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Issues involved: Interpretation of interest income accrual u/s 256(1) of the I.T. Act, 1961 for assessment years 1969-70 to 1972-73.
Summary: The High Court of Madhya Pradesh considered a reference u/s 256(1) of the I.T. Act, 1961 regarding the accrual of interest income to the assessee in the assessment years 1969-70 to 1972-73. The assessee, a private limited company, had advanced a loan to Hira Mills Ltd. and did not include the interest due from the Mills in its returns, citing a legal bar under the M.P. Sahayata Upakram Vishesh Upband Adhiniyam, 1965. The Income Tax Officer (ITO) and the Appellate Authority Commission (AAC) did not accept the assessee's contention, leading to an appeal before the Tribunal. The Tribunal held that the interest income had accrued to the assessee based on the mercantile system of accounting, dismissing the appeal and prompting the reference to the High Court. The key issue was whether interest income had accrued to the assessee despite the legal bar preventing recovery from the Mills. The Court referred to precedents like E. D. Sassoon & Co. Ltd. v. CIT and Morvi Industries Ltd. v. CIT to analyze the concept of income accrual. It was emphasized that the right to receive income determines accrual, even if not immediately received, and a legal bar does not negate accrual if the right exists. The Court distinguished the present case from CIT v. Ferozepur Finance (P.) Ltd., highlighting the importance of enforceability in defining a legal right to claim income. Considering the enforceability of the right to receive income as integral to income accrual, the Court concluded that the interest income had not accrued to the assessee due to the legal impediment preventing recovery from the Mills. The Court answered the reference question in the negative, ruling in favor of the assessee and directing each party to bear their own costs. This judgment clarifies the nuanced interpretation of income accrual in the context of legal barriers to recovery, emphasizing the significance of the right to claim income in determining taxability under the provisions of the Act.
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