INCOME TAX ACT, 1961

Section 5

Income - Accrual of income - Interest accrued pursuant to transfer of undertaking in the scheme of merger -

Assessee-firm engaged in banking and finance business was taken over by a company. The take over was on consideration paid to the firm. The interest accrued in the loans granted by assessee firm, was taken over by company along with the assets and liabilities of assessee-firm. Assessee's submission was that, since it was following the cash system of accounting, thus, the interest having not been received was not taxable as its income. Revenue, however, added the same as assessee's income alleging that the buyer agreed to compensate assessee for the interest accrued in the loan accounts up to the date of transfer; therefore, there was constructive receipt of the interest by the assessee, even in cash system of accounting. Held: The Company had taken over from the assessee-firm an amount as interest receivable, which was later collected and handed over to assessee by Company. Thus, the duplication was not in AO having made the addition, but in Company having received the payments in the course of the year in addition to the consideration. However, there were doubts about interest credited to profit and loss account and the interest receivable, collected and handed over to the firm by the Company; whether they are one and the same. Thus, it was essentially a question of fact and AO was directed to examine whether there was duplication in so far as the addition made.

REFERRED :

FAVOUR : Matter remanded

A.Y. :

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