Accrual of interest income depends on a real right to receive; disputed loan interest is not taxable until enforceable.

Under the mercantile system, interest is taxable only when the assessee has a real and enforceable right to receive it; if recovery is uncertain and the loan accounts are under dispute or litigation, the interest does not constitute accrued income merely because it is booked on accrual basis. Section 34 of the Code of Civil Procedure, 1908 may be used only as an aid in understanding interest payable where the right to receive depends on judicial determination, and this does not alter the scope of Section 5 of the Income-tax Act, 1961. The disputed interest was therefore treated as not taxable in the relevant years.

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Issues: (i) Whether, in the case of assessee following the mercantile system of accounting, interest on housing loans advanced to certain societies could be treated as income accrued or received during the relevant assessment years. (ii) Whether the Tribunal was justified in relying upon Section 34 of the Code of Civil Procedure, 1908 while deciding the taxability of such interest income in the light of Section 5 of the Income-tax Act, 1961.

Issue (i): Whether, in the case of assessee following the mercantile system of accounting, interest on housing loans advanced to certain societies could be treated as income accrued or received during the relevant assessment years.

Analysis: Under the mercantile system, income is ordinarily recognised on accrual, but accrual requires a corresponding right to receive and a real debt due to the assessee. Where recovery of interest is uncertain and the loans are in litigation, the claim cannot be treated as real income merely because the assessee follows mercantile accounting. The Tribunal's finding was based on the factual position that the interest in question had not really accrued as income and that the disputed loans were under legal proceedings.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Issue (ii): Whether the Tribunal was justified in relying upon Section 34 of the Code of Civil Procedure, 1908 while deciding the taxability of such interest income in the light of Section 5 of the Income-tax Act, 1961.

Analysis: Section 34 of the Code of Civil Procedure, 1908 was used only as an aid to understand the nature of interest payable where the right to receive interest depended on judicial determination. In the circumstances of disputed and sub judice loan accounts, the Tribunal's approach did not distort the scope of Section 5 of the Income-tax Act, 1961, and the Revenue's reliance on contrary authorities was held inapplicable on the facts.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: The appeals failed because the disputed interest was held not to have accrued as taxable income in the relevant years, and the Tribunal's view was sustained.

Ratio Decidendi: Under the mercantile system, interest becomes taxable only when the assessee has a real and enforceable right to receive it; if recovery is uncertain and the claim remains under dispute, the amount does not constitute accrued income.

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