2013 (7) TMI 914 - HC - Income Tax

Receipts on sale of electricity energy to A.P. TRANSCO - accrual of income - ITAT deleted the addition - whether the Tribunal is correct in law in relying on the Accounting Standard-9 issued by the ICAI which has not been approved by the Central Government? - Held that - Certain amount payable by the A.P. TRANSCO to the respondent - assessee is in dispute and such dispute is yet to be resolved by arbitration. Merely because the assessee has raised a bill for recovery of certain amount, it does not partake the character of income . If the amount is disputed and the same is pending adjudication in arbitration, there is no crystallization and quantification of the amount due and payable by the debtor. Unless the debtor accepts the amount due and paid, the question of accrual of income even in mercantile system of accounting does not and cannot arise. Tribunal has followed the principle of law laid down in Godhra Electricity Company Ltd. v. C.I.T. 1997 (4) TMI 4 - SUPREME Court wherein held Income tax is a levy on income. No doubt, the Income Tax Act take 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 materialize. - Tribunal has deleted the said income and we think that it has correctly done so. - Decided in favour of assessee.

Summary

Issues:
1. Deletion of addition of receipts on sale of electricity energy to A.P. TRANSCO.
2. Deletion of addition on the ground of dispute pending resolution by the Arbitrator.
3. Relying on Accounting Standard-9 issued by ICAI not approved by the Central Government.

Analysis:

Issue 1: Deletion of addition of receipts on sale of electricity energy to A.P. TRANSCO
The appeal challenged the deletion of the addition of a substantial amount of money received from the sale of electricity energy to A.P. TRANSCO. The Court examined whether the Tribunal was correct in law to delete this addition. The Court observed that the amount payable by A.P. TRANSCO to the assessee was in dispute and pending resolution through arbitration. The Court emphasized that if the amount is disputed and not yet accepted by the debtor, it does not qualify as 'income' for the assessee. The Court referenced the principle established by the Supreme Court in Godhra Electricity Company Ltd. v. C.I.T. 225 ITR 746, highlighting that income tax is levied on actual income, and if income does not materialize, there cannot be a tax liability. Therefore, the Court upheld the Tribunal's decision to delete the income addition in this context.

Issue 2: Deletion of addition based on the dispute pending resolution by the Arbitrator
The second issue pertained to the deletion of the income addition based on the ongoing dispute awaiting resolution by the Arbitrator. The Court reiterated that in cases where the amount is disputed and pending adjudication, there is no definitive quantification of the income due and payable. Without the debtor's acceptance and payment, income accrual does not occur, even under the mercantile system of accounting. By following the legal principle established by the Supreme Court, the Tribunal correctly deleted the disputed income. The Court found merit in this approach and dismissed the appeal accordingly.

Issue 3: Relying on Accounting Standard-9 issued by ICAI not approved by the Central Government
The final issue involved the Tribunal's reliance on Accounting Standard-9 issued by the ICAI, which had not been approved by the Central Government. While this issue was raised in the suggested questions of law, the Court did not provide a detailed analysis or ruling on this specific matter in the judgment. Therefore, the Court's decision did not directly address the validity or impact of relying on an unapproved accounting standard in this case.

In conclusion, the High Court of Andhra Pradesh upheld the Tribunal's decision to delete the disputed income addition, emphasizing the importance of actual income realization for tax liability. The judgment highlighted the legal principles governing income taxation and the significance of resolving disputes before income accrual.