Accrued interest taxability depends on an enforceable right to receive it; pendente lite interest was not treated as income.

Interest is taxable as accrued income only when the contract and surrounding facts create a real and enforceable right to receive it. Where the deposit clause provided interest only at half-yearly intervals and no term covered post-termination interest, no accrual was found for the period after termination but before suit, especially given the uncertainty created by the distributor's counterclaim and the non-strict mercantile treatment of the entries. Interest pending suit was also not treated as accrued income, since pendente lite interest depends on the court's discretion and not on an automatic contractual entitlement. The additions for assumed accrued interest were therefore deleted.

---

---

Issues: (i) Whether interest on the deposit with the distributor accrued to the assessee after the suit for recovery was filed and during the pendency of the suit. (ii) Whether interest accrued to the assessee for the period after termination of the distributorship agreement and before the filing of the suit.

Issue (i): Whether interest on the deposit with the distributor accrued to the assessee after the suit for recovery was filed and during the pendency of the suit.

Analysis: The agreement provided for interest on the deposit only at half-yearly intervals and contained no stipulation for interest after termination. The Court applied the principle reflected in section 34 of the Code of Civil Procedure, 1908, that interest pending suit is within the discretion of the court, while pre-suit interest depends on contract. On that basis, and following the reasoning accepted from the cited authorities, interest during the pendency of the suit could not be said to have accrued as income.

Conclusion: No interest accrued to the assessee for the period during which the suit remained pending.

Issue (ii): Whether interest accrued to the assessee for the period after termination of the distributorship agreement and before the filing of the suit.

Analysis: The deposit clause did not expressly provide for interest after termination, and the counterclaim by the distributor for a substantial amount made recovery uncertain. The entries were also not shown to be made in a strict mercantile manner for this transaction, as they depended on receipt of credit notes. In these circumstances, interest for the pre-suit post-termination period was not regarded as having really accrued to the assessee.

Conclusion: No interest accrued to the assessee for the period after termination and before the suit was filed.

Final Conclusion: The additions made on account of assumed accrued interest were rightly deleted, and the assessee succeeded on the substantive tax issue.

Ratio Decidendi: Interest can be taxed as accrued income only when, under the contract and surrounding circumstances, a real and enforceable right to receive it has arisen; interest pendente lite is not treated as accrued income merely because the underlying claim is ultimately decreed.

---