Real income principle bars tax on bona fide surrendered commission under a commercial arrangement despite mercantile accounting.

Income tax is chargeable only on real income, and a bona fide surrender of part of an accrued business receipt under the governing commercial arrangement is not taxable merely because the assessee follows the mercantile system. The managing agency agreement itself contemplated a reduction in commission if the managed company's profits were insufficient, and the surrender was made when accounts were being settled on grounds of commercial expediency. On that footing, the surrendered balance did not represent the assessee's real income and could not be included in total income for the relevant assessment year.

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Issues: Whether the sum of Rs. 57,785, being the balance of managing agency commission surrendered after the close of the accounting year, could be included in the assessee's total income for the relevant assessment year.

Analysis: The commission, though credited in the books under the mercantile system, was not to be viewed in isolation from the managing agency agreement, which itself contemplated a reduction in commission where the managed company's profits were insufficient. The surrender was found to be bona fide and made on grounds of commercial expediency at the stage when the accounts were being settled. The principle that each assessment year is a separate unit did not compel taxation of an amount that never represented the assessee's real income. The true legal rights and the actual business situation had to be examined, and on that approach the surrendered balance did not form part of the assessee's real income.

Conclusion: The sum of Rs. 57,785 could not legally be included in the assessee's total income for the assessment year ended 31 March 1950.

Ratio Decidendi: Income-tax is chargeable only on real income, and where a bona fide surrender of part of an accrued business receipt is made in accordance with the commercial arrangement and the true business situation, the surrendered amount cannot be taxed merely because the assessee follows the mercantile system.

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