1983 (7) TMI 74 - AT - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 53,982 credited by the assessee as commission receivable can be taxed as accrued income.
2. Application of the theory of real income in the context of mercantile accounting.
3. Validity of the revised return filed by the assessee under section 139(5) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Accrued Income and Taxability
The primary issue is whether the commission amount of Rs. 53,982, credited by the assessee in its books of account, can be taxed as accrued income. The Income Tax Officer (ITO) argued that since the assessee followed the mercantile system of accounting and had credited the commission in its books, the amount should be included in the income, even if it later proved to be irrecoverable. The Commissioner (Appeals) disagreed, stating that no real income had materialized from the entries made by the assessee, and thus, it should not be taxed. The Tribunal upheld this view, emphasizing that income must be real and not hypothetical to be liable to tax.

Issue 2: Theory of Real Income
The theory of real income was central to the decision. The assessee argued that the commission did not materialize into real income due to the hopeless financial position of the debtor, Plastic Resins and Chemicals Ltd. The Tribunal referred to several cases, including CIT v. Motor Credit Co. (P.) Ltd., CIT v. Shoorji Vallabhdas & Co., and CIT v. Devi Films (P.) Ltd., to support the principle that only real income, not hypothetical income, is liable to tax. The Tribunal concluded that the mere entries in the books or the system of accounting followed by the assessee do not convert a hypothetical income into a real one.

Issue 3: Revised Return under Section 139(5)
The assessee filed a revised return under section 139(5) of the Income-tax Act, 1961, claiming that the commission was erroneously taken into account as income. The Tribunal found this action appropriate, noting that if the assessment was still open, the assessee could file a revised return to correct the mistake. The Tribunal stated that the two remedies available to the assessee-filing a revised return or writing off the amount as a bad debt in a subsequent year-are not mutually exclusive.

Conclusion:
The Tribunal upheld the order of the Commissioner (Appeals), concluding that the sum of Rs. 53,982 did not constitute real income and should not be taxed. The Tribunal emphasized the importance of commercial and business realities over mere accounting entries and upheld the principle that only real income is liable to tax. The appeal by the department was dismissed.