THE issues before the Bench are - Whether an income accrues
once it becomes due but it must necessarily be accompanied by a corresponding
liability of the other party to pay the same; Whether when the assessee, an
exporter, earns entitlements under the DEPB and the Advance Licnece, such
entitlements do not become an income in the hand of the exporter unless it does
actual import of raw materials and it also becomes a liability for the Customs
to allow the same and Whether when an income accrues but there is no
corresponding liability for the same, such income is only hypothetical. And the
verdict goes against the Revenue.
Facts of the
case
The Assessee is a registered company.
It 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 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 Ranjit singhji Spinning and Weaving Mills v. Inspecting Assistant
Commissioner and also the order of the Commissioner of Income Tax (Appeals)
in its own case for the assessment years 1995-96 to 1997-98. AO did not accept
the assessee's claim on the ground that the taxability of such benefits was
covered by Section 28(iv) of the Income Tax Act, 1961, which provided that the
value of any benefit or perquisite, whether convertible into money or not,
arising from a business or a profession was income. According to the Assessing
Officer, along with an obligation of export commitment, the assessee got the
benefit of importing raw material duty free. When exports was made, the
obligation of the assessee was fulfilled and the right to receive the benefit
became 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 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."
On
appeal, the CIT(A) 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. The Tribuncal negativated the appeal of the Revenue. It held that the
issues were covered in favour of the assessee by earlier orders of the Tribunal
in the assessee's own cases. It was held by the Tribunal in the earlier cases
that income did not accrue until the imports were made and raw materials were
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.
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.
Aggrieved Revenue filed an appeal
before the High Court but the same was not admitted.
On appeal, the Apex court
held that,
++
the counsel for the Revenue submitted 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 counsel for the Revenue
for several reasons. First of all, it is now well
settled that income tax cannot be levied on hypothetical income. In the case of
Morvi Industries Ltd. v. Commissioner of Income-Tax (Central) (2002-TIOL-779-SC-IT-LB) 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;
++
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;
++
applying the 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 counsel
for the Revenue;
++ 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 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.
++ 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
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