Accrual of interest on doubtful loan recovery depends on real accrual, not mere mercantile accounting.

Interest on an outstanding loan was treated as not having accrued where the debtor denied liability, a recovery suit had been filed, and the right to post-suit interest depended on judicial discretion under section 34 of the Code of Civil Procedure, 1908. The Tribunal accepted that the original lending arrangement had effectively ended, recovery was doubtful, and no interest had in fact been realised. On that realistic assessment, the mercantile system did not require taxation of a notional amount that had not truly accrued. The interest was therefore not assessable in the relevant year.

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Issues: Whether interest on an outstanding loan had accrued to the assessee and was assessable in the relevant assessment year despite non-receipt and the pendency of a suit.

Analysis: The assessee had stopped showing interest on the loan after the debtor denied liability and a suit for recovery of principal and interest had been instituted. The right to interest after the suit was subject to the court's discretion under section 34 of the Code of Civil Procedure, 1908, and the Tribunal found that the original arrangement had come to an end, recovery was doubtful, and no interest had in fact been realised. On a realistic view of the facts, the existence of a mercantile system did not compel taxation of an amount that had not truly accrued.

Conclusion: The interest did not accrue to the assessee in the relevant year and was not assessable; the answer was in favour of the assessee.

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