Accrued interest is not taxable where recovery is doubtful and the income has not truly accrued.

Interest on a loan was not taxable on a mere accrual basis where the debtor's financial position had become precarious and recovery of the interest had become doubtful. The Tribunal accepted that, on those facts, the assessee was not required to credit the interest in its accounts as income, because the income had not truly accrued. The addition made on presumptive accrual was therefore not warranted and the deletion of the addition was upheld.

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Issues: Whether interest on the loan advanced by the assessee could be brought to tax on a mere accrual basis when the debt had become doubtful and the assessee had not credited such interest in its accounts.

Analysis: The dispute turned on whether the interest had ously accrued so as to constitute taxable income for the relevant assessment year. The Tribunal followed its earlier decision on the same facts and held that the assessee was not obliged to show the interest as income in its accounts when the debtor's financial condition had become precarious and the recovery of interest had become doubtful. On that footing, the addition made by the Income-tax Officer on presumptive accrual was not warranted.

Conclusion: The addition was not sustainable and the order deleting it was upheld in favour of the assessee.

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