Accrued interest remains taxable under the mercantile system despite later compromise or waiver of the claim.

Under the mercantile system, interest becomes taxable when it accrues, not when it is actually received, so a later compromise and relinquishment did not alter taxability once the right to interest had arisen. The assessee had not disclaimed the interest before the relevant valuation date, and the subsequent compromise in the money suit could not retrospectively remove accrued income from assessment. The fact that the debtor was an unregistered firm also did not prevent assessment of the partner individually on the income attributable to her share. The interest amount was therefore treated as rightly taxable in the assessee's hands.

---

---

Issues: Whether interest of Rs. 23,575 accrued to the assessee during the assessment year 1958-59 and was includible in her taxable income notwithstanding her later compromise and relinquishment of the claim.

Analysis: The assessee followed the mercantile system of accounting, so income became taxable when it accrued and not when received. She had advanced loans to the firm while a partner and continued to advance monies after retirement. Up to the relevant valuation date, there was no disclaimer or relinquishment of the right to interest. The later compromise in the money suit could not affect taxability once the income had already accrued. The fact that the firm was an unregistered firm also did not prevent assessment of the partner individually, since a partner of an unregistered firm could be assessed on his or her share of income without prior assessment of the firm.

Conclusion: The deletion of the interest amount was not justified and the sum of Rs. 23,575 was rightly held taxable in the hands of the assessee.

---