Business income accrual test: only contractual net commission is taxable, not notional gross receipts or book entries.

For computation of business income, only income that actually accrues under the governing arrangement is taxable; mere book entries or notional gross receipts cannot enlarge the taxable base. Where the assessee was contractually entitled, for the initial years, only to the reduced commission remaining after provision for compensation to outgoing agents, the larger amount shown in the books did not reflect the true legal character of the transaction. The compensation sums therefore never formed part of the assessee's income under the charging provision governing business profits, and were held not includible in total income.

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Issues: Whether the compensation amounts paid to the outgoing agents could be included in the assessee's total income as part of its business profits for the relevant years.

Analysis: The arrangement showed that for the first three years the assessee was entitled only to the reduced commission fixed by the agreement, namely the balance remaining after the compensation payable to the outgoing agents was provided for. The income did not fully accrue to the assessee and the larger notional commission reflected in the books did not alter the true legal character of the transaction. Book entries could not override the substance of the contractual arrangement. On that footing, the sums paid as compensation never formed part of the assessee's income under the charging provision governing business profits.

Conclusion: The compensation amounts were not includible in the assessee's total income and the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: For the computation of business income, only the income that actually accrues to the assessee under the governing arrangement is taxable, and mere book entries or notional gross receipts cannot be treated as income where the contractual right is confined to a reduced net amount.

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