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Income Tax Appellate Tribunal, JAIPUR BENCH ‘A’, JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 742/JP/2019
PER VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the order dated 15.05.2019 of ld. CIT (Appeals)-2, Jaipur for the assessment year 2016-17. The assessee has raised the following grounds of appeal :-
“ 1. That on the law and in the facts and in the circumstances of the case the learned lower authorities grossly erred in making an addition of Rs. 48,61,31,816/- to the total income of the assessee representing highly disputed refund claim of the assessee appellant filed with the customs authorities on account of excessive customs duty paid towards CVD and in ignoring the various factual and legal submission made during the course assessment and appellate proceedings and also in completely by passing the orders passed by the ld. Customs authorities on the refund application of the assessee appellant.
1.1 That on the law and in the facts and in the circumstances of the case the learned lower authorities grossly erred in not considering the facts that at one end, the Customs department has declined the Custom Duty refund application of the assessee and at the same time the income-tax department seeks to levy income-tax on the said Customs Duty refundable as income of the assessee appellant which is against the proposition of settled law that disputed refundable amount is not liable to be taxed until the amount is actually received by the assessee.
The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.
The only issue arises in this appeal of the assessee is regarding customs duty paid towards Countervailing Duty (CVD) subsequently claimed by the assessee refund from the Customs Department but the said claim was declined even upto the stage of first appellate authority and thereby the assessee claimed said CVD paid as allowable expenditure which was denied by the AO as well as ld. CIT (A).
2 The brief facts leading to the controversy are that the assessee is engaged in the business of import of mobile handsets which are subsequently sold in domestic market. The assessee paid Countervailing Duty total amounting to Rs. 48,32,83,229/-, part of which to the extent of Rs. 24.69 crores was paid during the financial year 2013-14 and the balance amount was paid for the year under consideration. The duty paid by the assessee under CVD was part of the purchase cost of imported mobile handsets and was also allowed for the assessment year 2014-15. However, after the payment of the remaining part of the CVD during the year under consideration the assessee claimed refund of the entire CVD in view of the Hon’ble Supreme Court judgment in case of M/s. SRF Limited vs. Commissioner of Customs, Chennai (2015-TIOL-74-SC-CUS) dated 26th March, 2015, by filing the application under section 27(1)(a) and 27(1)(b) of the Customs Act 1962. The assessee consequently added back the entire amount of Rs. 48,32,83,229/- while computing the net profit and shown the amount in the Balance Sheet as recoverable. Since the amount was paid to the Customs Department as per the Countervailing Duty levied on the goods, the assessee then reduced the said amount while computing the income and declared the income in the return of income after claiming the said amount of Rs. 48,32,83,229/-. The AO disallowed and made the addition of the said amount to the income of the assessee on the ground that the assessee itself has claimed the said amount as refundable from Customs Department and, therefore, this was treated as income in the hands of the assessee. The AO also referred to the provisions of section 41(1) and held that a benefit to the extent of Rs. 48.32 crores accrued to the assessee and shall be deemed to be profits and gains of business or profession and consequently chargeable to income tax as income of the previous year in which the benefit is accrued. The assessee challenged the action of the AO before the ld. CIT (A) but could not succeed.
Before the Tribunal, the ld. A/R of the assessee has referred to the purchase account wherein State-wise purchase details are given. He has submitted that the dispute is regarding the purchases made in the State of Rajasthan and Countervailing Duty of Rs. 48,32,83,229/- was paid by the assessee during the financial year 2014-15 and financial year 2015-16. He has referred to the details and submitted that an amount of Rs. 24,69,98,215/- was paid towards Countervailing Duty in respect of the import made from 01.10.2014 to 25.03.2015.
The another amount of Rs. 23,62,85,014/- was paid during the period from 01.04.2015 to 17.07.2015. Thus both the payments on account of Countervailing Duty are part of purchase cost of the respective year and the payment made during the financial year 2014-15 was allowed under section 43B. However, for the year under consideration since the Hon’ble Supreme Court in case of M/s. SRF Ltd vs. Commissioner of Customs, Chennai (supra) has held that the assessee is entitled for exemption from payment of CVD in terms of Notification/2002 and, therefore, the assessee applied for refund of the said amount vide two applications dated 26.09.2015 and 27.09.2015 respectively. Consequently the assessee reduced the entire amount of Customs Duty refundable from the purchase cost as reflected in the purchase account and thereby added the said amount to the income of the assessee while arriving at the Net Profit. The claim of refund was denied by the Customs Department first vide order dated 26.02.2016 passed by the Assistant Commissioner, Customs, Air Cargo Complex, Sanganer, Jaipur against which the assessee preferred an appeal before the Commissioner (Appeals) Central Excise And Central Goods & Service Tax which was also dismissed vide order dated 25th July, 2018. He has referred to these orders passed by the Customs Authorities as well as the Appellate Authority and submitted that the claim of refund was denied by the Customs Department and also declined by the Appellate Authority and thereby it is not an accrued or ascertained income in the hands of the assessee for the year under consideration. Thus the ld. A/R has submitted that until and unless the refund is granted to the assessee the said amount cannot be held as Income accrued or arises for the year under consideration. He has contended that only when the refund is finally granted and received by the assessee, it will be an income chargeable to tax in the said assessment year. Thus the ld. A/R has submitted that when the claim of the assessee is denied and it is not certain whether assessee will receive the refund then such a contingent claim cannot be treated as Income until and unless it is finally granted. The ld. A/R has referred to the trading account at page 7 of paper book and submitted that the purchases shown in the trading account are after reduction of said amount of Rs. 48,32,83,229/- as well as the other amount of Rs. 28,48,587/-, the refund of which was granted by the Customs Department vide order dated 31.03.2017. Therefore, the assessee has increased its profit by the amount of Rs. 48,32,83,229/- only on the basis of the claim of refund made to the department but the said claim was denied and rejected upto the stage of first appellate authority and, therefore, the assessee in the computation of income reduced the said amount. Keeping in view the provisions of section 37(1) read with section 43B of the IT Act, the payment of Countervailing Duty is an allowable expenditure. Even otherwise, the treatment of the amount in the books of account as well as the entries in the books of account is not a determinative factor for assessing the total income. The AO is otherwise duty bound to compute the correct income as per the provisions of law. The income which is not actually accrued or received by the assessee cannot be taxed. The ld. A/R has referred to provisions of section 43B and submitted that certain deductions are permissible in the year of payment irrespective of incurring of liability in any previous year as per the method of accounting regularly employed by the assessee. Therefore, the deduction is allowable only in the year of payment. The department has not disputed that the assessee has already paid the Countervailing Duty and, therefore, as per the provisions of section 43B it is an allowable deduction being the tax or duty paid by the assessee. He has relied upon the decision of Hon’ble Allahabad High Court in case of CIT vs. Shimboli Industries Pvt. Ltd., 365 ITR 173 (All.) and submitted that the Hon’ble High Court has held that the provision for duty as well as interest is allowable under section 43B only on the basis of actual payment and it is irrelevant that the assessee has followed the mercantile system of accounting. The provision of section 43B has over-riding effect of the other provisions and thereby the mercantile system of accounting becomes irrelevant so far as the claim falling in the ambit of section 43B. He has also relied upon the judgment of the Hon’ble Supreme Court in case of CIT vs. Bharat Carbon and Ribbon Manufacturing Co. Pvt. Ltd. 239 ITR 505 (SC) and submitted that the Hon’ble Supreme Court has reiterated its view as taken in case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT, 82 ITR 363 (SC) by holding that the entitlement of deduction will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in that matter. The Hon’ble Supreme Court has held that the liability accrued over the accounting period because of demand notice issued by the Excise Department, the obligation under the law to pay the excise duty arose at that stage.
Raising the dispute by the assessee by filing the Writ Petition for quashing or deduction of the said liability would not be a ground for holding that the liability to pay the excise duty as per demand notice was not incurred. Thus the ld. A/R has contended that the mere claim of the assessee for refund of Countervailing Duty based on the ground that the assessee is eligible for exemption would not be a ground for holding that the assessee has not incurred the liability and expenditure or the said amount becomes the income of the assessee. He has also relied upon the decision of Delhi Bench of the Tribunal in case of Maruti Suzuki India Ltd. vs. Addl.CIT (2015)(9) TMI 20-ITAT Delhi). The ld. A/R has thus contended that no income has accrued to the assessee due to claim of refund of Countervailing Duty in as much as such claim is dependent upon the necessary permission and grant of refund. Therefore, there would be no income in the hands of the assessee merely on the basis of refund claimed by the assessee more so when the said claim was denied by the Customs Department as well as Appellate Authority. He has referred to the decision of Hon’ble Supreme Court in case of CIT vs. Excel Industries Ltd. and Another, 358 ITR 295 (SC) and submitted that the income cannot be assessed to tax on hypothetical basis but only when the income is accrued or assessee gets the right to receive the income, the same is assessable to tax.
On the other hand, the ld. D/R has submitted that the assessee itself has computed the net profit by considering the said amount as not a liability of the assessee but receivable from the Customs Department. The assessee itself has shown the same as income. Even in the audit report, it is certified as income of the assessee. Therefore, the AO has rightly added the same to the total income of the assessee as there was no change in the facts or basis when the assessee has treated the said amount as income in the books of account and then claimed as deduction while computing the income offered to tax. He has relied upon the orders of the authorities below.
5. We have considered the rival submissions as well as the relevant material on record. The controversy is only regarding the payment of Customs Duty towards Countervailing Duty on the mobiles imported by the assessee which was subsequently claimed as refundable from Customs Department. The assessee paid a sum of Rs. 24,69,98,215/- on account of Countervailing Duty for the period from 01.10.2014 to 25.03.2015 and a sum of Rs. 23,62,85,014/- during the period 01.04.2015 to 17.07.2015. The total of these two payments comes to Rs. 48,32,83,229/- which is the subject matter of dispute in this appeal, as the other Customs Duty paid by the assessee are not subject matter of controversy. However, for sake of completeness, the purchase account of the assessee as part of the record as well as reproduced in the order of the ld. CIT (A) is relevant for the details of payment of Customs Duty and claim of refund. The State-wise purchases made by the assessee as per the purchase account reproduced at page 10 of the impugned order of ld. CIT (A) are as under :-
Particulars Rajasthan Gujarat Indore Raipur Total 1-Apr-2015 to 31-Mar-2016 Purchase 6,031,844,231.36 105,189,926.99 99,453,477.56 - 6,236,487,635.91 Custom Duty 711,428,260.00 - - - 711,428,260.00 paid Custom Duty -486,131,816.00 - - - -486,131,816,00 Refundable Purchase 651,757,082.61 - - - 651,757,082.61 against C form Purchase 4,949,894,564.14 - - - 4,949,894,564.14 Import Purchase VAT 425,000.00 - - - 425,000.00 14.50% Purchase VAT 204,471,140.61 - - - 204,471,140.61 @ 8% Purchase - 105,189,926.99 - - 105,189,926.99 against 2% CST Discount in - - -207,236.85 - -207,236,85 Received Purchase Entry Tax - - 28,458,209.00 - 28,458,209.00 Purchase - - 40,911,298.93 - 40,911,298.93 against C Form Purchase Vat @ - - 30,125,831.36 - 30,125,831.36 14% Purchase VAT - - 165,375.12 - 165,375.12 paid Consignment 159,086,280.08 - 66,708,332.12 - 225,794,612.20 Transfer Inward F Form Entry Tax - - - 810,440.00 810,440.00 Grant Total 6,190,930,511.44 105,189,926.99 166,161,809.68 810,440.00 6,463,092,688.11 Thus it is clear that for the year under consideration the assessee paid total Customs Duty on the purchases made by the Office/Division of the assessee in Rajasthan of Rs. 71,14,28,260/-. The assessee has reduced a sum of Rs. 48,61,31,816/- from the purchases on account of Customs Duty refundable because the assessee already claimed the refund of said amount from the Customs Department on the basis of judgment of Hon’ble Supreme Court in case of M/s. SRF Limited vs. Commissioner of Customs, Chennai dated 26th March, 2015. Thus it is clear that this amount as reduced from the purchases by the assessee includes the Countervailing Duty paid by the assessee of Rs. 24,69,98,215/- during the period from 01.10.2014 to 25.03.2015 and, therefore, this reduction has an effect of enhancing the income in the books of account of the assessee of the said amount which includes the payment of Countervailing Duty made in the preceding year as well as during the year under consideration. It is pertinent to mention that out of this Rs. 48,61,31,816/- reduced on account of refundable Customs Duty, a sum of Rs. 28,48,587/- was refunded by the Customs Department vide order dated 31.03.2017 and consequently the claim of the assessee for refund of Customs Duty remained only to the extent of Rs. 48,32,83,229/- which is the subject matter of dispute between the assessee and Income Tax Department as well as with the Customs Department. There is no dispute that the Customs Duty paid towards Countervailing Duty is an allowable claim under section 37 read with section 43B as the amount was already paid and was also allowed so far as it pertains to the assessment year 2015-16. Since the assessee has reduced the said amount which includes an amount of Rs. 24.69 crores paid during the financial year 2014-15 as well as Rs. 23.62 crores paid during the financial year 2015-16, therefore, the net effect of this reduction was to enhance the income of the assessee by a sum of Rs. 48,32,83,229/-. The claim of refund was rejected by the Assistant Commissioner of Customs vide order dated 26th February, 2016 against which the assessee preferred an appeal before the Commissioner (Appeals), Central Excise And Central Goods & Service Tax, Jaipur which was also dismissed vide order dated 25th July, 2018. Therefore, though the assessee claimed the refund of Countervailing Duty based on the judgment of Hon’ble Supreme Court in case of M/s. SRF Ltd. vs. Commissioner of Customs, Chennai (supra), however, the said claim was rejected by the Department and also rejected by the first appellate authority. In the computation of income to neutralize the effect of enhancing the income by the said amount of Rs. 48,32,83,229/- the assessee has again deducted the same and consequently the income offered to tax by the assessee was without any impact of said enhancement of income in the books of account on account of refundable duty. The AO has denied the said deduction to the assessee and treated the claim of refund of duty as income of the assessee for the year under consideration. The AO has referred to the provisions of section 41(1) of the Act and held that it is deemed to be the income for the year under consideration. The provisions of section 41(1) are applicable only when the assessee has claimed the deduction in the year or in the preceding year and subsequently the said liability is ceased to exist. In the case in hand, the assessee had already discharged the liability by making the payment. Therefore, the question of cessation of liability does not arise and consequently even if the amount is subsequently refunded to the assessee, the same cannot be deemed to be the income of the assessee under section 41(1) but it will be a real income for the year in which the refund is granted and hence the said amount will be the income of the assessee as per the provisions of section 28. Without entering into the controversy of applicability of either section 41(1) or section 28, since the amount in question was only a claim by the assessee for refund from the Customs Department but was not acceded to by the Department, therefore, it remains merely a claim which does not vest any right to the assessee to receive the said amount until and unless the refund is granted and consequently it would not constitute the income accrued or arise to the assessee. The AO has given much emphasis on the fact that the assessee itself has treated the same as income in view of the decision of Hon’ble Supreme Court and, therefore, it becomes the income of the assessee for the year under consideration. However, it is settled proposition of law that mere entries in the books of account are not decisive or conclusive to hold that a particular sum is eligible for deduction or income is accrued to the assessee. The Hon’ble Supreme Court in case of CIT vs. M/s. Bharat Carbon and Ribbon Manufacturing Co. Pvt. Ltd.
239 ITR 505 (SC) has observed in para 3 to 6 as under :- “3. In the present case, the liability to pay excise duty had arisen on 21-4-1980 when the Excise Department issued demand notice asking the assessee to pay the basic excise duty and special excise duty for the said years on the basis of trade notice issued in October 1979. The assessee admittedly was following the mercantile system of accounting and, therefore, he claimed deduction for the said amount for the assessment year 1981-82. Prior to that assessment year, there was no demand as, for the excise duty, the carbon paper manufactured by the assessee was classified under tariff Item 68. It is true that he has objected to the said demand and has filed writ petition challenging the said demand, but, at the same time, obligation to pay the said excise duty arose in that assessment year, although the liability to pay the said amount might not have been enforced pending petition. The liability had been quantified and the demand thereof had been made under the demand notice dated 21-4-1980. There was nothing uncertain, tentative, provisional or contingent in the matter of the assessee's liability to pay the excise duty. Under the law, the assessee was bound to pay the same till the order directing the assessee to pay the same was set aside or modified. In Kedarnath Jute Mfg. Co. Ltd.'s case (supra), this Court negatived a similar contention by holding thus :
". . . It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc. . . ." (p. 366) 4. Further, in that case, the Court has approved the decision of the Madras High Court in the case of Pope The King Match Factory v. CIT [1963] 50 ITR 495 where it was held that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy or the liability which had been imposed upon by the competent excise authority.
The learned counsel for the appellant further submitted that in the books of account the respondent had not debited the said amount and no entries were made acknowledging the said liability. In our view, this contention also does not require much consideration as similar contention was negatived by this Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) by holding thus : ". . . Whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs. 1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. . . ." (P. 367) 6. The learned counsel for the appellant, however, relied upon the decision of this Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 for contending that the expenditure would be deductible for the income-tax purpose which is towards a liability existing at the time, but putting aside the money which may become expenditure on the happening of a event is not expenditure. He submitted that the liability of the assessee in the present case was only contingent and not actual liability in praesenti. It is not necessary to discuss in detail the said decision because in that case itself the Court has observed : ". . . Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. . . ." (p. 76) The Court after discussing various contentions finally held : ". . . Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. . . ." (p. 80)
In the present case, the liability accrued over the accounting period because of demand notice issued by the Excise Department. The said demand notice was issued after the show-cause notice and on the basis of the trade notice issued by the Collector of Customs in October 1979 providing that coated paper would be liable to be classified under tariff Item 17(2). The obligation under the law to pay the excise duty arose at that stage. Raising of the dispute by the assessee by filing writ petition for quashing or deduction of the said liability would not be a ground for holding that liability to pay the excise duty as per the demand notice was not incurred.”
Thus the Hon’ble Supreme Court has reiterated its view as held in case of Kedarnath Jute Mfg. Co. Ltd. (supra) that the expenditure which is deductible for income-tax purposes is one which is towards a liability which is actually existing at the time and liability accrued during the accounting period because of the demand notice issued by the Excise Department. The obligation under the law to pay excise duty arose at that stage. Raising a dispute by the assessee by filing the writ petition for quashing or deduction of the said liability would not be a ground for holding that liability to pay the excise duty as per the demand notice was not incurred. In the case in hand, though the assessee has claimed refund of Countervailing Duty but the said claim itself would not be a ground for treating the same as the liability was not incurred and particularly when the assessee already paid the same. Further, in the case of the assessee the claim of refund was already rejected by the department as well as the appellate authority. Therefore, when the payment of Countervailing Duty is not in dispute then the same is otherwise an allowable deduction and cannot be added to the income of the assessee merely because the assessee has claimed a refund. The assessee has produced all the factual details before the authorities below. Even the ld. CIT (A) has reproduced the details of the purchase account as well as the details of the payment made by the assessee and refund claimed from the Customs Department which were finally rejected. The said order of rejection as well as appellate orders were also produced by the assessee which are crucial facts leading to the conclusion and inference that the claim of refund does not give any right to the assessee to receive the amount until and unless the refund is granted by the Department or the claim of the assessee is allowed by the higher courts but the AO and CIT (A) ignored these facts while adding the amount to the income of the assessee. Thus as on that date when the assessee filed its return of income as well as the assessment was completed by the AO, the said claim of refund stand rejected and consequently it cannot be treated as Income of the assessee on account of non- existing liability. The Hon’ble Supreme Court in case of CIT vs. M/s. Excel Industries Ltd. and Another (supra) has again considered this issue in para 16 to 27 as under :-
“16. Section 28(iv) of the Act reads as follows:— '28. Profits and gains of business or profession.— The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession"— ** ** ** (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; ** ** **' 17. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) it was held as follows:— "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor 15 M/s. Trust Marketing, Jaipur. receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."
The above passage was cited with approval in Morvi Industries Ltd. v. CIT (Central), [1971] 82 ITR 835 (SC) in which this Court also considered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. It was then observed that: "....... the date of payment ....... does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately."
This Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount."
It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.
In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee.
In Godhra Electricity Co. Ltd. v. CIT, [1997] 225 ITR 746/91 Taxman 351 (SC) this Court reiterated the view taken in Shoorji Vallabhdas & Co. (supra)and Morvi Industries Ltd. (supra).
Godhra Electricity is rather instructive. In that case, it was noted that the High Court held that the assessee would be obliged to pay tax when the profit became actually due and that income could not be said to have accrued when it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date. The High Court however held on the facts of the case that the assessee had a legal right to recover the consumption charge in dispute at the enhanced rate from the consumers.
This Court did not accept the view taken by the High Court on facts. Reference was made in this context to CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co. Ltd. v. CIT, [1965] 57 ITR 521 (SC) wherein it was held that income tax is a tax on real income.
Finally a reference was made to State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC) wherein the majority view was that accrual of income must be real, taking into account the actuality of the situation; whether the accrual had taken place or not must, in appropriate cases, be judged on the principles of real income theory. The majority opinion went on to say: 'What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made "no income".' 26. This Court then considered the facts of the case and came to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charges for a variety of reasons. One of the reasons so considered was a letter addressed by the Under Secretary to the Government of Gujarat, to the assessee whereby the assessee was "advised" to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but "one has to look at things from a practical point of view." (See R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC)). This Court took the view that the probability or improbability of realisation has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity. The decision of the High Court was, accordingly, set aside.
Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.”
Thus it is now settled proposition of law that an income is assessable to tax only when it is accrued as income to the assessee. If income does not result at all then even if in the books of account an entry is made about a hypothetical income, the same cannot be taxed. When there is no real income, then there is neither accrual or receipt of the same even though an entry to that effect might have been made in the books of account. It is also settled proposition of law that the income is said to be accrued only when it becomes due and it becomes due only when the assessee vest a right to receive the same. The Hon’ble Supreme Court has observed that income accrues when there arises a corresponding liability of the other party from whom the income becomes due to pay that amount. Therefore, until and unless the Customs Department accepted the claim of refund, the said amount would not be regarded as income accrued to the assessee. On the contrary, the Customs Department has rejected the claim and the assessee has also lost its first appeal, therefore, by applying any parameter the amount in question cannot be held as income of the assessee so long the claim of refund stand denied. Therefore, at the time of passing the assessment order dated 27.12.2008 it was rather certain that the claim of refund made by the assessee was denied by the Customs Authorities including the first appellate authority and consequently it cannot be said that income has accrued or arise to the assessee during the year under consideration or till the assessment order was passed. The entries and treatment in the books of account is not a conclusive basis for holding the income arises and liable to tax. The AO is under duty and obligation to assess the actual and correct income as per provisions of the Act while acting as a quasi judicial authority and not to take advantage of any mistake or the entries made in the books of account. The ld. CIT (A) has confirmed the addition by citing the provisions of section 41(1) which in our view not applicable in this case as discussed in earlier part of this order. Accordingly, in view of the above facts and circumstances of the case as well as the binding precedents as cited above, we hold that the addition made by the AO on account of claim of refund of Countervailing Duty without appreciating the fact that the said claim was already
18 M/s. Trust Marketing, Jaipur. rejected and the chances of refund are very bleak is not justified, therefore, the addition made by the AO and confirmed by the ld. CIT (A) is deleted. 6. In the result, appeal of the assessee is allowed.