Accrued interest is not taxable income unless received, adjusted, or constructively received under the assessee's control.

Interest merely accrued to a money-lending firm during the year of account was not taxable as income or business profits under the Income-tax Act, 1918, unless it was received in cash, adjusted in the accounts, or otherwise brought under the assessee's control by constructive receipt. The court examined the ordinary meaning of income, the statutory scheme for taxing business profits, and authorities on accrual and receipt, and accepted that mere creation of a debt does not by itself amount to taxable receipt. On that basis, accrued but unrealised interest was held not taxable on that footing alone, and the reference was answered in favour of the assessee.

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Issues: Whether interest which became due to a money-lending firm during the year of account, but was not received in cash or by adjustment in the accounts, was taxable as income or profits under the Income-tax Act, VII of 1918.

Analysis: The Act applies to income derived from business and the taxable profits of a business are to be computed under the statutory scheme. The judgments treated the controlling question as whether a sum merely becoming due could be treated as income without receipt or its legal equivalent. The Chief Justice and other judges examined the ordinary meaning of income, the statutory language of accrual, receipt and business profits, and the English authorities on receipts, profits and constructive receipt. The reasoning accepted that actual cash receipt is not indispensable, but mere accrual of a debt does not by itself make the amount taxable unless there is receipt, adjustment, or a form of constructive receipt that places the money under the assessee's control.

Conclusion: Interest that had merely accrued due, but had not been realized in cash or by adjustment, was not taxable on that footing alone. The reference was answered against the Revenue and in favour of the assessee.

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