Accrued interest under mercantile accounting is taxable when it accrues, not when it is received.

Interest income on loans advanced by an assessee following the mercantile system of accounting is taxable on accrual, not on receipt. Where interest has accrued during the relevant previous years, it forms part of the taxable income for those assessment years even if it was not actually received. The material principle applied is that, under mercantile accounting, income becomes chargeable when the right to receive it accrues. On that basis, the accrued interest was treated as assessable in the relevant assessment years and the issue was resolved against the assessee.

---

---

Issues: Whether interest income on loans advanced by the assessee was taxable on the accrual basis under the mercantile system of accounting.

Analysis: The assessee was found to be following the mercantile system of accounting for the assessment years in question. Under that system, income is assessable when it accrues, even if it is not received. The interest on the loans had accrued during the relevant previous years and therefore formed part of taxable income for the assessment years concerned.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: Accrued interest was held taxable for the relevant assessment years on the mercantile basis of accounting.

Ratio Decidendi: Under the mercantile system of accounting, income is chargeable to tax on accrual and not on receipt.

---