No. Accrual needs more than a due date and a book entry — there must be a corresponding liability on the other party to pay, and, looked at realistically, income that has not arisen at all cannot be taxed. Income tax is a levy on real income. The doctrine is narrow: it addresses whether income arose, not whether a debt that did arise later turned out to be bad.
The mercantile system brings a receipt into account when the right to it arises rather than when the money comes in. What the department routinely does with that is to treat any contractual entitlement as an accrual. The answer is that accrual is a question of substance. In CIT v. Excel Industries Ltd. the Supreme Court applied three tests: whether the income is real or hypothetical, whether there is a corresponding liability on the other party to pay the amount, and whether, from a realistic and practical point of view, realisation is probable. On those tests an entitlement to import raw material duty free under an advance licence or the duty entitlement pass book scheme did not accrue in the year of export, because until the imports were actually made the customs authorities were under no obligation at all. In the Court's words, "First of all, it is now well settled that income tax cannot be levied on hypothetical income."
The second limb of that case is the rule of consistency. Where the department has accepted the assessee's treatment for a number of years and has not carried the matter further, and there has been no change in the facts or the law, it cannot take a different position in a later year. The Court also said that where the only dispute is the year of taxability and the tax effect is small or nil, the matter should not be litigated at all.
The second application in the corpus is CIT v. Vasisth Chay Vyapar Ltd., where the Supreme Court agreed with the Delhi High Court that interest on an advance classified as a non-performing asset does not accrue in the hands of a non-banking financial company governed by the Reserve Bank of India Act, having regard to s.45Q of that Act and the prudential norms made under it. That case is worth reading closely because it shows the doctrine doing work in a place where the statute appears to be against the assessee: s.43D puts interest on bad and doubtful debts of banks and specified financial institutions on a receipt basis and does not cover NBFCs, and the officer's argument is that the omission means accrual applies. The answer is that s.43D is a concession about the timing of income that did arise, while the real-income question is whether income arose at all.
The limits matter as much as the doctrine. It does not permit an assessee to defer a receipt because collection looks difficult — a debt that has accrued and later goes bad is dealt with by s.36(1)(vii), not by non-recognition. It does not permit deferral by unilateral book entry; what is needed is the absence of a corresponding obligation on the other side, or a legal regime such as the RBI prudential directions that prevents recognition. And it does not survive an express deeming provision: where the Act says an amount shall be deemed to be income of a year, the doctrine does not displace it.
One consequence for practice is that the officer's own history is evidence. Where he has accepted the same treatment in earlier assessments, Excel Industries makes that relevant, and the earlier orders should be filed with the reply rather than merely referred to.
For years to which the income computation and disclosure standards apply, ICDS IV on revenue recognition governs the timing of many of these items and requires interest to be recognised on a time basis. How ICDS IV sits with the real-income line has not been settled by any decision located here, and parts of ICDS IV were struck down by the Delhi High Court in The Chamber of Tax Consultants v. Union of India before the Finance Act 2018 responded.
Almost every year-of-taxability addition is answered either by this doctrine or not at all, and the officer's opening position is always that the mercantile system settles it. Framing the reply around the corresponding obligation on the other party, rather than around the difficulty of recovery, is what separates an argument that works from one that invites a s.36(1)(vii) answer instead.
The Assessing Officer wants to tax what my client received on redemption of stock appreciation rights granted by the foreign parent as a perquisite. Is there Supreme Court authority on this?
Our members' club keeps its surplus in fixed deposits with banks that are themselves corporate members — is the interest exempt on the principle of mutuality?
I live in my own house and earn nothing from it. Can Parliament tax me on a notional annual value as income from house property?
My liability is certain but I cannot put a final figure on it yet and I will not pay it for years. Can I still deduct the provision?
I am an MES contractor and the department supplies me cement and steel at fixed rates. The Income-tax Officer added the value of that material to my cash receipts before applying a flat rate. Can he?
The trustees of my settlement are being assessed on the trust income. The department has now also included the same income in my own assessment under s.64. Does s.161(2) stop it?
I sell developed plots and book the whole sale price on the mercantile basis, but I still have to build the roads and drains I promised the buyers. Can I deduct the estimated cost of that work now?
My closing stock is worth more than it cost me. Does the rise in value get taxed, and does it matter that the goods were lying outside the place where I trade?
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