By TIOL News Service

NEW DELHI, OCT 10, 2013: 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.

(See 2013-TIOL-52-SC-IT-LB)