Real Income or Income which is accrued and not the hypothetical Income is Taxable; defined the term ‘accrual of income’

Harshit Sharma | Amity Law School, Madhya Pradesh | 9th January 2020

The Principal Commissioner of Income Tax V/s. KALPATARU POWER TRANSMISSION LTD. R/TAX APPEAL NO. 790 of 2019

FACTS OF THE CASE

1. The present appeal was preferred against the impugned order dated 10.05.2019 passed by the Income Tax Appellate Tribunal, Ahmedabad Branch for the Assessment year 2010-2011.
2. The Assessing officer in the present matter added the income of ₹4,42,72,610 which the CIT(A) and ITAT deleted in the appeal preferred before them in holding carbon receipts as capital receipts.
3. Thus, aggrieved by such deletion of the entry under the head of Income of the Assessee-Respondent in the matter, the appeal is brought before the Hon’ble High Court.

ISSUE RAISED

1. Whether   the   Appellate   Tribunal   has   erred in the facts and the circumstances of the case and in law, in upholding the order of the CIT(A) for deleting the addition of ₹4,42,72,610/- in holding carbon receipts as capital receipts?

RULING OF THE COURT/ THE COURT HELD THAT

The Hon’ble High Court dismissed the appeal on the following grounds and made the following observation and findings:

1. The High Court took note that a similar issue had arose in the case of very same Assessee with regard to assessment for the year 2009 10. The Revenue Office had then also challenged the order of CIT(A) deleting the addition of Rs.5,78,28,058 to the income of the Assessee by observing that as there was no transfer/sale of the carbon receipts during the year under consideration and therefore, the same cannot be included in the year consideration.
2. “It cannot be said that the learned CIT(A), as well as the learned Tribunal, have committed any error in deleting the addition of Rs.5,78,28,058 and holding that as neither the carbon receipts were sold and/or transferred in favour of foreign companies in the year under consideration, the same cannot be included as receipt/income in the year under consideration”.
3. The bench had referred to the Supreme Court decision in Commissioner of Income Tax vs. Excel Industries Limited, wherein the apex court had referred to its own decision in Commissioner of Income Tax vs. Shoorji Vallabhdas and Co. which states that “First of all, it is now well settled that income tax cannot be levied on hypothetical income”.
4. In Shoorji Vallabhdas and Co’s case, it was held that “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 bookkeeping, 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.” The Supreme Court had also held in Excel Industries Limited case 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”.