2013 (10) TMI 324 - SC - Income Tax

Income under Section 28(iv) accrues on actual duty-free imports, not at export time, says SC ruling

Commissioner of Income Tax Versus M/s Excel Industries Ltd. and Mafatlal Industries P. Ltd.

The SC held that income under Section 28(iv) accrues not at the time of export but when duty-free imports are actually made. The entitlement to import ... Accrual of Income - mercantile system of accounting - Applicability of Section 28(iv) - whether the benefit of an entitlement to make duty free imports of raw materials obtained by the assessee through advance licences and duty entitlement pass book issued against export obligations is income in the year in which the exports are made or in the year in which the duty free imports are made - Held that:- income does not accrue in the year of export but in the year in which the imports are made. 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. There is 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, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, 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. - Decided against the revenue. ISSUES: Whether the benefit of entitlement to make duty free imports of raw materials obtained through advance licences and duty entitlement pass book issued against export obligations constitutes income in the year in which the exports are made or in the year in which the duty free imports are made.Whether Section 28(iv) of the Income Tax Act, 1961 applies to such benefits at the time of export obligation fulfillment or at the time of actual import and consumption of raw materials.Whether income tax can be levied on hypothetical income arising from entitlement to duty free imports before actual importation and consumption.Whether the principle of consistency and finality in taxation applies to repeated assessment years where a fundamental aspect has been decided in favour of the assessee. RULINGS / HOLDINGS: The income does not accrue in the year of export but in the year in which the imports are made, as the benefit becomes real only upon actual import and consumption of raw materials.Section 28(iv) of the Income Tax Act, 1961, which taxes 'the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession,' is inapplicable until the benefit is real and not hypothetical.Income tax cannot be levied on hypothetical income; income accrues only when it becomes due and is accompanied by a corresponding liability of the other party to pay that amount, which does not arise until the goods are actually imported.Where a fundamental aspect permeates different assessment years and has been consistently decided in favour of the assessee, it is inappropriate to reopen the issue in subsequent years absent any material change justifying a different view. RATIONALE: The Court applied the well-settled legal principle that income accrues when it becomes due and there is a corresponding liability on the other party, citing precedents including Commissioner of Income Tax v. Shoorji Vallabhdas and Co., Morvi Industries Ltd. v. Commissioner of Income-Tax, and Godhra Electricity Co. Ltd. v. Commissioner of Income Tax.The Court emphasized the distinction between real income and hypothetical income, holding that tax liability arises only on real income, not on contingent or hypothetical benefits.It noted the consistent view taken by the Income Tax Appellate Tribunal and lower authorities since assessment year 1992-93, which was not successfully challenged in higher courts, invoking principles akin to res judicata to prevent repetitive litigation.The Court underscored the practical approach required in tax assessments, rejecting a pedantic interpretation that would tax hypothetical benefits before realization.The Court also considered the fact that the benefits were taxed in the year of actual import and consumption, and that the tax rates remained unchanged, rendering the dispute academic with minimal fiscal impact.