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Issues: (i) Whether interest claimed for the period after institution of the suit accrued to the assessee for income-tax purposes before the passing of the decree. (ii) Whether the Tribunal was justified in restoring the matter to the Appellate Assistant Commissioner for fresh decision after the result of the suit was known.
Issue (i): Whether interest claimed for the period after institution of the suit accrued to the assessee for income-tax purposes before the passing of the decree.
Analysis: The assessee followed the mercantile system, but accrual of income must still be tested by the governing law. For post-institution interest in a money suit, section 34 of the Code of Civil Procedure makes the grant and rate of such interest dependent on the court's discretion until decree is passed. Until then, the assessee has only a claim to seek such interest and no vested right to receive it at the contract rate as income. Accordingly, the post-suit interest did not accrue year by year for assessment merely because the suit was pending.
Conclusion: The question was answered in the affirmative and in favour of the assessee.
Issue (ii): Whether the Tribunal was justified in restoring the matter to the Appellate Assistant Commissioner for fresh decision after the result of the suit was known.
Analysis: The Tribunal did not decide the matter in vacuum. It took note that the suit had not yet been decided and found it proper to defer final tax determination until the civil court's decision on the underlying claim for post-institution interest. Such a course was held to be within the Tribunal's jurisdiction and appropriate on the facts.
Conclusion: The question was answered in the affirmative and in favour of the assessee.
Final Conclusion: The reference was decided entirely for the assessee, and the taxability of post-suit interest was held to depend on the outcome of the civil suit and the decree under section 34 of the Code of Civil Procedure.
Ratio Decidendi: Where entitlement to post-institution interest depends on the court's discretionary award in a pending money suit, no income accrues for tax purposes until the decree determines that entitlement.
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