2025 (2) TMI 221 - AT - Income Tax

Electricity company cannot be taxed on disputed charges not actually received despite book entries

ITAT Chennai held that income accrues only when assessee acquires right to receive it, not merely through book entries. Following SC precedents in Godhra ... Accrual of income - mercantile system of accounting - Income relating to the unaccepted data - HELD THAT:- it is well settled that income can be said to accrue only when the assessee acquires a right to receive that income [C.IT V. Ashok Bhai [1964 (10) TMI 11 - SUPREME COURT]] and such accrual may depend on the agreements which may give rise to such rights. AR cited the decision in Godhra Electricity Co. Ltd. [1997 (4) TMI 4 - SUPREME COURT] wherein the Hon’ble Supreme Court reiterated the concept of ‘real income’, emphasizing that even under the mercantile system, a mere claim by the assessee is not sufficient to make income accrue on the basis of ‘hypothetical income’ - the income must actually become due. Although the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the representative suits filed by the consumers which were decreed by the court and ultimately, after various proceedings which took place, the assessee- company had not been able to realize the enhanced charges. Since no real income having accrued, it was held that the amount due on enhancement was not assessable to Income Tax. In a subsequent decision rendered in CIT v. Bokaro Steel Ltd. [1998 (12) TMI 4 - SUPREME COURT] following its earlier decision in Godhra Electricity Co. Ltd.’s case [1997 (4) TMI 4 - SUPREME COURT] affirmed the decision of the Patna High Court wherein it was held that the entry in the books of account shown as income from Hindustan Steel Ltd. for the 8 locomotives supplied by the assessee-company to them could not be brought to tax as income since this entry reflected ‘hypothetical income’ and only the real income could be brought to tax. In CIT v. Modi Rubber Ltd [1997 (9) TMI 92 - DELHI HIGH COURT] held that a mere unilateral act of the assessee debiting the books of account, the liability for payment whereof was not accepted or agreed to by the debtor, did not amount to income accrued to the assessee. No infirmity in the impugned order of the Ld.CIT(A) deleting the addition - Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this judgment was whether the income of Rs. 2,01,77,597/- should be added to the assessee's taxable income for the Assessment Year 2013-14. This issue arose from the agreement between the assessee and M/s. Lexis Nexis, where the Assessing Officer (AO) believed that the income had accrued to the assessee under the mercantile system of accounting, despite the assessee's claim that the income had not been realized due to non-acceptance of the data by M/s. Lexis Nexis.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework revolved around the principles of income accrual under the mercantile system of accounting. The precedents considered included the Supreme Court decisions in Ashokbhai Chimanbhai vs. CIT and CIT vs. Goverdhan Ltd., which emphasize that income accrues only when the right to receive it is established. The concept of 'real income' versus 'hypothetical income' was central, as highlighted in Godhra Electricity Co. Ltd. v. CIT and CIT v. Bokaro Steel Ltd.Court's Interpretation and ReasoningThe Tribunal interpreted the terms of the agreement between the assessee and M/s. Lexis Nexis, particularly focusing on the clauses related to compensation and the conditions under which payments were to be made. The Tribunal found that the income claimed by the AO as accrued was contingent upon the acceptance of data by M/s. Lexis Nexis, which had not occurred. Therefore, the Tribunal reasoned that the income in question was hypothetical and did not meet the criteria for accrual under the mercantile system.Key Evidence and FindingsThe key evidence included the agreement dated 19.05.2011, the invoices raised by the assessee, and the Form 26AS showing the actual payments made by M/s. Lexis Nexis. The Tribunal noted that the assessee had only received payment for the judgments that were accepted by M/s. Lexis Nexis, totaling Rs. 1,13,09,280/-, and that no further income had accrued as the additional data was not accepted.Application of Law to FactsThe Tribunal applied the legal principles of income accrual to the facts, determining that the income could not be considered accrued simply because it was mentioned in the agreement. The actual realization of income depended on the acceptance of the data, which was a condition precedent for the accrual of income as per the agreement.Treatment of Competing ArgumentsThe Tribunal considered the AO's argument that the entire balance of Rs. 3,14,86,877/- should be accrued based on the agreement. However, it found that the AO failed to consider the conditional nature of the payment terms, which required acceptance of the data. The Tribunal agreed with the assessee's argument that income can only accrue when there is a right to receive it, which was not the case here due to the lack of acceptance by M/s. Lexis Nexis.ConclusionsThe Tribunal concluded that the addition of Rs. 2,01,77,597/- by the AO was incorrect as the income had not accrued to the assessee. The Tribunal upheld the decision of the Ld.CIT(A) to delete the addition.SIGNIFICANT HOLDINGSCore Principles EstablishedThe judgment reinforced the principle that income accrues only when there is a right to receive it, and this right is contingent upon the fulfillment of conditions stipulated in agreements. The concept of 'real income' was emphasized, distinguishing it from 'hypothetical income' that does not meet the criteria for taxation under the mercantile system.Final Determinations on Each IssueThe Tribunal determined that the income of Rs. 2,01,77,597/- did not accrue to the assessee in the Assessment Year 2013-14, as the conditions for its accrual were not met. Consequently, the Tribunal dismissed the Revenue's appeal and upheld the deletion of the addition by the Ld.CIT(A).