JUDGMENT judgment of court was delivered by L. Narasimha Reddy J.-This appeal under section 260A of Income-tax Act, 1961 (for short "the Act"), is preferred by Revenue, feeling aggrieved by order dated March 3, 2003, passed by Hyderabad Bench of Income-tax Appellate Tribunal (for short "the Tribunal"), in I. T. A. No. 40/Hyd/2000. facts that gave rise to filing of appeal are as under: respondent is civil contractor. It was awarded contract by Hyderabad Municipal Water Supply and Sewerage Board. terms of contract provided for deduction of 7.5 per cent. on each bill. Out of this, 5 per cent. would be released to respondent on successful completion of work and remaining 2.5 per cent., on expiry of defect liability period, on finding that no defects in work are noticed during that period. In its return, filed for assessment year 1996-97, respondent did not include amount representing 2.5 per cent. of bills. According to them, such amount can be shown as income, only on its being received. Assessing Officer, however, took view that since respondent was following mercantile system of accounting, amount of 2.5 per cent. of bills can be said to have accrued to it, along with amount paid under bills and same is liable to be treated as income for that year. respondent filed appeal before Commissioner of Income-tax (Appeals). same was rejected on October 29, 1999. Thereafter, it filed I. T. A. No. 40 of 2000 before Tribunal. appeal was allowed and Revenue has challenged order of Tribunal by filing this appeal. Ms. Kiranmayee, learned counsel, representing, Sri J. V. Prasad, learned counsel for appellant, submits that it is only when cash system of accountancy is followed by assessee, that he can reflect receipts, when amount is actually received, and in contrast, if mercantile system is followed, amount deserves to be shown, in returns of year, in which it was mentioned in books of account, irrespective of date of actual receipt. She contends that 2.5 per cent. of bill amount has already accrued to respondent, except that payment thereof is deferred, and that Tribunal was not justified in taking different view. Sri A. V. Shiva Kartikeya, learned counsel for respondent, on other hand, submits that even where mercantile system is followed, distinction between true accrual, on one hand, and mere entry made in books, on other hand, needs to be maintained. Placing reliance upon certain precedents, he submits that amount can be said to have accrued to assessee, as income, only when corresponding right to receive it, arises and not otherwise. Section 145 of Act gives liberty to assessee to follow either mercantile system or cash system of accounting. distinction between these two, is too well-known. At same time, certain niceties involved in understanding true purport of certain expressions, which are used in process, present some amount of difficulty. assessee, who follows cash system, would be under obligation to pay tax only on amount received by him, after assessment, in accordance with law. In contrast, assessee, who follows mercantile system, would be liable to pay tax on amounts reflected in books of account, irrespective of fact whether he received amount or not. same is case with deductions and they do not depend upon actual payments. Two judgments rendered by hon'ble Supreme Court, which are almost classics, would be helpful to have clear idea about concept. Of course, most of players in administration of tax regime are fairly acquainted with it. In CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC), Sri Hidayatullah J. explained it as under (page 148): "Income-tax is levy on income. No doubt, Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., accrual of income or its receipt; but substance of matter is income. If income does not result at all, there cannot be tax, even though in book keeping, entry is made about hypothetical income, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains income of recipient, even though given up, tax may be payable. Where, however, income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though entry to that effect might, in certain circumstances, have been made in books of account." Equally educative and instructive is judgment of hon'ble Supreme Court in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC), hon'ble Justice Sri Subba Rao K., in his inimitable style, explained distinction between two, succinctly, by addressing root of matter. discussion was commenced by taking note of section 4(1)(b)(i) of 1922 Act, as it stood then. provision reads as under: "Subject to provisions of this Act, total income of any previous year of any person includes all income, profits and gains from whatever source derived which-... (b) if such person is resident in taxable territories during such year,- (i) accrue or arise or are deemed to accrue or arise to him in taxable territories during such year." concentration was on sub-clause (i). following passage from Rogers Pyatt Shellac and Co. v. Secretary of State for India [1925] 1 ITC 363, 371 was taken note of: "... both words are used in contradistinction to word 'receive' and indicate right to receive. They represent stage anterior to point of time when income becomes receivable and connote character of income which is more or less inchoate." hon'ble Supreme Court proceeded to observe (page 118 of 53 ITR): "Under this definition accepted by this court, income accrues or arises when assessee acquires right to receive same. It is commonplace that there are two principal methods of accounting for income, profits and gains of business; one is cash basis and other, mercantile basis. latter system of accountancy brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure amount for which legal liability has been incurred before it is actually disbursed. book profits are taken for purpose of assessment of tax, though credit amount is not realised or debit amount is not actually disbursed. If income accrues within particular year, it is liable to be assessed in succeeding year. When does right to receive amount under contract accrue or arise to assessee, i.e., come into existence? That depends upon terms of particular contract." problem was explained with help of illustration, as under (page 119 of 53 ITR): "When Income-tax Officer proceeds to include particular income in assessment, he should ask himself, inter alia, two questions, namely: (i) what is system of accountancy adopted by assessee? and (ii) if it is mercantile system of accountancy subject to deemed provisions, when has right to receive that amount accrued? If he comes to conclusion that such right accrued or arose to assessee in particular accounting year, he shall include said income in assessment of succeeding assessment year. No power is conferred on Income-tax Officer under Act to relate back income that accrued or arose in subsequent year to another earlier year on ground that said income arose out of earlier transaction. Nor is question of reopening of accounts relevant in matter of ascertaining when particular income accrued or arose. Section 34 of Act empowers Income- tax Officer to assess income which escaped assessment or was underassessed in relevant assessment year." One does not need any further help or material to understand basics of concept than this. clear distinction is maintained between right to receive amount and acquisition of right, as such. In present context, distinction is mostly between acquisition of right to receive, on one hand, and being in position to claim, on other hand. On acquisition of right to receive amount, assessee would be in position to enforce it, and enforcement may, in given case take sometime. In context of and enforcement may, in given case take sometime. In context of mercantile system, mere acquisition of right to receive would be sufficient to saddle assessee, with obligation to pay tax. Where, however, he is yet to acquire right but is in position to claim of such right, matter stands on different footing. As observed by hon'ble Supreme Court, that would depend upon terms of contract. Issues of this nature crop up mostly, when conditions are contingent in nature. In instant case, clause in contract provided for deduction of 7.5 per cent. from each bill. Out of this, 5 per cent. would be payable on successful completion of work and balance 2.5 per cent. after expiry of defect- free period. For instance, if value of contract is Rs. 1 crore and amounts are paid under four bills of Rs. 25 lakhs each. From each of first 3 bills, sums representing 7.5 per cent. are deducted. On successful completion of work, amounts representing 5 per cent. deducted from first three bills, would become payable along with final bill. However, even from final bill, 2.5 per cent. would be deducted. This amount of 2.5 per cent., which stood deducted from all four bills, becomes payable, only on expiry of defect-free period. If such period is one year, amount becomes payable only when no defects whatever are found or noticed, during that period. controversy, in instant case, is about year in which amount representing 2.5 per cent. had accrued to respondent. It is, no doubt, true that in all bills, reference was made to these amounts and corresponding entries were made in books of account. However, right to receive that amount was contingent upon there not being any defects in work, during stipulated period. It is then, and only then, that amount can be said to have accrued to respondent. It is represented by learned counsel for respondent that amount was received by his client in subsequent assessment year on expiry of defect-free period and that amount has been brought under tax. view taken by Tribunal accords with law laid down by hon'ble Supreme Court and we do not find any basis to interfere with order under appeal. I. T. T. A. is, accordingly, dismissed. There shall be no order as to costs. miscellaneous petitions filed in this appeal shall also stand disposed of. *** Commissioner of Income-tax v. Shanker Construction