Disputed income not taxable if not accrued: High Court ruling on tax liability.

The High Court held that disputed income is not exigible to tax if it has not accrued to the assessee. Emphasizing the principle that income accrues when it becomes due and is accompanied by a corresponding liability to pay, the Court ruled in favor of the assessee. As the disputed income did not create a corresponding liability for payment by the other party, it was not taxable. The Court overturned the Tribunal's decision and disposed of the appeal in favor of the assessee without costs.

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Issues:
1. Whether disputed income is exigible to tax when it has not accrued to the assesseeRs.

Analysis:
The Tax Appeal under section 260A of the Income Tax Act, 1961 was filed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad, raising the issue of whether disputed income is taxable when it has not accrued to the assessee. The assessee was awarded a contract for compression of natural gas services by ONGC. Due to a dispute, the assessee only showed 50% of the contractual amount as income in the return. The Assessing Officer considered the entire income as taxable since it had accrued, leading to an appeal before the CIT(A) and subsequently the Tribunal, which upheld the decision. The main contention was whether under the mercantile system of accounting, only real income can be taxed, not hypothetical income.

The learned Senior Advocate for the assessee argued that taxing income that had not accrued due to a dispute was erroneous. He emphasized that only real income, not hypothetical income, should be taxed under the mercantile system of accounting. On the other hand, the Standing Counsel for the Revenue contended that since the accrued income was not shown in the return, the Tribunal's decision was justified. The Tribunal and revenue authorities added the accrued income based on the completion of work and billing, despite the actual income not being received by the assessee.

The High Court referred to the principle established by the Supreme Court in the case of Commissioner of Incometax v. Excel Industries Ltd., emphasizing that income accrues when it becomes due and is accompanied by a corresponding liability of the other party to pay the amount. In this case, as ONGC disputed the liability, there was no corresponding liability on ONGC to pay the accrued amount to the assessee. Therefore, the disputed income was not exigible to tax. The Court held that until a corresponding liability arises for payment, the income cannot be considered taxable. Consequently, the Court ruled in favor of the assessee, quashing the Tribunal's decision and disposing of the appeal in favor of the assessee without costs.

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