2014 (11) TMI 58 - HC - Income Tax

Liability to pay tax on surcharge levied for delayed payment - Whether surcharge for delayed payment reflected in the bills raised by the assessee and its accounts, would invite payment of a tax dehors recovery/payment/receipt of surcharge Held that - The amount was added by the AO as reflecting levy of surcharge on delayed payment of bills - this amount has neither been paid nor recovered by the assessee - the surcharge is a disputable item and may at any time be reduced or waived and, therefore, despite the fact that the assessee maintains a mercantile system of accounting - income tax is fundamentally a levy on income and though the Act may prescribe different points in time at which liability to taxation enures still remains a tax on receipt of income - A hypothetical income that may or may not materialise should not be made subject matter of tax merely because of an entry in the accounts books maintained by an assessee - in Commissioner of Income-tax Vs. Shoorji Vallabhdas and Co. 1962 (3) TMI 6 - SUPREME Court it has been held that where the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Application to condone delay in refiling the appeal.
2. Challenge to the order passed by the Income Tax Appellate Tribunal (ITAT) regarding surcharge on delayed payment.
3. Interpretation of whether surcharge for delayed payment attracts tax liability.

Analysis:
1. The first issue addressed in the judgment pertains to an application seeking condonation of a 666-day delay in refiling an appeal. The court, after considering the submissions and affidavit filed by the appellant's counsel, granted the application and condoned the delay.

2. The second issue involves a challenge by the revenue against the ITAT's order confirming the Commissioner of Income Tax (Appeals) decision on surcharge for delayed payment. The revenue argued that the mere presence of surcharge in bills, regardless of payment realization, should not absolve the assessee from tax liability. The ITAT and CIT(Appeals) were accused of error in deleting the addition made by the Assessing Officer.

3. The crucial question in this case was whether surcharge for delayed payment, reflected in bills and accounts, triggers tax liability irrespective of actual recovery. The CIT(Appeals) ruled in favor of the assessee, highlighting the mercantile system of accounting and the treatment of surcharge as income upon collection. The ITAT upheld this decision, emphasizing that the disputed surcharge, not realized by the assessee, does not constitute taxable income due to its hypothetical nature.

4. The final issue revolved around the fundamental principle of income tax being a levy on actual income. The court cited precedents to support the view that hypothetical income, which may not materialize, should not be subject to taxation merely based on accounting entries. The judgment referenced the Supreme Court's ruling in "Commissioner of Income-tax Vs. Shoorji Vallabhdas and Co." to emphasize that tax liability arises upon actual receipt of income.

5. Ultimately, the court dismissed the appeal, affirming the decisions of the lower authorities. It was clarified that the assessee would be liable to pay tax on the surcharge amount only upon its actual receipt. The judgment underscored the distinction between hypothetical income and realized income in determining tax liability, aligning with established legal principles and precedents.