Accrued interest under regular accounting was assessable where fresh promissory notes were treated as realisation of debt.

Interest treated by the assessees as realised when fresh promissory notes were accepted in substitution of existing debt could be assessed as accrued income in the relevant year where the books of account and regular accounting practice supported that treatment. The Income Tax Officer was entitled to compute income according to the method of accounting regularly employed under section 13 of the Income-tax Act, 1922, and the surrounding facts provided material for concluding that the interest had been liquidated and entered as received. The Court therefore held that the sum was assessable to income-tax in the assessment year 1933-1934, answering the reference in favour of the Revenue.

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Issues: Whether there was material before the Income Tax Officer to conclude that the sum of Rs. 23,373, being interest on loans to non-Chettyar debtors represented by fresh promissory notes, had accrued and was assessable to income-tax in the assessment year 1933-1934.

Analysis: The assessees treated interest due under the original loans as having been realised when fresh promissory notes were executed and delivered in substitution of the old debts, and the amount was entered as received in both the interest accounts and the debtors' accounts. On that footing, the Court held that the Income Tax Officer was entitled to compute income in accordance with the method of accounting regularly employed by the assessees under Section 13 of the Income-tax Act, 1922. The facts distinguished the cases relied upon by the assessees, because here the books and the accounting practice showed treatment of the interest as realised, and the execution of fresh promissory notes was regarded as a liquidation of the interest liability.

Conclusion: There was material to justify the finding that the sum of Rs. 23,373 represented interest assessable in the relevant year, and the answer to the question was in the affirmative in favour of the Revenue.

Ratio Decidendi: Where an assessee, following a regular method of accounting, treats interest as realised upon acceptance of fresh promissory notes in substitution of an existing debt, the tax authority may assess that amount as accrued income if the books and surrounding facts furnish material for such a conclusion.

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