Accrual of income depends on real recovery rights, not mere invoicing or mercantile entries, in disputed contract claims.

Income does not accrue merely because a contract was performed or invoices were raised; accrual requires a real and enforceable right to receive, with a realistic probability of recovery. Where the contract was terminated due to persistent non-payment and the counterparty was financially precarious, the larger contractual claim was not credited because collection was uncertain, and later recovery was only a small fraction after prolonged litigation. The demobilisation and winding-up claim also did not accrue because the invoices were raised after termination and were not accepted. Only the amount actually received in a later year was taxable on receipt.

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Issues: Whether the amounts claimed for contractual work performed before termination of the contract and for demobilisation and winding-up charges had accrued as income in the relevant assessment year.

Analysis: The assessee had terminated the contract because of persistent non-payment by the contracting party, which was in a precarious financial position. The larger claim was never credited in the books as the collection was uncertain, and the subsequent recovery was only a small fraction of the claim after prolonged litigation. For the demobilisation and winding-up claim, the invoices were raised after termination and were not accepted by the contracting party. Applying the principle that income must be real and not hypothetical, and that accrual requires a corresponding liability and realistic probability of recovery, mere maintenance of mercantile accounts or issuance of invoices did not by itself establish accrual.

Conclusion: The addition relating to the accepted contractual claim was not sustainable in the year under appeal, and the addition relating to the unaccepted demobilisation claim was also not sustainable; only the amount actually received in a later year could be brought to tax in the year of receipt.

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