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Issues involved: Determination of whether interest accrued on a loan advanced to a company should be considered as income for the assessee-company following the mercantile system of accounting.
Summary: The High Court of Rajasthan addressed the question of law regarding the accrual of interest on a loan advanced to a company under the mercantile system of accounting. The assessee-company had agreed to advance a sum to another company and the interest on the loan was to be charged at 12% per annum. The original agreement was not produced, but correspondence indicated the debtor-company's attempt to pay interest at a lower rate, which was not accepted by the assessee. The Income-tax Officer added the interest amount to the assessee's income, as per the mercantile system. The Appellate Assistant Commissioner upheld this decision, emphasizing that income accrues when due, regardless of actual receipt. The Tribunal also affirmed the accrual of interest to the assessee, dismissing the appeal. The Court considered the arguments, noting the charge u/s 5 on income accrual and receipt. The assessee maintained accounts on the mercantile system, and the interest rate was established at 12% per annum. Despite the absence of the original agreement, the right to receive interest had accrued to the assessee. The Court held that income can accrue without immediate receipt if the right to receive it exists. Once income accrues in a year, it should not be included in the total income of other years. Consequently, the Tribunal's decision that the interest had accrued to the assessee was deemed justified, ruling in favor of the Revenue. In conclusion, the High Court ruled in favor of the Revenue, affirming that the interest on the loan advanced to the company had accrued to the assessee following the mercantile system of accounting. No costs were awarded in this matter.
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