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Even where the assessee follows the mercantile system of accounting, it is not obliged to pay tax on the interest that has accrued but has not fallen due before the end of the relevant financial year, said the Bombay High Court in Director of Income Tax (International Taxation) vs Credit Suisse First Boston (Cyprus) Ltd and others .
The Respondent, a SEBI-registered FII, had permission to invest in Government of India securities.
For the previous year 2006-07, it had filed a return showing income of Rs 5.9 crore.
The Department made an addition of Rs 1.21 crore on the ground that this constituted interest accrued, although not due as on March 31, 2007.
The Bombay High Court, sustaining the stand of the Respondent, held that even where a person follows the mercantile system of accounting, interest is not taxable unless it has fallen due.
Thus the interest for January 1 to March 31 cannot be taxed on a notional basis if such interest, together with the interest for the remaining period of the half-year — for April to June — is payable on June 30.
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