Gujarat High Court
Commissioner Of Income Tax-I, vs Asian Finstock Limited on 6 March, 2020
Author: J.B.Pardiwala
Bench: J.B.Pardiwala, Bhargav D. Karia
C/TAXAP/912/2008 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 912 of 2008
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE J.B.PARDIWALA Sd/
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA Sd/
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1 Whether Reporters of Local Papers may be allowed to YES
see the judgment ?
2 To be referred to the Reporter or not ? YES
3 Whether their Lordships wish to see the fair copy of NO
the judgment ?
4 Whether this case involves a substantial question of NO
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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COMMISSIONER OF INCOME TAXI,
Versus
ASIAN FINSTOCK LIMITED
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Appearance:
MRS MAUNA BHATT (174) for the Appellant(s) No. 1
MR SN DIVETIA (1378) for the Opponent(s) No. 1
MR VIVEKKUMAR CHAVDA (6666) for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 06/03/2020
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) Page 0 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT 1 This Tax Appeal under Section 260A of the Income Tax Act, 1961 [for short, 'the Act, 1961'] is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad, 'A' Bench, Ahmedabad dated 6 th July 2007 in the ITA No.164/Ahd/2000 for the assessment year 199697.
2 This Tax Appeal was ordered to be admitted on the following substantial question of law:
"Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs.3.50 crores made by the Assessing Officer and confirmed by the CIT(A) in respect of profit earned from trading in shares of KHEL, when the assessee was following mercantile system of accounting and the amount was shown as income but credited to "Suspense Account?"
3 The aforesaid substantial question of law formulated by this Court while admitting the Tax Appeal arises in the following factual background:
4 The respondent assessee filed its return of income dated 30 th November 1996 showing total loss of Rs.37,17,921/. The proceedings under Section 143(1)(a) of the Act concluded on 29 th October 1997 with an adjustment of Rs.14,000/. Notice under Section 143(2) of the Act was issued to the respondent assessee within the prescribed period. The assessee company is engaged in the business of trading of shares, investment and finance. In the return of income, the assessee company showed profit on trading in shares of Kamakshi Housing Finance Ltd. (for short, 'KHFL') amounting to Rs.2,78,87,259/. The said amount was not shown in the profit and loss account, but, instead was transferred to the "suspense account". The amount was shown in the balancesheet on the credit side under the head of "sundry creditors". In the report of the Page 1 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT company, it came to be stated that the company's profit on account of the trading activities in the shares of the KHFL could not be realised as the amount due on that account had been freezed by the Bombay Stock Exchange in accordance with the directions issued by the SEBI, Mumbai. Thus, it was claimed that as the transaction could not attain finality on account of the dispute between the company and the BSE - SEBI, the profit accrued in favour of the assessee company could not be shown as profit.
5 The Assessing Officer declined to accept the case of the assessee company as discussed above. The findings recorded by the Assessing Officer in the assessment year reads thus:
"2.2 The assessee's contention has been examined. It is proved from the above submission that the assessee company has already earned the profit in respect of the above trading on account of the auction of the shares of KHFL since the delivery had not been made. On account of this auction, the assessee has admitted that it had earned a profit of Rs.3,50,15,800/(as against the amount of Rs.2,78,87,259/ mentioned in the return). It is also admitted in its reply that the profit actually accrued to it, but not received because of SEBI, Bombay conducting the investigation of manipulation of share prices. However, since the assessee company is following the mercantile system of accounting, whatever profit has accrued and become due to it has to be taken into account for the current year's income. If the SEBI, Bombay has conducted an enquiry regarding the manipulation of shares prices of the KHFL',˙ and as a consequence of this enquiry has impounded the auction proceeds as per direction issued to the BSE and the difference between the auction price and the standard rate which they have allowed to the assesses has been impounded to be deposited to the credit of the Investors Protection Fund of BSE, this doesn't affect the fact that the front had actually become due to the assessee on account of the auction having been conducted. The subsequent action of the SEBI under the SEBI Act is in the nature of a penalty or fine imposed for infringement of the provisions of SEBI Act and the norms/regulations for fair trading in shares. Because of Infringement of the provisions... this action has been taken by SEBI which is of a penal notice, by virtue of which the sale proceeds exceeding the standard rate fixed have been impounded. Therefore, the mere fact that the assessee has not accepted the standard rate allotted to it and challenged the auction of the SEBI/BSE in the Hon'ble Gujarat High Court doesn't affect the position Page 2 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT that the total profit earned at Rs.3,50,15,800/ is to be treated as taxable income for the year under consideration. The assessee's action in crediting this profit earned to the suspense account and showing in the liability side of the balancesheet under the head "suspense account" also proved this fact that the profit has accrued to the assessee and become due and only because of the subsequent dispute,, the assessee is trying to claim this amount as not the income of the current year which is not acceptable.
2.3 As regards the claim of loss of Rs.14,81,177/ incurred in the same scrip excluding the auction sale, there is no justification regarding the assessee company not having taken into account these particular transactions in the books of accounts. No justification with corroborative evidence of the claim of genuineness of the loss could be furnished. Therefore, this claim is not entertainable.
Accordingly, the amount of Rs.3,50,20,260/ being profit on account of trading in shares of KHFL is being added to the assessee's income.
[Addition Rs.3,50,20,260/] 3 In accordance with the above discussion, the total income of the assessee company is recomputed as under:
Loss as per return of income () Rs.37,17,921/
Add Adjustment u/s.143(1)(a) Rs.14,000
() Rs.37,03,921
Add: Additions as per order:
i) Profit on trading of loss of shares Rs.3,50,15,800
Total income .. Rs.3,13,11,879
i.e. ... Rs.3,13,11,880
Assessed u/s. 143(3) of the I.T. Act on total income of () Rs.3,13,11,880/. Issue demand notice and challan accordingly. Issue penalty proceedings u/s. 271(1)(c) of the I.T. Act."
6 The respondent assessee being dissatisfied with the assessment order referred to above went in appeal before the Commissioner of Income Tax. The Commissioner (Appeals) dismissed the appeal holding Page 3 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT as under:
"3.2....The appellant company was incorporated on 15.12.94. The main object of the company was to carry on the business as an Investment company and to invest, acquire and hold and otherwise deal ln shares, stocks, debentures, debenturestock, bonds etc. The company filed Its return of Income for the A.Y.9697 relevant to financial year 199596 on 30th November, 1996 showing loss of Rs.37,17,921/. The return was processed u/s 143(1)(a) on 29.10.97 and adjustment of Rs.14,000/was made. Thereafter, the assessment proceedings were initiated and notices u/s 143(2) and 143(1) were issued.
The appellant company In the course of business activities had purchased 418800 shares of Kamakshi Housing Finance Ltd. During the financial year 199596 for Rs.2,16,70,945/. Out of these shares, the appellant company sold 77,200 shares of Kamakshi Housing Finance Ltd. For sale consideration of Rs.29,93,519/. This transaction resulted in loss of Rs.14,81,177/. In the month of February, 1996 the Mumbai Stock Exchange invited offers for sale of Rs.94,000/shares of Kamakshi Housing Finance Ltd. The appellant company participated In the auction and offered to sell 94,400 shares of Kamakshi Housing Finance Ltd. For an average price of Rs.370/per share. The offer of the company was accepted and in accordance with the said offer, the company was entitled to receive Rs.3,50,20,260/on the payout date after the date of settlement.
The appellant company delivered the requisite number of shares to the Mumbai Stock Exchange through its three brokers. However, before the date of payout, the Mumbai Stock Exchange under the instructions from SEBI issued an order that the payment for the auction sale of 94,400 shares of Kamakshi Housing Finance Ltd. Has not to be made at the price fixed in the auction and passed an order freezing the payout. Accordingly, the BSE did not make any payment to the appellant company on the payout date. The order of the SEBI/BSE was not acceptable to the appellant company and representation in this regard was sent to the BSE as well as SEBI. Since there was no positive response, the appellant company has filed a Special Civil Application in the High Court of Gujarat which is pending for disposal.
Since there was a dispute with regard to the amount receivable on the auction of 94,400 shares of Kamakshi Housing Finance Ltd. The appellant company could not arrive at any profit or loss on the offer for auction of such shares before the end of Asstt. year ending on 31.3.96, Page 4 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT During the course of assessment proceedings written submissions in this regard were filed under letter dated 19th February, 1999.
However, the Assessing Officer has rejected the appellant company's claim for loss of Rs.14.81 Lacs on sale of 77,200 shares and also considered the disputed auction sale price of Rs.3.50 crores which is inclusive of purchase price of Rs.60,09,478 + Rs.2,90,10,782/ disputed pront in respect of 94,400 shares of Kamakshi Housing Finance Limited, as taxable profit. The Assessing Officer has also initiated penalty proceedings u/s 271(1)(c) of the I.T.Act, and hence this appeal.
3.3 I have considered the facts of the case and the submission made on behalf of the appellant In the statement of facts. It Is seen that the appellant has already earned Income of Rs.2,78,87,250/. The appellant has already shown this Income as profit but credited to Suspense Account. Since it is the income of the appellant, the Assessing Officer was justified in treating this as income of the appellant. Merely, because there are some disputes does not mean that the character of the Income has changed. Therefore, the action of the Assessing Officer is upheld."
7 The respondent assessee being dissatisfied with the order passed by the Commissioner (Appeals) referred to above went in further appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal while allowing the appeal on the point in question held as under:
"13 We have heard the rival submissions, perused the orders of the lower authorities and the material available on record. We find that the undisputed facts of the case are that the assessee, during the year under consideration in the course of business activity, had purchased 418800 shares of KHEL for Rs.2,16,70,945/, The assessee sold 77200 shares out of the said shares for a consideration of Rs.29,93,519/and incurred loss of Rs.14,81,177/. The assessee, in the month of February 1996, participated in the auction of shares at BSE and offered for sale of 94400 shares at an average price of Rs.370/per share for total consideration of Rs.3,50,20,260/. The assessee gave delivery of the shares and the offer of the assessee was accepted. But in 'the meanwhile, vide order dated 9.1.1997 of the BSE on the instruction of SEBI stopped the payment of sale consideration of Rs. 94400 shares for the reason that there was manipulation of share price. Accordingly, on the payout day, three share brokers, namely, S/Shri Bharat B. Shah, Kirit J. Shah and Sharukh N. Tara were not paid the sale consideration for the shares and they, in turn, did not make the payment for the shares to the assessee company. The Page 5 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT assessee made representation to BSE and SEBI and as no positive response was received by the assessee, the assessee company held a special civil application in the High Court of Gujarat which is pending for disposal. In the circumstances, the assessee company did not show the profit earned on sale of 94400 shares at Rs.2,78,87,259/in the profit and loss account but showed the same as liability in the balance sheet under the head "Suspense Account." The Assessing Officer was of the view that as the assessee has given delivery of the shares and has credited the amount of profit earned from the sale of 94400 shares in the suspense account, the income has accrued to the assessee and hence the same was the income of the assessee for the year under consideration. Accordingly, he made the addition for the entire sale consideration of Rs.3,50,15,800/to the income of the assessee. The Ld.CIT(A) confirmed the said order of the Assessing Officer. In these facts and circumstances of the case, we are of the considered opinion that the BSE on the instruction of the SEBI had stopped the payment of sale consideration of 94400 shares on account of manipulation in share price and, therefore, the payment was not made to three brokers through whom the assessee has entered into the sale transaction. Therefore, the brokers also could not make the payment of the sale consideration of the shares to the assessee company. We find that the above fact of non receipt of payment of shares in the above circumstances is not in dispute. We find that a formal restraint order was passed by the SEBI on 9.1.97 and the same is dispute as on date before the Hon'ble Gujarat High Court. Ld. A/R of the assessee submitted before us that the payment for the aforesaid transaction has yet not been received by the assessee and the matter is still in dispute before the Gujarat High Court. The above fact could not be disputed by the Ld. D/R. In the above facts and circumstances in our considered opinion no real income could be treated as accrued in favour of the assessee in respect of the above transaction. In our considered opinion, till the dispute is settled by the Hon'ble Gujarat High Court, it cannot be held that any real income has accrued to the assessee in relation to the aforesaid transaction Our above view finds support from the decision of the Hon'ble Supreme Court CIT Vs. Hindustan Housing & Loan Development Trust, 161 ITR 524(SC) and UCO Bank CIT , 237 IT R 889(SC). Therefore, we set aside the orders of the lower authorities on the issue and direct the AO to delete the addition made of Rs.3,50,15,800/."
8 The Revenue being dissatisfied with the order passed by the Appellate Tribunal is here before this Court with the present appeal.
9 Ms. Mauna Bhatt, the learned senior standing counsel appearing for the Revenue vehemently submitted that the Appellate Tribunal committed a serious error in passing the impugned order. She would Page 6 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT submit that the assessee company indisputably was managing its account according to the mercantile system. The mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system, it is only the actual cash receipt and actual cash payments that are recorded as credits and debits; whereas under the mercantile system, the credit entries are made in respect of the amounts due immediately they became legally due and before they are actually received. According to the learned senior standing counsel, the respondent company actually sold the shares of KHFL and earned profit. The physical delivery of the shares in favour of the brokers had also taken place. The shares were actually sold and the amount realised from the sale proceeds of the shares came to be credited in the account of the brokers. According to the learned senior standing counsel, thereafter, whatever may be the dispute between the brokers and BSE - SEBI, is not relevant. It is argued that the concept of real income would apply where there has been a surrender of income which in theory may have accrued, but, in the reality of the situation, no income had resulted because the income did not really accrue. Mere improbability of recovery, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. It is argued that the mere fact that an amount due to the respondent assessee had been carried to the suspense account and the BSE - SEBI was withholding the payment on account of a pending dispute with the brokers cannot be held to mean that the income had not accrued to the assessee. The date of accrual is the date on which the amount has been accrued by the assessee. It is argued that the date on which the shares were sold and the amount towards the sale proceeds came to be appropriated in the account of the brokers, the income could be said to have been accrued to the assessee as the assessee could be said to have acquired a legal right to receive such amount from its brokers.
Page 7 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021C/TAXAP/912/2008 JUDGMENT 10 In such circumstances referred to above, Ms. Bhatt prays that
there being merit in this appeal, the same be allowed and the substantial question of law as formulated be answered in favour of the Revenue and against the assessee.
11 On the other hand, this Tax Appeal has been vehemently opposed by Mr. Divetia, the learned counsel appearing for the respondent assessee. According to Mr. Divetia, no error, not to speak of any error of law could be said to have been committed by the Appellate Tribunal in passing the impugned order. The learned counsel would submit that the income accrues when it becomes due, but, it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxabilty that income is not hypothetical and it has really accrued to the assessee. According to Mr. Divetia, it is not in dispute that the shares of the KHFL came to be sold by the respondent assessee and the assesse earned profit in the said transaction. However, before the assessee could receive the amount, the accounts of the brokers came to be freezed by the BSE - SEBI and in such circumstances, the assessee company had no other option, but to show the amount out of the said transaction in the "suspense account". According to Mr. Divetia, at best, it could be said that his client earned a hypothetical income which failed to materialise and its money value, therefore, cannot be said to be the income of the assessee.
12 In such circumstances referred to above, the learned counsel appearing for the respondent assessee prays that there being no merit in this Tax Appeal, the same be dismissed and the substantial question of law as formulated may be answered in favour of the assessee and against the Revenue.
Page 8 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021C/TAXAP/912/2008 JUDGMENT 13 Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the only question that falls for our consideration is whether the Appellate Tribunal committed any error in passing the impugned order.
14 Although the payment was deffered in favour of the respondent assessee on account of the dispute raised by the BSE - SEBI with the brokers, yet it cannot be said that the accrual of income was postponed simply because the brokers were unable to realise the amount in favour of the respondent assessee. The income can be held to accrue when the assessee acquired a right to receive that income. In E. D. Sassoon and Co. Ltd. vs. C. I.T. (1 954) 26 ITR 27 : (AIR 1954 SC 470), the principle that income must be held to accrue on the date when a debt becomes due has been affirmed. In C.I.T. vs. K.R.M.T.T. Thiagaraja Chetty (1953) 24 ITR 525 : (AIR 1953 SC 527), it was further held that the mere fact that an amount due to the assessee has been carried to the suspense account and company was withholding payment on account of a pending dispute cannot be held to mean that the income has not accrued to the assessee. The date of accrual is the date on which the right to receive the income has been acquired by the assessee. The assessee herein acquired the right to receive the requisite amount the day the shares came to be sold. The right to receive the requisite amount cannot be said to have arisen on the date when the BSE - SEBI raised the dispute.
15 In the aforesaid context, we may refer to and rely upon a decision of the Supreme Court in the case of Commissioner of Income Tax, Amritsar vs. Shivprakash Janak Raj and Company Private Limited reported in 1996(11) SCC 530. We quote the relevant observations:
Page 9 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT
"9 In State Bank of Travancore v. Commissioner of Income Tax,
Kerala [(1986) 158 I.T.R.102], the facts were the following: the appellantBank maintained its accounts on the basis of mercantile system. It was charging interest on the loans advanced by it. Some of the loans had become "sticky", i.e., their recovery had become extremely doubtful. The Bank, however, charged interest on these loans also, debiting the account of the concerned parties. But instead of carrying the interest amount to the profit and loss account, the appellant remitted the said interest amount to a separate account called "the Interest Suspense Account". In the course of its assessment, the Bank claimed that having regard to the poor financial condition of the said debtors and the poor chances of recovery of interest from them, the interest amount due from them was taken to the "Interest Suspense Account" to avoid showing inflated profits by including hypothetical and unreal income and further that the interest on such sticky advances was not its real Income and, hence, not taxable. Both the Tribunal and the High Court rejected the plea. On appeal, this Court, by majority, Sabyasachi Mukharji and Ranganath Misra,JJ., [Tulzapurkar,J. dissenting] affirmed the decision of the High Court. This Court held that the interest on sticky advances did accrue to the appellantBank according to the mercantile system of accounting and that, indeed, the appellant had debited the respective parties with interest. The appellant, however, did not chose to treat the debt as bad debts but carried the interest amount to the 'Interest Suspense Account". Mere crediting of the said interest amount to, what it called the "Interest Suspense Account", without treating it as a bad debt or irrecoverable interests was repugnant to Section 36 (1)(vii) and Section 32(3) of the Act and that the concept af real income does not help the appellantBank. It was observed that the concept of real income cannot he so read as to defeat the object and the provisions of the Act. Sabyasachi Mukharji,J., in his opinion, discussed all the relevant cases on the subject including Morvi Industries Limited and Birla Gwalior (P) Ltd. as well as the derision of this Court in Shoorji Vallabhdas & Co. and stated the proposition emerging therefrom in the following words:
"(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be Judged in the light of the reality of the situation.
2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue.
(3) Where a debt has become bad, deduction in compliance with Page 10 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT the provisions of the Act should be claimed and allowed.
(4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act.
(5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee.
(6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not.
(7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee.
(8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within wellrecognised limits."
To the argument of real income pressed with great persistence in that case, the learned Judge responded in the following words:
"We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is a wellaccepted one and must be applied in appropriate cases but with circumspection and must not Be called in aid to defeat the fundamental principles of the law of incometax as developed."
10 We respectfully agree with the propositions as well as the observations of the learned Judge with respect to the plea of real income."
16 We may also refer to a Division Bench decision of the Bombay High Court in the case of Meherbai N. Sethna vs. Commissioner of Incometax reported in 1994(209) ITR 453. We quote the relevant observations:
Page 11 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021C/TAXAP/912/2008 JUDGMENT "2. The assessee is an individual. The assessment year is 197576. The controversy relates to includibility of dividend and interest income which accrued to the assessee in Ceylon in computation of his income under the Incometax Act, 1961, for the assessment year under consideration. The contention of the assessee is that in view of the restrictions on remittance from Ceylon to India during the relevant assessment year, the amount of dividend and interest is not includible in the computation of his income. This contention of the assessee was rejected by the Incometax Officer. The appeals of the assessee against the orders of the Incometax Officer were also rejected by the Appellate Assistant Commissioner and the Incometax Appellate Tribunal. Hence this reference at the instance of the assessee.
3. We have carefully considered the contention of the assessee. We, however, do not find any merit in the same. There is no dispute in regard to the accrual of income to the assessee from dividend and interest during the year under consideration in Ceylon. Nor is there any dispute regarding the existence of restrictions in Ceylon on remittance of money to India during the relevant year. The only controversy is regarding the effect of such restriction on accrual of income to the assessee or includibility of the same in the computation of income of the assessee. In our opinion, section 5 of the Act provides a complete answer. Section 5 deals with the scope of total income. It provides :
"Subject to the provision of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year."
4. The uncontroverted facts of this case are that (i) the assessee is a resident in India and (ii) the income from dividend and interest accrued to him during the year under consideration in Ceylon. Such income clearly falls within the scope of his total income in view of section 5 of the Act. The only ground on which the assessee objects to its inclusion in his total income is the restrictions in Ceylon on the remittance of money to India. This factor, in our opinion, does not have any bearing on the computation of total income of the assessee. Despite such restriction, income which accrued to the assessee outside India falls within the scope of total income under section 5 of the Act. Accrual of income outside India in the previous year is the only relevant factor. This view of ours also gets support from section 220(7) of the Act which reads :
"Where an assessee has been assessed in respect of income arising Page 12 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT outside India in a country the laws of which prohibit or restrict the remittance of money to India, the Incometax Officer shall not treat the assessee as in default in respect of that part of the tax which is due in respect of that amount of his income which, by reason of such prohibition or restriction, cannot be brought into India, an shall continue to treat the assessee as not in default in respect of such part of the tax until the prohibition or restriction is removed."
5. It is clear from the above subsection that it is intended to mitigate the hardship that may be caused to the assesses who are assessed in respect of income arising to them outside India in a country the laws of which prohibit or restrict the remittance of money to India by relieving them from the obligation to pay the tax which is due in respect of such income until the removal of the prohibition or restriction on remittance. It was necessitated only because in the case of a person who is a resident, income arising outside Indian forms part of his total income under sections 5 of the Act notwithstanding the existence of any restriction or prohibitions in such country on its remittance to India. We are, therefore, of the clear opinion that in the instant case notwithstanding the restrictions imposed by the Ceylon Government on remittance, the whole of the dividend of Rs. 9,353 and interest of Rs. 410 which accrued to the assessee during the relevant previous year in Ceylon is liable to be assessed in his hands for the assessment year 197576."
17 The Supreme Court in the case of Godhra Electricity Co. Ltd. vs. Commissioner of Incometax [1997] 25 ITR 746 (SC) has very succinctly explained the position of law as regards the concept of real income. We quote the relevant observations:
"10 Under the Act income charged to tax is the income that is received or is deemed to be received in India in the previous year relevant to the year for which assessment is made or on the income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method or accounting with the method or accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis i.e. accrual of the right to receive payment and the accrual of the liability to disburse or pay. In commissioner of Income tax Bombay cityI v. Messrs. Shoorji Vallabhdas and co.(supra) it has been laid down : "Income tax is a levy on income no doubt the Income Tax act takes Page 13 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT into account two points of time all 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."[P. 148] This principle is applicable whether the accounts are maintained on case system or under the mercantile system. If the accounts are maintained under the mercantile system what has to be seen is whether income can be said to have really accrued to the assesseecompany. in H.M. Kashiparekh & co. ltd. v. commissioner of Income Tax (1960) 39 ITR 706 the Bombay High court had said : "Even so, (the failure to produce account losses we shall proceed on the footing that the assessee company having followed the mercantile system of account there must have been entries made in its books in the accounting year in respect of the amount of commission in our judgment we would not be justified in attaching any particular importance in this case to the fact that the company followed mercantile system of accounting. They would not have any particular bearing in applying the principle of real income in the facts of this case".
The said view was approved by this court in commissioner of Income Tax v. Birla Gwalior (p) Ltd. (supra) where the assessee maintained its accounts on the mercantile system. In that case this court after referring to the decision in Morvi Industries Ltd. V. commissioner of Income Tax, (1971)82 ITR 835 which was also a case where the accounts were maintained on mercantile system has said : "Hence it is clear that this court in Morvi Industries case did emphasise the fact that the real question for decision was whether the income had really accrued of not it is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income "[p. 273] In Poona Electric supply co. Ltd. V. commissioner of Income Tax Bombay cityI (supra ) this court has said : "Income tax is a tax on the real income i.e. the profits arrived at on commercial principles subject to the provisions of the income tax act."
In that case the court has approved the following principle laid down by the Bombay High court in H.M. Kashiparekh & co. Ltd. v. commissioner of Income tax (supra): "The principle of real income is not to be so subordinated as to Page 14 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT amount virtually to a negation of it when a surrender or concession or rebate in respect or managing agency commission is made agreed to or given on grounds of commercial expediency simply because it takes place some time after the close of an accounting year In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it will lay greater emphasis on the business aspect of the matter viewed as whole when that can be done without disregarding statutory language."
In state bank of Travancore v. commissioner of income tax Kerala (supra ) after considering the various decisions of this court sabyasachi Mukharji J. (as the learned chief justice then was ) has said : "An acceptable formula of co relating the notion of real income in conjunction with the method of accounting for the purpose of taxation is difficult to evolve besides any strait jacket formula is bound to create problems in its application to every situation it must depend upon the facts and circumstances of each case when and how does an income accrue and what are the consequences that follow from actual of income as well settled the accrual must be real taking in go account the actuality of the situation whether an accrual has taken place or not must in appropriate cases be judged on the principles of real income theory After accrual non charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted in determining the question whether it is hypothetical income or whether real income has materialised or not various factors will have to be taken into account it would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only what has really accrued to the assessee has to be find out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made "no income ." [P. 154] 11 If the matter is examined in the light of the aforementioned principles laid down by this court it must be held that even thought the assesseecompany was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers no real income had accrued to the assessee company in respect of those enhanced charges in view of the fact that soon Page 15 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021 C/TAXAP/912/2008 JUDGMENT after the assesseecompany decided to enhance the rates in 1963 representative suits (civil suits Nos. 152 of 1963 and 50 of 1964) were filed by the consumers which were decreed by the trial court and which decree was affirmed by the appellate court and learned single judge of the High court and it is only on December 3 1968 that the letters patents Appeals filed by the assesseecompany were allowed by the division bench of the high court and the said judgment by the consumers in this court and the same were dismissed by the judgment of this court and the same were dismissed by the judgment of this court dated February 26 1969. shortly thereafter on march 19 1969 the under secretary to the Government of Gujarat wrote a letter advising the assesseecompany to maintain the status quo for the rates to the consumers for at least six moths and the chief Electrical inspector was directed to go through the accounts of the assesseecompany from year to year and to report to the Government about the actual position about the reasonable returns earned by the assesseecompany on may 16 1969 another representative suit (suit no 118 of 1969) was filed by the consumers wherein interim injunction was granted bu the court and which was finally decreed in favour of the consumers on June 23 1974 it would thus appear that after the decision was taken by the assesseecompany to enhance the charges it was not able to realise the enhanced charges on account of pendency of the earlier representative suits of the consumers followed bu the letter of the under secretary to the government of Gujarat and the subsequent suit of the consumers and during the pendency of the subsequent suit the management of the undertaking of the assesseecompany was taken over by the Government of Gujarat under the Defence of India rules 1971 and the undertaking was subsequently transferred to the Gujarat state Electricity Board."
"14 The question whether there was real accrual of income to the assesseecompany in respect of the enhanced charges for supply of electricity has to be considers by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light it is not possible to hold that there was real accrual of income to the assesseecompany in respect of the enhanced charges for supply of electricity which were added by the income tax officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant commissioner was right in deleting the said addition made by the income tax officer and the tribunal had rightly held that the claim at the increased rates as made by the assesseecompany on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the income tax officer did represent the income which had really accrued to the assesseecompany during the relevant previous years. The High court in our option was in error in upsetting the said view of the Tribunal."Page 16 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021
C/TAXAP/912/2008 JUDGMENT 18 Having regard to the aforesaid discussion, we are of the view that
the Appellate Tribunal committed an error in passing the impugned order.
19 In the result, this appeal succeeds and is hereby allowed. The impugned order passed by t he Appellate Tribunal is hereby quashed and set aside. The substantial question of law as formulated is answered in favour of the Revenue and against the assessee.
(J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) CHANDRESH Page 17 of 18 Downloaded on : Mon Feb 15 06:04:26 IST 2021