2016 (11) TMI 1050 - AT - Income Tax

Addition made under DEPB entitlements - Method of accounting - cash basis or accrual of entitlement - Held that - In the present case, the assessee had been following the said procedure consistently and has already offered the income for tax in the year of receipt from the sale of DEPB license. Considering the facts of the present case and the fact that system of accounting of DEPB entitlements on cash/ realization basis has been consistently followed year after year by the assessee in past also and more so since the DEPB entitlements receipt during financial year 2009-10 relevant to A.Y. 2010-11 are already accounted and offered for taxation in the next financial year 2010-11 relevant year 2011-12 on realization basis, therefore after taking into consideration the decision of Hon ble Supreme Court in the case of CIT Vs. M/s. Excel Industries Ltd., (2013 (10) TMI 324 - SUPREME COURT ), we hold that the assessee is entitled for DEPB credit in the year under consideration and therefore the additions made by the AO are hereby deleted. The AO is directed to re-compute the income in the terms of aforementioned decision. Therefore, these grounds raised by the Assessee are allowed.

Issues Involved:
1. Dismissal of appeal and sustaining additions made by AO regarding DEPB entitlements.
2. Failure to consider relevant case law by Commissioner of Appeals.
3. Accounting treatment of DEPB income on cash basis.
4. Interpretation of mercantile system of accounting.
5. Application of Supreme Court judgment on tax liability.

Issue 1: Dismissal of appeal and sustaining additions made by AO regarding DEPB entitlements:
The appellant challenged the order of the Commissioner of Income Tax (Appeals)-8, Mumbai, which upheld the addition of ?11,09,321 in respect of DEPB entitlements. The appellant argued that the Commissioner erred in dismissing the appeal without considering all grounds and facts of the case. The Appellate Tribunal analyzed the submissions and orders passed by the Revenue Authorities. The Tribunal noted that the appellant consistently accounted for DEPB income on a cash basis and offered it for tax in the year of receipt. Citing a Supreme Court judgment, the Tribunal held that if income does not materialize, there cannot be a tax liability. As the appellant followed a consistent procedure and offered income for tax in the relevant year, the additions made by the AO were deleted, directing a re-computation of income based on this decision.

Issue 2: Failure to consider relevant case law by Commissioner of Appeals:
The appellant contended that the Commissioner of Appeals ignored the case of CIT v/s Excel Industries Ltd (Supreme Court) ITR-358 (Part-2) - Page 295. However, the Commissioner dismissed the appeal without considering this case, despite submissions made by the appellant. The Appellate Tribunal, in its analysis, referred to the judgment relied upon by the appellant and found that the principles laid down by the Supreme Court supported the appellant's consistent accounting treatment of DEPB income on a cash basis. The Tribunal held that the appellant was entitled to DEPB credit for the year under consideration, and the additions made by the AO were unjustified, thereby allowing the grounds raised by the Assessee.

Issue 3: Accounting treatment of DEPB income on cash basis:
The appellant argued that they accounted for DEPB income on a cash basis due to market fluctuations in DEPB premiums. The appellant waited for favorable market conditions to sell DEPB licenses, accounting for income upon actual realization. The Tribunal considered this argument along with the consistent practice of the appellant in following this cash basis treatment year after year. The Tribunal found this method acceptable, especially since the income was offered for tax in the year of receipt, aligning with the principles laid down by the Supreme Court regarding tax liability on actual income realization.

Issue 4: Interpretation of mercantile system of accounting:
The Commissioner of Appeals held that the appellant's adoption of the mercantile system of accounting required the DEPB income to be credited in the Profit & Loss Account as income for the relevant year on an accrual basis. However, the Appellate Tribunal, after considering the consistent cash basis treatment followed by the appellant and the Supreme Court judgment, concluded that the appellant's method of accounting for DEPB income on a cash basis was valid. The Tribunal emphasized that the substance of income realization determines tax liability, and since the appellant consistently offered income for tax in the year of receipt, the additions made by the AO were unwarranted.

Issue 5: Application of Supreme Court judgment on tax liability:
The Tribunal extensively referred to a Supreme Court judgment regarding tax liability concerning income realization. By aligning the appellant's case with the principles enunciated in the Supreme Court judgment, the Tribunal concluded that the appellant's consistent practice of accounting for DEPB income on a cash basis and offering it for tax in the year of receipt was in accordance with legal requirements. Consequently, the Tribunal allowed the appellant's appeal, deleting the additions made by the AO and directing a re-computation of income based on this decision.

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