Deferred guarantee commission accrues proportionately where the right to receive it remains contingent during the unexpired guarantee period.

Under the mercantile system, deferred guarantee commission accrues only when an enforceable right to receive it arises. Where the commission is collected at the outset but remains refundable for the unexpired period if the guarantee ends early, the amount relatable to that unexpired period does not crystallise as income on execution of the guarantee agreement. The assessable income is therefore limited to the proportion attributable to the relevant accounting year, with the balance carried forward until the guarantee runs its course.

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Issues: Whether deferred guarantee commission accrued in full in the year of execution of the guarantee agreement or accrued proportionately over the period to which the guarantee related.

Analysis: The assessee followed the mercantile system of accounting and consistently credited guarantee commission only to the extent relatable to the relevant accounting year, carrying forward the balance for the unexpired period. The governing rules of the Foreign Exchange Dealers' Association required collection of the commission at the outset but also contemplated refund of the proportionate amount if the guarantee was redeemed before expiry. On that footing, payment at inception did not by itself create an unconditional and perfected right to receive the whole amount. Accrual depended on the guarantee running its full course, and the right to the commission for the unexpired period remained contingent until that period elapsed. The principle that income accrues only when a debt comes into existence and a right to receive is created supported the assessee's case.

Conclusion: Deferred guarantee commission did not accrue in full on execution of the guarantee agreement and was rightly assessable only on a proportionate basis over the period to which it related.

Ratio Decidendi: Under the mercantile system, income accrues only when an enforceable right to receive it arises; where commission is collected in advance but is refundable for the unexpired period on premature termination, the amount relatable to that unexpired period does not crystallise into accrued income at inception.

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