C/TAXAP/790/2019 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 790 of 2019 PRINCIPAL COMMISSIONER OF INCOME TAX Versus KALPATARU POWER TRANSMISSION LTD. Appearance: MRS MAUNA M BHATT(174) for Appellant(s) No. 1 for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 06/01/2020 ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. This Tax Appeal is filed under Section 260A of Income Act, 1961 (for short Act ) at instance of revenue and it is directed against order dated 10.05.2019 passed by Income Tax Appellate Tribunal, Ahmedabad C Bench, Ahmedabad in ITA No.1462/Ahd/2016 for assessment year 2010 2011. 2. revenue has proposed solitary substantial question of law in its Memorandum of Appeal. question formulated reads thus: 2(A) Whether Appellate Tribunal has erred in facts and circumstances of case and in law, in upholding order of CIT(A) for deleting addition of Rs.4,42,72,610/ in holding carbon receipts as capital receipts? Page 1 of 8 Downloaded on : Tue Jan 07 10:27:25 IST 2020 C/TAXAP/790/2019 ORDER 3. We take notice of fact that similar issue had arose in case of very same assessee, so far as assessment for year 2009 10 is concerned, we refer to order passed by this Court in Tax Appeal No.141 of 2017 dated 02.03.2017. relevant observations made in said order reads thus: [1.0] Feeling aggrieved and dissatisfied with impugned judgment and order dated 18.03.2016 passed by learned Income Tax Appellate Tribunal, Ahmedabad (hereinafter referred to as Tribunal ) in ITA No.538/Ahd/2013 for AY 200910, by which learned Tribunal has dismissed said appeal preferred by Revenue and confirming order passed by learned CIT(A) deleting addition of Rs.5,78,28,058/, Revenue has preferred present Tax Appeal with following substantial question of law. Whether ITAT is right in law and on facts in deleting addition of Rs.5,78,28,058/in holding carbon receipts as capital receipt? However, considering impugned judgment and order passed by learned Tribunal, correct proposed question of law would be as under: Whether ITAT is right in law and on facts in confirming order passed by learned CIT(A) in deleting addition of Rs.5,78,28,058/on ground that aforesaid income has not accrued / received by assessee in year under consideration? [2.0] At outset it is required to be noted that while passing original assessment order AO made addition of Rs.5,78,28,058/on ground that carbon receipt receivable / accrued under year under consideration is capital receipt. [3.0] Feeling aggrieved and dissatisfied with addition made by AO of Rs.5,78,28,058/, assessee preferred appeal before learned CIT(A). That by detailed reasoned judgment and Page 2 of 8 Downloaded on : Tue Jan 07 10:27:25 IST 2020 C/TAXAP/790/2019 ORDER order learned CIT(A) directed to delete aforesaid addition of Rs.5,78,28,058/by observing that as there was no transfer / sale of carbon receipts during year under consideration and therefore, same cannot be included in year consideration. learned Tribunal in appeal preferred by Revenue has confirmed said order passed by learned CIT(A) by specifically observing that as carbon receipts were neither sold / transferred during year under consideration and therefore, same cannot be included in income of assessee in year under consideration. [3.1] Feeling aggrieved and dissatisfied with impugned judgment and order passed by learned Tribunal, Revenue has preferred present appeal to consider above recast proposed question of law. [4.0] We have heard Shri Sudhir Mehta, learned Counsel appearing on behalf of Revenue and Shri S.N. Soparkar, learned Counsel appearing on behalf of assessee. We have perused and considered order passed by AO as well as orders passed by learned AO as well as orders passed by learned CIT(A) as well as impugned judgment and order passed by learned Tribunal. [4.1] Considering order passed by learned AO it appears that AO made addition of Rs.5,78,28,058/on ground that amount of Rs.5,78,28,058/was receivable and/or can be said to have been accrued in year under consideration and therefore, same is required to be included in income of assessee in year under consideration. However, learned CIT(A) as well as learned Tribunal have held that carbon receipts were neither sold nor transferred by assessee during year under consideration and therefore, same cannot be said to have been included in income of assessee in year under consideration. As such whether when amount can be said to have been accrued and/or is required to be included in income of assessee and in which year, is now not res integra in view of decision of Hon ble Supreme Court in case of Commissioner of Income Tax vs. Excel Industries Limited reported in (2013) 358 ITR 295 (SC). In case before Hon ble Supreme Page 3 of 8 Downloaded on : Tue Jan 07 10:27:25 IST 2020 C/TAXAP/790/2019 ORDER Court, question was whether advance license benefit and Duty Entitlement Pass Book (DEPB) benefits were taxable in year in which same were actually utilized by assessee or in year of receipts. While considering aforesaid question, in paras 13 to 27, Hon ble Supreme Court has observed and held as under: 13. Revenue then preferred appeal under Section 260A 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 260A 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: 28. Profits and gains of business or profession.The 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 vs. Shoorji Vallabhdas and Co., [1962] 46 ITR 144 (SC) it was held as follows: Incometax is levy on income. No doubt, Page 4 of 8 Downloaded on : Tue Jan 07 10:27:25 IST 2020 C/TAXAP/790/2019 ORDER Incometax 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 bookkeeping, 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. 18. above passage was cited with approval in Morvi Industries Ltd. vs. Commissioner of Incometax (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. 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 Page 5 of 8 Downloaded on : Tue Jan 07 10:27:25 IST 2020 C/TAXAP/790/2019 ORDER 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. vs. 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 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 vs. 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. vs. 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 vs. 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 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 Page 6 of 8 Downloaded on : Tue Jan 07 10:27:25 IST 2020 C/TAXAP/790/2019 ORDER 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 vs. 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 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. [4.2] Applying aforesaid law laid down by Hon ble Supreme Court to facts of case on hand, it cannot be said that learned CIT(A) as well as learned Tribunal have committed any error in deleting addition of Rs.5,78,28,058/ and holding that as neither carbon receipts were sold and/or transferred in favour of foreign companies in year under consideration, same cannot be included as receipt / income in year under consideration. Under circumstances, we Page 7 of 8 Downloaded on : Tue Jan 07 10:27:25 IST 2020 C/TAXAP/790/2019 ORDER see no reason to interfere with impugnedjudgment and order passed by learned Tribunal. No substantial question of law arise in present Tax Appeal. 4. Thus, in view of aforesaid decision of this Court in case of very same assessee, this appeal fails and is hereby dismissed. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) GIRISH Page 8 of 8 Downloaded on : Tue Jan 07 10:27:25 IST 2020 Principal Commissioner of Income-tax v. Kalpataru Power Transmission Ltd