Accrued interest remains taxable under mercantile accounting despite later waiver; subsequent remission cannot defeat completed accrual.

Interest accrued under the mercantile system was taxable in the relevant assessment year because the assessee had an express yearly arrangement for charging interest on outstanding advances and the amount had become due during the accounting year. The later correspondence did not establish any prior agreement dispensing with interest, so accrual was complete in the relevant previous year. A subsequent waiver could not alter the taxability of income already accrued, because the real income doctrine operates only to determine whether accrual occurred and does not nullify an accrual already completed in that year.

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Issues: (i) Whether interest of Rs. 1,30,233 had accrued to the assessee in the relevant previous year and was taxable for the assessment year 1974-75. (ii) Whether waiver of the interest in a subsequent year could alter the taxability of the amount that had already accrued.

Issue (i): Whether interest of Rs. 1,30,233 had accrued to the assessee in the relevant previous year and was taxable for the assessment year 1974-75.

Analysis: The assessee maintained mercantile accounts and had an express yearly arrangement for charging interest on the outstanding advances. For the accounting year ending 31 December 1973, the interest had become due in terms of that arrangement. The subsequent correspondence did not show any prior agreement dispensing with interest during that year. On these facts, the income was held to have accrued during the relevant previous year.

Conclusion: The amount of Rs. 1,30,233 had accrued and was rightly assessed as income for the assessment year 1974-75, against the assessee.

Issue (ii): Whether waiver of the interest in a subsequent year could alter the taxability of the amount that had already accrued.

Analysis: The controlling principle applied was that once income has accrued, later conduct of the parties cannot convert that accrued income into no income. The real income theory can be invoked only to determine whether accrual has in fact taken place, and not to nullify an accrual already completed in the relevant year.

Conclusion: The subsequent waiver did not affect the accrued income and the answer was against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue on both questions, confirming the taxability of the accrued interest notwithstanding its later waiver.

Ratio Decidendi: Income that has accrued under the mercantile system cannot be rendered non-taxable by a subsequent waiver or remission; the real income doctrine does not override an accrual already completed in the relevant accounting year.

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