TMI Blog1973 (9) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered firm of four partners and derives income from various sources. The accounting period in question ended with 24th of March, 1961. The year of assessment is 1960-61. The assessee maintained the mercantile method of accounting. During the previous year relevant to the assessment year under reference, the assessee undertook a project styled as "D. B. K. Railway Project". The assessee failed to render any income from this source. From the balance-sheet of the assessee the Income-tax Officer found that the assessee had made a credit of Rs. 1,34,028 and a debit of Rs. 2,18,442. A debit balance of Rs. 84,414 had been carried over to the next year as an item on the asset side. The assessee's case was that Rs. 2,18,442 had been spent for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me was determined at Rs. 16,753 on this head. The assessee carried a second appeal before the Income-tax Appellate Tribunal. The Tribunal was of the view that, as the payment under the contract work had not been finally adjusted, there was no real income accruing to the assessee in the accounting year and as such the amount of Rs. 16,753 could not be taken into consideration for enhancing the net income of the assessee in the appropriate assessment year. The reference was filed at the instance of the Commissioner of Income-tax. Before we examine the question of law, we may notice one important fact that a memo. was filed by Shri Mohanty on behalf of the assessee that a suit was filed by the railway authorities on 27th of November, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceive and the liability to pay. Anticipated losses and contingent liabilities cannot be claimed under the mercantile system of accounting. Under that system an income accrues or arises when the assessee acquires a right to receive the same. When an Income-tax Officer proceeds to include a particular income in the assessment, under the mercantile system he shall have to find out when the right to receive the amount accrued. (See Commissioner of Income-tax v. A. Gajapathy Naidu and Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills (Private) Ltd). The assessee entered Rs. 2,18,442 on the debit side under the mercantile system. This he could validly do in law if the following conditions had been satisfied:-- (i) The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal income to be added to the total income. If the debit entry of Rs. 2,18,442 was rejected as not genuine, then there is no question of any adjustment of the credit and debit entries. The credit entry alone stands. The fact that in 1967 the railways filed a suit for recovery of Rs. 89,946 out of Rs. 1,34,028 paid by them in 1961 is wholly irrelevant. If the railways would ultimately get a decree and recover any amount from the assessee, then the same would be adjusted as a business loss in the accounting year in which recovery is to be made. The mercantile system of accounting cannot be stretched to embrace all sorts of provisional, notional or contingent payments which the assessee considers he might be called upon to pay. (See N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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