Real income doctrine bars tax on uncertain fixed deposit interest until pending criminal proceedings are resolved.

Accrued interest on fixed deposits kept under prohibitory orders during pending criminal proceedings was not taxable as real income merely because it had earlier been offered on an accrual basis. The HC held that where the deposits remained subject to continuing uncertainty and the interest was not credited to the assessee's account, tax liability arose only when the entitlement was finally resolved. A past accounting practice of recognising the interest could not override the unsettled character of the income. The deletion of the interest addition was therefore upheld in favour of the assessee.

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Issues: Whether accrued interest on fixed deposits, kept under prohibitory orders in pending criminal proceedings and not credited to the assessee's account, could still be brought to tax merely because the assessee had earlier offered such interest on accrual basis and had subsequently shifted to receipt basis.

Analysis: The assessment years in question were governed by the Income-tax Act, 1961. The dispute centred on whether the interest on the fixed deposits had attained the character of real income in the assessee's hands. The fixed deposits remained subject to uncertainty because the underlying criminal proceedings were pending and the amounts were not credited to the assessee's account. In that situation, the Court treated the CBDT's clarification and the surrounding legal position as supporting the principle that uncertain income cannot be taxed on a notional basis merely because interest may accrue in a bookkeeping sense. The earlier practice of offering the interest to tax did not override the continuing uncertainty attaching to the deposits and the assessee's liability to pay tax was held to arise only upon final resolution of the pending proceedings.

Conclusion: The addition of accrued interest on fixed deposits was rightly deleted and the answer to the substantial questions was in favour of the assessee.

Final Conclusion: The appeals failed on the core tax issue and the Tribunal's deletion of the interest addition was sustained.

Ratio Decidendi: Interest that remains uncertain because the underlying entitlement to the fixed deposits is sub judice does not constitute taxable real income merely on accrual, and cannot be brought to tax until the uncertainty is resolved.

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