Accrual of interest income turns on enforceable rights, not mere book entries in suspense accounts.

Interest booked in suspense accounts was examined for accrual under the mercantile system of accounting. For interest in the recalled account, the governing CBDT circular on doubtful debts, reinforced by UCO Bank, required taxation only on actual recovery, not on a mere book entry. For interest from the date of suit until decree, the right to further interest depended on the court's discretion under section 34 of the Code of Civil Procedure, so the claim remained inchoate until decree and did not accrue year by year. On that basis, neither amount was taxable as accrued income for the relevant assessment year.

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Issues: Taxability of interest credited to the interest suspense (suit filed) account and the interest suspense (recalled) account, and whether such amounts had accrued as income for the assessment year.

Analysis: The assessee continued to follow the mercantile system of accounting, but the treatment of the two categories of interest had to be tested separately. As to the amount in the interest suspense (recalled) account, the binding circular of the Central Board of Direct Taxes governing doubtful debts and the later clarification in UCO Bank required that only actual recovery, and not the mere credit entry, be taxed. As to interest from the date of suit until decree, the right to claim further interest was held to depend on the discretion of the court under section 34 of the Code of Civil Procedure, 1908, so the assessee had only an inchoate claim until decree and no taxable accrual arose year by year.

Conclusion: Neither the amount credited to the interest suspense (recalled) account nor the amount credited to the interest suspense (suit filed) account was taxable as accrued income for the relevant assessment year.

Final Conclusion: The reference was answered against the Revenue and the addition of both interest amounts was disapproved.

Ratio Decidendi: Under the mercantile system, interest is taxable only when it represents an enforceable accrual of income; where a binding circular governs doubtful debts or the right to further interest remains subject to judicial discretion until decree, mere book entries do not constitute taxable accrual.

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