JUDGMENT
K.S. Paripoornan, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following two questions of law for the decision of this court :
” 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and fact in holding that the interest on advance payment is not taxable and the assessee following the mercantile system of accounting does not become entitled to it ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and fact in holding that the interest becomes taxable in the year in which the Excise Department gives credit to the assessee ?”
2. The respondent is a firm. It is an abkari contractor. We are concerned with the assessment year 1983-84, for which the accounting period ended on March 31, 1983. The firm had deposited a sum of Rs. 9,86,190 in March, 1980, with the Government as advance kist. The interest due on this amount for this year amounted to Rs. 39,448. Admittedly, the assessee is keeping its accounts on the mercantile basis. While computing the total income for the assessment year 1983-84, the Income-tax Officer included the said sum of Rs. 39,448 as interest accrued to the assessee on the deposit. In appeal, the Commissioner of Income-tax (Appeals) held that the calculation of interest due on accrual basis is not called for. He directed the deletion of the interest added by the officer in the sum of Rs. 39,448. The Commissioner of Income-tax (Appeals) stated thus :
“. . . . The Income-tax Officer calculated Rs. 39,448 as interest accrued on this amount. The advance kist is adjustable, against the subsequent instalments. Records for the payment are maintained by the treasury and are released to the Excise Department, which then intimates to the contractor. In fact the interest due would be adjusted against the subsequent kist. I now find that interest due for the year had been adjusted only in July and August, 1986. Since the appellant had no right to the interest which would get determined after the Government makes adjustments, etc., I would hold that the calculation of interest due on an accrual basis is not called for.”
3. In the appeal filed by the Revenue before the Income-tax Appellate Tribunal, as I. T. A. No. l098/(Coch.) of 1986, the Appellate Tribunal, by order dated November 4, 1987, affirmed the decision of the Commissioner of Income-tax (Appeals). In paragraph 15 of the order dated November 4, 1987, the Tribunal stated thus :
“15. The last ground is whether certain interest is to be treated as the income of the assessee. According to the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, the successful bidder has to make a deposit, at the time of signing of the agreement, of an amount equivalent to 30 per cent. of the bid. This amount can be in treasury deposits. Treasury deposits, however, will have to be assigned to the Excise Commissioner. The Excise Commissioner will adjust this deposit against the dues from the successful bidder towards the end of the period of auction. Now interest will accrue on these deposits. It is the Department’s case that such interest is the income of the assessee and should be taxed in the year in which the income accrued. Now if the deposits were with the assessee there is no doubt that such interest would accrue to the assessee and should be taxed in the year in which such interest have accrued. But here the deposits have been assigned to the Excise Department and the assessee would be entitled to the interest only when the Excise Department gives credit to him. Till such time although the interest may accrue on the deposits the assessee does not become entitled to it. Therefore, as far as the assessee is concerned, the accrual is only in the year in which the Excise Department gives credit That has not happened during this accounting year. We, therefore, hold that the interest becomes taxable in the year in which the Excise Department gives credit to the assessee.”
4. It is thereafter at the instance of the Revenue that the Income-tax Appellate Tribunal has referred the two questions of law, formulated hereinabove, for the decision of this court.
5. We heard counsel for the Revenue–senior counsel, Mr. P. K. R. Menon. The assessee was not represented before us.
6. From the order of assessment, it is evident that the assessee maintains its accounts on the mercantile basis. The assessee had deposited Rs. 9,86,190 with the Government as advance kist. Admittedly, interest accrued on this amount. The interest so accrued for the year 1983-84 came to Rs. 39,448; It is true that the advance so deposited which is evidenced by treasury deposits is assigned in favour of the Excise Commissioner. Even so, interest will accrue on the said deposits de die in diem. It may be that the interest so accrued to the assessee from time to time is finally adjusted against the subsequent lusts or otherwise paid when the balance is struck. Till then, he will not be entitled to receive the amount in cash. It may be that only when the amount is finally struck, the amount due to the assessee may be exactly determined. But, none of these factors will prevent the accrual of interest. The said accrual is from time to time. Even though the assessee is not entitled to receive such interest during the relevant year, nor will it be paid in cash, the fact that such interest will accrue to his credit and will be reckoned finally cannot admit of any doubt. We are not told nor is there any material in the paper book adverted to by the Commissioner of Income-tax (Appeals) or the Appellate Tribunal, that, by any statutory provision or terms in the agreement executed between the assessee and the Government, there is provision for cesser of interest during the period it accrues. There is no such plea or proof. So, on the facts, it cannot be denied that, for the deposits made, the interest that accrues to the assessee is taxable for the relevant accounting period. The fact that the assessee does not become entitled to it in the sense that the actual figure was not struck, will not in any way deter the accrual of interest. We are of the view that the mere fact that the Excise Department gives credit to the assessee only when the matter is finally settled will hot in any way make the interest taxable in that year. It is taxable the moment it accrues. That it accrues every year cannot admit of any doubt. Since the method of accounting followed herein is mercantile, we hold that the Commissioner of Income-tax (Appeals) as also the Appellate Tribunal were wrong in holding that the interest becomes taxable only in the year in which the Excise Department gives credit to the assessee. The moment the interest accrues it will be caught within the tax net, since, admittedly, the method of accounting is mercantile. We, therefore, hold that the decision to the contrary by the Commissioner of Income-tax (Appeals) and the Appellate Tribunal are erroneous in law.
7. We answer the questions referred to this court in the negative, against the assessee and in favour of the Revenue.
8. The reference is answered as above.
9. A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.