Mercantile accounting governs income computation: accrued business income is taxable even without actual receipt.

Under the Indian Income-tax Act, 1922, business income had to be computed on the assessee's regularly employed mercantile system of accounting where that method provided a proper basis for deducing profits and gains. Accrued interest was therefore brought into account when it became due, even if it had not been actually received, and the taxing authority was bound to adopt that method for computation. The reasoning rejected the contention that only realised income could be taxed under the charging provisions and treated accrued but unrealised business income as chargeable when the mercantile system was regularly followed.

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Issues: Whether, for the purpose of computing business income under Section 10 of the Indian Income-tax Act, 1922, the assessee's profits and gains had to be computed in accordance with the mercantile method of accounting regularly employed by the assessee, even though the interest credited in the books had not been actually received.

Analysis: The charging provisions of the Act were read as taxing all income, profits and gains accruing, arising or received in British India, and Section 13 was treated as the statutory rule governing computation where the assessee regularly employed a particular method of accounting. The regular mercantile system brought accrued interest into account when it became due, and the Income-tax Officer was bound to adopt that system so long as it afforded a proper basis for deducing profits and gains. The reasoning rejected the contention that only actual receipt could be taxed, and distinguished authorities decided under different statutory language.

Conclusion: The issue was answered against the assessee and in favour of the Revenue. The Income-tax Officer was entitled and bound to compute the assessee's business profits on the mercantile basis, notwithstanding that the resulting profits included amounts not actually received.

Final Conclusion: The reference was answered in favour of the Revenue by holding that income-tax computation must follow the assessee's regular mercantile system, and unrealised but accrued business income could be brought to charge under the Act.

Ratio Decidendi: Where an assessee regularly employs the mercantile system of accounting, the taxing authority must compute business profits on that basis under the Act, and accrued income is taxable even if it has not been actually received.

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