2014 (6) TMI 531 - AT - Income Tax

Accrual of incentives - Addition u/s 28(iii)(c) of the Act Hypothetical income of the incentive on Advance License Held that - Assessee contended that as per the accounting system followed by it it had accounted for the incentive income of advance license on hand for unused license or licenses not received but for which application to the appropriate authorities were made - assessee had discontinued its manufacturing operations after 31.03.1995 and due to discontinuing to its operation had surrendered the licenses and no benefit has been derived out of sale of advance license or by importing materials Relying upon CIT vs. Excel Industries 2013 (10) TMI 324 - SUPREME COURT - even if it was 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 were actually imported and made available for clearance - the benefits represent a hypothetical income which may or may not materialize and its money value is therefore not the income of the assessee - in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) would be inapplicable. The Assessee has discontinued its manufacturing operations after 31.03.1995 surrendered the licenses to the appropriate authorities and has not obtained subsequently any benefit out of the advance licenses - no income arose to the Assessee and therefore no addition can be made on account of income on advance license thus the deletion made on account of income on advance licenses is directed Decided in favour of Assessee.

Summary

Issues:
1. Interpretation of income accrual under section 28(iii)(c) for advance license.
2. Determination of deduction under section 80HHC.

Analysis:

Issue 1: Interpretation of income accrual under section 28(iii)(c) for advance license:
The appeal concerned the Assessee challenging the addition made by the Assessing Officer of Rs. 62,88,891 under section 28(iii)(c) for hypothetical income of the incentive on Advance License. The CIT(A) upheld the addition, stating that the Assessee followed the mercantile system of accounting, and income accrual should be based on events in the relevant period. The Assessee argued that no income accrued as the advance license was not realized due to subsequent events. The Tribunal noted that the Assessee discontinued manufacturing operations, surrendered licenses, and did not benefit from them. Citing the Supreme Court case of CIT vs. Excel Industries, the Tribunal ruled that no real income accrued to the Assessee, and thus, no addition could be made. Consequently, the Tribunal directed the deletion of the income on advance licenses, allowing the Assessee's appeal.

Issue 2: Determination of deduction under section 80HHC:
The Assessee also challenged the computation of deduction under section 80HHC. The CIT(A) and the Tribunal both upheld the Assessing Officer's calculation, considering the conditions under the fifth Proviso inserted in the section. The Assessee's argument to ignore export losses in the deduction calculation was rejected post the amendment. The Tribunal affirmed that the deduction under section 80HHC was correctly determined by the Assessing Officer, based on the formula and legal provisions. Consequently, the Tribunal rejected all grounds of appeal related to the deduction under section 80HHC.

In conclusion, the Tribunal allowed the Assessee's appeal regarding the addition of income on advance licenses and upheld the calculation of deduction under section 80HHC as per the legal provisions and amendments.