Mercantile system accrual rule governs taxability of business receipts; later bank realisation did not justify addition.

Under the mercantile system of accounting, business income is taxable when the right to receive accrues, not merely when cash is later realised. The assessee's receipts were found to have arisen on credit basis in the relevant year, and accounting records and bank statements supported that the later banking entries represented realisation of already accrued income. On that basis, the subsequent receipt did not shift the year of taxability, and the cash deposit was also explained by supporting evidence. The addition of Rs. 14,00,000 was therefore held unjustified and deleted.

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Issues: Whether the addition of Rs. 14,00,000 was sustainable when the assessee claimed that the receipts had accrued in the relevant year under the mercantile system of accounting and were subsequently realised through banking channels.

Analysis: The assessee's business receipts were found to have arisen on credit basis, with the corresponding amounts received from customers in the succeeding year. The accounting records and bank statements supported the explanation that the receipts represented realization of income that had already accrued in the relevant previous year. Under section 145 of the Income-tax Act, 1961, income from business is to be computed according to the system of accounting regularly employed by the assessee. Where the mercantile system is followed, taxability attaches when the right to receive becomes vested, and not merely upon actual receipt. On that basis, the later banking receipt did not alter the year of accrual. The assessee also furnished evidence explaining the source of the cash deposit.

Conclusion: The addition of Rs. 14,00,000 was not justified and was deleted.

Ratio Decidendi: Under the mercantile system, income is taxable when the right to receive accrues, and subsequent receipt does not postpone taxability of an already accrued business receipt.

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