Law:

Section:

Section 145 of the income-tax act, 1961-Method of accounting-Charge on accrual/receipt or other basis-assessee-company, following mercantile system of accounting, had advanced certain amounts to a partnership firm-assessee filed suit against debtor for recovery of debt which was decreed in assessee's favour in 1961 and decretal amount was payable in four annual installment-decree also authorized assessee to charge interest in case of default in payment of installment under decree-following such default on debtor's part, interest became chargeable but no such interest was charged by assessee-Whether impugned interest, due but not charged, could be included in assessee's income-Held, on facts, yes Facts The assessee-company, following the mercantile system of accounting, had advanced certain amount to a partnership firm in 1951. The assessee had charged interest on this account from the years 1952 to 1956. Later, on the debtor's request that no interest should be charged as it was experiencing financial difficulty, the directors of the assessee decided that no interest should be charged until the principal amount was repaid. In 1961, the assessee, however, filed a suit against the firm for the recovery of the amount due which was decreed in favour of the assessee on 11-8-1961, and the decretal amount was to be paid to the assessee in four annual installments The decree clearly authorized the assessee to charge interest in case of default of payment of installments under the decree. There were defaults in the payment of the installments but the assessee did not charge the interest which it was entitled to charge. For the assessment years 1965-66 and 1966-67, the ITO held that in view of the aforesaid decree, certain sums had accrued to the assessee as interest and he brought such sums to tax. On appeal, the AAC upheld the order of the ITO. On second appeal, the Tribunal observed (i) that the position that the interest could not be said to have accrued had been accepted by the department for the assessment years 1959-60 to 1961-62, and (ii) that the right to receive income must be a real and enforceable one against a solvent debtor which was not the case here.…

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