Interest received in advance on discounting of bills against LC is taxable on accrual basis: Madras HC
Karur Vysya Bank Ltd. v. ACIT –  120 taxmann.com 331 (Madras)
Short overview of the case :
During the scrutiny assessment, Assessing Officer (AO) held that assessee excluded interest from taxable income claiming that same was received in advance, which need not be assessed in the relevant year as it was following mercantile system of accounting.
AO, though accepted that the amount represented interest pertaining to a subsequent year, however, held that same was received during the relevant year.
Therefore, by referring to section 5(1)(a), he held that the assessee received income during the relevant year and the same should be included in the total income of the relevant year. CIT(A) upheld the order of AO.
Before ITAT, assessee contended that there was no escapement of income as it was following the mercantile system of accounting and income could be assessed in the year of receipt only when cash basis was followed.
ITAT held that assessee physically received the amount towards income in advance and there was no liability for repayment.
ITAT was of opinion that the same had to be treated as income of assessee and that the matter would stand differently in case there was a liability for repayment of money received in advance.
On further appeal, Madras HC held that Section 145, which deals with method accounting, states that income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
Therefore, to bring the receipt of interest by the assessee to be profit as mentioned in Sub-Section 2(24), it must be computed in accordance with the method of accounting regularly employed by the assessee.