Mercantile system taxation: accrued interest remains taxable despite non-receipt unless accrual itself has failed or been given up.

Under the mercantile system, interest on outstanding loans is taxable when it has legally accrued, even if not actually received. The principle of real income may exclude tax only where accrual itself has failed or the interest has been effectively given up; mere non-receipt, difficulty in recovery, or bona fide reluctance to charge interest is not enough. On the facts stated, the accrued interest remained includible in taxable income and the additions for the relevant years were sustained.

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Issues: Whether, on the mercantile system of accounting, interest on outstanding loans was liable to be included in the assessee's total income for the relevant assessment years despite non-receipt and apprehended difficulty in recovery.

Analysis: Section 13 of the Income-tax Act required income, profits and gains to be computed in accordance with the method of accounting regularly employed by the assessee. Under the mercantile system, income that has legally accrued is brought into account even if not actually received. The principle of real income may prevent taxation where no real accrual exists, but the mere fact of non-receipt for some years, without writing off the debt or showing that the interest was given up, is not enough to establish that no income accrued. The assessee's bona fide reluctance to charge interest and the difficulty in recovery did not, on the facts found, displace accrual.

Conclusion: The interest amounts were rightly includible in the assessee's taxable income, and the answer to the question was in the affirmative, against the assessee.

Final Conclusion: The reference was answered by holding that interest on the outstanding loans accrued as taxable income under the mercantile system, and the additions made for both assessment years were sustained.

Ratio Decidendi: Income that has legally accrued under the mercantile system is taxable even if not received, unless the assessee establishes that there was in truth no real income because the accrual itself had failed or been effectively given up.

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