Constructive receipt of Tavanai interest made the income taxable under Section 4 in British India.

Interest on loans advanced outside British India under the Tavanai system was treated as taxable income where overdue interest was added to principal and carried forward in a way that amounted to constructive receipt. The court held that, on these facts, the interest was deemed received rather than being a mere book entry, so the Explanation to Section 4 did not prevent taxability. It further accepted that the income was received in British India within the meaning of the provision. The sum was therefore assessable under Section 4 of the Income-tax Act and taxable in the assessee's hands.

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Issues: Whether interest on loans advanced outside British India under the Tavanai system could be taxed as income under Section 4 of the Income-tax Act as income accruing, arising or received in British India during the year of account.

Analysis: Under the Tavanai system, interest due and unpaid at the end of each period was treated as added to principal and carried forward to bear further interest, with the practical effect that the interest was treated as received and re-lent. On that basis, the interest was deemed to have been received for income-tax purposes even though no cash payment was actually made. The Explanation to Section 4, which excludes mere book entries in a balance sheet from amounting to receipt, did not assist the assessee because the Court found an actual deemed receipt on the facts. The Court also accepted that the interest was received in British India within the meaning of the section.

Conclusion: The sum was taxable under Section 4 of the Income-tax Act, and the reference was answered in the affirmative against the assessee.

Final Conclusion: The assessment was upheld on the footing that interest treated as realised under the Tavanai arrangement constituted taxable income received in British India.

Ratio Decidendi: Where, under a lending arrangement, overdue interest is treated by the parties as added to principal and carried forward in a manner that amounts to constructive receipt in British India, such interest is assessable under Section 4 as income received in British India.

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