If you aren't sure of realizing income, then don't add it.
If you aren't sure of realizing income, then don't add it.
You pay income tax on income that you earn. You know this very well. Earned income is calculated on accrual concept. Accrual concept demands you add all the income that is due, even if cash hasn't been received. What should you do if per accrual concept you have to book income but you are damn sure that the other person wouldn't pay it? In that case, courts say that you should not add.
It was held that income shall be deemed to accrue only when there is reasonable certainty of its ultimate collection. Just because assessee is following mercantile system of accounting, it cannot be said that every income which is due has also accrued to the assessee. For accrual i.e for recording of income in books, there is a direct mandate by guidance note by ICAI on income recognition. As per guidance note, income shall be recorded(deemed to accrue) only when there is reasonable certainty of its ultimate collection.
Even in mercantile system of accounting an item would be regarded as accrued income only if there is certainty of receiving it and not when it has been waived.
It is one of the fundamental principles of accounting that, as a measure of prudence and following the principle of conservatism, the incomes are not taken into account till the point of time that there is a reasonable degree of certainty of its realization, while all anticipated losses are taken into account as soon as there is a possibility, howsoever uncertain, of such losses being incurred.
