Mercantile accounting and accrued interest: income is taxable when it accrues, even if payment falls later.

Under the mercantile system of accounting, accrued interest on hire purchase machinery loans and penal interest are taxable in the relevant previous year when the income accrues, even if the payment due dates fall after the year-end. The court treated the accounting method as ative and declined remand because the assessee's mercantile basis was clear and its own earlier case governed the issue. The accrued interest and penal interest were therefore correctly included in total income for the assessment year, and the issue was answered against the assessee.

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Issues: Whether accrued interest on hire purchase of machinery loans and penal interest were liable to be included in the assessee's total income for the relevant assessment year despite the due dates of payment falling after the close of the previous year.

Analysis: The assessee was found to be following the mercantile system of accounting for the assessment year in question. On that basis, the liability to bring the accrued interest and penal interest into account arose in the relevant previous year itself. A request for remand was declined because the finding regarding the accounting method was clear and the earlier decision in the assessee's own case governed the matter.

Conclusion: The accrued interest and penal interest were correctly included in the total income. The question was answered in the affirmative and against the assessee.

Ratio Decidendi: Under the mercantile system of accounting, income that has accrued during the relevant previous year is taxable in that year even if the due date for payment falls later.

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