IN HIGH COURT OF DELHI AT NEW DELHI Decided on: May 19, 2015. ITA 268/2008 ITA 269/2008 ITA 270/2008 LIQUIDATOR POLYMERLAND INDIA P.LTD. ..Appellant Through Mr. S. Ganesh Sr. Adv. with Mr. Syed Naqvi, Mrs. Namrata Kapoor Sharma and Mr. P P Kanwer, Advs. versus DEPUTY COMMISSIONER OF INCOME TAX ..... Respondent Through Mr. N P Sahni, sr. standing counsel with Mr. Nitin Gulati, Adv. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) 1. following questions of law arise for consideration : (i) Whether Tribunal misdirected itself in law in holding that interest of 70,26,492/- had accrued to assessee and hence was assessable to tax in hands of Appellant? (ii) Whether finding and conclusion of Tribunal regarding deemed accrual of interest is perverse? 2. brief facts are that assessee appellant is joint venture ITA 268/2008 & conn. Page 1 company currently facing liquidation in proceedings by Allahabad High Court. In meantime, amounts continued to be disbursed to suppliers for routine course of its business. However, on account of deteriorating financial conditions, suppliers of goods in this instance TIPCO Ltd., could not keep up its commitments. It had also failed to repay amounts advanced by assessee. In these circumstances, when unpaid advances amounted, assessee entered into composition/settlement with said supplier on 1.7.1997 whereby advances were converted into loan. In sense this is acknowledgment of debt by said supplier (TIPCO), who also undertook to pay, besides pre-amounts, interest in agreed rate. However, TIPCO Ltd. breached its commitments under said agreement. In these circumstances for AY 1997-98, assessee reversed its entries of outstanding amounts. After initially suffering adverse order, CIT(Appeals) on being approached accepted assessee s plea that income on amounts due had not accrued for those years. However, Revenue for succeeding years 1999-2000, 2000-01 and 2001-02 held that income was deemed to have accrued in absence of write off. assessee which had met with initial success before CIT(Appeals), was aggrieved by impugned order of ITAT regarding accrual of income. It is contended by Mr. Ganesh, learned senior counsel firstly that in view of entirety of circumstances of case, though entries in books noted as outstanding dues were based on advances paid to supplier, in fact, over course of time, there was no prospect of their realisation. Contending that such entries do not amount to income liable to taxation under Income Tax Act, 1961 learned senior counsel relied upon judgments of Supreme Court in CIT V. Shoorji Vallabhdas & Co. (1962) ITA 268/2008 & conn. Page 2 46 ITR 144 and Godhra Electricity Co. Ltd. V. CIT (1997) 225 ITR 746. It is emphasised that though income tax enactment takes into account two points of time at which taxation liability is directed, i.e. accrual of income or its receipts, nevertheless substance of matter is income and if income does not result there cannot be tax. Learned senior counsel also relied upon Supreme Court decision in Radhasoami Satsang V. Commissioner of Income-tax (1992) 193 ITR 321. In said judgment Court had held that even though doctrine of res judicata is inapplicable to income tax proceedings. Nevertheless if Revenue treats particular subject matter for period of time, and returns findings in favour of assessee in absence of changed circumstance of facts, it would be estopped from taking contrary position. It was lastly argued that some time in January, 2002 assessee entered into further agreement with its debtor (i.e. TIPCO) in terms of which entire dues payable by latter were written off. 3. Learned counsel for Revenue resisted appellants and submitted that subsequent development could not have been validly re-urged as ground for relief in present case. It was emphasised that since in books assessee never reversed entry during relevant points in time, learned counsel highlighted that logically revenue was justified in brining to tax such amounts on basis that they had accrued. 4. judgment Shoorji Vallabhdas & Co. (supra) has been recently follows in CIT V. Excel Industries Ltd. 358 ITR 295 where it was reiterated that income tax is levied on real income and not hypothetical income. Therefore, entries inspired by realistic prospects of their realisation cannot per se constitute basis of valid levy. This view finds support in Division Bench ruling of this Court in CIT V. Goyal M G Gases (2008) 303 ITA 268/2008 & conn. Page 3 ITR 159. Furthermore, this Court is of opinion that having once accepted assessee s explanation, with respect to income not in fact accruing and therefore not liable to be taxed for previous period 1998- 99, Revenue could not have in absence of any compelling reason, treated identical subject matter for succeeding years as it did. In view of foregoing discussions impugned order of ITAT is set aside. appeal consequently succeed and allowed. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) MAY 19, 2015 vld ITA 268/2008 & conn. Page 4 Liquidator Polymerland India P. Ltd. v. Deputy Commissioner of Income-tax