Law: Income Tax Act, 1961

Section: 256

Income-tax-----Income---Accrual of income---Meaning of accrual---Interest on debentures of companies---Nationalisation of companies---Notifications suspending operation of all contracts and obligations of the companies ---Assessee not able to realise interest on the debentures---Interest on debentures did not accrue to the assessee. Income must be held to accrue at the point of time when a debt becomes due. Thus, the verb "accrue" is inter-connected with income becoming due because it is only when something becomes due to the assessee and appears crystallised as a debt in his favour that the right to receive can be said to have emerged. Until then, there is no accrual of income, as a person cannot recover which is not due and payable. Deferment of payment or the qualification of course, does not matter. If the assessee can show that either by the covenants in the contract or by any operation of law, the right to receive did not arise to the assessee and, therefore, no debt equivalent to the amount of the income in question was created in his favour, no income can accrue. It is necessary for the income to accrue that the income must be due to be paid to the assessee. The assessee held debentures of B & Co., and K & Co. Both these companies were taken over by the State and the relevant notifications made it clear that operations of all contracts and all obligations remained suspended. The assessee was placed law in the order of priorities for discharge of the liabilities of the companies. The assessee was not able to realise any interest on the debentures in the accounting year relevant to the assessment year 1983-84. The Income Tax Officer added the interest to the total income of the assessee on the ground that it had accrued. The Commissioner of Income ¬tax Appeals and the Tribunal deleted the addition. On a reference: Held, that, in the present case, it was the operation of law, i.e., provisions of the Nationalisation Act which prevented the interest on the debentures becoming due. As a result of the takeover the two debtor ¬companies the right to receive interest on debentures ceased during the relevant previous year. Accordingly, interest on…

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