JUDGMENT Gulati, J.
1. This is a reference under Section 66(1) of the Income-tax Act. The assessee had advanced certain loans to a private limited company known as Virmani Refrigeration and Cold Storage Company Ltd. He was being assessed to tax on interest accruing on these loans from year to year. However, for the two assessment years 1953-54 and 1954-55, the assessee did not include any income from this source in its return. The Income-tax Officer estimated the income from interest on these two loans at Rs. 12,000 for the first year and Rs. 6,000 for the second year and taxed the assessee on interest which had accrued to him, even if it was not received, during the assessment years in question. The matter ultimately went to the Income-tax Appellate Tribunal, The Tribunal did not record a finding on the point as to whether the system of accounting followed by the assessee was mercantile or cash. Accordingly, this court called for a supplementary statement of the case. The supplementary statement of the case has been submitted recording a finding that the assessee was following the mercantile system of accounting for both the assessment years in question.
2. When a person follows the mercantile system of accounting the income under sections 10 and 12 of the Act is to be assessed according to the system of accounting followed by him. Accordingly, under the mercantile system of accounting the income becomes assessable when it accrues even if it is not received. Therefore, the income accrued to the assessee at the end of the previous year relating to each of the two assessment years and he was, therefore, liable to include this income in its return. The Income-tax Officer was, in our opinion, right in levying tax on the accrued interest. We accordingly answer the question in the affirmative, in favour of the department and against the assessee. The department is entitled to costs which we assess at Rs. 100.