Mercantile accrual principle: service charges became taxable when the right to receive arose, despite later waiver and doubtful recovery.

Under the mercantile system, service charges for delayed or non-payment of instalments accrued when the contractual right to receive them arose during the relevant accounting year. A later settlement or waiver after year-end did not destroy that accrual for tax purposes, and doubtful recoverability by itself was not enough to defer taxation where the right to receive had already vested. The service charges were therefore taxable on accrual basis, and the contrary contention that they were chargeable only on receipt basis was rejected.

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Issues: Whether service charges for delayed or non-payment of instalments accrued as income to the assessee under the mercantile system, and whether subsequent waiver or doubtful recovery prevented taxation of such amount.

Analysis: The assessee remained on the mercantile system and continued to account for lease rental and interest on accrual basis. No valid change in the method of accounting was shown in respect of only this item of income. The right to receive service charges arose under the lease and hypothecation arrangements during the relevant accounting year. The later settlement and waiver of the overdue charges took place after the close of the accounting year, and therefore did not affect accrual for that year. Doubtful recoverability by itself did not prevent the income from accruing where the contractual right to receive had already arisen.

Conclusion: The service charges had accrued during the relevant year and were taxable. The assessee's contention that they were not chargeable on receipt basis was rejected.

Final Conclusion: The addition of the service charges was sustained and the appeal failed.

Ratio Decidendi: Under the mercantile system, income accrues when the right to receive arises, and a later waiver or settlement after the accounting year does not destroy that accrual for tax purposes.

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