CIT vs. Excel Industries Ltd. and Ors. [2013] 358 ITR 295 (SC)
Advance Licence Benefit and Duty Entitlement Pass Book Benefit-Income does not accrue when the benefit becomes vested but accrues when imports are actually made. The assessee maintained its accounts on a mercantile basis. In its return (revised on 31st March, 2003) the assessee claimed a deduction of Rs. 12,57,525 under the head advance licence benefit receivable.
The assessee also claimed a 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 the relevant import and export policy by way of reduction from raw material consumption.
According to the assessee, the amounts were excluded from its total income since they could not be said to have accrued until imports were made and the raw material consumed. During the assessment proceedings, the assessee relied upon a decision of the Income-tax Appellate Tribunal in Jamshri Ranjitsinghji Spinning and Weaving Mills Ltd. vs. IAC [1992] 41 ITD 142 (Mum) and also the order of the Commissioner of Income-tax (Appeals) in its own case for the assessment years 1995-96 to 1997-98.
By his order dated 24th March, 2004, the Assessing Officer did not accept the assessee’s claim on the ground that the taxability of such benefits was covered by section 28(iv) of the Income-tax Act, 1961 which provides that the value of any benefit or perquisite, whether convertible into money or not, arising from a business or a profession is income. According to the Assessing Officer, along with an obligation of export commitment, the assessee gets the benefit of importing raw material duty free. When exports are made, the obligation of the assessee is fulfilled and the right to receive the benefit becomes vested and absolute, at the end of the year.
In the year under consideration, the export obligation had been made and the accounting entries were based on such fulfillment. The Assessing Officer distinguished Jamshri on the ground that it pertained to the assessment year 1985-86 when the export promotion scheme was totally different and the taxability of such a benefit was examined only with reference to section 28(iv) of the Act but in the present case the taxability of such benefit was examined from all possible angles as it formed part of the profits and gains of business according to the ordinary principles of commercial accounting. The assessee took up the matter in appeal and by an order dated 15th September, 2008, the Commissioner of Income-tax (Appeals) referred to an earlier appellate order in the case of the assessee relevant to the assessment years 1999-2000 and 2000-01 and following the conclusion arrived at in those assessment year, the appeal was allowed and it was held that the advance licence benefit receivable amounting to Rs. 12,57,525 and duly entitlement pass book benefit of Rs. 4,46,46,976 ought not to be taxed in this year.
Reliance was also placed on the order of the Income-tax Appellate Tribunal in the assessee’s own case for the assessment year 1995-96. Feeling aggrieved, the Revenue preferred an appeal before the Income-tax Appellate Tribunal, which referred to the issues raised by the Revenue and by its order dated 29th April, 2011, dismissed the appeal upholding the view taken by the Commissioner of Income-tax (Appeals).
The Tribunal held that the issued were covered in favour of the asseessee by earlier orders of the Tribunal in the assessee’s own cases. It had been held by the Tribunal in the earlier cases that income does not accrue until the imports are made and raw materials are consumed by the assessee. As regards the accounting year under consideration, it was found that there was no dispute that it was only in subsequent year that the imports were made and the raw materials consumed by the assessee.
The Tribunal also took the note of the fact in the assessee’s own cases starting from the assessment year 1992-93 onwards these issues had been consistently decided in its favour. It was also noted that for some of the assessment years, namely, 1993-94, 1996-97 and 1997-98 appeals were filed by the Revenue in the Bombay High Court but they were not admitted. Under the circumstances, the Tribunal affirmed the decision of the Commissioner of Income-tax (Appeals) on the issues raised.
The Revenue then preferred an appeal under section 260A of the Act in respect of the following substantial question of law:
“Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal is justified in law in holding by following its decision in the case of Jamshri Ramjitsinghji Spinning and Weaving Mills Ltd. vs. IAC [1992] 41 ITD 142 (Mum), that advance licence benefit and the DEPB benefits are taxable in the year in which these are actually utilised by the assessee and not in the year of receipts ?” By the impugned order, the High Court declined to admit the appeal filed by the Revenue under section 260A of the Act.
On further appeal to the Supreme Court by the Revenue, the Supreme Court observed that it was well settled that Income-tax cannot be levied on hypothetical income Referring to its decision in CIT vs. Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC) and Morvi Industries Ltd. vs. CIT (Central) (1971) 82 ITR 835 (SC) in this regards, the Supreme Court noted that it has been further held, and in its view, more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount”.
According to the Supreme Court therefore, income certainly 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 Supreme Court held that, so far as the present case was concerned, even if it was assumed that the assessee was entitled to the benefits under the advance licence as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods were actually imported and made available for clearance.
The benefits represented, at best, a hypothetical income which may or may not materialise and its money value was, therefore, not the income of the assessee. Referring to its decision of Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 756 (SC) and applying the three tests laid down by various decisions of the apex court, namely, whether the income accrued to the assessee is real or hypothetical ; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made ; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), the Supreme Court held that, it was quite clear that in fact no real income but only hypothetical income had accrued to the assessee and section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case.
The Supreme Court further held that, as noted by the Tribunal, a consistent view had been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee, and consequently, there was no reason for if to take a different view unless there were very convincing reasons, none of which were been pointed out by the learned counsel for the Revenue.
The Supreme Court observed that, it appeared from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assess- ment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, according to the Supreme Court, the Revenue could not be allowed to flip- flop on the issue and it ought let the matter rest rather than spend the taxpayers’ money in pursuing litigation for the sake of it.
Lastly, the real question was the year in which the assessee was required to pay tax. The Supreme Court noted that there was no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, the Rev- enue had not been deprived of any tax. Further, since that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year, the dispute raised by the Revenue was entirely academic or at best may have a minor tax effect. According to the Supreme Court, there was, therefore, no need for the 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 the public coffers.
