Per Shri K. B. Menon, Judicial Member - This appeal by the department relates to the assessment year 1973-74, for which the previous year ended on 31-3-1973.
2. The assessee is a Government company, which was incorporated on 16-2-1972 to take over the business of F. X. P. Minerals, Chavara, which was being run by the Government as a Government department. The business was being over on 31-3-1972. The assessment year year now under appeal relates to the first year of business. The original assessment was completed on 31-12-1974. This was reopened and a reassessment was made in which an addition was made of a sum of Rs. 41,250 as is interest on securities. This was comprised of Rs. 33,062.50, Rs. 4,750 and Rs. 3,437.50 being interest at the rate of 5 3/4 per cent on K. S. D. Loan, 4 3/4 per cent on K. S. D. Loan Bonds and 5 1/2 per cent on K. S. D. Loan Bonds, respectively. The interest amounts had accrued during the period when the assets were held by the Government and was not, therefore, taxable. The amounts were brought to tax by the ITO in the reassessment by resorting to section 18(2) of the Income-tax Act, 1961 (the Act).
3. The Commissioner (Appeals) held that section 18(2) is not attracted in the present case and deleted the addition. Aggrieved by the same, the department has come up in appeal. The grounds taken by the department are to the effect that the Commissioner (Appeals) erred in holding that the interest amounts cannot be brought to tax in the assessment year under appeal under section 18(2).
4. In the present case, there is no dispute about the fact that the interest amounts accrued due in the earlier assessment year and that during that assessment year, the amounts could not have been brought to tax as the recipient of the interest was the Government of Kerala. The amount is now sought to be taxed in the subsequent year on receipt basis taking advantage of the fact that the assets have become the property of a Government-owned company and that the income of the company can be brought to tax.
"(1) The following amounts due to an assessee in the previous year shall be chargeable to income-tax under the head Interest on securities, - (i) interest on any security of the Central or State Government not being interest payable under section 280D in respect of an annuity deposit made under Chapter XXIIA; (ii) interest on debetures or other securities for money issued by or on behalf of local authority or a company or a corporation established by a Central, State or Provincial Act.
(2) Nothing contained in sub-section (1) shall be construed as precluding an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year." Sub-section (2) provides that interest on securities received by an assessee in the previous year can be charged to fix if such interest has not been charged to tax for any earlier previous year. The purpose of the section is to tax the interest amount on receipt basis when it had not been taxed on accrual basis. This presupposes that the amount could have been taxed either in the earlier previous year or in the previous year. Sub-section (2) does not seem to cover a case where the interest was not chargeable to tax at all when it accrued due and where it could have been charged to tax in a subsequent assessment year on receipt basis. The sub-section is intended to cover cases where there was an omission to charge the interest income to tax on accrual basis.
In such cases, the sub-section empowers the ITO to tax the interest income on receipt basis. The sub-section does not seem to have been intended to cover a change in the assessee after the accrual of the interest and before the actual payment of interest. In fact, the sub-section presupposes that the interest amount could have been brought to tax on accrual basis in an earlier previous year. In the present case, the interest amount was not chargeable to tax at all in the earlier previous year. It is stated at page 993 of Vol. I of Sampath Iyengars Law of Income-tax, Seventh edn., that the Act made a departure in respect of the basis of charge of interest on securities, that under the Indian Income-tax Act, 1922 the charge was on receipt basis, that under the Act, a charge was created on accrual basis and that the purpose of sub-section (2) was to cover the switch over to the due basis, which was only prospective. This confirms the view expressed by us earlier that the sub-section is not intended to take advantage of a transfer of the assets from one assessee to another after the accrual of the interest and before the receipt of the same.
6. The assessment of the interest amount in the hands of the assessee is bad for another reason. The assessee-company has taken over the assets and liabilities of a business carried on by the Government. When the assessee took over the business, the interest amount had already accrued due to the Government and it formed part of the assets taken over by the assessee. This is confirmed by the deed of sale executed in favour of the company by the Governor or Kerala and the connected papers regarding the valuation of the assets. The assesse merely collected an amount which had accrued due to the predecessor in interest. It was not, therefore, a case of the assessee receiving an income. It was only a case of a recovery of an asset. In this view of the matter also, the interest amount cannot be brought to tax in the hands of the assessee. We, therefore, confirm the order of the Commissioner (Appeals) deleting the additions.