Hypothetical Income Not Taxable, Reiterates Guj HC [Read Order]

The High Court of Gujarat has reiterated that for the purpose of taxability, income should not be hypothetical but should have accrued to the assessee in the year under consideration.

A bench of Justice J B Pardiwala and Justice Bhargav D Karia said so while refusing to interfere with the May 2019 order of the Income Tax Appellate Tribunal confirming the order of Commissioner of Income Tax for deleting the addition of Rs.4,42,72,610 as income of the assessee for assessment year 2010-11in holding carbon receipts as capital receipts?"

The bench dismissed the appeal filed by the Revenue.

In doing so, the high court took note that a similar issue had arose in the case of very same assessee with regard to assessment for the year 2009­10.

The Revenue had then also challenged the order of CIT(A) deleting the addition of Rs.5,78,28,058 to the income of the assessee by observing that as there was no transfer/sale of the carbon receipts during the year under consideration and therefore, the same cannot be included in the year consideration.

Back then, the court had held that "it cannot be said that the learned CIT(A), as well as the learned Tribunal, have committed any error in deleting the addition of Rs.5,78,28,058 and holding that as neither the carbon receipts were sold and/or transferred in favour of foreign companies in the year under consideration, the same cannot be included as receipt/income in the year under consideration".

The bench had referred to the Supreme Court decision in Commissioner of Income Tax vs. Excel Industries Limited in which case the question before the court was whether advance license benefit and the Duty Entitlement Pass Book (DEPB) benefits were taxable in the year in which the same were actually utilized by the assessee or in the year of receipts.

In Excel Industries Limited case, the apex court had referred to its own decision in Commissioner of Income Tax vs. Shoorji Vallabhdas and Co. to say that "First of all, it is now well settled that income tax cannot be levied on hypothetical income".

In Shoorji Vallabhdas and Co's case, it was held that "Income Tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at 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 bookkeeping, an entry is made about a 'hypothetical income', which does not materialise.

"Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."

The Supreme Court had also held in Excel Industries Limited case that, "…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 taxability that the income is not hypothetical and it has really accrued to the assessee".

The bench had also noted that in Godhra Electricity Co. Ltd. vs. Commissioner of Income Tax, the SC had reiterated the view taken in Shoorji Vallabhdas and Morvi Industries and came to the conclusion that that no real income had accrued to the assessee in respect of the enhanced charges (for electricity supply) for a variety of reasons.

"One of the reasons so considered was a letter addressed by the Under Secretary to the Government of Gujarat, to the assessee whereby the assessee was "advised" to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but one has to look at things from a practical point of view. This Court took the view that the probability or improbability of realisation has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity," the SC had noted.

Click here to download the Order