2008 (1) TMI 567 - HC - Income Tax

Business Expenditure- The assessee maintained accounts on both receipt and mercantile basis. The Tribunal upheld the order of commissioner (Appeals) and affirmed the deletion of additions made by the Assessing Officer (a) in respect of lease rent on the ground that the assessee followed the mercantile system of accounting and (b) in respect of insurance charges on the plea that actual payment was made by the assessee whereas it was to be borne by the lessee as per the lease agreement. Held that- the real income was to be considered with reference to the commercial and business realities of the situation and not merely with reference to entries made in the books of account. The finding of fact was to the effect that the assessee did not earn the income and the conclusion of Tribunal was right. (ii) since the assessee claimed that the premium was paid by it the liability to pay tax could not be fastened upon on the assessee.

Summary

Issues:
1. Appeal filed by Revenue against Tribunal's judgment for assessment year 1998-99.
2. Substantial questions of law framed by the court.
3. Interpretation of provisions of section 145 regarding income computation.
4. Consideration of real income principle and accounting methods.
5. Application of judgments to determine tax liability.
6. Tribunal's findings on accrual of income and tax liability.
7. Examination of liability for insurance premium payment.
8. Remand of matters related to salary expenses under section 64.
9. Dismissal of appeal by the court.

Analysis:
1. The appeal was filed by the Revenue against the Tribunal's judgment for the assessment year 1998-99, involving two appeals - one by the assessee and the other by the Revenue. The court framed substantial questions of law related to the addition of income from lease rent, deletion of insurance charges, disallowance of salary expenses, and payment of salary to directors' spouses under section 64 of the Income-tax Act.

2. The court examined the provisions of section 145 concerning income computation and the choice between cash or mercantile system of accounting. It considered the principle that only real income should be taxed and that income cannot be taxed twice. The court analyzed the assessee's accounting methods and previous acceptance by the Department, concluding that the accrual basis for lease income was not justified due to commercial realities and the possibility of double taxation.

3. Regarding the first question, the court upheld the Tribunal's decision based on the real income principle and the judgment in Andhra Bank Ltd. v. CIT. It emphasized that tax liability cannot be solely based on book entries without actual income accrual, leading to the deletion of the disputed income by the Tribunal.

4. The court addressed the second question concerning insurance premium payment liability, emphasizing the need to verify actual payment by the assessee to determine tax liability. The court ruled against the Revenue on this issue.

5. Questions three and four related to salary expenses and payment to directors' spouses under section 64 were remanded for further examination as per the Commissioner of Income-tax (Appeals) order, and the court did not delve into these questions.

6. Ultimately, the court found the appeal devoid of merit and dismissed it based on the detailed analysis of the issues and the application of legal principles and judgments to determine tax liability and income computation.