REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JUDISDICTION CIVIL APPEAL NO.125 OF 2013 Commissioner of Income Tax ...Appellant Versus M/s Excel Industries Ltd. Respondent WITH CIVIL APPEAL NO.5195 OF 2011 WITH CIVIL APPEAL NO. 9101 OF 2013 (Arising out of SLP(C) No.l9897 of 2012) AND CIVIL APPEAL NO. 9100 OF 2013 (Arising out of SLP(C) No.l9898 of 2012) JUDGMENT Madan B. Lokur, J. 1. Leave granted in Special Leave Petitions. 2. question for consideration in all these appeals is whether benefit of entitlement to make duty free imports of raw materials obtained by assessee through advance C.A. No. 125 of 2013 etc. Page 1 of 16 Page 1 licences and duty entitlement pass book issued against export obligations is income in year in which exports are made or in year in which duty free imports are made. 3. In our opinion, income does not accrue in year of export but in year in which imports are made. 4. facts pertaining to Civil Appeal No. 125 of 2013 (M/s Excel Industries Limited for Assessment Year 2001-02) are referred to for convenience. 5. assessee maintains its accounts on mercantile basis. In its return (revised on 31 st March 2003) assessee claimed deduction of Rs.12,57,525/- under head advance licence benefit receivable. assessee also claimed deduction in respect of duty entitlement pass book benefit receivable amounting to Rs.4,46,46,976/-. These benefits related to entitlement to import duty free raw material under relevant import and export policy by way of reduction from raw material consumption. According to assessee, amounts were excluded from its total income since they could not be said C.A. No. 125 of 2013 etc. Page 2 of 16 Page 2 to have accrued until imports were made and raw material consumed. 6. During assessment proceedings, assessee relied upon decision of Income Tax Appellate Tribunal in Jamshri Ranjitsinghji Spinning and Weaving Mills v. Inspecting Assistant Commissioner [1992] 41 ITD 142 (Mum) and also order of Commissioner of Income Tax (Appeals) in its own case for assessment years 1995-96 to 1997-98. 7. By his order dated 24th March 2004, Assessing Officer did not accept assessee s claim on ground that taxability of such benefits is covered by Section 28(iv) of Income Tax Act, 1961 (for short Act ) which provides that value of any benefit or perquisite, whether convertible into money or not, arising from business or profession is income. According to Assessing Officer, along with obligation of export commitment, assessee gets benefit of importing raw material duty free. When exports are made, obligation of assessee is fulfilled and right to receive benefit becomes vested and absolute, at end of year. In year under consideration, export obligation had been made and C.A. No. 125 of 2013 etc. Page 3 of 16 Page 3 accounting entries were based on such fulfilment. Assessing Officer distinguished Jamshri on ground that it pertained to assessment year 1985-86 when export promotion scheme was totally different and taxability of such benefit was examined only with reference to Section 28(iv) of Act but in present case taxability of such benefit is to be examined from all possible angles as it forms part of profits and gains of business according to ordinary principles of commercial accounting. 8. assessee took up matter in appeal and by order dated 15th September 2008 Commissioner of Income Tax (Appeals) referred to earlier appellate order in case of assessee relevant to assessment years 1999-2000 and 2000-01 and following conclusion arrived at in those assessment years, appeal was allowed and it was held that advance licence benefit receivable amounting to Rs.12,57,525/- and duty entitlement pass book benefit of Rs.4,46,46,976/- ought not to be taxed in this year. Reliance was also placed on order of Income Tax Appellate Tribunal in assessee s own case for assessment year 1995-96. C.A. No. 125 of 2013 etc. Page 4 of 16 Page 4 9. Feeling aggrieved, Revenue preferred further appeal before Income Tax Appellate Tribunal (for short ITAT) which referred to issues raised by Revenue and by its order dated 29th April 2011 dismissed appeal upholding view taken by Commissioner of Income Tax (Appeals). 10. Tribunal held that issues were covered in favour of assessee by earlier orders of Tribunal in assessee s own cases. It had been held by Tribunal in earlier cases that income does not accrue until imports are made and raw materials are consumed by assessee. As regards accounting year under consideration, it was found that there was no dispute that it was only in subsequent year that imports were made and raw materials consumed by assessee. 11. Tribunal also took note of fact in assessee s own cases starting from assessment year 1992- 93 onwards these issues had been consistently decided in its favour. It was also noted that for some of assessment years namely 1993-94, 1996-97 and 1997-98 appeals were filed by Revenue in Bombay High Court but they were not admitted. C.A. No. 125 of 2013 etc. Page 5 of 16 Page 5 12. Under circumstances, Tribunal affirmed decision of Commissioner of Income Tax (Appeals) on issues raised. 13. Revenue then preferred appeal under Section 260-A of Act in respect of following substantial question of law: Whether on facts and in circumstances of case and in law ITAT is justified in law in holding by following its decision in case of Jamshri Ranjitsinghji Spinning & Weaving Mills Ltd. (41 ITD 142), that advance license benefit and DEPB benefits are taxable in year in which these are actually utilized by assessee and not in year of receipts. 14. By impugned order, High Court declined to admit appeal filed by Revenue under Section 260-A of Act. 15. It was submitted before us by learned counsel for Revenue that in view of provisions of Section 28(iv) of Act, value of benefit obtained by assessee is its income and is liable to tax under head Profits and gains of business or profession . We are unable to accept contention of learned counsel for Revenue for several reasons. 16. Section 28 (iv) of Act reads as follows:- C.A. No. 125 of 2013 etc. Page 6 of 16 Page 6 Profits and gains of business or profession. 28. following income shall be chargeable to income-tax under head Profits and gains of business or profession - .. (iv) value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession; 17. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In Commissioner of Income Tax v. Shoorji Vallabhdas and Co., [1962] 46 ITR 144 (SC) it was held as follows:- Income-tax is levy on income. No doubt, Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., accrual of income or its receipt; but substance of matter is income. If income does not result at all, there cannot be tax, even though in book-keeping, entry is made about hypothetical income , which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains income of recipient, even though given up, tax may be payable. Where, however, income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though entry to that effect might, in certain circumstances, have been made in books of account. C.A. No. 125 of 2013 etc. Page 7 of 16 Page 7 18. above passage was cited with approval in Morvi Industries Ltd. v. Commissioner of Income-Tax (Central), [1971] 82 ITR 835 (SC) in which this Court also considered dictionary meaning of word accrue and held that income can be said to accrue when it becomes due. It was then observed that: ........ date of payment ....... does not affect accrual of income. moment income accrues, assessee gets vested with right to claim that amount even though it may not be immediately. 19. This Court further held, and in our opinion more importantly, that income accrues when there arises corresponding liability of other party from whom income becomes due to pay that amount. 20. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by corresponding liability of other party to pay amount. Only then can it be said that for purposes of taxability that income is not hypothetical and it has really accrued to assessee. C.A. No. 125 of 2013 etc. Page 8 of 16 Page 8 21. In so far as present case is concerned, even if it is assumed that assessee was entitled to benefits under advance licences as well as under duty entitlement pass book, there was no corresponding liability on customs authorities to pass on benefit of duty free imports to assessee until goods are actually imported and made available for clearance. benefits represent, at best, hypothetical income which may or may not materialise and its money value is therefore not income of assessee. 22. In Godhra Electricity Co. Ltd. v. Commissioner of Income Tax, [1997] 225 ITR 746 (SC) this Court reiterated view taken in Shoorji Vallabhdas and Morvi Industries. 23. Godhra Electricity is rather instructive. In that case, it was noted that High Court held that assessee would be obliged to pay tax when profit became actually due and that income could not be said to have accrued when it is based on mere claim not backed by any legal or contractual right to receive amount at subsequent date. High Court however held on facts of case that assessee had C.A. No. 125 of 2013 etc. Page 9 of 16 Page 9 legal right to recover consumption charge in dispute at enhanced rate from consumers. 24. This Court did not accept view taken by High Court on facts. Reference was made in this context to Commissioner of Income Tax v. Birla Gwalior (P.) Ltd., [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not hypothetical accrual of income ought to be taken into consideration. For similar conclusion, reference was made to Poona Electric Supply Co. Ltd. v. Commissioner of Income Tax, [1965] 57 ITR 521 (SC) wherein it was held that income tax is tax on real income. 25. Finally reference was made to State Bank of Travancore v. Commissioner of Income Tax, [1986] 158 ITR 102 (SC) wherein majority view was that accrual of income must be real, taking into account actuality of situation; whether accrual had taken place or not must, in appropriate cases, be judged on principles of real income theory. majority opinion went on to say: What has really accrued to assessee has to be found out and what has accrued must be C.A. No. 125 of 2013 etc. Page 10 of 16 Page 10 considered from point of view of real income taking probability or improbability of realisation in realistic manner and dovetailing of these factors together but once accrual takes place, on conduct of parties subsequent to year of closing income which has accrued cannot be made no income . 26. This Court then considered facts of case and came to conclusion (in Godhra Electricity) that no real income had accrued to assessee in respect of enhanced charges for variety of reasons. One of reasons so considered was letter addressed by Under Secretary to Government of Gujarat, to assessee whereby assessee was advised to maintain status quo in respect of enhanced charges for at least six months. This Court took view that though letter had no legal binding effect but one has to look at things from practical point of view. (See R.B. Jodha Mal Kuthiala v. Commissioner of Income Tax, [1971] 82 ITR 570 (SC)). This Court took view that probability or improbability of realisation has to be considered in realistic manner and it was held that there was no real accrual of income to assessee in respect of disputed C.A. No. 125 of 2013 etc. Page 11 of 16 Page 11 enhanced charges for supply of electricity. decision of High Court was, accordingly, set aside. 27. Applying three tests laid down by various decisions of this Court, namely, whether income accrued to assessee is real or hypothetical; whether there is corresponding liability of other party to pass on benefits of duty free import to assessee even without any imports having been made; and probability or improbability of realisation of benefits by assessee considered from realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to assessee and Section 28(iv) of Act would be inapplicable to facts and circumstances of case. Essentially, Assessing Officer is required to be pragmatic and not pedantic. 28. Secondly, as noted by Tribunal, consistent view has been taken in favour of assessee on questions raised, starting with assessment year 1992-93, that benefits under advance licences or under duty entitlement pass book do not represent real income of assessee. C.A. No. 125 of 2013 etc. Page 12 of 16 Page 12 Consequently, there is no reason for us to take different view unless there are very convincing reasons, none of which have been pointed out by learned counsel for Revenue. 29. In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) this Court did not think it appropriate to allow reconsideration of issue for subsequent assessment year if same fundamental aspect permeates in different assessment years. In arriving at this conclusion, this Court referred to interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: Parties are not permitted to begin fresh litigation because of new views they may entertain of law of case, or new versions which they present as to what should be proper apprehension by court of legal result either of construction of documents or weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, same principle, namely, that of setting to rest rights of litigants, applies to case where point, fundamental to decision, taken or assumed by plaintiff and traversable by defendant, has not been traversed. In that case also defendant is bound by judgment, although it may be true C.A. No. 125 of 2013 etc. Page 13 of 16 Page 13 enough that subsequent light or ingenuity might suggest some traverse which had not been taken. 30. Reference was also made to Parashuram Pottery Works Ltd. v. Income Tax Officer, [1977] 106 ITR 1 (SC) and then it was held: We are aware of fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being unit, what is decided in one year may not apply in following year but where fundamental aspect permeating through different assessment years has been found as fact one way or other and parties have allowed that position to be sustained by not challenging order, it would not be at all appropriate to allow position to be changed in subsequent year. On these reasonings in absence of any material change justifying Revenue to take different view of matter and if there was no change it was in support of assessee we do not think question should have been reopened and contrary to what had been decided by Commissioner of Income Tax in earlier proceedings, different and contradictory stand should have been taken. 31. It appears from record that in several assessment years, Revenue accepted order of Tribunal in favour of assessee and did not pursue matter any further but in respect of some assessment years matter was taken up C.A. No. 125 of 2013 etc. Page 14 of 16 Page 14 in appeal before Bombay High Court but without any success. That being so, Revenue cannot be allowed to flip- flop on issue and it ought let matter rest rather than spend tax payers money in pursuing litigation for sake of it. 32. Thirdly, real question concerning us is year in which assessee is required to pay tax. There is no dispute that in subsequent accounting year, assessee did make imports and did derive benefits under advance licence and duty entitlement pass book and paid tax thereon. Therefore, it is not as if Revenue has been deprived of any tax. We are told that rate of tax remained same in present assessment year as well as in subsequent assessment year. Therefore, dispute raised by Revenue is entirely academic or at best may have minor tax effect. There was, therefore, no need for Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to public coffers. C.A. No. 125 of 2013 etc. Page 15 of 16 Page 15 33. For aforesaid reasons, we dismiss civil appeals with no order as to costs, but with hope that Revenue implements its litigation policy little more practically and little more seriously. J (R. M. Lodha) .. J (Madan B. Lokur) J (Kurian Joseph) New Delhi, October 8, 2013 C.A. No. 125 of 2013 etc. Page 16 of 16 Page 16 Commissioner of Income-tax v. M/s. Excel Industries Ltd