Real income doctrine excludes bona fide surrendered commission from taxable income when contractual surrender is commercially justified.

Managing agency commission surrendered bona fide under a contractual proviso, on grounds of commercial expediency while accounts were being settled, did not constitute real income for the accounting year. The mercantile method of accounting did not make the book entry conclusive, because accrual depended on the true legal rights and the real nature of the transaction. The annual character of income tax and the doctrine of real income were treated as capable of working together, and the surrendered balance was excluded from the assessee's total income for the assessment year.

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Issues: Whether the amount of managing agency commission surrendered by the assessee in the relevant accounting year could be included in its total income for the assessment year, having regard to the doctrine of real income and the commercial basis of the surrender.

Analysis: The commission earned by the assessee was subject to a contractual proviso under which part of the commission could be given up if the managed company's profits were insufficient to provide the stipulated dividend. The surrender of the balance was found to be bona fide and made on grounds of commercial expediency at the time the accounts were being settled. The fact that the assessee kept mercantile accounts did not make the book entry conclusive, because accrual had to be judged by the true legal rights and the real nature of the transaction. The annual character of income-tax and the principle of real income were held to be capable of harmonious application, and the surrendered amount did not represent real income of the assessee for the accounting year.

Conclusion: The surrendered sum could not be included in the assessee's total income for the assessment year in question, and the answer to the referred question was in the negative.

Ratio Decidendi: Where a contractual liability to forgo part of commission is bona fide acted upon on grounds of commercial expediency at the time of ascertaining the earning, the amount so surrendered does not constitute real income and is not taxable as income of that accounting year.

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