TMI Blog2020 (10) TMI 459X X X X Extracts X X X X X X X X Extracts X X X X ..... for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice. The above directions issued by the RBI would also come to the aid and assistance of the assessee. We hold that the Assessing Officer, the CIT(A) and the Tribunal fell in error while considering the issue framed before us as a substantial question of law. - Tax Case Appeal No.739 of 2019 - - - Dated:- 1-10-2020 - HONOURABLE MR. JUSTICE T.S. SIVAGNANAM AND HONOURABLE MRS. JUSTICE V. BHAVANI SUBBAROYAN For Appellant : Mr. R. Parthasarathy For Respondent : Mr. M. Swaminathan, SSC assisted by Mrs. V. Pushpa, JSC Judgment was delivered by T.S.SIVAGNANAM,J This appeal, filed by the assessee under Section 260A of the Income Tax Act, 1961 (for short, the Act), is directed against the order dated 27.4.2017 made in ITA.No.1340/Mds/2013 on the file the Income Tax Appellate Tribunal, Chennai B Bench (for brevity, the Tribunal) for the assessment year 2003-04. 2. The assessee filed this appeal by raising the following substantial question of law : Whether, on facts and in circumstances of the case, the Tribunal was right in holding that the income received in advance in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 8. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) by contending that the Assessing Officer misinterpreted Section 5(1)(a) of the Act and failed to consider that the assessee was following mercantile system of accounting. The CIT(A) did not assign any independent reason while concurring with the decision taken by the Assessing Officer. 9. Before the Tribunal, the assessee reiterated the stand taken by them at the earliest point of time i.e. before the Assessing Officer by stating that as the interest income as shown under the head other liabilities represented the interest received upfront on the bills purchased/discounted, the interest received beyond the account closing date was included under that head. It was further contended that the interest received upto the period of closing date was offered to tax, that the interest related to the period beyond the closing date was debited from interest received account and that the interest received in advance account was credited. It was thus explained that this credit balance in interest received in advance was a liability as on 31st March and after 31st March, the balance in income re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accordance with either cash or mercantile system of accounting regularly employed by the assessee . 15. Therefore, to bring the receipt of interest by the assessee to be profit as mentioned in Sub-Section 2(24) of the Act, it is necessary that it should be computed in accordance with the method of accounting regularly employed by the assessee and in the instant case, it is mercantile system of accounting. 16. In the decision of the Mumbai Tribunal, which is placed before us for consideration by Mr. R. Parthasarathy, learned counsel for the assessee in the case of Siam Commercial Bank PCL Vs. DDIT, International Taxation [reported in (2011) 15 Taxmann.com 353], the assessee was also a bank, which was following the mercantile system of accounting. The Tribunal explained the mercantile system of accounting and how the deduction for expenses was allowed when the liability to pay arose irrespective of the fact whether such an amount had been paid or remained unpaid at the end of the year in the following lines : The assessee bank is admittedly following mercantile system of accounting. Under such a method, deduction for expenses is allowed when the liability to pay aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 100 on 1.1.2011 and advanced it on the same date, his interest expenditure for the year ending 31.3.2011 shall be to the tune of ₹ 2 (8% on ₹ 100 for a period of three months from 1.1.2011 to 31.3.2011). When the interest expenditure for a period of three months is deductible, naturally going by the matching concept, the interest of only ₹ 3 (10% interest income on ₹ 100 for a period of three months from 1.1.2011 to 31.3.2011) can be recognized as income. 18. It cannot be disputed that discounting of bills is being done in one of the modes of finance and the Assessing Officer accepted that the assessee received the amount of interest, which represented interest pertaining to a subsequent year. In such cases, if the assessee is not permitted to debit interest related to the period beyond the closing date from the interest received account and credited in the advance account, then it would fall foul of the mercantile system of accounting. This concept has been clearly brought out in the decision of the Mumbai Tribunal in the case of Siam Commercial Bank PCL, which we quote with approval. 19. In fact, in the said decision, the Revenue placed re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest income and the basis on which it is to be allocated over the different accounting period. A bill discounting receipt is also the interest income in nature. In the sense that by way of bill discounting, the borrower is allowed the use of money from the date of bill discounting till the date when bill is actually paid. When such usage of money is spread over more than one accounting period and particularly when the assessee is following mercantile method of accounting, only such income from bill discounting can be brought to tax as pertains to that accounting period. In the case before us the bills are discounted at the fag end of the relevant previous year. With the result that a portion of time for which the money is allowed to be used by the borrower falls outside the relevant accounting year. Following the discussions in the preceding paras dealing with Ground Nos. 1 and 2 the interest income for that period as falls outside the accounting year is to be taxed in the accounting year to which it pertains. Therefore, only such bill discounting can be taxed in this year as pertains to the period of usage of money within this previous year. The learned Commissioner (Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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