Real income theory bars taxation of inter-corporate deposit interest until accrual and irrecoverability are verified.

Interest on inter-corporate deposits could not be taxed on a merely notional basis without first verifying whether income had actually accrued. The Tribunal held that the key enquiry was whether the amount had become irrecoverable before accrual or only after accrual, and applied the real income theory to reject addition absent foundational factual verification. The Supreme Court authority relied on by the revenue was found inapposite on these facts. The matter was restored to the Assessing Officer for fresh examination of accrual and irrecoverability, and the assessee's grounds were allowed for statistical purposes.

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Issues: Whether interest on inter-corporate deposits had accrued so as to be taxable, or whether the matter required verification on the basis of real income theory and the assessee's claim that the amount had become irrecoverable before accrual.

Analysis: The addition was based on the view that interest on the inter-corporate deposits had accrued and could not be treated as bad debt. The Tribunal found the reliance on the cited Supreme Court decision inapposite on the facts, as the present dispute turned on whether income had actually arisen or accrued at all. It noted that in the assessee's own earlier years the same issue had been remitted for factual verification, and that the decisive enquiry was whether the interest was irrecoverable before accrual or only after accrual. Applying the real income theory, the Tribunal held that notional taxation could not be sustained without first verifying these foundational facts.

Conclusion: The issue was restored to the Assessing Officer for fresh examination of whether interest on the inter-corporate deposits had accrued or had become irrecoverable before accrual, and the assessee's grounds were allowed for statistical purposes.

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