2023 (6) TMI 1438 - AT - Income Tax

Taxability of Excise Duty refund in view of notification and the amended section 2(24)(xviii) - assessee is following mercantile system of accounting and income is to be taxed on accrual basis and the assessee has passed this entry in the books of accounts maintained during the year under consideration - HELD THAT - In the present case, the necessary entries were made in the books of account of the appellant company to represent only hypothetical/notional income and thus, the impugned amounts as brought to tax by the ITO did not represent the income which had really accrued to the assessee-company during the relevant Assessment Year. It is a settled law that passing of entries in the books of accounts is not conclusive to determine the income under the provisions of the law. Whether an amount is to be considered as income or not is to be determined on the basis of the Income Tax law and not on the basis of the entries made in the books of accounts. In our view, no tax can be charged on an amount which is not earned. In the case of Godhra Electricity Co. Ltd. Vs. CIT 1997 (4) TMI 4 - SUPREME COURT while adjudicating the question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity observed that it has to be considered by taking the probability or improbability of realisation in a realistic manner. It is further observed that if the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity. Thus, affirmed the view of the Tribunal that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the ITO did not represent the income of the appellant company. In another case of Satluj Cotton Mills 1978 (9) TMI 1 - SUPREME COURT observed that it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Thus we hold that since the necessary entries made in the books of account of the appellant company represents only hypothetical/notional income although it is following mercantile system of accounting and hence, the impugned amounts as brought to tax by the ITO did not represent the income of the appellant company. Therefore, the ground No. 2 of the department is rejected. Allowance of 100% of the capital receipt when the assessee himself claimed entire amount as refundable from Excise Department - whether CIT(A) was in error in not appreciating (that as per) the amended section 2(24)(xviii) of the IT Act, 1961 any assistance in the form of subsidy, grant, etc. provided by the Government or any other authority is to be considered as income/revenue receipt taxed accordingly? - HELD THAT - Government of India vide amended notification has made its intention clear that the assessee would be entitled to excise duty exemption only to the extent of 36%. The excess exemption from excise duty to the extent of 64% recognized by the assessee in its books of accounts is nothing but hypothetical income which has not accrued. This is also confirmed by Hon ble Supreme Court by dismissing the SLP filed by the assessee. In view of that matter, the Ld. CIT(A) has rightly deleted the addition - Thus, ground no. 1 and ground no. 3 of revenue are rejected. Addition u/s 2(24)(xviii) being 36% of Excise Duty Exemption availed by the assessee firm - As settled principal of law, to the interpretation of the Notification No.56/2002 dtd. 14.11.2002 as amended by Notification No.19/2008 dt. 27.03.2008, the assessee is granted exemption from payment of excise duty to the balance part of 36% of total excise duty collected. Since, the word exemption in not included in the of ambit the Section 2(24)(xviii) of the Act, though it specifically includes the words subsidy, grant, cash incentive, duty drawback, waiver, concession reimbursement. and hence, in the absence of inclusion of word exemption under the said clause, we are of the considered view that the scope of this section cannot be enlarged to include exemption by interpreting that it is subsidy. Accordingly, the addition confirmed by Ld. CIT(A) is held to be unjustified and bad in law. As such, the part addition confirmed by Ld. CIT(A) is directed to be deleted. Thus, the ground of the assessee is allowed.

Summary

Issues Involved:

1. Taxability of 100% capital receipt under amended section 2(24)(xviii) of the Income Tax Act, 1961.
2. Taxability of 36% Excise Duty Exemption under section 2(24)(xviii) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Taxability of 100% Capital Receipt

The primary contention revolved around whether the entire amount of Rs. 5,15,25,900/- claimed by the assessee as refundable from the Excise Department should be considered a taxable income under the amended section 2(24)(xviii) of the Income Tax Act, 1961. The assessee argued that this amount was a capital receipt and not taxable, citing that the excise duty exemption was part of a policy to promote industrial development in Jammu & Kashmir. The Assessing Officer, however, treated the entire amount as revenue receipt based on the mercantile system of accounting, where income is taxed on an accrual basis. The CIT(A) partially agreed with the assessee, ruling that only 36% of the excise duty was refundable under Notification No. 19/2008, and thus, the remaining 64% could not be taxed as it did not accrue to the assessee. The Tribunal upheld this view, emphasizing that the excess recognition of 64% was hypothetical and not real income, supported by the Supreme Court's decision, which confirmed that the assessee was entitled to only 36% exemption.

Issue 2: Taxability of 36% Excise Duty Exemption

The second issue focused on whether the 36% excise duty exemption should be treated as income under section 2(24)(xviii). The CIT(A) had upheld the addition of Rs. 1,85,49,324/-, considering it as income, arguing that central excise refund is akin to a subsidy. The assessee contended that exemption and subsidy are distinct terms, with exemption implying freedom from a tax or duty, not a subsidy to meet project costs. The Tribunal agreed with the assessee, noting that the term 'exemption' is not included in section 2(24)(xviii), which specifically mentions subsidy, grant, and similar terms. The Tribunal concluded that the scope of the section could not be extended to include exemptions as subsidies, and thus, the addition was unjustified and should be deleted.

Conclusion:

The Tribunal dismissed the department's appeal and allowed the assessee's appeal, ruling that the entire excise duty exemption, including the 36%, was not taxable under section 2(24)(xviii) of the Income Tax Act, 1961. The Tribunal emphasized that the interpretation of taxing statutes should be based on clear legislative intent, and any ambiguity should favor the taxpayer. The decision highlighted the importance of distinguishing between exemptions and subsidies in tax law, reinforcing that hypothetical income entries in books do not constitute real income.