2014 (2) TMI 124 - HC - Income Tax

System of accounting Deletion made on account of non-accrual of income Held that - The approach made by the Tribunal is insupportable the assessee is maintaining its accounts on the mercantile system of accounting - the Tribunal ought not have found when there is no accrual of income for the reason that foreign exchange was not received on June 11, 1981 - The fact that foreign exchange was not received on June 11, 1981, is completely irrelevant having regard to the system of accounting followed - The question of accrual is essentially related to the question whether the assessee became entitled to receive the amount - If once the question is answered in favour of the assessee, namely, the assessee was entitled to get the amount then necessarily the further question would be that when the assessee would be entitled to get the amount - Once both these questions are answered, then the further question as to when actually the assessee received the amount falls into insignificance in a situation where accounts are maintained under the mercantile system of accounting Decided in favour of Revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 5,37,909 by the Tribunal based on the accrual of income.
2. Legitimacy of the Tribunal's conclusion on the accrual of income and its compliance with accounting principles.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 5,37,909 by the Tribunal Based on the Accrual of Income:
The respondent-assessee, dealing with exports and maintaining accounts on a mercantile basis, credited Rs. 5,37,909 to its profit and loss account, representing the estimated exchange difference on Sudan export bills. The assessee contended that this amount did not represent any income received or accrued as of the balance-sheet date and should be excluded in determining income. The Assessing Officer rejected this, asserting that the exchange difference should be credited due to the mercantile system of accounting. The Commissioner of Income-tax (Appeals) upheld this disallowance. However, the Tribunal allowed the assessee's appeal, stating that the income had not accrued since the foreign exchange was received much later through ECGC, not on June 11, 1981. The High Court remanded the matter, noting that the correct factual position regarding the entry on June 11, 1981, was not properly explained or considered. Upon remand, the Tribunal maintained that there was no accrual of income on June 11, 1981, and deleted the assessment of Rs. 5,37,909 credited by the assessee.

2. Legitimacy of the Tribunal's Conclusion on the Accrual of Income and Its Compliance with Accounting Principles:
The Revenue argued that the Tribunal's approach was insupportable, emphasizing that under the mercantile system, income is reflected on the basis of accrual, not receipt. The Revenue cited several case laws, including Godhra Electricity Co. Ltd. v. CIT, which stated that if income does not result, there cannot be a tax, even if a hypothetical income entry is made. In CIT v. United Provinces Electric Supply Co., it was held that for tax purposes, moneys payable became due and were paid and received, and any additional amounts received later would be taxable subsequently. In Southern Technologies Ltd. v. Joint CIT, the Supreme Court reiterated that income tax is a tax on "real income" arrived at on commercial principles. The High Court noted that the Tribunal's finding that there was no accrual of income because foreign exchange was not received on June 11, 1981, was irrelevant under the mercantile system. The High Court emphasized that the issue is whether the assessee became entitled to receive the amount, not when it was actually received. The Tribunal's approach was deemed insupportable as it did not consider the accrual principle under the mercantile system.

Conclusion:
The High Court concluded that the Tribunal's approach was incorrect and that the Revenue's appeal must succeed. The questions of law were answered in favor of the Revenue and against the assessee. The Tribunal's order was set aside, and the Assessing Officer's order was restored.