2016 (8) TMI 225 - HC - Income Tax

Accrual of income - whether that disputed income is exigible to tax even when the same has not accrued to the assessee as held by ITAT - Held that - In view of the fact that ONGC had disputed the liability, it cannot be said that there was any corresponding liability on the ONGC to pay the accrued amount to the assessee. Only when a corresponding liability arises on the ONGC to pay up the accrued amount, the income will become taxable. Thus, the authorities below as also the Tribunal seriously erred in holding that the disputed income is exigible to tax. - Decided in favour of the assessee

Summary

Issues:
1. Whether disputed income is exigible to tax when it has not accrued to the assessee?

Analysis:
The Tax Appeal under section 260A of the Income Tax Act, 1961 was filed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad, raising the issue of whether disputed income is taxable when it has not accrued to the assessee. The assessee was awarded a contract for compression of natural gas services by ONGC. Due to a dispute, the assessee only showed 50% of the contractual amount as income in the return. The Assessing Officer considered the entire income as taxable since it had accrued, leading to an appeal before the CIT(A) and subsequently the Tribunal, which upheld the decision. The main contention was whether under the mercantile system of accounting, only real income can be taxed, not hypothetical income.

The learned Senior Advocate for the assessee argued that taxing income that had not accrued due to a dispute was erroneous. He emphasized that only real income, not hypothetical income, should be taxed under the mercantile system of accounting. On the other hand, the Standing Counsel for the Revenue contended that since the accrued income was not shown in the return, the Tribunal's decision was justified. The Tribunal and revenue authorities added the accrued income based on the completion of work and billing, despite the actual income not being received by the assessee.

The High Court referred to the principle established by the Supreme Court in the case of Commissioner of Incometax v. Excel Industries Ltd., emphasizing 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, as ONGC disputed the liability, there was no corresponding liability on ONGC to pay the accrued amount to the assessee. Therefore, the disputed income was not exigible to tax. The Court held that until a corresponding liability arises for payment, the income cannot be considered taxable. Consequently, the Court ruled in favor of the assessee, quashing the Tribunal's decision and disposing of the appeal in favor of the assessee without costs.