Taxability of accrued interest under mercantile accounting upheld despite omission from accounts due to Reserve Bank direction.

Interest on sticky advances remained taxable where the assessee, following the mercantile system, had accrued the interest during the accounting period but omitted it from the profit and loss account pursuant to a Reserve Bank direction. The Income-tax Act required income to be computed according to the method of accounting regularly employed, and a Reserve Bank instruction could not displace that statutory mandate or prevent taxation of accrued income. An omission or incorrect accounting entry could not defeat tax liability when accrual had already taken place under the regular method. The interest was therefore brought to tax.

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Issues: Whether interest on sticky advances, omitted from the profit and loss account pursuant to a Reserve Bank direction, was nonetheless taxable as income accrued to an assessee following the mercantile system of accounting.

Analysis: The assessee had not changed its regular method of accounting. It merely omitted to credit interest which, under the mercantile system, had accrued during the relevant accounting period. The statutory scheme required income to be computed in accordance with the method of accounting regularly employed. A direction issued by the Reserve Bank of India could not override the mandate of the Income-tax Act or exclude from taxation income that had accrued according to the assessee's own accounting method. An omission or incorrect entry in the accounts could not defeat tax liability where the method of accounting required recognition of the amount.

Conclusion: The interest on sticky advances was rightly brought to tax. The answer to the reference was in the affirmative and against the assessee.

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