Accrual of interest income on deferred sale consideration depends on vested rights and valid prospective modification of payment terms.

Interest on deferred sale consideration accrues under the mercantile system when the assessee's enforceable right to receive it vests. A later board-approved revision of payment terms did not retrospectively extinguish interest already accrued for the earlier assessment year, so that amount remained taxable. For the subsequent assessment year, the revised arrangement became operative before the relevant previous year ended and provided that interest would start only from 1-7-1979; as no right to receive interest arose during that year, there was no accrual and no taxable income for that period.

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Issues: (i) Whether interest on deferred sale consideration accrued to the assessee for assessment year 1979-80 despite the subsequent arrangement modifying the payment terms. (ii) Whether interest on the deferred sale consideration accrued for assessment year 1980-81 after the board resolution approving the revised mode of payment.

Issue (i): Whether interest on deferred sale consideration accrued to the assessee for assessment year 1979-80 despite the subsequent arrangement modifying the payment terms.

Analysis: The original agreement and the supplemental agreement created an enforceable right in favour of the assessee to receive interest on the unpaid purchase price. Income accrues when the right to receive it vests, and under the mercantile system interest ordinarily accrues as the debt becomes due. The revised arrangement approved by the board on 30-6-1978 did not operate retrospectively to wipe out the accrued right for the earlier period. No sufficient commercial expediency was established to justify giving up the accrued interest for that year.

Conclusion: The interest was taxable for assessment year 1979-80 and the addition was rightly sustained, against the assessee.

Issue (ii): Whether interest on the deferred sale consideration accrued for assessment year 1980-81 after the board resolution approving the revised mode of payment.

Analysis: For the later assessment year, the revised mode of payment had already become operative before the relevant previous year ended, and the agreement provided that interest would begin only from 1-7-1979. Where the parties validly modify their arrangement so that no right to receive interest arises during the accounting year, there is neither accrual of income nor any enforceable obligation to pay interest for that year. In such a situation, the question of relinquishment of an accrued right does not arise.

Conclusion: The interest was not taxable for assessment year 1980-81 and the addition was deleted, in favour of the assessee.

Final Conclusion: The appeals succeeded only in part, with the addition relating to assessment year 1980-81 deleted while the addition for assessment year 1979-80 was maintained.

Ratio Decidendi: Income from interest is taxable on accrual only when the assessee's enforceable right to receive it has vested; a valid prospective modification of the payment terms can prevent accrual for the later period, but it does not retrospectively extinguish interest already accrued for an earlier year.

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