Per Shri T. N. C. Rangarajan, Judicial Member - These appeals raise an interesting question about the impact of the Wealth-tax Act, 1957 (the Act) on interest arising from bank accounts.
2. The assessee is an individual. she is qualified physician. She had been to Dubai to make her fortune. On 20-10-1973, she returned to India. For the assessment years 1981-82 and 1982-83, for which we are concerned, she is treated as resident for tax purposes. She had fixed deposits with the British Bank of Middle East, Bombay, and State Bank of India, Kodaikanal. The amount in the British Bank of Middle East was Rs. 20,48,005 and the amount in the State Bank of India was Rs. 70,000. Under the terms of the deposit with the British Bank of Middle East, interest was payable on 30th June and 31st December of each year and with the State Bank of India every month. Since the assessees valuation date was 31st March, the assessee had taken into account only the interest credited on 31st December in the British Bank of Middle East account, and on 1st March in the State Bank of India account. The WTO was of the view that even the interest accrued after dates if credit until 31st March in each year was to be added to the net wealth of the assessee as if it had accrued. He, accordingly, added a sum of Rs. 52,950 for the assessment year 1981-82 made up of Rs. 51,200 for the British Bank of Middle East and Rs. 1,750 for the State Bank of India. For the next assessment year 1982-83, he added a like amount. On appeal, the Commissioner (Appeals) was of the opinion that even though the assessee could not enforce the payment of the interest before the due date, the interest accrued uptill 31st March would become part of the asset and enhance market value of the fixed deposits and as such this enhancement, according to the commissioner, was equivalent to the interest accrued and, therefore, justified the addition.
3. In further appeal, before us, the contention of the assessee is that interest does not accrue until the due date and, therefore, there is no asset in existence with regard to interest after the due date which could be added as part of the net wealth of the assessee. On the other hand, the contention of the revenue is that interest accrues day-to-day and enhances the value of fixed deposits and, therefore, the market value of the fixed deposits as on the valuation date should include the interest accrued. It is also submitted that the method of accounting of the assessee is irrelevant in considering the assessability for wealth-tax purposes.
4. On a consideration of the rival submissions, we are of the opinion that the assessee is entitle to succeed. This case is not to be decided on the method of accounting at all. What we are concerned with is the question whether there was at all in existence any asset which could be said to consists of the interest payable on the fixed deposits for the period 31st December to 31st March in the case of the British Bank of Middle East deposit. It is well known that interest can be said to have accrued only when it becomes due and payable under the terms of the loan or deposit. In the case of promissory note payable on demand but in the case of a fixed deposit the terms of which state that interest is playable only at the expiry of six months i.e., 30th June and 31st December interest accrues only when that date is reached. Even though the interest may be calculated for the period which has elapsed, it does not become due until that date is reached. Hence, as on 31st March, it would be a misnomer to say that interest has accrued or that any accrued interest is being treated as an asset, for, interests on these deposits can accrue only on 30th June and not before. This is the position whether the assessee maintains his accounts either on cash system or on mercantile system.
5. We must now proceed on the basis as on 31st March no interest has accrued. Under the terms of the deposits, it may be possible for the assessee to surrender the deposits as on the valuation dates but it would involve calculation of the interest at a different rate subject to mutual agreement because the bank is not charging interest at the same rate for foreclosing the deposits. In such a situation, we have to consider the approach of the Commissioner as to whether the valuation of the fixed deposit as on 31st March could itself include interest that could be calculated from 31st December up to 31st March. It is significant that interest which has not yet accrued has not vested and, therefore, it is not property as such. In the circumstances, what a prospective purchaser could get upon the transfer of fixed deposit on the valuation date is only the mere right to sue the bank for the interest. The payment of interest on that date is only a possibility because interest has not yet become due and the bank would be well within rights to refuse the payment as on that date. Under section 6(e) of the Transfer of Property Act, 1882, the mere right to sue cannot be transferred. It would follow that what cannot be transferred is not property and, therefore, cannot be an asset for the purposes of the Act. Under section 2(e) of the Act asset includes certain items. This definition, however, does not mean that an items which is not property could be treated as an asset merely because it is not exempted from that section.
6. This interest which has not accrued and would represent only a mere right to sue cannot be transferred, it would not be property and, consequently, cannot be treated as an asset for the wealth-tax purposes.
7. Secondly, interest which has not accrued has not vested in the assessee and, hence, he has no right even for himself to enforce the payment of interest up to 31st of March.
8. Thirdly, if at all the interest is to be realised on the valuation date, it would involve the foreclosure of the deposit and forfeiture of the interest already accrued and even interest at lower rate only may be paid if the bank consents. This position has been recognised by the Board by the following Circular No. 243 [F. No 178/65/77-IT (AI)], dated 26-6-1978 :
'(xiii) Interest on reinvestment deposit schemes, recurring deposit schemes, cash certificates, etc. -accrual of interest departmental circular. - Several banks are accepting deposits under the reinvestments deposit schemes, recurring deposit schemes, cash certificates and similar schemes. These schemes have been evolved to provide the public with an attractive medium of investment and simultaneously mobilise savings.
2. Under these schemes, a depositor invests a sum of money for a certain period of years and at the end of contracted period, a lump sum payment is made to him. This lump sum amount comprises of the principal amount and the interest earned thereon. Normally, the interest is credited to the depositors account at periodical intervals, but he is not entitled to collect such interest unless he decides to terminate the deposit. If he decides to terminate the deposit, he is entitled to receive back the principal amount plus interest thereon although at a reduced rate.
3. The question for consideration is whether the interest at the stipulated rate earned on the principal amount can be said to have accrued annually and if so whether a depositor is entitled to claim the benefit of deductions under section 80L of the Income-tax Act, 1961, in respect of such interest which has accrued.
4. The Government has decided that interest for each year calculated at the stipulated rate will be taxed as income accrued in that year. The benefit of deductions under section 80L of the Income-tax Act, 1961, will be available on such interest.'-Chaturvedi and Pithisarias Income-Tax Law, Vol. 1, Third edn., p. 284.
This shows that the revenue is aware of the fact that the interest does not arise before the date it is due and only as a matter of concession it is calculated and treated as income for income-tax purposes.
9. Fourthly, even if it is taken as the part of fixed deposits, the market value of the fixed deposits as on the valuation dates must depend upon the possibility of encashment. In this context, it cannot be gainsaid that under the rules of the bank these fixed deposits are not transferable and discount has to be given in respect of this disability in the process of determining the market value of the fixed deposit and such a discount could easily offset any addition for possible interest to be added for the period from 31st December to 31st March. Reference was made to the decisions in Vadrevu Venkappa Rao v. CWT : 69ITR552(AP) CWT v. Vysyaraju Badreenarayanamoorthy Raju : 79ITR330(Orissa) and CWT v. Pachigolla Narasimha Rao : 134ITR640(AP) . These cases related to interest accruing in money lending business where by an agreement, interest accrued day by day not on any stipulated date. These cases also involved the question of adding professional fees due but not received and were concerned with the question of recognising the balance sheet for the purpose of arriving at the true worth of the assessee. Firstly, in all these cases interest had already accrued unlike, the present case and secondly, the valuation was being done under the rules.
10. These rules also throw some light on these properties. The return of wealth provides that in item 13 of Annexure VI, interest accrued due up to the valuation date should be added to the moneys lent out by way of loans and advances but no such addition is prescribed for items 7 and 10 being deposit with banks, financial corporations and co-operative societies. It appears, therefore, that the Board itself has recognised that interest which has not accrued and which is due only after the valuation date need not be estimated or added to the net wealth of the assessee. In the circumstances, we have to accept the appeal of assessee and direct that the estimated interest added to the net wealth he deleted.
The appeals are allowed.