Accrued interest capitalised in a fresh promissory note may be assessed as income when accounting entries treat it as received

Where accrued interest on an existing debt was converted into a fresh promissory note and treated in the books as received under the assessee's accounting method, that accounting treatment provided material for the Income Tax Officer to treat the amount as assessable income in the relevant year. The court noted that the real question was not whether another view was possible, but whether the officer had material on which to reach the conclusion he did. On that basis, the sum was upheld as taxable income, and the reference was answered in favour of the Revenue.

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Issues: Whether there was material before the Income Tax Officer to conclude that the interest credited on the fresh promissory note was assessable income for the accounting year.

Analysis: The accounting treatment adopted for transactions with non-Chettiyar debtors showed that when an accrued interest debt was converted into a fresh loan by acceptance of a new promissory note, the interest was treated as having been received and was entered in the accounts accordingly. In that situation, the interest was capitalised in the new transaction and the method of accounting supported the inference that the amount had accrued and was properly brought to tax. The issue was not whether a different conclusion was possible, but whether there was material on which the Income Tax Officer could reach the conclusion that he did.

Conclusion: There was material before the Income Tax Officer to hold that the sum represented accrued interest assessable to income tax, and the answer to the question was in the affirmative, in favour of the Revenue.

Final Conclusion: The reference was answered by upholding the taxability of the disputed interest on the footing that the officer's conclusion was supported by material on record.

Ratio Decidendi: Where accrued interest on an existing debt is capitalised into a fresh promissory note and treated in the books as received under the assessee's accounting method, there is material to support assessment of that amount as taxable income for the relevant year.

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