Court rules interest income taxable only when due for payment under mercantile accounting system

The court ruled in favor of the assessee, holding that interest accrued but not due under the mercantile system of accounting should not be treated as income until it becomes due for payment. The court emphasized that income on securities is chargeable only when due, especially if following the cash system of accounting. Changing the method of assessment without valid reasons is unsustainable. The judgment dismissed the appeals, affirming that income should be recognized when due for payment, in line with statutory provisions and established case law principles.

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Issues:
1. Taxability of interest accrued but not due under the mercantile system of accounting.

Analysis:
The main issue in this case revolved around the taxability of a sum of Rs. 7,93,423 being the interest accrued but not due under the mercantile system of accounting. The senior standing counsel argued that even if the interest had accrued but not received, it should be treated as income if it had become due in the previous year. However, the counsel for the assessee maintained that the interest had always been treated as income accrued "but not due." The Tribunal held that once interest had accrued but not due, it should not be included as income until it becomes due, supporting the assessee's position.

The court examined the Assessing Officer's rejection of the claim for exclusion of interest accrued, emphasizing that the right to receive the interest had not arisen to the assessee until the following year. Referring to a similar case involving a mercantile system of accounting, the court highlighted that under section 145 of the Income-tax Act, income on securities is chargeable only when due, especially if the assessee is following the cash system of accounting. The court reiterated that the method of accounting should not be changed without valid reasons, and the assessee should be taxed for interest on securities only when it becomes due for payment.

Based on the analysis of the statutory provisions and relevant case law, the court dismissed the appeals, ruling in favor of the assessee and against the Revenue. The judgment established that under the mercantile system of accounting, income should be recognized when it becomes due for payment, and changing the method of assessment without proper justification is unsustainable. Consequently, the tax case was dismissed, applying the principles laid down in the cited case law and statutory provisions.

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