Enforceable right to receive income and deductibility of foreign note interest depend on payment restrictions and taxpayer status.

Income is treated as arising only when the assessee acquires an enforceable right to receive it, and supervening exchange restrictions that frustrate payment in the agreed contractual mode can defer taxability; on that principle, interest on the foreign debentures was not regarded as accruing in the earlier year. For interest paid to a foreign parent on promissory notes, the sterling note interest was treated as allowable expenditure with no obligation to deduct tax at source where section 42 did not apply, while the rupee note interest was disallowable in the non-resident year but allowable when the assessee was assessed as resident.

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Issues: (i) Whether interest on foreign debentures, though due under the contract in the accounting year, could be treated as arising only when it became legally enforceable in view of supervening exchange restrictions and the altered mode of payment; (ii) Whether interest paid by the assessee to its foreign parent company on the sterling and rupee promissory notes was deductible and whether tax was required to be deducted at source.

Issue (i): Whether interest on foreign debentures, though due under the contract in the accounting year, could be treated as arising only when it became legally enforceable in view of supervening exchange restrictions and the altered mode of payment.

Analysis: Income arises when the assessee acquires a right to receive it and a debt becomes due and payable under the contract. Where the agreed mode of discharge is frustrated by supervening foreign exchange restrictions, the debt may remain due but does not remain payable in the agreed manner. On the facts, payment in sterling through London was prevented until 1951, and the assessee had no enforceable claim for the 1950 interest in that year. The same position applied to the 1953 interest because the restrictions again prevented payment in the agreed mode.

Conclusion: The interest did not arise for assessment in the earlier year and the Tribunal's view in favour of the assessee was correct.

Issue (ii): Whether interest paid by the assessee to its foreign parent company on the sterling and rupee promissory notes was deductible and whether tax was required to be deducted at source.

Analysis: The sterling promissory note arose out of a sale transaction and not out of any loan at interest brought into the taxable territories. Section 42 was therefore inapplicable, and no obligation to deduct tax under section 18(3B) arose. The interest on that note was accordingly allowable as expenditure. As regards the rupee promissory note, the expenditure was not deductible when the assessee was assessed as non-resident because it was not connected with income earned within the taxable territories, but it was deductible from total income in the year when the assessee was assessed as resident.

Conclusion: Tax was not deductible at source on the sterling promissory note interest, and that interest was allowable; the rupee promissory note interest was disallowable in the non-resident year but allowable in the resident year.

Final Conclusion: The reference was substantially answered in favour of the assessee on the accrual questions, while the deduction issue was answered partly in favour of the assessee and partly against it, depending on the nature of the promissory note and the assessee's status in the relevant year.

Ratio Decidendi: Income arises when the assessee acquires an enforceable right to receive it, and supervening legal impossibility preventing performance in the agreed contractual mode may defer the point at which the debt becomes payable for tax purposes; deductibility of interest depends on the statutory chargeability of the recipient's income and the connection of the expenditure with taxable income.

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