Accrual of interest income follows the preliminary decree, preventing tax in the later assessment year.

Interest arising from a family deposit was held not taxable in the year under appeal because the preliminary decree had already conclusively determined the liability and the rate of interest. The final decree merely quantified the amount on the basis previously settled, and a party that did not challenge the preliminary decree could not reopen it in an appeal from the final decree under the rule reflected in Section 97 CPC. As the dispute stood finally concluded before the relevant previous year, the income had not accrued in that year, and taxation on receipt basis was also unsupported on the record. The addition was therefore unsustainable.

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Issues: Whether the interest amount arising from the family deposit was assessable in the assessment year under appeal on the basis of the final decree, or whether the dispute had already been finally concluded by the preliminary decree so that the amount could not be brought to tax in the year under appeal.

Analysis: The dispute between the assessee and the company concerned the liability to pay interest and the rate at which it was payable. The preliminary decree conclusively determined that liability and the rate of interest. The final decree only quantified the amount on the basis already settled. A preliminary decree has binding force, and under the rule embodied in Section 97 of the Code of Civil Procedure, 1908, a party who does not challenge it cannot later dispute its correctness in an appeal from the final decree. Since the controversy stood finally settled by the preliminary decree long before the relevant previous year, the interest could not be said to have accrued in the year covered by the assessment under appeal. The view that the income was taxable on receipt basis was also not sustainable, as neither party had proceeded on that basis before the lower authority.

Conclusion: The interest amount was not assessable in the year under appeal, and the addition could not be sustained. The decision is in favour of the assessee.

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