DR. (MRS) G. ISSAC v. WEALTH-TAX OFFICER
[Citation -1984-LL-0427-1]

Citation 1984-LL-0427-1
Appellant Name DR. (MRS) G. ISSAC
Respondent Name WEALTH-TAX OFFICER
Court ITAT
Relevant Act Wealth-tax
Date of Order 27/04/1984
Assessment Year 1981-82, 1982-83
Judgment View Judgment
Keyword Tags transfer of property • method of accounting • payment of interest • accepting deposits • contracted period • recurring deposit • accrued interest • interest accrued • lump sum payment • mutual agreement • promissory note • interest earned • valuation date • money lending • co-operative • market value • net wealth
Bot Summary: On appeal, the CIT(A) 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 the market value of the fixed deposits and as such this enhancement, according to the CIT, was equivalent to the interest accrued and justified the addition. In the case of a promissory note payable on demand but in the case of a fixed deposit the terms of which state that interest is payable only at the expiry of six months, i.e., 30th June and 31st December interest accrues only when that date is reached. 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, interest on these deposits can accrue only on 30th June and not before. 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. 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. Normally, the interest is credited to the depositor's account at periodical intervals, but he is not entitled to collect such interest unless he decides to terminate the deposit. These cases related to interest accruing in money lending business where by an agreement, interest accrued day by day and not on any stipulated date.


These appeals raise interesting question about impact of WT Act, 1957 ('the Act') on interest arising from bank accounts. assessee is individual. She is qualified physician. She had been to Dubai to make her fortune. On 20th Oct., 1973, she returned to India. For asst. yrs. 1981-82 and 1982-83, for which we are concerned, she is treated as resident for tax purposes. She had fixed deposits with British Bank of Middle East, Bombay, and State Bank of India, Kodaikanal. amount in British Bank of Middle East was Rs. 20,48,005 and amount in State Bank of India was Rs. 70,000. Under terms of deposit with British Bank of Middle East, interest was payable on 30th June and 31st December of each year and with State Bank of India every month. Since assessee's valuation date was 31st March, assessee had taken into account only interest credited on 31st December in British Bank of Middle East account, and on 1st March in State Bank of India account. WTO was of view that even interest accrued after dates of credit until 31st March in each year was to be added to net wealth of assessee as if it had accrued. He, accordingly, added sum of Rs. 52,950 for asst. yr. 1981-82 made up of Rs. 51,200 for British Bank of Middle East and Rs. 1,750 for State Bank of India. For next asst. yr. 1982-83, he added like amount. On appeal, CIT(A) was of opinion that even though assessee could not enforce payment of interest before due date, interest accrued uptill 31st March would become part of asset and enhance market value of fixed deposits and as such this enhancement, according to CIT, was equivalent to interest accrued and, therefore, justified addition. In further appeal, before us, contention of assessee is that interest does not accrue until due date and, therefore, there is no asset in existence with regard to interest after due date which could be added as part of net wealth of assessee. On other hand, contention of Revenue is that interest accrues day-to-day and enhances value of fixed deposits and, therefore, market value of fixed deposits as on valuation date should include interest accrued. It is also submitted that method of accounting of assessee is irrelevant in considering assessability for wealth-tax purposes. On consideration of rival submissions, we are of opinion that assessee is entitled to succeed. This case is not to be decided on method of accounting at all. What we are concerned with is question whether there was at all in existence any asset which could be said to consist of interest payable on fixed deposits for period 31st December to 31st March in case of 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 terms of loan or deposit. In case of promissory note payable on demand but in case of fixed deposit terms of which state that interest is payable only at expiry of six months, i.e., 30th June and 31st December interest accrues only when that date is reached. Even though interest may be calculated for period which has elapsed, it does not become due until that date is reached. Hence, as on 31st March, it would be misnomer to say that interest has accrued or that any accrued interest is being treated as asset, for, interest on these deposits can accrue only on 30th June and not before. This is position whether assessee maintains his accounts either on cash system or on mercantile system. We must now proceed on basis that as on 31st March no interest has accrued. Under terms of deposits, it may be possible for assessee to surrender deposits as on valuation dates but it would involve calculation of interest at different rate subject to mutual agreement because bank is not charging interest at same rate for foreclosing deposits. In such situation, we have to consider approach of CIT as to whether valuation of fixed deposits 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 circumstances, what prospective purchaser could get upon transfer of fixed deposit on valuation date is only mere right to sue bank for interest. payment of interest on that date is only possibility because interest has not yet become due and bank would be well within rights to refuse payment as on that date. Under s. 6(e) of Transfer of Property Act, 1882, mere right to sue cannot be transferred. It would follow of Property Act, 1882, mere right to sue cannot be transferred. It would follow that what cannot be transferred is not property and, therefore, cannot be asset for purposes of Act. Under s. 2(e) of Act 'asset' includes certain items. This definition, however, does not mean that item which is not property could be treated as asset merely because it is not exempted from that section. This interest which has not accrued and would represent only mere right to sue cannot be transferred, it would not be property and, consequently, cannot be treated as asset for wealth-tax purposes. Secondly, interest which has not accrued has not vested in assessee and, hence, he has no right even for himself to enforce payment of interest up to 31st of March. Thirdly, if at all interest is to be realised on valuation date, it would involve foreclosure of deposit and forfeiture of interest already accrued and even interest at lower rate only may be paid if bank consents. This position has been recognised by Board by following Circular No. 243 [F.No. 178/65/77-IT (AI)], dt. 26th June, 1978: " (xiii) Interest on reinvestment deposit schemes, recurring deposit s c h e m e s , cash certificates, etc. accrual of interest Departmental circular. Several banks are accepting deposits under reinvestment deposit schemes, recurring deposit schemes, cash certificates and similar schemes. These schemes have been evolved to provide public with attractive medium of investment and simultaneously mobilise savings. Under these schemes, depositor invests sum of money for certain period of years and at end of contracted period, lump sum payment is made to him. This lump sum amount comprises of principal amount and interest earned thereon. Normally, interest is credited to depositor's account at periodical intervals, but he is not entitled to collect such interest unless he decides to terminate deposit. If he decides to terminate deposit, he is entitled to receive back principal amount plus interest thereon although at reduced rate. question for consideration is whether interest at stipulated rate earned on principal amount can be said to have accrued annually and if so whether depositor is entitled to claim benefit of deductions under s. 80L of IT Act, 1961, in respect of such interest which has accrued. Government has decided that interest for each year calculated at stipulated rate will be taxed as income accrued in that year. benefit of deductions under s. 80L of IT Act, 1961, will be available on such interest." Chaturvedi and Pithisaria's Income-Tax Law, Vol. 1, Third edn., p. 284. This shows that Revenue is aware of fact that interest does not arise before date it is due and only as matter of concession it is calculated and treated as income for income-tax purposes. Fourthly, even if it is taken as part of fixed deposits, market value of fixed deposits as on valuation dates must depend upon possibility of encashment. In this context, it cannot be gainsaid that under rules of bank these fixed deposits are not transferable and discount has to be given in respect of this disability in process of determining market value of fixed deposit and such discount could easily offset any addition for possible interest to be added for period from 31st December to 31st March. Reference was made to decisions in Vadrevu Venkappa Rao vs. CWT (1968) 69 ITR 552 (AP), CWT vs. Vysyaraju Badreenarayanamoorthy Raju (1971) 79 ITR 330 (Ori) and CWT vs. Pachigolla Narasimha Rao (1980) 18 CTR (AP) 122: (1982) 134 ITR 640 (AP). These cases related to interest accruing in money lending business where by agreement, interest accrued day by day and not on any stipulated date. These cases also involved question of adding professional fees due but not received and were concerned with question of recognising balance sheet for purpose of arriving at true worth of assessee. Firstly, in all these cases interest had already accrued unlike present case and secondly, valuation was being done under rules. These rules also throw some light on these properties. return of wealth provides that in item 13 of Annexure VI, interest accrued due up to valuation date should be added to moneys lent out by way of loans and advances but no such addition is prescribed for items 7 and 10 being deposits with banks, financial corporations and co-operative societies. It appears, therefore, that Board itself has recognised that interest which has not accrued and which is due only after valuation date need not be estimated or added to net wealth of assessee. In circumstances, we have to accept appeal of assessee and direct that estimated interest added to net wealth he deleted. appeals are allowed. *** DR. (MRS) G. ISSAC v. WEALTH-TAX OFFICER
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