Accrual under mercantile system: accepted liability gives rise to income; unadjudicated counterclaims do not prevent taxation.

Under the mercantile system of accounting income accrues when liability to pay is accepted; therefore bills accepted by the Government constituted accrued income. An unadjudicated assertion of a counterclaim or a mere right to claim damages does not constitute an enforceable claim capable of defeating or setting off the admitted liability absent adjudication (for example by arbitration as provided in the contract). The operative effect is that the specified sum accrued to the assessee in the relevant previous year and is taxable in that year.

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Issues: Whether the sum of Rs. 1,45,395 had accrued or arisen during the relevant previous year as the assessee's income under the mercantile system of accounting.

Analysis: The mercantile system recognises income on accrual when the liability to pay is accepted rather than on actual receipt. The bills presented were accepted by the Government as establishing liability to pay for the work done. The Government's assertion of a right to claim damages for alleged breach of contract, without adjudication by arbitration or other competent authority, did not create an enforceable claim capable of reducing or defeating the assessee's accrued income. The contract provided for disputes to be referred to arbitration; absent an arbitration award in favour of the Government, the alleged claim for damages could not be treated as an effective set-off against the admitted liability.

Conclusion: The sum of Rs. 1,45,395 had accrued to the assessee during the relevant previous year and is taxable in that year; the question is answered in the affirmative.

Ratio Decidendi: Under the mercantile system of accounting, income accrues when liability for payment is accepted, and a mere unadjudicated assertion of a counterclaim does not prevent accrual until such claim becomes enforceable by adjudication.

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