The assessee computed the capital gains on sale of shares taking into account the proportion of the total consideration which included the escrow amount which had not been received by the time returns were filed but were received by the promoters but were still parked in the escrow account. The income declared by the assessee was accepted in the scrutiny assessment. The assessee stated that subsequent to the sale of the shares certain statutory and other liabilities arose for the period prior to the sale of the shares and according to the agreement, certain amount was withdrawn from the escrow account and it did not receive the amount. The assessee filed an application under section 264 before the Principal Commissioner and submitted that the capital gains were to be recomputed accordingly reducing the proportionate amount from the amount deducted from the escrow account and that an application under section 264 was filed since the assessment had been completed by the time the amount was deducted from the escrow account. The Principal Commissioner rejected the assessee’s application. On writ  allowing the petition the Court held that  that capital gains was computed under section 48 of the Act by reducing from the full value of consideration received or accrued as a result of transfer of capital asset, cost of acquisition, cost of improvement and cost of transfer. The real income (capital gains) could be computed only by taking into account the real sale consideration, i. e., sale consideration after reducing the amount withdrawn from the escrow account. The amount was neither received nor accrued since it was transferred directly to the escrow account and was withdrawn from the escrow account. When the amount had not been received or accrued it could not be taken as full value of consideration in computing the capital gains from the transfer of the shares of the assessee. The purchase price as defined in the agreement was not an absolute amount as it was subject to certain liabilities which might have arisen on account of certain subsequent events. The full value of consideration for computing capital gains would be the amount which was ultimately received after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement. The liability as contemplated in the agreement should be taken into account to determine the full value of consideration. Therefore, if the sale consideration specified in the agreement was along with certain liability, then the full value of consideration for the purpose of computing capital gains under section 48 of the Act was the consideration specified in the agreement as reduced by the liability. The full value of consideration under section 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability was to be regarded as a subsequent event, it ought to be taken into consideration in determining the capital gains chargeable under section 45. Such reduced amount should be taken as the full value of consideration for computing the capital gains under section 48. If income did not result at all, there could not be a tax, even though in book keeping, an entry was made about hypothetical income which did not materialize. Therefore, the Principal Commissioner ought to have directed the Assessing Officer to recompute the assessee’s income irrespective of whether the computation would result in income being less than the returned income. CIT v. Shoorji Vallabhdas and co.(1962) 46 ITR 144 (SC), relied. Court also held that   reliance by the Principal Commissioner on the provisions of section 240 to hold that he had no power to reduce the returned income was erroneous because the circumstances provided in the proviso to section 240 did not exist. The proviso to section 240 only provides that in case of annulment of assessment, refund of tax paid by the assessee according to the return of income could not be granted to the assessee. The only thing that was sacrosanct was that an assessee was liable to pay only such amount which was legally due under the Act and nothing more. Therefore, the assessee was entitled to refund of excess tax paid on the excess capital gains.

Section 264 of the Income-tax Act, 1961 does not restrict the scope of powers of the Principal Commissioner to restrict relief to an assessee only to the returned income. Where the income can be said not to have resulted at all, there is neither accrual nor receipt of income even though an entry might, in certain circumstances, have been made in the books of account.

It is the obligation of the Department to tax an assessee on the income chargeable to tax under the Act but if higher income is offered to tax, it is the duty of the Department to compute the correct income and grant the refund of taxes erroneously paid by the assessee. There is no provision in the Act which provides, if the assessed income is less than the returned income, the refund of the excess tax paid by the assessee would not be granted to the assessee. If the returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to refund of excess tax paid by it. (AY.2011-12)