M/S. FGP LIMITED vs. ASSISTANT COMMISSIONER OF INCOME TAX ( OSD ) 1 (1) (2)

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ITXA/69/2008HC Bombay26 June 2008Bench: HON'BLE SHRI JUSTICE F.I. REBELLO, HON'BLE SHRI JUSTICE K.U. CHANDIWAL4 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the ratio of the Supreme Court judgment in Godhra Electricity Co. Ltd. vs. CIT, which emphasizes that income tax can only be imposed if there is real income and not hypothetical income, fully applies to the present case. The Court noted that the Supreme Court, in Godhra Electricity, had held that even under the mercantile system, what needs to be seen is whether income can be said to have 'really accrued' to the assessee. In the instant case, due to the dispute between the parties and pending arbitration proceedings initiated by UPT denying its liability, there was no real accrual of income. Income will only be liable to be assessed once the arbitral proceedings conclude, an award is passed, and the income is received by the assessee. Consequently, questions 1, 2, and 3 were answered against the revenue.

What were the facts?

The assessee, M/s. FGP Limited, had a royalty agreement with M/s. UP Twiga Fibre Glass Limited (UPT). UPT filed a suit denying liability to pay under the agreement, and the dispute was referred to arbitration. The assessee had not received any income from this agreement to date. The Assessing Officer (AO) had initially held in favour of the assessee, stating no real income accrued. However, the revenue appealed this decision. The Tribunal, distinguishing the Supreme Court's decision in Godhra Electricity Co. Ltd. vs. CIT, allowed the revenue's appeal, holding that under the mercantile system, royalty accrued and was taxable even if not received, for the year it was payable. This led to the present appeal before the High Court.

What were the issues?

1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in concluding that royalty of Rs. 1.35 crores accrued to the Appellant during the year in question (Section 6, Section 5 of the Income Tax Act, 1961). 2. In view of the principles laid down in CIT vs. Smt. Vimla D. Sonawane & Ors. and Godhra Electricity Co. Ltd. vs. CIT, whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in its impugned conclusion (Section 6, Section 5 of the Income Tax Act, 1961). 3. On the facts and in the circumstances of the case and in law, whether the Tribunal was justified in concluding that the impugned royalty accrued to the appellant even though UPT, the party from whom the amount is due, had filed a suit denying its liability to make any payment under the said agreement (Section 6, Section 5 of the Income Tax Act, 1961). Assessee's Contentions: The assessee relied on the Supreme Court decision in Godhra Electricity Co. Ltd. vs. Commissioner of Income Tax, 225 ITR 746. Revenue's Contentions: The revenue argued that under the mercantile system of accounting, the royalty was taxable even if not received, as it accrued in the year it was payable. The Tribunal distinguished the Godhra Electricity Co. Ltd. judgment.

Which sections of the Income-tax Act were involved?

Section 5,Section 6

AI-generated summary — verify with the full judgment below

HVN IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ORDINARY ORIGINAL CIVIL JURISDICTION ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 69 OF 2008 M/s. FGP Limited ... Appellant Versus The Commissioner of Income Tax ... Respondent Mr. Subhash Shetty with Mr.A.K. Jasani for Appellant. Mr. A.D. Kango for Respondent. CORAM: F.I. CORAM: F.I. CORAM: F.I. REBELLO REBELLO REBELLO & K.U.CHANDIWAL,JJ. K.U.CHANDIWAL,JJ. K.U.CHANDIWAL,JJ. DATED: JUNE 26, 2008 DATED: JUNE 26, 2008 DATED: JUNE 26, 2008 ORAL JUDGMENT (Per F.I. Rebello,J.) : . Admit on the following questions : "(1) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in coming to the conclusion that the royalty of Rs.1.35 crores accrued to the Appellant during the year in question. (2) In view of the principles laid down in the decision of this Hon’ble High Court in the case of CIT Vs. Smt. Vimla D. Sonawane & Ors. 212, ITR 489 and the Supreme Court decision in the case of Godhra Electricity Co. Ltd. Vs. CIT 225 ITR 746, whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in coming to its impugned conclusion. CNR No : HCBM020012482008 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 12:42:34

(3) On the facts and in the circumstances of the case and in law, whether the Tribunal w as justified in coming to the conclusion that impugned royalty accrued to the appellant even though UPT, the party from whom the said amount is due had field a suit in this Hon’ble Court denying its liability to make any payment under the said agreement." 2. The assessee had a royalty agreement with M/s. UP Twiga Fibre Glass Limited (UPT) under which certain amounts were payable to the assessee. The record would, however, indicate that no income has been received by the appellant till date pursuant to the royalty agreement as there is dispute between the parties and arbitration proceedings are being proceeded with. It is pointed out that when the parties have been referred to arbitration pursuant to suit filed by UPT before this court, seeking relief that no amount was due and payable by them to the assessee herein. 3. The learned CIT had held in favour of the appellant that no real income had accrued in favour of the assessee relying on the judgment in Godhra Electricity Company Ltd.(supra). The revenue aggrieved, preferred an appeal. The assessee relied on the judgment of the Supreme Court in Godhra Electricity Co. Ltd. Vs. Commissioner of Income Tax, 225 ITR 746. The tribunal distinguished the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 12:42:34

said judgment on the ground that on the facts it was not applicable and consequently allowed the appeal preferred by the revenue by holding that once the assessee adopted the mercantile system even if the amount is not received, it will be taxable in Assessment year for which it were payable. Hence, the present appeal. 4. The Apex Court in Godhra Electricity Co. Ltd. (supra) has laid down the test to assess income in the hands of an assessee. The Assessee therein was also following the mercantile system of accounting and had made entries in the books regarding electrical charges for the supply made to the consumers, however, no real income had accrued to the assessee company. The Tribunal had held that it represented hypothetical income and the Assessing Officer was not right in assessing it to tax. Before the Supreme Court it was urged that even in case of mercantile system of accounting, tax can only be imposed if there is real income and income tax cannot be imposed on hypothecated income.The Court held even in mercantile system what has to be seen is whether income can be said to have really accrued to the assessee company. The Court referred to the judgment of the Court in H.M. Kashiparekh and Co. Ltd. Vs. CIT (1960) 39 ITR 706 (Bom) which view was approved by the Supreme Court in CIT Vs.Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC). What can therefore, be assessed is real income as income tax is a tax on income. The test therefore, before income can be taxed is whether there is real Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 12:42:34

accrual of income. In our opinion, the ratio of that judgment fully applies to the facts of the present case. 5. In the instant case, there is no real accrual of income. There is dispute between the parties for the relevant Assessment year which was pending in arbitration. It is only on the arbitral proceedings coming to an end and award being passed and income received by the assess, will it be liable to be assessed. . Considering the above, questions Nos. 1, 2 and 3 are answered against the revenue. Appeal accordingly allowed. (K.U.CHANDIWAL, J.) (K.U.CHANDIWAL, J.) (K.U.CHANDIWAL, J.) (F.I.REBELLO, J.) (F.I.REBELLO, J.) (F.I.REBELLO, J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 12:42:34 Powered by TCPDF (www.tcpdf.org)

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