2013 (10) TMI 324 - SC - Income Tax

Accrual of Income - mercantile system of accounting - whether the benefit of an entitlement to make duty free imports of raw materials obtained by the assessee through advance licences and duty entitlement pass book issued against export obligations is income in the year in which the exports are made or in the year in which the duty free imports are made. - Held that - income does not accrue in the year of export but in the year in which the imports are made. Even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. - Decided against the revenue.

Issues Involved:
1. Determination of the year in which the benefit of duty-free imports under advance licenses and duty entitlement pass book (DEPB) should be considered as income.
2. Applicability of Section 28(iv) of the Income Tax Act, 1961.

Detailed Analysis:

1. Determination of the Year of Income Recognition:
The central issue in these appeals is whether the benefit of duty-free imports obtained by the assessee through advance licenses and DEPB issued against export obligations should be considered as income in the year of export or the year in which the imports are made. The Supreme Court held that the income does not accrue in the year of export but in the year in which the imports are made. The assessee maintained its accounts on a mercantile basis and claimed deductions for advance license benefits and DEPB benefits in the year of export, arguing that these amounts could not be said to have accrued until imports were made and raw materials consumed.

The Assessing Officer (AO) rejected the assessee's claim, stating that the taxability of such benefits is covered by Section 28(iv) of the Income Tax Act, which includes the value of any benefit or perquisite arising from business or profession as income. The AO argued that the right to receive the benefit becomes vested and absolute at the end of the year when the export obligation is fulfilled. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) upheld the assessee's view, stating that income does not accrue until the imports are made and raw materials consumed.

2. Applicability of Section 28(iv) of the Income Tax Act, 1961:
The Revenue contended that under Section 28(iv) of the Act, the value of the benefit obtained by the assessee is its income and is liable to tax under "Profits and gains of business or profession." The Supreme Court, however, disagreed with this contention for several reasons:

- Hypothetical Income: The Court reiterated that income tax cannot be levied on hypothetical income. Citing previous cases like Commissioner of Income Tax v. Shoorji Vallabhdas and Co. and Morvi Industries Ltd. v. Commissioner of Income-Tax, the Court emphasized that income accrues when it becomes due and is accompanied by a corresponding liability of the other party to pay the amount. In this case, no real income had accrued to the assessee in respect of the benefits under advance licenses and DEPB, as there was no corresponding liability on the customs authorities to pass on the benefit of duty-free imports until the goods were actually imported and made available for clearance.

- Real Income Theory: The Court applied the principles of real income theory, stating that the income must be real and not hypothetical. The probability or improbability of realization must be considered realistically. The Court found that no real income had accrued to the assessee, making Section 28(iv) inapplicable.

- Consistency in Judicial Decisions: The Court noted that a consistent view had been taken in favor of the assessee from the assessment year 1992-93 onwards, and there was no reason to deviate from this view. The Court referred to Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, emphasizing that it is inappropriate to reconsider an issue for a subsequent assessment year if the same fundamental aspect permeates different assessment years.

- Practicality and Litigation Policy: The Court criticized the Revenue for pursuing litigation despite the consistent judicial decisions in favor of the assessee and the minor tax effect involved. The Court highlighted the need for the Revenue to implement its litigation policy more practically and seriously.

Conclusion:
The Supreme Court dismissed the civil appeals, holding that the benefits under advance licenses and DEPB do not represent real income in the year of export but only in the year when imports are made. The Court emphasized the importance of real income theory, consistency in judicial decisions, and practical implementation of litigation policy by the Revenue. The appeals were dismissed with no order as to costs, urging the Revenue to adopt a more pragmatic approach in its litigation policy.

← Previous Next →