Accrual of business income governs taxability; non-drawal or suspense entries do not prevent managing agency commission from being taxed.

For business income under the Indian Income-tax Act, 1922, the assessee's own regularly employed method of accounting is decisive under Section 13, and accounts maintained by managing agents alone do not prove a cash basis. Income is chargeable when it accrues or arises, so managing agency commission and remuneration that had been earned and had become due were taxable even though not actually drawn and one amount was placed in suspense. A claim to exemption for sums said to relate to work done in Indian States failed where the commission was earned and payable at Madura and no part arose or accrued in an Indian State. The discussed decision therefore treated the amounts as taxable business profits and rejected the exemption claim.

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Issues: (i) Whether the assessees were shown to have been assessed on the cash basis in the prior years under the Indian Income-tax Act, 1922. (ii) Whether the managing agency commission and remuneration, though not actually drawn and in one year kept in suspense, had nevertheless accrued or arisen to the assessees and were assessable to tax. (iii) Whether the sum attributed to work done in Indian States was exempt under Section 14(2)(c) of the Indian Income-tax Act, 1922.

Issue (i): Whether the assessees were shown to have been assessed on the cash basis in the prior years under the Indian Income-tax Act, 1922.

Analysis: The method of accounting relevant under Section 13 is the method regularly employed by the assessee in respect of his own income. The accounts of the company kept by the managing agents could not, by themselves, establish that the firm had adopted a cash basis. In the absence of accounts of its own, and in view of the material showing that the department had treated the firm on a mercantile basis, there was no sufficient basis for the finding that the assessees had regularly employed the cash system.

Conclusion: The issue was decided against the assessees.

Issue (ii): Whether the managing agency commission and remuneration, though not actually drawn and in one year kept in suspense, had nevertheless accrued or arisen to the assessees and were assessable to tax.

Analysis: Under Sections 3, 4, 12 and 13, income, profits and gains are chargeable when they accrue or arise, and actual cash receipt is not the sole test. For business profits, the mercantile system recognises book debts and liabilities when they become due. On the prevailing view, the sums in question had been earned by the firm, had become debts due from the company, and were appropriated to the firm's account notwithstanding the later attempt to place one sum in suspense. The device of non-drawal did not prevent accrual of taxable profits.

Conclusion: The issue was decided against the assessees and the sums were held taxable as accrued business profits.

Issue (iii): Whether the sum attributed to work done in Indian States was exempt under Section 14(2)(c) of the Indian Income-tax Act, 1922.

Analysis: The altered managing agency arrangement showed that the firm's remuneration was for supervision and managing agency work carried on at Madura, while the purchases and sales commissions were separately assigned to other agencies. The commission in question was earned and payable at Madura and no part of it arose or accrued in an Indian State.

Conclusion: The exemption claim failed and the amount was held taxable.

Final Conclusion: The references were answered against the assessees on all surviving substantive issues, and the assessments were upheld.

Ratio Decidendi: For business income under the Indian Income-tax Act, 1922, the decisive question is whether profits have accrued or arisen according to the assessee's own regularly employed method of accounting, and a mere non-drawal or suspense entry does not prevent taxability where the income has become a debt due and payable.

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