Law:

Section:

Section 145 of the Income-tax Act, 1961 - Method of accounting - Charge on accrual basis - Assessee-company, engaged in business as financiers for hire purchase of motor vehicles, was following mercantile system of accounting - It advanced moneys to two firms, but they defaulted and there was no prospect of recovery of said amounts - Whether interest on outstanding amount of advances to said two firms includible in assessee's income in view of method of accounting followed by assessee - Held, n facts, no Facts The assessee-company, carrying on the business as financiers for purchase of motor vehicles on hire purchase, advanced moneys of two firms which were plying buses. Since the routes of these two firms were taken over by the State authorities, they defaulted in making payments to the assessee. The assessee was legally advised that there was no prospect of any recovery of the amount lent. Consequently, it did not account for any interest, either on accrual or on receipt basis, from the aforesaid firms. The ITO, however, included Rs. 56,163 by way of accrued interest on the impugned outstanding amounts. The AAC deleted the same holding that though under the mercantile system of accounting accrued interest should be treated as income, in the peculiar facts and circumstances of the case, even where the capital was not capable of being realised there was no point in making a debit entry in respect of a hypothetical unrealised interest. The Tribunal, on appeal by the revenue, sustained the AAC's order holding that the assessee could not have expected to get any interest income on the outstanding dues from the said two firms and it would be wholly unrealistic on the part of the assessee to take credit for a highly illusory interest income. On reference, the revenue contended, inter alia, that since the assessee was following the mercantile system of accounting, it was bound to account for accrued interest even though nothing was received during the year of account and it was always open to the assessee to write off such of the interest as became irrecoverable in the year in which it was found to be so. Held In the mercantile system of accounting, credit entries…

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