Constructive receipt principle treats capitalised interest under tavanai as received, enabling taxation under Section 4 of the Income tax Act.

Whether a specified sum constituted income "received in British India" under Section 4 formed the legal issue. Applying the tavanai contract characterisation that unpaid interest is capitalised and treated as received and reinvested, the court relied on mercantile accounting and the constructive receipt principle to distinguish constructive receipt from mere balance-sheet inclusion. The Court concluded that the capitalised interest was constructively received in British India and therefore taxable under Section 4, and the assessment of the sum in question was upheld in favour of the revenue.

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Issues: Whether the sum of Rs. 5,578 can be taxed under Section 4 of the Income-tax Act as income accruing or arising or received in British India during the year of account.

Analysis: The petitioner lent money abroad under the tavanai system whereby unpaid interest is added to principal at each period and thus treated as received and reinvested. Precedents were considered holding that interest so capitalised is to be treated as a fresh deposit or as having been received. Section 4 provides that profits or gains of a business accruing or arising outside British India to a resident shall be deemed to have accrued or arisen in British India if they are received in or brought into British India, and the explanation disallows mere inclusion in a balance sheet from constituting receipt. The Court applied the principle that under the tavanai contract the unpaid interest is constructively received (not merely recorded) and, applying prior decisions on mercantile accounting and constructive receipt, concluded that the interest in question must be treated as received in British India for the purposes of Section 4.

Conclusion: The reference is answered in the affirmative and the assessment of the sum of Rs. 5,578 under Section 4 of the Income-tax Act is upheld in favour of the revenue.

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