2008 (6) TMI 343 - HC - Income Tax

Accrual of Income - The assessee had not received any amount as the Company U had denied that any amount was due and payable by it to the assessee company and arbitration proceeding is pending. The Commissioner (Appeals) held that no real income accrued in favour of the assesese. Tribunal held that once the assessee adopted the mercantile system the income of the assesse would be assessable in the assessment year. Held that- there was no real accrual of income. There was dispute between the parties which was pending in arbitration during the assessment year. The income of the assessee would be liable to be assessed only after passing of the award.

Summary

Issues:
1. Whether the Tribunal was right in concluding that royalty accrued to the appellant?
2. Whether the Tribunal was justified in its conclusion based on legal principles?
3. Whether the Tribunal was correct in its decision despite the dispute and arbitration proceedings?

Analysis:
1. The appellant had a royalty agreement with a company, but no income had been received due to a dispute and ongoing arbitration proceedings. The Commissioner of Income-tax initially ruled in favor of the appellant, stating that no real income had accrued. However, the Revenue appealed, and the Tribunal decided in their favor, stating that under the mercantile system, income is taxable in the assessment year it was due, even if not received. This led to the present appeal challenging the Tribunal's decision.

2. The Supreme Court's judgment in Godhra Electricity Company Ltd. v. CIT [1997] 225 ITR 746 established that for income to be taxable, it must have really accrued to the assessee, even under the mercantile system. The court emphasized that income tax is imposed on real income, not hypothetical income. Referring to previous judgments, the court reiterated that the key consideration is the actual accrual of income. In this context, the court found that the principles laid down in Godhra Electricity case applied to the present situation.

3. The High Court concluded that in the current case, there was no real accrual of income due to the ongoing dispute and arbitration proceedings. The court highlighted that income would only be liable for assessment once the arbitration concluded, an award was issued, and income was received by the appellant. Therefore, the court answered all three questions against the Revenue, allowing the appeal in favor of the appellant based on the absence of real income accrual.

This detailed analysis of the judgment from the Bombay High Court underscores the significance of real income accrual for tax assessment purposes, particularly in cases involving disputes and arbitration proceedings impacting the actual receipt of income outlined in royalty agreements.