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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI C.N. PRASAD & SHRI RAMIT KOCHAR
सुनवाई क" तार"ख /Date of Hearing : 03-08-2016 घोषणा क" तार"ख /Date of Pronouncement : 24-10-2016 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
1. This appeal, filed by the assessee, being 8th May, 2014 passed by learned Commissioner of Income Tax (Appeals)- 25, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2010-11, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 28th February, 2013 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called “the Act”).
ITA 4793/Mum/2014 2
The grounds of appeal raised by the assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-
“Based on the facts, circumstances of the case and in law, the Appellant respectfully submits that the learned Commissioner of Income Tax (Appeals) ['CIT(A)'] has:
General ground
1. erred in confirming total addition of Rs. 17,87,822/- made by the AO to the income of the appellant; Taxing receipt from the sale of licenses amounting to Rs. 8,74,936/- on due basis
2. erred in confirming the taxability of the licenses received during the year amounting to Rs.8,74,936/- during the year under appeal, without appreciating that the said receipt was offered to tax in the next year on sale of the license;
3. failed to appreciate that the said practice is consistently followed by the appellant in the past and it has never been disputed by the department; Disallowance of Rs. 9,l2,886/- under section l4A read with Rule 8D
4. erred in confirming the additional disallowance of Rs. 9,12,886 under section 14A read with Rule 8D (i.e. over and above suo-mote disallowance of Rs. 3,32,482/-);
5. failed to appreciate that where the investments have been made from owned funds and not from borrowed funds, interest cannot be disallowed under section 14A read with Rule 8D of the Act;
6. failed to appreciate that the appellant has suo-moto disallowed Rs. 3,32,482/- while computing disallowance under section 14A read with Rule 8D of the Act (i.e. 0.5% of average value of investment) and hence no further disallowance is required under section 14A of the Act.
Each of the ground is independent and without prejudice to one another.”
ITA 4793/Mum/2014 3
The Brief facts of the case are that the assessee is a firm engaged in the business of exports. It was observed by the A.O. from perusal of the accounts that the assessee has received Rs. 8,74,936/- on sale of DEPB licenses which was not offered for taxation. The assessee was asked to explain as to why the receipt of above sale proceed of DEPB licenses should not be treated as its income and brought to tax while computing income of the impugned assessment year. In reply , the assessee submitted that the above licenses were sold in subsequent year hence the same was not offered for taxation in this year as per its practice, but was offered for taxation in the subsequent year.
The A.O. rejected the contentions of the assessee. The A.O. observed that the assessee is a firm doing business and it cannot follow different accounting system for the different receipts, income of the same business. The A.O. referred to the decision of Hon’ble Supreme Court in the case of M/s Topman Exports v. CIT (2012) 342 ITR 49(SC) whereby accrual of income on licenses granted is taxable in the year the DEPB licenses accrued. Therefore , the explanation offered by the assessee was rejected and the AO held that the sales proceed of license of Rs. 8,74,936/- received by the assessee was treated as suppressed income and was added to the total income of the assessee by the AO vide assessment order dated 28-02-2013 passed by the AO u/s. 143(3) of the Act.
It was further observed by the A.O. that the assessee has earned exempt income and disallowed of its own Rs. 3,32,482/- u/s 14A r.w.r. 8D of the Income-tax Rules, 1962(hereinafter called “1962 Rules”) . Since the working of the disallowance under Rule 8D of 1962 Rules was not found correct, the assessee was asked to explain as to why the disallowance under Rule 8D of 1962 Rules should not be done properly and why the same should not be disallowed accordingly. The assessee submitted that the investment in ITA 4793/Mum/2014 4 mutual fund, shares were made out of partners fund and no outside borrowings were made for the purchase of mutual funds and shares. Thus , the assessee prayed that the disallowance was correctly made and the same should be accepted.
The A.O. rejected the contentions of the assessee and applied provisions of Section 14A(3) of the Act whereby it was held that disallowance under Rule 8D of 1962 Rules should be made even if the assessee claims that no expenditure was incurred in earning exempt income. The A.O. observed that the partners devote some time in selection of purchase of mutual funds or shares or in giving instruction to share brokers. The assessee's premises, offices, its infrastructures were used for investment in mutual funds and purchase of shares. As such, the assessee's claim that no expenditure was incurred for investment was not correct and the same was rejected by the AO.
The A.O., accordingly, worked out the total disallowable amount of interest amounting to Rs. 9,43,034/- u/r 8D(2)(ii) of 1962 Rules r.w.r. Section 14A of the Act of 1961, while the AO disallowed Rs. 3,32,482/- towards administrative expenses u/r 8D(2)(iii) of 1962 Rules read with Section 14A of the Act and thus, the total disallowance worked out by the AO comes to Rs. 12,75,516/- u/s 14A of the Act read with Rule 8D of 1962 Rules, out of which Rs. 3,32,482/- was disallowed voluntarily by the assessee of its own u/r 8D(2)(iii) of 1962 Rules and the balance of Rs. 9,12,886/- was disallowed by the AO u/r 8D(2)(ii) of 1962 Rules read with Section 14A of the Act of 1961, and added the same to the total income of the assessee vide assessment order dated 28-02-2013 passed by the AO u/s 143(3) of the Act.
4. Aggrieved by the assessment order dated 28-02-2013 passed by the A.O. u/s. 143(3) of the Act, the assessee filed its first appeal before the ld. CIT(A).
ITA 4793/Mum/2014 5
5. Before the ld. CIT(A) , the assessee submitted vide its statement of facts that as per copy of annual accounts along with Accounting Policies filed before the Revenue , it was mentioned that the export incentives in the form of drawback and DEPB are accounted when received and that of license premium is accounted when encashed. It was submitted that mere receipt of license from DGFT office does not make the assessee eligible for transfer and after receipt of the license it is to be submitted to Custom Authorities for verification and registration which takes time and once the license is registered by the custom authorities then only it is eligible for transfer. The assessee submitted that the assessee had received Rs. 8,74,936/- on sale of license. However, during the year DEPB license of Rs. 8,74,936/- had been accrued and not accounted as ‘due’ and would be accounted in the year of sale of licenses as per method of accounting followed consistently taking the cost at nil as per the judgment of Hon’ble Bombay High Court in the case of CIT v. Kalpataru Colours and Chemicals, 328 ITR 451 which has been reversed by the Hon’ble Supreme Court in the case of Topman Exports v. CIT reported in 322 ITR 49(SC) only on the ground that the assessee has offered on ‘due’ basis when licenses were received and when sold, the department wanted to tax on gross basis i.e. the sale value of licenses without deducting the notional value of cost under section 28(iii)(d) of the Act. Hence the Hon’ble Supreme Court held that when the licenses accounted on "due" basis under section 28(iii)(b) of the Act, then on sale of licenses only profit is to be taxed under section 28(iii)(d) of the Act. In assessee’s case , the assessee offered gross value of the sale of licenses taking cost as Nil u/s 28(iii)(d) of the Act in the subsequent year, hence, there is no loss of taxes to the revenue.
The ld. CIT(A) rejected the contentions of the assessee and observed that the judgment of Hon’ble Supreme Court in the case of Topman Exports (supra) was given only on the ground that in that case the assesse had already offered the amount on "due" basis, and the department again wanted to tax ITA 4793/Mum/2014 6 the gross amount including cost on sale of such licenses in subsequent year, the Hon’ble Supreme court held that as per the provisions of section 28 of the Act of 1961 that under clause (iiib) of the Act, cash assistance received or receivable by any person against exports' under any scheme of the Government of India is by itself income chargeable to income tax under the head profits and gains of business or profession which means that DEPB is a cash assistance receivable by a person against exports under the scheme of Government of India and under clause (iiib) of section 28 of the Act is chargeable to income tax under the head profits and gains of business or profession even before it is transferred by the assessee. Under clause (iiid) of Section 28 of the Act , any profit on transfer of DEPB is chargeable to income tax under the head ‘Profits and Gains of Business or Profession’ as an item separate from cash assistant under clause (iiib) of Section 28 of the Act. The word ‘profit’ means the gross proceeds of a business transaction less the costs of the transaction. Thus, the face value of DEPB will fall under clause (iiib) of Section 28 of the Act, the difference between the sale value and the face value of the DEPB will fall under clause (iiid) of Section 28 of the Act. Thus, the assessee’s contention was rejected by the learned CIT(A) as the Hon’ble Supreme Court has not indicated that aforesaid decision in Topman Exports(supra) would be applicable only in such cases where the assessee has already offered the cost of DEPB on ‘due’ basis rather the Hon’ble Supreme Court has held that DEPB is receivable once exports are made and an application is made by an exporter for DEPB license. The learned CIT(A) held that the DEPB license is considered to be receivable as soon as application is made after making the exports. It was observed by learned CIT(A) that there is no stipulation in the aforesaid judgment of Hon’ble Supreme Court that formalities of making it transferable also need to be completed so as to bring it to tax. The learned CIT(A) confirmed the assessment order of AO whereby additions made by the AO were confirmed by ITA 4793/Mum/2014 7 learned CIT(A) vide appellate orders dated 08-05-2014 passed by the learned CIT(A).
Further, the disallowance u/s 14A of the Act read with Rule 8D of 1962 Rules was confirmed by the ld. CIT(A). The assessee had submitted before learned CIT(A) that the assessee had invested Rs. 4.65 crores in shares , mutual funds which are capable of yielding exempt income, out of own funds held by the assessee of Rs.12.75 crores. The assessee also took a plea before the learned CIT(A) that the AO cannot disallow the expenses of Rs.12,75,516/- u/s 14A of the Act of 1961 r.w.r. 8D of 1962 Rules without establishing that a particular expenditure was incurred for the purposes of earning exempted income. The assessee relied upon several judicial decisions which are cited in the learned CIT(A) appellate orders dated 08-05-2014 at page 6/7 of the appellate order.
The ld. CIT(A) held that Rule 8D of 1962 Rules were applicable w.e.f. assessment year 2008-09 keeping in view of the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., (2010) 328 ITR 81 (Bom) wherein it was held that Rule 8D of 1962 Rules read with section 14A of the Act is not arbitrary or unreasonable but can be applied if assessee’s method is not satisfactory. Thus, the additions made by the A.O. was confirmed by learned CIT(A) vide appellate orders dated 08-05-2014 as the assessee failed to challenge the AO’s finding that certain administrative expenses by use of partner’s time in selection of mutual funds/shares and also use of its office infrastructure for the said purposes must have been certainly incurred . The learned CIT(A) observed that the assessee plea that it has not used borrowed funds for making investment and that the investments were made out of own capital cannot be accepted and hence since Rule 8D of 1962 Rules is applicable w.e.f. assessment year 2008-09 as held by Hon’ble Bombay High court in the case of Godrej and Boyce Manufacturing Company ITA 4793/Mum/2014 8 Limited(supra), then as per appellate orders dated 08-05-2014 passed by learned CIT(A) proportionate disallowance for interest has to be made as per Rule 8D of 1962 Rules relying on decisions of Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited (2010) 328 ITR 81(Bom.) .
6. Aggrieved by the appellate order dated 08-05-2014 passed by the ld. CIT(A), the assessee is in appeal before the Tribunal.
7. The ld. Counsel for the assessee submitted before the Tribunal that there is a sale of DEPB license in the subsequent year and the assessee has received Rs. 8,74,936/- against the same and offered for taxation in the subsequent year , while the DEPB license was received during the year. There is no loss to the Revenue as the whole amount has been offered for taxation albeit in the subsequent year when the DEPB licenses’ were sold. The ld. Counsel for the assessee submitted that assessee is an exporter and DEPB licenses accrued on exports during the year under consideration and the assessee did not offer for taxation income based on accrual of DEPB license on the face value of DEPB license in the instant year under appeal as the same is taxable when the DEPB license is accrued and due. The taxability will arise only when the DEPB license is accrued and due as after accrual there are certain formalities to be performed with the Custom authorities for verification and registration and then only the DEPB license becomes accrued and due. It was submitted that these licenses were sold in the subsequent year wherein the income was offered for taxation in the subsequent year , and the same were not offered for taxation in this year when the DEPB license was accrued and received as per the practice followed by the assessee. The ld. Counsel submitted that there are certain formalities which have to be completed with the Custom authorities for verification and registration which takes time and once the license is registered by the Custom authorities, then ITA 4793/Mum/2014 9 only the same can be sold. The ld. Counsel relied on the following case laws in support of his contention:-
CIT v. Excel Industries Ltd., (2013) 358 ITR 295 (SC) 2. Unites Phosphorous Ltd. v. Addl. CIT, (2014)91 CCH 91 (Guj) 3. Liquidator Polymerland India Pvt. Ltd. V. DCIT, (2015)93 CCH 85 (Del HC) 4. Topman Exports V. CIT, (2012)342 ITR 49 (SC)
The ld. Counsel submitted that the assessee has rightly brought to tax income from sale of DEPB license in the subsequent year when the DEPB licenses’ were sold and sale proceeds were received and it cannot be brought to tax in this year as it became accrued and due in subsequent year. It was submitted that decision of Hon’ble Supreme Court in Topman Exports(supra) was rendered in context of eligibility of premium on sale of DEPB license under Section 80HHC of the Act and decision of Hon’ble Supreme Court in the case of Excel Industries Limited(Supra) is directly applicable wherein it is held by Hon’ble Supreme Court that DEPB license is taxable in the year in which duty free imports are made. Thus, it was submitted that the DEPB license is not taxable in the year of receipt but in the year of utilization i.e. either against import of raw material or sale to third party and till that point it is notional income and not taxable. Further it is was submitted that Hon’ble Supreme Court has held that if the tax rate remains the same and the income is brought to tax in the next year, then it is fruitless to undertake such litigation as nothing is going to add to the public coffers.
With respect to the disallowance u/s 14A of the Act read with Rule 8D of the 1962 Ruless the ld. Counsel submitted that the assessee has voluntarily disallowed 0.5% of average investments held whereby Rs. 3,32,482/- was offered for disallowance u/s 14A of the Act r.w.r. Rule 8D(2)(iii) of 1962 Rules.
ITA 4793/Mum/2014 10 The assessee has invested its own funds in making investments and as such no disallowance can be made under Rule 8D(2)(ii) of 1962 Rules r.w.s 14A of the Act. The assessee has own funds to the tune of Rs. 12.74 crores as at 31- 03-2010 and Rs. 12.37 crores as at 31-03-2009, while the investment was only Rs. 4.65 crores as at 31-03-2010 and Rs. 8.65 crores as at 31-03-2009, as are reflected in audited financial statements which are placed in paper book. The ld. Counsel relied on the decision of Hon’ble Bombay High Court in the case of CIT v. HDFC Bank Ltd., (2014)366 ITR 505 (Bom) , CIT v. Reliance Utilities & Power ltd., (2009) 313 ITR 340 (Bom) and decision of Hon’ble Bombay High Court in writ petition in HDFC Bank Limited v. DCIT (2016) 67 taxmann.com 42(Bom. HC). The ld. Counsel also relied on the decision of the Tribunal in the case of M/s Silvassa Estates Pvt. Ltd. v. ITO in vide orders dated 14th June, 2016 and decision of the Tribunal in the case of Tickerplant Limited v. DCIT in ITA No. 251/Mum/2014 vide orders dated 13.07.2016.It was also submitted that no disallowance has been made u/s 14A of the Act read with Rule 8D of 1962 Rules for the assessment year 2008-09, 2009-10 and 2011-12 and this is the first year when the disallowance of interest is proposed by the AO.
8. The ld. D.R. on the other hand submitted that the ld. CIT(A) has rightly applied the decision of Hon’ble Supreme Court in the case of Topman Exports (supra) and brought to tax income on DEPB license when the said license was applied for on accrual basis wherein face value of DEPB is taxable on accrual basis on exports made by the assessee u/s 28(iiib) of the Act when the license was applied with the Government authorities, while profit on sale of DEPB license i.e. sale proceeds less face value of DEPB license is taxable in the year of sale of DEPB license u/s 28(iiid) of the Act of 1961. It was submitted that decision of Hon’ble Supreme Court in the case of Topman Exports(supra) is applicable and the Hon’ble Supreme Court while passing orders in Excel ITA 4793/Mum/2014 11 Industries Limited(supra) did not consider its decision in the case of Topman Exports(supra). The ld. D.R. also supported the order of the ld. CIT(A).
The learned AR in rejoinder submitted that the DEPB license is taxable when it is accrued and due .It was submitted that decision of Hon’ble Supreme Court in the case of Topman Exports(supra) was in context of Section 80HHC of the Act and not sale of DEPB license. It was submitted that if the DEPB license is merely accrued, it is not taxable. It is only when the DEPB license is accrued and due, the taxability will arise. It is submitted that there is no escapement of income as the assessee did paid the tax in next year when DEPB license was sold and there is no loss to Revenue and decision of Hon’ble Supreme Court in the case of Excel Industries Limited(supra) is directly applicable.
We have considered the rival contentions and also perused the material available on record including the case laws cited by the both parties. We find that the assessee is an exporter and the assessee has applied for DEPB licenses which has been granted for an amount of Rs. 8,74,936/- during the impugned assessment year but the face value of the DEPB licenses granted to the assessee as placed in paper book page 73-92 are to the tune of Rs.10,94,118/- which need reconciliation so that correct income is brought to tax. The said licenses are placed by the assessee in paper book filed with the Tribunal at page 73-92 . It is the say of the assessee that on receipt of the DEPB licenses, no income has accrued. All the formalities have to be completed with the Custom authorities w.r.t. verifications and registrations after receipt of DEPB license and then only the income will accrue and due on the face value of DEPB license u/s 28(iiib) of the Act as contemplated by Hon’ble Supreme Court in the case of Topman Exports(supra). Thus, it is the say of the assessee that the taxability shall arose when the DEPB license is accrued and due . It is the say of the assessee that the only after the entire ITA 4793/Mum/2014 12 verification and registration formalities with Custom Authorities were completed , then only the DEPB license can be said to accrue and due in favour of the assessee. The said DEPB licenses were stated to be sold in the subsequent year which has been stated to be offered for taxation. The sale invoices raised by the assessee for sale of afore-stated DEPB licenses are placed along with DEPB licenses in paper book/ page 72-92. The assessee had relied on the decision of Hon’ble Supreme Court in the case of Excel Industries Ltd., (2013) 358 ITR 295 (SC) which is a decision of Hon’ble Supreme Court rendered on 08-10-2013 while decision in the case of Topman Exports(supra) was rendered by Hon’ble Supreme Court on 08-02-2012 i.e. prior to rendering of decision in the case of Excel Industries Ltd.(supra), wherein the Hon’ble Supreme court held in Excel Industries Ltd(supa) as under:-
“2. The question for consideration in all these appeals is whether the benefit of an entitlement to make duty free imports of raw materials obtained by the assessee through advance licences and duty entitlement pass book issued against export obligations is income in the year in which the exports are made or in the year in which the duty free imports are made.
3. In our opinion, the income does not accrue in the year of export but in the year in which the imports are made.
The facts pertaining to Civil Appeal No. 125 of 2013 (M/s Excel Industries Limited for the Assessment Year 2001-02) are referred to for convenience.
The assessee maintains its accounts on a mercantile basis. In its return (revised on 31st March 2003) the assessee claimed a deduction of Rs.12,57,525/- under the head advance licence ITA 4793/Mum/2014 13 benefit receivable. The assessee also claimed a deduction in respect of duty entitlement pass book benefit receivable amounting to Rs.4,46,46,976/-. These benefits related to entitlement to import duty free raw material under the relevant import and export policy by way of reduction from raw material consumption. According to the assessee, the amounts were excluded from its total income since they could not be said to have accrued until imports were made and the raw material consumed.
During the assessment proceedings, the assessee relied upon a decision of the Income Tax Appellate Tribunal in Jamshri Ranjitsinghji Spg. and Wvg. Mills v. Inspecting Asstt. Commissioner [1992] 41 ITD 142 (Bom) and also the order of the Commissioner of Income Tax (Appeals) in its own case for the assessment years 1995-96 to 1997-98.
By his order dated 24th March 2004, the Assessing Officer did not accept the assessee's claim on the ground that the taxability of such benefits is covered by Section 28(iv) of the Income Tax Act, 1961 (for short 'the Act') which provides that the value of any benefit or perquisite, whether convertible into money or not, arising from a business or a profession is income. According to the Assessing Officer, along with an obligation of export commitment, the assessee gets the benefit of importing raw material duty free. When exports are made, the obligation of the assessee is fulfilled and the right to receive the benefit becomes vested and absolute, at the end of the year. In the year under consideration, the export obligation had been made and the accounting entries were based on such fulfilment. The Assessing Officer distinguished Jamshri on the ground that it pertained to the assessment year 1985-86 when the export promotion scheme was totally different and the ITA 4793/Mum/2014 14 taxability of such a benefit was examined only with reference to Section 28(iv) of the Act but "in the present case the taxability of such benefit is to be examined from all possible angles as it forms part of the profits and gains of business according to the ordinary principles of commercial accounting."
The assessee took up the matter in appeal and by an order dated 15th September 2008 the Commissioner of Income Tax (Appeals) referred to an earlier appellate order in the case of the assessee relevant to the assessment years 1999-2000 and 2000- 01 and following the conclusion arrived at in those assessment years, the appeal was allowed and it was held that the advance licence benefit receivable amounting to Rs.12,57,525/- and duty entitlement pass book benefit of Rs.4,46,46,976/- ought not to be taxed in this year. Reliance was also placed on the order of the Income Tax Appellate Tribunal in the assessee's own case for the assessment year 1995- 96.
9. Feeling aggrieved, the Revenue preferred a further appeal before the Income Tax Appellate Tribunal (for short 'the ITAT) which referred to the issues raised by the Revenue and by its order dated 29th April 2011 dismissed the appeal upholding the view taken by the Commissioner of Income Tax (Appeals).
10. The Tribunal held that the issues were covered in favour of the assessee by earlier orders of the Tribunal in the assessee's own cases. It had been held by the Tribunal in the earlier cases that income does not accrue until the imports are made and raw materials are consumed by the assessee. As regards the accounting year under consideration, it was found that there was no dispute that it was only in the subsequent year that the imports were made and the raw materials consumed by the assessee.
ITA 4793/Mum/2014 15
11. The Tribunal also took the note of the fact in the assessee's own cases starting from the assessment year 1992-93 onwards these issues had been consistently decided in its favour. It was also noted that for some of the assessment years namely 1993-94, 1996-97 and 1997-98 appeals were filed by the Revenue in the Bombay High Court but they were not admitted.
Under the circumstances, the Tribunal affirmed the decision of the Commissioner of Income Tax (Appeals) on the issues raised.
The Revenue then preferred an appeal under Section 260-A of the Act in respect of the following substantial question of law:
Whether on facts and in circumstances of the case and in law ITAT is justified in law in holding by following its decision in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. v. Inspecting Asstt. Commissioner [1961] 41 ITD 142 (Bom), that advance license benefit and DEPB benefits are taxable in the year in which these are actually utilized by the assessee and not in the year of receipts.
By the impugned order, the High Court declined to admit the appeal filed by the Revenue under Section 260-A 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:— ITA 4793/Mum/2014 16 '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 receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."
ITA 4793/Mum/2014 17
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.
ITA 4793/Mum/2014 18
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 ITA 4793/Mum/2014 19 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 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 ITA 4793/Mum/2014 20 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. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) this Court did not think it appropriate to allow the 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:
Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to ITA 4793/Mum/2014 21 the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.
Reference was also made to Parashuram Pottery Works Ltd. v. ITO [1977] 106 ITR 1 (SC) and then it was held: "We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter - and if there was no change it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken."
It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ITA 4793/Mum/2014 22 ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it.
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.
For the aforesaid reasons, we dismiss the civil appeals with no order as to costs, but with the hope that the Revenue implements its litigation policy a little more practically and a little more seriously.”
We have observed that with respect to the sale of afore-stated DEPB licenses, the entire revenue has been stated to be offered for taxation by the assessee voluntarily of its own , albeit in the subsequent year when the DEPB licenses were sold. Thus, keeping in view of the pecuilar facts and circumstances of the case before us and not going into legality of the issue involved in this appeal while seeking support from the proposition of the Hon’ble Supreme Court in para 32 in the case of Excel Industries Limited(Supra) , we are of considered view no prejudice has been caused to the Revenue as the said ITA 4793/Mum/2014 23 gross sale proceeds on transfer of DEPB licenses by the assessee in its entirety is stated to be offered for taxation in the next year and tax rate remained the same in the next year. However , these claims as made by the assessee needs verification by the authorities below and therefore, we are inclined to set aside and restore this matter back to the file of the A.O. to verify that the total income in its entirety from sale of the afore-stated DEPB licenses is subjected to tax in the subsequent assessment year and the Revenue has got all the due taxes on total income chargeable to tax albeit in the subsequent assessment year as in that case revenue effect shall be tax neutral. The assessee is directed to appear before the AO and produce all necessary evidences and explanations in support of its contentions that no prejudice is caused to Revenue by making payment of taxes on the total income arising in its entirety from sale of DEPB licenses in the subsequent assessment year. Needless to say that proper and adequate opportunity of being heard shall be provided by the AO before concluding the necessary verification as contemplated by our orders in accordance with principles of natural justice in accordance with law. We order accordingly.
With respect to the addition u/s 14A of the Act read with Rule 8D of 1962 Rules, we have observed that the assessee has earned exempt income and offered disallowance to the tune of Rs. 3,32,482/- under Rule 8D(2)(iii) of 1962 Rules as administrative and indirect expenses @ 0.5% of average investment held by the assessee. There are sufficient own funds available with the assessee for the investment and no borrowed funds were stated to be utilized by the assessee for making investments in shares and mutual funds capable of earning tax-free income. The assessee has also filed financial statements which reveal that the assessee has own funds available in its hand which are far in excess of investments made in the shares, mutual funds and other securities yielding tax-exempt income. Perusal of audited financial statements for the financial year 2009-10 (page 27-67/paper book)
ITA 4793/Mum/2014 24 will reveal that the assessee’s own funds are to the tune of Rs.12.47 crores as at 31-03-2010 and Rs. 12.37 crores as at 31-03-2009, while investments capable of yielding exempt income are to the tune of Rs 4.65 crores as at 31- 3-2010 and Rs. 8.65 crores as at 31-03-2009. We agree with the proposition and contentions of the assessee that presumption will apply unless contrary is brought on record by the Revenue , that the assessee has made investment in shares , mutual funds and other securities capable of yielding exempt income out of its own surplus funds unless contrary is brought on record by the AO keeping in view the decision of the Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd., (2009)313 ITR 340(Bom. HC), HDFC Bank Limited v. DCIT (2014) 366 ITR 505(Bom. HC) and HDFC Bank Limited v. DCIT (2016) 67 taxmann.com 42(Bom. HC). In our considered view, this addition of Rs. 9,12,886/- made by the AO and sustained by learned CIT(A) u/s 14A of the Act r.w.r. 8D(2)(ii) of 1962 Rules is not sustainable in law keeping in view facts and circumstances of the case and is hereby ordered to be deleted .We order accordingly.
In the result, the appeal filed by the assessee in 2010-11 is partly allowed as indicated above