2017 (3) TMI 392 - HC - Income Tax

Carbon receipts - accrual of income - treatment as capital receipt or revenue receipt - Held that - carbon receipts were neither sold nor transferred by the assessee during the year under consideration and therefore, the same cannot be said to have been included in the income of the assessee in the year under consideration. It cannot be said that the learned CIT(A) as well as the learned Tribunal have committed any error in deleting the addition and holding that as neither the carbon receipts were sold and/or transferred in favour of foreign companies in the year under consideration, the same cannot be included as receipt / income in the year under consideration. See Commissioner of Income Tax Versus M/s Excel Industries Ltd. and Mafatlal Industries P. Ltd. 2013 (10) TMI 324 - SUPREME COURT - Decided in favour of assessee.

Summary

Issues:
1. Whether the ITAT was correct in deleting the addition of ?5,78,28,058 as capital receipt.
2. Whether the carbon receipts should be included in the income of the assessee for the year under consideration.

Issue 1 Analysis:
The appeal was against the ITAT's decision to delete the addition of ?5,78,28,058 as a capital receipt. The AO had initially made this addition based on the belief that the carbon receipt accrued in the relevant year was a capital receipt. However, the CIT(A) and the Tribunal both ruled that since the carbon receipts were neither sold nor transferred during the year under consideration, they should not be included in the income. The Hon'ble Supreme Court's decision in Commissioner of Income Tax vs. Excel Industries Limited was cited to support this view, emphasizing that income tax cannot be levied on hypothetical income. The Court highlighted that income accrues when it becomes due and is accompanied by a corresponding liability of the other party to pay the amount. As the carbon receipts were not realized or transferred during the relevant year, they were deemed hypothetical income and not taxable. Consequently, the Tribunal's decision to delete the addition was upheld.

Issue 2 Analysis:
The Revenue challenged the Tribunal's decision, arguing that the carbon receipts should have been included in the assessee's income for the year under consideration. However, the Court reiterated the principle that income accrues when it becomes due and when there is a corresponding liability from the other party to pay. Since the carbon receipts were neither sold nor transferred during the relevant year, they were considered hypothetical income and not taxable. The Court applied the legal precedent set by the Hon'ble Supreme Court and concluded that the CIT(A) and the Tribunal were correct in deleting the addition of ?5,78,28,058. Therefore, the Court dismissed the Tax Appeal, finding no substantial question of law to warrant interference with the Tribunal's decision.

In summary, the Court upheld the Tribunal's decision to delete the addition of ?5,78,28,058 as the carbon receipts were not realized or transferred during the relevant year, making them hypothetical income and not taxable. The legal principle that income accrues when it becomes due and is accompanied by a corresponding liability was crucial in determining the taxability of the carbon receipts, leading to the dismissal of the Tax Appeal.