Accrual of income follows the contractual right to receive, and matching costs must track the year income actually arises.

Accrual of period-linked income depends on when the contractual right to receive vests, not merely on the passage of time or the mercantile system of accounting. Here, cold storage charges for the cycle ending in November were not taxable in the year ending 31 March because the right to receive arose only on completion of the storage obligation, not during February to March. Direct input expenditure relating to the uncompleted part of the same cycle could not be treated as current-year revenue cost; it had to be carried forward and matched against the year in which the corresponding income accrued.

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Issues: (i) Whether cold storage charges for the business cycle ending in November accrued to the assessee during the months of February to March so as to be taxable in the year ending 31 March. (ii) Whether the direct input expenditure incurred for the uncompleted part of the contract during February to March was required to be deferred by treating it as closing stock or prepaid cost for matching against the corresponding income.

Issue (i): Whether cold storage charges for the business cycle ending in November accrued to the assessee during the months of February to March so as to be taxable in the year ending 31 March.

Analysis: Accrual of income depends on the vesting of the right to receive and not merely on the passage of time or the adoption of the mercantile system of accounting. On the facts found, the cold storage was entitled to the charges only on completion of its contractual obligation of preserving the potatoes in marketable condition till the end of the agreed storage period. The nature of the receipt was a period-related charge, but the right to receive did not vest on part-performance during February to March.

Conclusion: The income did not accrue during February to March, and no part of the cold storage charges for that period was taxable in the year ending 31 March.

Issue (ii): Whether the direct input expenditure incurred for the uncompleted part of the contract during February to March was required to be deferred by treating it as closing stock or prepaid cost for matching against the corresponding income.

Analysis: Correct determination of business income requires matching the expenditure incurred for earning the relevant revenue. Since the income attributable to the uncompleted part of the cycle was not yet accrued, the direct costs relatable to the same part of the contract could not be allowed as current-year revenue expenditure and had to be carried forward for adjustment against the year in which the corresponding income accrued.

Conclusion: The direct input cost for February to March had to be deferred and adjusted in the subsequent year against the corresponding income.

Final Conclusion: The assessee succeeded on the core question of taxability of the disputed cold storage charges in the year under appeal, and the corresponding direct costs were to be aligned with the later year in which the related income accrued.

Ratio Decidendi: For period-linked receipts, accrual of income is governed by the contractual vesting of the right to receive, and the matching of direct costs must follow the year in which the corresponding income actually accrues.

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