2025 (4) TMI 1366 - SCH - Income Tax

Accrual of income - Duty drawback had not accrued and become payable to the assessee and cannot be included in the taxable income of the Assessee - HELD THAT - Whether the said claim is accepted or not is something which is in the knowledge of the respondent. Therefore while passing an order of remand the ITAT directed the respondent to place all the relevant material before the Assessing Officer. Thus the scope of remand is very narrow for the limited purposes of ascertaining whether the claim made by assessee was accepted in the year under consideration. While passing order of remand as noted above the ITAT observed that if the claim of assessee was not accepted in the year under consideration then no addition shall be made. However if it is found that the claim of assessee was accepted in the year under consideration to that extent addition would be retained. There was no reason for the High Court to interfere with the order of remand as it was passed only for the purposes of limited factual verification by the AO. Accordingly the appeal is partly allowed. The impugned judgment and order of the High Court is interfered with only as regards the finding recorded by the High Court 2017 (12) TMI 536 - DELHI HIGH COURT on question no.(iv) in paragraph nos.7 and 8. Consequently the order of remand passed by ITAT under order 2004 (10) TMI 278 - ITAT DELHI-A stands restored. The appeal is accordingly partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court, as framed by the High Court and surviving for consideration, primarily revolve around the tax treatment of duty drawback amounts and sales tax exemptions. The principal issues include:

(i) Whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that a sum of Rs.31,79,98,407/- on account of duty drawback had not accrued and become payable to the assessee and hence could not be included in the taxable income for the Assessment Year (AY) 1999-2000.

(ii) Whether the Tribunal erred in ruling that sales tax exemptions amounting to Rs.32,25,70,213/- received from the Government of Haryana were capital in nature, particularly in light of the precedent set by the Supreme Court in Sahney Steel & Press Works Ltd. vs. CIT.

(iii) Related questions on the accrual and taxability of duty drawback amounts in other appeals, including whether sums on account of duty drawback had accrued and become payable to the assessee and could be included in taxable income for AY 1999-2000.

Other questions framed by the High Court were either not pressed by the Revenue or found to be based on findings of fact that did not warrant interference.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Accrual and Taxability of Duty Drawback Amounts

Relevant Legal Framework and Precedents: The question centers on the interpretation of the accrual of income principle under the Income Tax Act, particularly whether the right to receive duty drawback accrues immediately upon export or only upon acceptance of the claim by the relevant authorities. The principle that income accrues only when the right to receive it becomes certain is well-established in tax jurisprudence.

Court's Interpretation and Reasoning: The ITAT found that the addition of Rs.31,79,98,407/- on account of duty drawback was incorrectly upheld by the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) had proceeded on the assumption that income accrued automatically upon export, which the ITAT held to be erroneous. The Tribunal reasoned that no amount of duty drawback can be said to accrue until the claim is accepted by the concerned authorities.

Key Evidence and Findings: The Tribunal noted the absence of evidence on record verifying whether the assessee's claim for duty drawback was accepted in the relevant year. This factual aspect was crucial to determining the timing of accrual.

Application of Law to Facts: The Tribunal remanded the matter to the Assessing Officer (AO) for verification of the factual question of acceptance of the claim. It directed that if the claim was not accepted in the year under consideration, no addition should be made. Conversely, if accepted, the addition could be retained for that year but would need to be deleted in the year when the claim was actually offered for taxation to avoid double taxation.

Treatment of Competing Arguments: The assessee contended that the right to receive duty drawback did not accrue in the relevant year and that the amounts were offered for tax in subsequent years when the release orders were passed. The Revenue challenged this view, but the Court found that the ITAT's order of remand was appropriate to ascertain the factual position.

Conclusions: The Supreme Court held that the ITAT's approach was correct and that the High Court erred in interfering with the remand order. The remand was limited to the factual verification of whether the claim was accepted in the relevant year, and the scope was narrow and justified.

Issue (ii): Nature of Sales Tax Exemptions

Relevant Legal Framework and Precedents: The classification of sales tax exemptions as capital receipts or revenue receipts is significant for tax treatment. The Supreme Court precedent in Sahney Steel & Press Works Ltd. vs. CIT is authoritative on this issue, where the Court held that certain tax exemptions could be capital in nature depending on their context and purpose.

Court's Interpretation and Reasoning: The High Court had ruled that the sales tax exemptions amounting to Rs.32,25,70,213/- received from the Government of Haryana were capital in nature. The Supreme Court found no reason to interfere with this view, recognizing the correctness of the High Court's application of the precedent.

Key Evidence and Findings: The factual matrix and nature of the sales tax exemptions as presented showed that these were linked to capital assets or capital expenditure, supporting the capital nature classification.

Application of Law to Facts: Applying the principle from Sahney Steel, the Court upheld the capital nature of these exemptions, which impacts their tax treatment accordingly.

Treatment of Competing Arguments: The Revenue had challenged this classification but withdrew certain grounds. The Court, therefore, affirmed the High Court's decision without interference.

Conclusions: The ruling that the sales tax exemptions were capital receipts stands affirmed, with the appeal dismissed on this point.

Issue (iii): Accrual of Duty Drawback in Other Appeals

Relevant Legal Framework and Precedents: Similar to Issue (i), this concerns whether duty drawback amounts accrued and became payable in the relevant assessment year.

Court's Interpretation and Reasoning: The Court extended the reasoning in Civil Appeal No. 11919/2018 to other appeals involving similar questions. It directed remand to the Assessing Officer for limited purposes of verifying acceptance of the duty drawback claims in the relevant year.

Key Evidence and Findings: The factual verification of acceptance of claims was again identified as critical.

Application of Law to Facts: The Court applied the same principle that accrual depends on acceptance of the claim and that no addition should be made if acceptance did not occur in the relevant year.

Treatment of Competing Arguments: The Revenue did not press other questions, and the Court found no reason to interfere with factual findings of the Tribunal or High Court.

Conclusions: The appeals were partly allowed with remand orders restored for limited factual verification, ensuring consistent application of the accrual principle.

3. SIGNIFICANT HOLDINGS

On the critical question of accrual of duty drawback amounts, the Court held:

"No amount of duty drawback can be said to accrue to the assessee until such claim is accepted by the concerned authorities."

This principle underscores that income accrual for tax purposes is contingent upon the right to receive becoming certain, not merely the occurrence of an export transaction.

The Court emphasized that:

"If the claim of assessee was not accepted in the year under consideration, then no addition shall be made by the Assessing Officer. However, if it is found that claim of assessee was accepted in the year under consideration, then to that extent, the addition would be retained. However, in the later situation, the addition would have to be deleted in the year in which it has been offered for taxation if such claim of deduction is made before the appropriate authority. The reason is that double addition cannot be made on the same account."

This holding preserves the principle against double taxation and mandates precise factual inquiry before inclusion of such amounts in taxable income.

Regarding sales tax exemptions, the Court reaffirmed the principle that such receipts may be capital in nature depending on context, following the precedent:

"The view taken by the High Court that sales tax exemptions received from the Government of Haryana were capital in nature is affirmed."

On procedural aspects, the Court upheld the limited scope of remand orders, rejecting High Court interference where factual determinations were required to be made by the Assessing Officer.

In sum, the Court's determinations clarify and reaffirm the principles governing accrual of income in relation to duty drawback claims and the nature of sales tax exemptions, ensuring consistent tax treatment aligned with established jurisprudence and factual verification.