GEORGE MAIJO INDUSTRIES (P) LTD.,,CHENNAI vs. ACIT, CC-II (1),, CHENNAI

The CIT(A) after considering the statutory audit report whereby assessee has claimed SAD receipts as provision, contingent liability and contingent assets. As per clause 29 of audit report, it was claimed that this receipt is subject to verification and approval by customs authority and hence, the same is in the nature of contingent receipt. According to CIT(A), once the assessee is following mercantile system of accounting and both the statutory auditor as well as assessee has signed the audit reports accompanied by balance sheet, the assessee was required to offer the SAD receipts as income for taxation and should not have & 2959/Chny/2019 4 claimed the same as deduction. Accordingly, he confirmed the disallowance made by the AO. Aggrieved against the order of CIT(A) confirming the order of AO, the assessee came in appeal before the Tribunal.

Before us, the ld.counsel for the assessee explained that the assessee company is crediting the SAD portion to cost of goods sold i.e., material consumption account instead of taking it to separate head under income group. The SAD portion comes as a deduction from material consumption rather than capturing the same under any head of income. The assessee claimed that in the financial year 2014-15 relevant to assessment year 2015-16, the assessee company has accounted SAD receipts of Rs.139 lakhs and by this amount, the profit of the assessee is increased. The assessee claimed that these SAD receipts were never received and it is pending adjudication before the Customs authority. The assessee claimed that these are contingent receipts and a mere provision and actually it has not accrued to the assessee nor received. The ld.counsel for the assessee explained that the assessee company has claimed SAD refund and the value of import purchases from July 2014 to March 2015 amounting to Rs.1,39,77,719/- as on 31.03.2015. The ld.counsel explained that this amount is subject to & 2959/Chny/2019 5 quantification by the Customs Authorities and Customs Authorities till this financial year i.e., 31.03.2015 has not finalized the claim. Accordingly, the assessee has made claim of the same and disclosed this amount in subsequent year as and when customs authorities have finalized this claim. The ld.counsel for the assessee stated that the assessee consistently following this system of accounting and disclosing the receipts of SAD as and when the customs authorities finalized the claim. The ld.counsel for the assessee filed a certificate from the Chartered Accountant of the assessee company which explained that the assessee is claiming exclusion and thereafter inclusion of the same amount in subsequent years in the return of income. The relevant certificate issued by Chartered Accountant dated 22.03.2022 reads as under:- “For assessment year 2015/16 to 2021/22 following is the Amount of Special Additional Duty (SAD) provided in the accounts of George Maijo Industries (P) Limited, 2B Apex Plaza, Nungambakkam High Road, Chennai – 34 and actually received by the Company Financial Assessment Amount excluded Amount offered to year year from Total taxation in income as in computation towards computation this account 31/3/2015 2015/16 13,97,771.00 Nil 31/3/2016 2016/17 1,12,03,110.00 1,07,60,600.00 31/3/2017 2017/18 71,47,791.00 95,99,623.00 31/3/2018 2018/19 7,05,543.00 53,47,433.00 31/3/2019 2019/20 Nil 18,03,998.00 31/3/2020 2020/21 Nil Nil 31/3/2021 2021/22 Nil Nil & 2959/Chny/2019 6 As on 31/3/2021 an amount of Rs.55,22,505/- is due from Customs Department towards SAD amount receivable. What is stated above has been extracted from ITR filed for the assessment years 2015/16 to 2021/22.”

On the other hand, the ld.Senior DR heavily relied on the order of AO as well as the CIT(A). He argued that once the assessee is following mercantile system of accounting and whatever is accrued to the assessee, he should disclose in the return of income and cannot claim any deduction on the plea that the particular receipt is contingent or a mere provision.

We have heard rival contentions and gone through facts and circumstances of the case. We noted that the assessee admits that whatever SAD receipts are taxable but only question is year of taxability. The assessee’s claim is that a particular claim of SAD receipts is not settled by the Customs Authorities and it is pending verification before the customs authorities. The assessee claimed that in regard to this amount of Rs.1,39,77,719/- claim of deduction & 2959/Chny/2019 7 made of SAD receipts in this year is already been offered for tax in subsequent years. The ld.counsel for the assessee before us filed complete chart, year-wise, as and when these SAD receipts are verified and authenticated by customs authorities. The assessee has included the same in respective return of income of the respective years.

The above passage was cited with approval in Morvi Industries Ltd. v. Commissioner of Income-Tax (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 & 2959/Chny/2019 9 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. 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 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. 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 v. 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:

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. 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.

Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue.

In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) this Court did not think it appropriate to allow the & 2959/Chny/2019 11 reconsideration of an issue for a subsequent assessment year if the same “fundamental aspect” permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said:

Reference was also made to Parashuram Pottery Works Ltd. v. Income Tax Officer, [1977] 106 ITR 1 (SC) and then it was held:

Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.

In the result, both the appeals filed by the assessee are allowed.