Accrued interest on sticky loans is taxable under mercantile accounting when the right to receive interest continues.

Under the mercantile system, interest becomes taxable when the right to receive it accrues, even if it is not entered in the books or is taken to an interest suspense account. Relief was confined to sticky loans where suits had been filed and interest had ceased to accrue; for the remaining loans, no suit was filed, the contractual right to interest continued, and the assessee's non-charging of interest did not prevent accrual of income. The Tribunal's view that tax was payable on the accrued interest on those remaining sticky loans was upheld, and the reference application failed.

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Issues: Whether the assessee was liable to pay tax on accrued interest on sticky loans for the assessment year 1980-81 under the mercantile system of accounting.

Analysis: The assessee had earlier credited interest on sticky loans to an interest suspense account, but for the relevant year it had not charged interest on all such advances. Relief was confined to those sticky loans in respect of which suits had been filed and interest had ceased to accrue. For the remaining loans, no suit had been filed, the contractual right to interest continued, and the assessee's conduct did not establish that income had not accrued. On the mercantile system, the mere fact that interest was not entered in the books was immaterial where the right to receive it had accrued.

Conclusion: The reference application failed, and the Tribunal's view that the assessee was liable to tax on accrued interest on the remaining sticky loans was upheld.

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