Accrual of interest before the accrual of principal amount.

Nilesh Shah Writes:
Cell: 92246-59941
E mail: nilesh63@vsnl.com

Accrual of interest before the accrual of principal amount.

Interest income on compensation for compulsory acquisition is
assessable on year to year basis as was decided by the Supreme Court
in CIT v. T. N. K. Govindarajulu Chetty [1987] 165 ITR 231 and Rama
Bai v. CIT [1990] 181 ITR 400 (SC). This was followed even in
respect of amount received consequent on arbitration in a business
dispute . The concept of accrual of interest, even prior to the date
on which such right to compensation arises, is an anomaly even in
compulsory acquisition cases as pointed out by the Bombay High Court
in CIT v. Abbasbhoy A. Dehgamwalla [1992] 195 ITR 28 leading to
practical difficulties for both the Revenue and taxpayer. Kanga and
Palkhivala's Law and Practice of Income-tax brought out this
anomaly with reference to the two decisions, one in CIT v. Hindustan
Housing and Land Development Trust Ltd. [1986] 161 ITR 524 (SC),
which holds that enhanced compensation itself accrues only when it
is finally decreed and the other in T. N. K. Govindarajulu Chetty's
case holding that interest accrues on year to year basis, leading
to the inference that interest on enhanced compensation accrues even
before accrual of the enhanced compensation itself. Such anomaly in
respect of compulsory acquisition cases, now part of law as laid
down by the Supreme Court without any amendment, could not possibly
be extended to normal business agreements, where interest income
according to accounting principles and the concept of accrual could
arise only on the same date as the principal amount. The issue
including interest on compulsory acquisition requires the attention
of the Government for possible amendment to accord with the
accounting principles.

Yours Sincerely,

Nilesh Shah