Conditional contractual receipts require an enforceable and reasonably certain right before taxable income can accrue under mercantile accounting.

Under mercantile accounting, income accrues only when the right to receive is vested, unconditional, enforceable and reasonably certain. A contractual tranche contingent on unfulfilled obligations, subject to an assignee's cost-adjustment mechanism and disputed in recovery proceedings does not constitute taxable real income merely because it is contractually claimed. The notes also explain that property-tax and advertisement costs connected with a real-estate project may be claimed when corresponding revenue is recognised under the percentage completion method, where the costs were carried in work-in-progress, paid through the taxpayer's account, and their business nexus and genuineness are established without double deduction.

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Issues: (i) Whether the balance consideration of Rs. 2.50 crore under the Deed of Assignment accrued as taxable income in A.Y. 2013-14; (ii) Whether property-tax and advertisement expenditure of Rs. 3.97 lakh was allowable as business expenditure.

Issue (i): Whether the balance consideration of Rs. 2.50 crore under the Deed of Assignment accrued as taxable income in A.Y. 2013-14.

Analysis: Under the mercantile system, taxable accrual requires a vested, unconditional and enforceable right to receive income; a contractual claim alone does not establish accrual. The disputed third tranche was conditional upon fulfilment of contractual obligations and subject to a step-in mechanism permitting deduction of costs by the assignee. Its quantum and collection were therefore uncertain. Subsequent recovery proceedings and consent terms corroborated that the receipt had remained conditional and disputed. The tax treatment adopted by the sister concern was not determinative of accrual in the assessee's hands.

Conclusion: The Rs. 2.50 crore third tranche did not accrue as taxable income in A.Y. 2013-14; the finding is in favour of the assessee.

Issue (ii): Whether property-tax and advertisement expenditure of Rs. 3.97 lakh was allowable as business expenditure.

Analysis: The payments were made through the assessee's bank account and related to its real-estate project. As the assessee followed the percentage completion method, expenses incurred earlier and carried in work-in-progress could be claimed when corresponding project revenue was recognised. No double deduction or material contradicting the business nexus and genuineness of the expenditure was established.

Conclusion: The expenditure of Rs. 3.97 lakh was allowable under Section 37(1) of the Income-tax Act, 1961; the finding is in favour of the assessee.

Final Conclusion: Conditional and disputed contractual receipts lacking reasonable certainty of collection are not taxable on accrual, and project expenditure carried in work-in-progress is deductible on recognition of corresponding revenue where its business nexus and genuineness are established.

Ratio Decidendi: Under mercantile accounting, income accrues only when the right to receive is vested, enforceable and reasonably certain; a conditional and disputed receipt subject to contractual adjustment cannot be taxed as real income.

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