Real income principle excludes disputed loan interest from tax when recovery suits are pending and accrual remains uncertain.

Interest on loans covered by pending recovery suits was not treated as having accrued because the right to receive it remained contingent on the outcome of the litigation and the court's discretion. The assessee's decision not to charge the interest to the debtors' accounts was consistent with the absence of real accrual. Applying the real income principle, the court held that notional or hypothetical income cannot be taxed where recovery is uncertain and the matter is sub judice. The disputed interest was therefore not includible in total income despite the mercantile system of accounting.

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Issues: Whether interest said to have accrued on loans in respect of which recovery suits were pending and no recovery had been made was includible in the assessee's total income despite the assessee following the mercantile system of accounting and having resolved not to charge such interest.

Analysis: Interest on the disputed loans was not treated as having actually accrued during the pendency of the recovery suits, because the right to receive it remained contingent upon the outcome of litigation and the court's discretion to award interest. In this setting, the assessee's decision not to debit the interest to the debtors' accounts was consistent with the absence of real accrual. The reasoning applied the settled approach that only real income, and not hypothetical or notional income, can be brought to tax where recovery is uncertain and the matter is sub judice.

Conclusion: The issue was decided in favour of the assessee and against the Revenue; the disputed interest was not includible in the total income.

Ratio Decidendi: Where recovery suits for loan amounts are pending and the right to interest remains uncertain, interest does not accrue as taxable income merely because the assessee follows the mercantile system.

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