The assessee had been following the mercantile system of ...

Tribunal Rules Hypothetical Income Not Taxable; Excise Duty Adjustment Upheld for Assessee's Mercantile Accounting.

November 5, 2024

Case Laws     Income Tax     HC

The assessee had been following the mercantile system of accounting, wherein book profits are taken for tax assessment, though credit or debit amounts may not be realized or disbursed. The Income Tax Officer treated certain amounts as income, which the assessee claimed were not actually accrued. It is settled law that income tax cannot be levied on hypothetical income, and only real income can be taxed. Recording entries in books of accounts is not conclusive for determining income under tax laws. Whether an amount is income or not is determined based on Income Tax Law, not book entries. No tax can be charged on an amount not actually earned. The Tribunal rightly deleted the addition as hypothetical income not actually accrued, which was 64% of the excise duty recognized in the assessee's books. While subsidies, grants, and reimbursements are considered income u/s 2(24)(xviii), exemptions are not explicitly mentioned. Exemption means freedom from a general burden or tax, while subsidy means government aid for a public benefit enterprise. The assessee was exempted from paying 36% of the excise duty, not subsidized, making it a capital receipt not taxable under the Income Tax Act.

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