Accrual of income under mercantile accounting requires an enforceable right to recover, not a disputed demand.

Under the mercantile system, income is taxable only when it has actually accrued or arisen, which requires a present legal right to recover the amount and a corresponding legal obligation on the debtor. Mere issue of bills at a higher rate after expiry of an agreement did not create an enforceable entitlement. On the facts, the assessee proved no legal right to recover anything beyond the amount actually received at 19 paise per unit, and the balance remained a disputed demand. The Bombay HC therefore held that the claimed amount was not includible in the assessee's income for the relevant accounting year.

---

---

Issues: Whether the sum of Rs. 35,251.02 claimed from the municipality was liable to be included in the assessee's income for the relevant accounting year under the mercantile system of accounting.

Analysis: Under the mercantile system, only income that has actually accrued or arisen can be taxed. Accrual requires the assessee to have a legal right to recover the amount and the debtor to be under a corresponding legal obligation. The mere sending of bills at the higher rate after expiry of the agreement did not by itself create an enforceable right. On the record before the Court, the assessee had no proved legal entitlement to charge anything more than the amount actually recovered at 19 paise per unit, and the claimed balance remained only a disputed demand.

Conclusion: The amount of Rs. 35,251.02 was not includible in the assessee's income.

---