Method of accounting under the mercantile system governs taxability; regulatory omission cannot exclude accrued income and addition stands.

The article addresses whether accrued but unrealised interest omitted from accounts at the behest of a regulatory direction may be excluded from taxable income. It applies the taxpayer's regular method of accounting and the mercantile accrual principle to conclude that income accrues when entries should have been made; a regulatory instruction to omit such crediting does not change the statutory basis for computing total income. Consequently amounts properly accruing under the regular method may be included by the tax authority and the addition is justified.

---

---

Issues: Whether the addition of Rs. 38,500 to the assessee's income for the assessment year 1958-59, representing accrued but unrealised interest omitted from the profit and loss account in compliance with a Reserve Bank of India direction, was justified.

Analysis: The issue turns on the application of the assessee's regular method of accounting and the operation of the Income-tax Act, 1922. Section 13 requires computation of income in accordance with the method of accounting regularly employed by the assessee; under the mercantile system income on accrual is taxable when entries should have been made. A direction by the Reserve Bank of India to omit crediting unrealised interest does not alter the statutory basis for computing total income under the Income-tax Act. Omission of entries required by the regular method of accounting cannot be used to escape liability to tax, and the Income-tax Officer may include amounts which should have been brought into account under that method.

Conclusion: The addition of Rs. 38,500 is justified; decision in favour of the Revenue and against the assessee.

---