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TMI Blog2002 (8) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on securities' ? 2. Whether interest on debentures in all circumstances is liable to be considered income only when received by the assessee and not when it becomes due?" The relevant assessment years are 1987-88 and 1988-89. Apart from the references, this group also consists of tax appeals filed by the Revenue under section 260A of the Act. The references as well as the tax appeals arise from the Tribunal's judgment and order dated September 30, 1997, and the subsequent orders passed by the Tribunal following the aforesaid judgment. In the tax appeals also, the same questions were framed by this court at the time of admission of these appeals. All the assessees numbering more than 300 were holders of bonds issued by Ambalal Sarabhai Enterprises Ltd., and Repropack (P.) Ltd. Since common questions of law and facts arise in this group of references and appeals, with the consent of learned counsel for the parties, the references as well as the appeals have been heard together and are being disposed of by this common judgment. The brief facts, leading to these references and appeals are as under: That the assessees had purchased convertible debentures of Ambalal Sarabhai En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintaining accounts on the cash system of accounting for the income received on such investments. No interest was received by the respondents on the aforesaid bonds from the assessment year 1986-87 onwards. However, the Assessing Officer held in the assessment orders that the income by way of interest from securities had accrued to the respondent for the years under consideration, that is 1987-88 and 1988-89. The income by way of interest on those bonds/debentures was offered for taxation by the respondent on that basis and the same was also assessed by the Assessing Officer on that basis. There is no dispute about this fact as the assessment orders for the earlier years were also produced before the authorities in the present proceedings to show that the income from the bonds in the earlier years was declared and also assessed on the cash method of accounting. The bonds were to carry interest on July 1, of every calendar year but in June, 1985, the ASE offered to the original bondholders a new scheme by virtue of which interest payment upon bonds was deferred for two years and in lieu of deferment of interest, the bondholders were allowed higher rate of interest at 15 per cent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not necessarily to be taxed on accrual basis and that the assessees who were maintaining the cash system of accounting and who had offered such interest income for taxation on cash basis and were also so assessed for earlier years, would not be subjected to tax on accrual basis for the subsequent years, that is, assessment years 1987-88 and 1988-89, which are the years under consideration. For this purpose, the Tribunal also relied on the decision of the Supreme Court in Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 holding that income-tax is a levy on income and that if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise. The Tribunal gave the finding that the assessees were not able to realise any interest out of these bonds and that ultimately if the assessees did not get any income, though technically they were entitled to, no tax would be levied. The Tribunal also followed the principle that when two views are possible, the one in favour of the assessee should be adopted (vide the decision of the Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total interest per bond for six years 63.00 -------------------------------------------------------------------------- The bondholders offered the said income on receipt basis as under and paid tax at applicable rate: -------------------------------------------------------------------------- Assessment year Interest per bond (Rs.) Period 1989-1990 21.00 1-7-1981 to 30-6-1983 1999-2000 36.75 1-7-1983 to 31-12-1986 2000-2001 5.25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the Tribunal has rightly applied the rule of interpretation, noscitur a sociis, a word is known by the company that it keeps and, therefore, the instruments, that is bonds/debentures offered by ASE Ltd. and Repropack (P.) Ltd., do not fall within the provisions of section 18(1)(ii) of the Act. In support of the said submission, learned counsel has also relied on the decision of the Madras High Court in CIT v. Lakshmi Vilas Bank Ltd. [1997] 228 ITR 697. Learned counsel for the assessee has also submitted that as a matter of practice all these years interest on debentures of non-Government companies is shown and/or being treated as income from other sources. Having heard learned counsel for the parties, it appears to us that the legislative history throws a flood of light on the controversy at hand. Section 8 of the 1922 Act read as under: "8. The tax shall be payable by an assessee under the head 'Interest on securities' in respect of the interest receivable by him on any security of the Central Government or of a State Government, or on debentures or other securities for money issued by or on behalf of a local authority or a company: Section 18(1) of the 1961 Act wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961, for the relevant assessment years under consideration. We accordingly answer question No. 1 in the negative, that is in favour of the Revenue and against the assessee. Coming to the second question, the same has been more seriously contested by both the parties. Mr. M.R. Bhatt, learned counsel for the Revenue, has submitted as under: When the Legislature has expressly used the word "due" in section 18(1) of the Act, it means that the liability of the assessee to pay tax on "interest on securities" arises as soon as such interest is due and that the liability to pay tax is not to be deferred till the stage when the assessee receives the interest; in fact whether the assessee receives the interest or not is a matter of no concern to the tax authorities in view of the provisions of section 18(1) of the Act. Reference is made to the legislative history. In section 8 of the 1922 Act, the Legislature had used the word "receivable" and the same was interpreted as "actually received" by the Bombay High Court in Seth Lalbhai Dalpatbhai v. CIT [1952] 22 ITR 13. Hence, to make its intent clear the Legislature thereafter used the word "due" in the corresponding section 18(1) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bondholders waive the interest. On the other hand, Mr. R. K. Patel and Mr. B. D. Karia, learned counsel for the assessee, have submitted as follows: The change in phraseology in the 1961 Act does not make any difference, because even the 1922 Act had used the word "receivable" which was interpreted by Chief Justice M.C. Chagla, speaking for the Division Bench of the Bombay High Court, to mean that it is on actual receipt that interest on securities becomes taxable. "Receivable" and "due" convey the same meaning and are interchangeable. It is further submitted that the word "due" means "payable by the borrower", and the corresponding expression "would be receivable by the creditor". The word "receivable" was also interpreted by the Bombay High Court to mean that interest on securities becomes income when it is actually received and not when it is capable of being received by the assessee. Strong reliance is also placed on the decision of the Supreme Court in the case of Vijaya Bank Ltd. v. CIT (Addl.) [1991] 187 ITR 541 and the Karnataka High Court in CIT v. Canara Bank [1992] 195 ITR 66, in so far as they lay down that income by way of interest on securities attracts section 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n March 27, 1952, and is, therefore, certainly binding on this court. The only question is whether there is any material difference on account of the change of the expression "receivable" to "due". Before answering this question, it is necessary to refer to the provisions of sections 193 and 145 of the 1961 Act. Section 193 of the 1961 Act (which came into effect from April 1, 1989) reads as under, in so far as the same is relevant. "193. Interest on securities.--The person responsible for paying any income by way of interest on securities shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax at the rates in force on the amount of the interest payable: Provided...." Section 145(1) dealing with the method of accounting, originally provided that the income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of payment; or a debt ascertained and fixed though payable in future. As an adjective, "due" means capable of being justly demanded, payable or owing and unpaid. The expression "due" is defined b y "Webster" to mean that which is owed; that which custom, statute or law requires to be paid. At this stage, we may also refer to the decision of the Supreme Court in Vijaya Bank Ltd.'s case [1991] 187 ITR 541 and of the Karnataka High Court in Canara Bank's case [1992] 195 ITR 66, where the courts held that income attracts section 18 when the securities yield income by way of interest. It is true that Mr. Bhatt, learned counsel for the Revenue, has vehemently submitted that those decisions were rendered in the context of the dispute as to whether the securities yielded any income during the broken period of any year when the securities are purchased by the assessee before the due date. While the submission of Mr. Bhatt is not entirely off the mark, the fact remains that in that case the securities did yield interest and the question was only whether interest could be said to have accrued on day-to-day basis or only on the date on which the securities yielded interest. The apex court as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that on March 30, 1990, the bondholders of ASE Ltd., had passed a resolution under which the assessees got equity shares of ASE Ltd. in lieu of bonds and, therefore, it cannot be said that the assessees did not receive any consideration in lieu of interest on bonds. In view of the above submission, it is necessary to refer to the contents of the said resolution, which forms part of the order of the Commissioner of Income-tax: "(a) Both the bonds of series A and series B would become zero interest bonds with effect from July 1, 1986, from which date interest had not been paid by ASE, till the date of redemption. (b) Series A bonds of Rs. 100 each would be redeemed by the issue and allotment of seven equity shares of Rs. 10 each at par. (c) Series B bonds of Rs. 100 each on which redemption premium of Rs. 5 was payable as per the terms of issue, would be redeemed by the issue and allotment of 7.5 equity shares of Rs. 10 each at par." Those bondholders who would not accept the above options were to retain their bonds on the basis of the same terms and conditions at the time of issue. Out of the bondholders holding bonds of Rs. 25 crores, those holding bonds of Rs. 23,19 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me as non-taxable, and, in the said decision, this court has also examined the decisions on the concept of the real income and even thereafter held that the income which had already accrued cannot be allowed to come out of the tax net by such devices. Having perused the aforesaid decision of this court in Sarabhai Chemicals P. Ltd.'s case [2002] 257 ITR 355, to which one of us was a party, we find that there are several material distinctions between the facts of that case and the facts in the instant group of matters: (i) In Sarabhai Chemicals P. Ltd.'s case [2002] 257 ITR 355 (Guj), the contractual liability was between the holding company and the subsidiary company, and the subsidiary company passed a resolution for waiving interest on the last date of the accounting year after the interest had accrued. In the instant case, the assessees were not the only bondholders of ASE Ltd. The court is informed and there is no dispute about the fact that there are also other bondholders holding bonds of the face value of Rs. 2 crores who are not in anyway related to the persons in the management of ASE Ltd. or with the assessees. (ii) In Sarabhai Chemicals P. Ltd.'s case [2002] 257 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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