Interest income does not accrue when recovery is barred by statute, even under mercantile accounting principles.

Interest income on deposits did not accrue under the mercantile system where the governing statutory bar prevented institution of recovery proceedings. Accrual for income-tax purposes required a present, legally enforceable right to receive the amount, not a merely notional entitlement. Because the assessee could not legally enforce recovery during the relevant assessment years, the interest was not taxable on accrual. Authorities involving postponed or later relinquished income were distinguished because, in those cases, the right to receive had already crystallised and enforcement was not barred.

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Issues: Whether interest income on the deposits advanced to the mills accrued to the assessee during the relevant assessment years, despite the statutory bar on instituting proceedings for recovery of the interest.

Analysis: The assessee maintained accounts on the mercantile basis, under which income ordinarily accrues when the right to receive it comes into existence. The statutory provision in force during the relevant years barred the institution of proceedings for recovery of the amount, so the assessee's claim to interest was not legally enforceable. Accrual for income-tax purposes requires more than a notional entitlement: the assessee must have a present enforceable right to receive the amount. Authorities dealing with situations where income had merely been postponed or later relinquished were distinguished because, in those cases, the right to receive had already crystallized and no legal bar existed to enforcement.

Conclusion: The interest income did not accrue to the assessee during the relevant assessment years, and the answer to the referred question was in the negative, in favour of the assessee.

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