THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. KALPATARU POWER TRANSMISSION LTD.

This Tax Appeal is filed under Section 260A of the Income Act, 1961 (for short the “Act”) at the instance of revenue and it is directed against the order   dated   10.05.2019   passed   by   the   Income   Tax Appellate Tribunal, Ahmedabad “C” Bench, Ahmedabad in ITA   No.1462/Ahd/2016   for   the   assessment   year   2010­ 2011. 2. The   revenue   has   proposed   solitary   substantial question   of   law   in   its   Memorandum   of   Appeal.   The question formulated reads thus:­ “2(A)  Whether  the Appellate  Tribunal  has erred in the facts and circumstances of the case and in law, in upholding the order of the CIT(A) for deleting   the   addition   of   Rs.4,42,72,610/­   in holding carbon receipts as capital receipts?”

We   take   notice   of   the   fact   that   the   similar issue had arose in the case of very same assessee, so far   as   the   assessment   for   the   year   2009­10   is concerned, we refer to the order passed by this Court in the Tax Appeal No.141 of 2017 dated 02.03.2017. The   relevant   observations   made   in   the   said   order reads thus:­ “[1.0] Feeling aggrieved and dissatisfied with the impugned judgment and order dated 18.03.2016 passed by   the   learned   Income   Tax   Appellate   Tribunal, Ahmedabad   (hereinafter   referred   to   as   “Tribunal”) in ITA No.538/Ahd/2013 for AY 200910, by which the learned   Tribunal   has   dismissed   the   said   appeal preferred by the Revenue and confirming the order passed by the learned CIT(A) deleting the addition of Rs.5,78,28,058/, the Revenue has preferred the present Tax Appeal with the following substantial question of law. “Whether the ITAT is right in law and on facts in deleting the addition   of   Rs.5,78,28,058/in   holding   carbon   receipts   as capital receipt?”

By the impugned order, the High Court declined to   admit   the   appeal   filed   by   the   Revenue   under Section 260A of the Act.

It was submitted before us by learned counsel for the Revenue that in view of the provisions of Section   28(iv)   of   the   Act,   the   value   of   the benefit obtained by the assessee is its income and is liable to tax under the head “Profits and gains of   business   or   profession”.   We   are   unable   to accept the contention of learned counsel for the Revenue for several reasons.

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”...

First of all, it is now well settled [1962]   46   ITR   144   (SC)   it   was   held   as follows: “Incometax is a levy on income. No doubt, the Incometax 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 bookkeeping,   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 receipt of income, even though an entry to   that   effect   might,   in   certain circumstances, have been made in the books of account.”

Incometax   (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.   vs. Commissioner   of   Income   Tax,   [1997]   225   ITR   746 (SC)   this   Court   reiterated   the   view   taken   in Shoorji Vallabhdas and Morvi Industries.

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   Commissioner   of   Income   Tax   vs. 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. vs. Commissioner of Income Tax, [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 vs. Commissioner of Income Tax, [1986] 158   ITR   102   (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”.

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 vs. Commissioner   of   Income   Tax,   [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.” [4.2] Applying the aforesaid law laid down by the Hon’ble Supreme Court to the facts of the case on hand, it cannot be said that the learned CIT(A) as well   as   the   learned   Tribunal   have   committed   any error in deleting the addition of Rs.5,78,28,058/­ and   holding   that   as   neither   the   carbon   receipts were sold and/or transferred in favour of foreign companies in the year under consideration, the same cannot be included as receipt / income in the year under   consideration.   Under   the   circumstances,   we see

Thus, in view of the aforesaid decision of this Court in the case of the very same assessee, this appeal fails and is hereby dismissed. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) GIRISH