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TMI Blog2014 (2) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... ce on outstanding Sudan export bills. But the respondent contended that the said amount did not represent any income received or accrued as on the date of the balance-sheet and, therefore, the same should be excluded in the determination of income from its Cochin office. According to the respondent-assessee, the said amount had not accrued during the previous year which ended on June 30, 1981. The Assessing Officer rejected the contentions finding that the respondent was entitled to receive the sale consideration in foreign exchange. When the prevailing exchange rate is taken into consideration, the assessee is entitled to receive the Indian currency equivalent to the sale bills raised and the estimation difference is now credited to the export sales, it is found. The exchange difference, in view of the system of accounting (mercantile) being followed by the assessee was rightly taken credit. The Commissioner of Income-tax (Appeals) confirmed the disallowance. However, the Tribunal allowed the assessee's appeal, holding that since realisation of the sale proceeds in foreign exchange depended on the repatriation of the funds, there is no accrued income in the hands of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case law was canvassed before us : (1) In Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC), the apex court held, inter alia, as follows (headnote) : "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt ; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialise." That was a case where the Government of Bombay had given a licence to a company authorising it to generate and supply electricity. The assessee-company was the successor. The appellant enhanced its rates unilaterally. Two representative suits were instituted. During the pendency of the litigation, the company was not able to realise the enhanced charges. The citizens of the area met the Minister and thereafter the Under Secretary to the Government wrote to the assessee suggesting that the company may maintain status quo for the rates. There was yet another suit filed by the consume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s follows (headnote) : "that, presuming that the assessee was entitled to additional amounts other than what was paid by the acquiring authority, yet for the purpose of tax, moneys payable became due and were paid and received. In case the assessee received any additional amount, that would be taxable subsequently as profits in accordance with the provisions of the Act. There was no question of piecemeal assessment, as under sub-sections (1) and (4) of section 41 also the sum deemed to be a business profit is to be taxed as income in the year in which it is received." (3) In Southern Technologies Ltd. v. Joint CIT [2010] 320 ITR 577 (SC), the apex court held, inter alia, as follows (page 608) : "Theory of 'real income' An interesting argument was advanced before us to say that a provision for NPA, under commercial accounting, is not an 'income' hence the same cannot be added back as is sought to be done by the Department. In this connection, reliance was placed on 'Real income theory'. We find merit in the above contention. In the case of Poona Electric Supply Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in foreign exchange rate have really resulted in accrual of income to the assessee or in other words, whether any income arose to assessee as a result of such fluctuation. It was held that no income arose or accrual as a result of fluctuation in foreign exchange rates. The further issue before the Tribunal was whether the assessee was entitled to deduction on the commission paid by it abroad in respect of its exports. Applying the ratio of decision of this court in CIT v. Kerala Nut Food Co. [1991] 192 ITR 585 (Ker), it was held that the matter was to be decided in favour of the assessee. So far as question relating to fluctuation in foreign exchange rate is concerned, learned counsel for the Revenue submitted that the assessee itself had included the income in profit and loss account. Having done so, it was precluded from taking the hypothetical stand that it was not to be treated as income. Learned counsel for the assessee submitted that what is to be assessed is real income and merely because an entry has been made unless the same related to an income, the assessment should not have been done. So far as the other question related to weighted deduction is concerned, learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he finding is further that there is no accrual of income because foreign exchange was not received on June 11, 1981, and the payments were received much later only through ECGC. We are of the view that the approach made by the Tribunal is insupportable. Admittedly, the respondent-assessee is maintaining its accounts on the mercantile system of accounting. Admittedly, the assessee has credited its own accounts with Rs. 5,37,909 being the difference arising on account of foreign exchange fluctuation. Unlike the fact situation in Godhra's case (supra), where there was absolutely no possibility of the assessee recovering the amount, the same is not the position here. May be the assessee has received the amount much later. But the time of receipt is relevant only when accounts are being maintained on the basis of the receipt system. When admittedly the assessee is maintaining the accounts on the mercantile system, 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 fol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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