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ICDS - Accrual basis of Accounting - Accrual of income versus Receipt of income

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Dated: 4-10-2017

Manual - ICDS I : Accounting Policies

The Honorable Supreme Court in the case of E.D. Sassoon & Co. Ltd. v CIT [1954 (5) TMI 2 - SUPREME Court] discussed the concepts of ‘accrual’, ‘arisal’ and ‘receipt’. The relevant observations are as under:

 “'Accrues', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three expressions 'accrues', 'arises' and 'is received' having been used in the section, strictly speaking ‘accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry, L.J., in Colquhoun v. Brooks [1888] 21 Q.B.D. 52 at 59 [this part of the decision not having been affected by the reversal of the decision by the Houses of Lords [1889] 14 App. Cas. 493] that both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate”

The Honorable Supreme Court in the case in  Morvi Industries Limited Versus CIT [ 1971 (10) TMI 5 - SUPREME Court] has observed that:

"The dictionary meaning of the word "accrue" is "to come as an accession, increment, or produce: to fall to one by way of advantage: to fall due ". The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned, but it does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by the assessee would also not detract from or efface the accrual of the income, although the non-receipt may, in appropriate cases, be a valid ground for claiming deductions. The accrual of an income is not to be equated with the receipt of the income. That the two, accrual and receipt of income, have different connotations is also clear from the language of section 4 of the Act. Clause (a) of sub-section (1) of section 4 of the Act deals with the receipt of income while the accrual of income is dealt with in clause (b) of that sub-section."

The Honorable Supreme Court in the case in CIT v Excel Industries Limited [ 2013 (10) TMI 324 - SUPREME COURT] after considering decision in the case of Movi Industries ltd (supra) has observed that:

 “19. This Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount."


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