Real income principle defeats tax on waived management fee, where bona fide commercial expediency led to a year-end waiver.

Management fee receivable under a scheme was waived by board decision during the relevant year on grounds of commercial expediency after poor scheme performance and a fall in net asset value below repurchase price. Applying the real income principle, the fee was not treated as taxable on accrual basis because it was neither effectively earned in substance nor pursued through a bona fide business decision. A merely notional addition could not stand where the contractual fee was consciously forgone before year-end. The deletion of the addition was therefore justified.

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Issues: Whether the management fee receivable under the scheme, which was consciously waived by the assessee before the close of the accounting year on grounds of commercial expediency, could still be brought to tax as income on accrual basis.

Analysis: The waiver was resolved by the board during the relevant year, and the fee was never charged in the circumstances in which the scheme's performance had lagged and the net asset value had fallen below the repurchase price. The addition was sought to be made only on a notional basis. Applying the real income principle, income that had neither effectively accrued in substance nor been pursued in view of a bona fide business decision could not be assessed merely because a contractual fee was otherwise payable. The commercial decision to forgo the fee was treated as genuine and not as an afterthought to avoid tax.

Conclusion: The waived management fee was not taxable as the assessee's income for the year under consideration, and the deletion of the addition was justified.

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