Law: Income Tax Act, 1961

Section: 45,48

Income-tax-----Capital gains---Computation of capital gains---Deductions---Cost of acquisition--- Banking company---Nationalisation of Bank---Compensation awarded---Sticky advances credited to separate account but on which Bank had paid income-tax---Deductible from compensation as part of cost of acquisition---Indian Income Tax Act, 1961, Ss.45 & 48. Consequent upon the nationalisation of banks and acting under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 the banking business of the assessee-company was taken over by the nationalised institution, the Indian Overseas Bank, on July 18, 1969. For the assessment year 1970-71, the assessee worked out a capital loss of Rs.19,19,539 originally and subsequently at a revised figure of Rs.29,06,396. This was based on the value of the undertaking as on December 31, 1968. The Income-tax Officer, in working out the capital gains, reduced the cost of acquisition of the assets by a sum of Rs.19,78,065 which represented what was called rebated interest. On account of peculiar system of noting outstandings adopted by the assessee from year to year where an account was not active for a period such as six months or more, the interest accruing to the assessee in this account was not transferred to the profit and loss account but to a separate account called "rebated interest account". According to the assessee, this represented actual interest accrued. The Tribunal held that the sum of Rs.19,78,065 was deductible. On a reference: Held, that the assessee followed the mercantile system of accounting. The sum of Rs.19,78,065 was credited for the assessment year 1970-71. This was not a bad debt or even an amount which was not recoverable. The assessee had paid income-tax on this amount. As and when the advance become operative the corresponding amounts would be transferred from the rebated interest account to the profit and loss account. Therefore, the amount accumulated in the rebated interest account could not be treated as liabilities. The Tribunal was right in holding that the sum of Rs.19,78,065 representing "rebated interest" should be added to the "cost of acquisition" of the assessee…

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