CIT vs. Excel Industries Ltd (Supreme Court)

DATE: (Date of pronouncement)
DATE: October 9, 2013 (Date of publication)

Click here to download the judgement (excel_income_accrual.pdf)

(i) Q whether income has accrued must be considered from a realistic & practical angle (ii) If Dept has accepted adverse verdict in some years, it cannot be allowed to challenge verdict in other years (iii) disputes as to the year of taxability with no/ minor tax effect should not be raised by Dept

Pursuant to the import-export policy of the Government, the assessee was entitled to make duty free imports of raw materials in respect of the exports made by it. The assessee accounted for the benefit of the entitlement to make duty free imports in the year of export but claimed that the benefit was not chargeable to income-tax in the year in which the exports were made but it was chargeable to tax only in the year in which the imports were availed of and the raw materials consumed. The AO rejected the contention and held that as the assessee was following the mercantile system of accounting, the right to receive the benefit accrued as soon as the export obligation was fulfilled and it was chargeable to tax in that year u/s 28(iv). On appeal, the CIT(A), Tribunal and High Court upheld the assessee’s stand. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

(i) Three tests have been laid down by various decisions of the Supreme Court to determine when income can be said to have accrued: (a) whether the income is real or hypothetical; (b) whether there is a corresponding liability of the other party to pay the amount to the assessee & (c) the probability or improbability of realisation of the income by the assessee has to be considered from a realistic and practical point of view. Applying these tests, on facts, even if it is assumed that the assessee was entitled to the benefits under the advance licences 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 are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. Also, from a realistic and practical point of view (the assessee may not have made imports), no real income accrued to the assessee in the year of exports and s. 28(iv) would be inapplicable. Essentially, the AO is required to be pragmatic and not pedantic (Shoorji Vallabhdas 46 ITR 144 (SC), Morvi Industries 82 ITR 835 (SC) & Godhra Electricity Co 225 ITR 746 (SC) followed);

(ii) Further, as 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, it cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it (Radhasoami Satsang 193 ITR 321 (SC) & Parashuram Pottery Works 106 ITR 1 (SC) followed);

(iii) Further, as the dispute was only as to the year of taxability and as the rate of tax remained the same the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. 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. It is hoped that the Revenue implements its litigation policy a little more practically and a little more seriously.

4 comments on “CIT vs. Excel Industries Ltd (Supreme Court)
  1. very sensible judgement. I wonder why tax man wastes public exchequer monies in litigation when if you can apply common sense on laws or f or any law as such administrator can do a better job after all law makers do not make laws on the basis of any special intelligence other than common sense.
    Laws of not made on common sense then we have to appoint all kinds of scientists in tax department or only super lawyers with terrible scientific background, I think

    again if so voters need to elect only super scientists or super lawyers while on election as every party needs to make such candidates to contest.

    soon there will be no democracy but some dictatorship that is what Lord Macaulay predicted what will happen, may be his premonition is coming true.

    great you are taxmen and you need all Bharat Ratnas are reserved to you especially . may Lord bless you!

    • Aloke Kaumar Ghosh says:

      I fully agree with your assessment on the attitude of I T Authorities. They have been borne to apply their own views on a simple matter despite using common sense which may lawfully help the tax payers. really they are great and Ministry should henceforth appoint some great scientists to innovate the ways and means to negate the judgments passed by the Hon’ble High Court / Supreme Court

  2. Ashok Garg says:

    A very welcome judgement indeed. While lot could be said in favour of Revenue as well, but the approach suggested by Hon’ble Court would go a long way in encouraging tax payers’ voluntary compliance, which is in short-supply in India.

    This decision of the Hon’ble Court should also be taken note of by the law making bodies in respect of transactions where the consideration is actually “received”, at times, a few years later. For example- in case of Land Development Agreements / collaboration agreements, the revenue/ consideration to the land owner comes generally not earlier than 3 years, but the land owner is expected to pay tax at the time he hands over the possession of the land to the developer in pursuance of the Development Agreement. In large number of cases (in majority of cases), disputes arise and the matters are settled otherwise.
    On the other hand , Mercantile System of Accounting is becoming complicated not only because of increasing complexities of business models, but also because of ‘accounting guidelines’ being issued. While conservatism in recognizing revenue appears to be sensible, ‘accounting standards’ being prescribed for booking expenses are becoming irrational, in the name of conservatism and prudence. For example – accounting ‘lease rent liability’ by equalizing the liability over the entire period of lease. The Institute should take guidance from this judgement while laying down accounting standards. While in this judgement the Court rightly pointed out that the assessee may never en-cash the benefit of import entitlements, the accounting standards for ‘lease rent liability’ does not take into account similar situations, like – premature termination of the lease.
    One could indeed argue that the purpose of financial accounting is also to inform the stakeholders (other than owner) about the health of the business, but does it not disproportionately increase the requirements of record keeping? Say, one for creditors, and another for tax department, and yet another for the Owners. Increased ‘accounting load’ and ‘compliance cost’ benefits, it is felt by businessmen, none other than the professionals.
    Professionals also need to introspect.

  3. see sirs every section reading and understanding is like the gap between idealiation and decoding so it takes years to understand a section properly that cannot be provided by getting some college LL.B and LL.M degrees why even PhD and the like too, so court ask how many years you did practice, without sensible practice no advocate too can help by showing so many blessed degrees and diplomas, is a world known truth :

    So just LL.B or B.L is enough if u have long standing practice or /and daily reading lot of material relating to your area of practice even then you are not thorough how just all india service on its own provide;

    All India services mean one has secured special real capabilities in chosen area that is not so easy so only highly \really experienced officers are given top positions is it not a rationale?

    sorry one cannot go by university educational diplomas and degrees is a time immemorial guidance,

    sorry to remind!

    otherwise face music in life, good Luck india service man!

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