Real income principle barred tax on overdue interest where recovery remained uncertain and accrual was only notional.

Overdue interest on an unrecovered contractual debt was not taxable on accrual basis where it had remained unpaid for years, was no longer recognised in the books, and recovery remained uncertain. The mercantile system did not by itself create taxable income; the interest had to accrue in a real and enforceable sense before it could be brought to tax. Applying the real income principle, the addition could not be sustained on notional accrual alone, and the deletion of the addition was upheld in favour of the assessee.

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Issues: Whether overdue interest on the unrecovered contractual debt was taxable on accrual basis despite prolonged non-recovery and uncertainty of recovery.

Analysis: The interest had not been received for many years, had ceased to be recognized in the books, and the facts showed continuing uncertainty about recovery. In such circumstances, the amount did not represent real income merely because the assessee maintained mercantile accounts. The reasoning on real income and accrual was treated as consistent with the principles applied in the cited authorities, and the addition could not be sustained unless the income had actually accrued in a real and enforceable sense.

Conclusion: The overdue interest was not taxable as accrued income in the relevant years, and the deletion of the addition was upheld in favour of the assessee.

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