Mercantile accounting principle: accrued interest credited in books is taxable even without cash receipt.

Income credited in an assessee's mercantile books is taxable on accrual basis even if not actually received in cash. The assessee had entered interest on renewal of a promissory note in its books and added it to principal, showing treatment as business income. On that footing, the court applied the mercantile system consistently and held that the assessee could not adopt cash basis for this single item while keeping mercantile treatment for the rest. The disputed interest was therefore rightly included in taxable income, and the question was answered in the affirmative.

---

---

Issues: Whether interest of Rs. 2,500, credited in the assessee's books on renewal of a promissory note but not actually received in cash, was rightly included in taxable income under the mercantile system of accountancy.

Analysis: The assessee regularly maintained accounts on the mercantile basis, under which entries are made when transactions occur rather than when cash is actually received. Under that system, profits shown in the books form the basis of assessment, and if any item later becomes irrecoverable, it is dealt with as a bad debt. The disputed interest had been credited to the interest account in the assessee's own books and added to the principal on renewal of the note, showing that it had been treated as part of business income. On that footing, the governing principle was that an assessee who adopts the mercantile system cannot, for one item, insist on cash basis treatment while retaining mercantile treatment for the rest of the accounts.

Conclusion: The inclusion of the Rs. 2,500 was justified and was rightly brought to tax.

Final Conclusion: The legal effect of the decision is that income shown as accrued and credited in mercantile books is assessable even if not actually received in cash, and the question referred was answered in the affirmative.

Ratio Decidendi: Where an assessee maintains accounts on the mercantile basis, income credited in the books and treated as accrued is taxable on that basis, and the assessee cannot selectively switch to cash receipt treatment for a single item.

---