Blog # 26. Concept of Real Income under the Income Tax Act, 1961

 

1. What is Income ?

• Before understanding the concept of Real Income, it shall be important to go through the the term “Income” and “Real”.
• Income is defined under S.2(24) of the Income Tax Act, 1961(Hereinafter referred as “the Act”).
• The definition as provided under the Act is an inclusive definition so as to cover up all the usual as well as unusual items, however it certainly does not define it in a way that we can be said it to be precise.
• The same can be understood by various Judge Made Laws. The first and the lead amongst them is a Privy Council Judgment in the case of
  • KamakshyaNarain Singh CIT 11 ITR 513 (PC)

        Facts

• The assesse was a “Raja” gave mining lease and He received payments by way of royalty for coal mines leased out to various lessees.
• The case of the Assessee was that this royalty income received by the Assessee was nothing but the recoupment of the resources which shall be exhausted by the end of the lease and thus the same was not income but a capital receipt.

        Held :

• "Income, it is true, is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest Connotation".

 

• CIT vs M/s Bhogilal Laherchand Including Batliboi and Co. 25 ITR 50

       Question raised before the Supreme Court (In todays Context Section 5 read with Section 9). The         Assessee claimed that there is no law to treat income as “deemed income”. The legislature cannot         treat something as deemed income which was not an income at the first place. The Supreme             Court held that the Legislature has power to bring in to ambit such receipts and tax it in accordance with the law.In the 1922 Act, capital gain was not taxable, however by way of an amendment, capital gain was included as taxable. The Question came up before the Supreme Court that whether capital gains can be considered as “Income” (With reference to interpreting the word “income” in item no. 54 in List I of the Seventh Schedule of the Government of India Act, 1935) in the case of

• Navincahandra Mafatlal vs CIT in [1954] 26 ITR 758 (SC).

The Supreme Court in this judgment after relying upon English Jurisprudence held that it is always open to the legislature to treat even receipt of capital nature as income.

Whether Legislature has power to include “Income of other person” in the hands of some other Person?

The Answer is Yes. The supreme court in the case of Sardar Baldev Singh Vs Commissioner of Income Tax [1960] 40 ITR 605 (SC) held that a law could also be passed to prevent a person from evading the tax payable on his own income. A Law can also be passed not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. The Supreme Court in Balaji Vs ITO (1961) 43 ITR 393 further held that the scope of “Income” income is wide enough so as to instances wherein the income may not have been earned by the Assessee, but his spouse.

Loan : Loan is not an income but we all are aware that S.2(22)(e) covers loans/ advances received by a share holder in conditional circumstances to be its income. The Question was raised before the Supreme Court in the case of CIT vs Navnitlal Zaveri 56 ITR 198 that whether transaction which has no element of income, such as transaction of loan can be brought under the purview of the word “Income” by creating a deeming fiction. The Supreme Court held that the private companies if would have distributed the dividend, then shareholders would have paid the taxes (In those day, the dividend was taxable in the hands of shareholders), this is nothing else but a device to utilise the funds of the company without payment of taxes and therefore attempt of the legislature to tax even the loan as deemed income is a valid exercise.

Section 44AC which taxes income on the presumptive basis was brought in to the statute book and the Assessees challenged the piece of law on the basis that the tax is not imposed on the income and is imposed on the turnover and the union has no power to levy tax on turnover. The case came up before the Hon’ble Supreme Court in the case of Union of India Vs A. Sayasi Rao [1996] 85 Taxman 321 (SC), wherein it was held that held that though it is a tax on turnover, it is not a turnover tax, it is an income tax because we are now, reading down the law to require that if the assesse claims, that its taxable income is not percentage of turnover, he will be taxed on actual assessment and not on income which is presumed to be his income on percentage of turnover.

In short while construing the term income, the courts have construed it in a very wide manner so as to include, transactions, loans, and various situation which may not ordinarily be regarded as income, but has been considered as “Income”.

 

2. What is Real Income?

 

• An assessee is required to pay tax on its income. The concept of income is discussed hereinabove. As per S.145 of the Act, the income under the head “Business or profession” or “Income from other Sources” shall be determined on the basis of Accounting, followed by an assesse regularly, being mercantile system or cash system. However, there may be situation, wherein it may appear that the assesse has earned income but in reality, he may claim that he hasn’t earned such income and that is how, the concept of Real Income has evolved.

 

• The fundamental question thus arises as to what do we mean by the term “Real” ?

           Something which has not been earned by the Assessee, something which is being regarded as             having been earned by the Assessee on a notional or Hypothetical basis but in reality is not being         earned it, is being taken out from the sphere of income.

 

• In order to better understand the concept of “Real Income”, as it stands today, it is important to go through the history of its evolution in different courts. The same is summarised as under :-

 

• D. Sassoon & Co. Ltd. v. Commissioner of Income-tax [1954] 26 ITR 27 (SC)

Facts

• Assessee-company were managing agents of three companies. They transferred their managing agencies to other companies during relevant accounting year and received consideration which was taken to 'capital reserve account' –
• Transferee companies received from managed companies certain amounts as and by way of commission in relevant accounting year –
• As per Agreement of agency, the amount of commission becomes payable per annum, ie. only at the end of the year
• The ITO taxed the commission on prorate basis ie on the basis of Services which was confirmed by AAC, Tribunal and the High Court.
• Whether in the facts of the managing agency commission was not liable to be apportioned between assessee-company and respective transferee companies in proportion of services rendered as managing agents by each one of them

Held 

• The Supreme Court held that as no income had accured to assessee-company on dates of respective transfers of managing agencies as the contract stipulated the accrual at the end of the year, assignment before such date to transferees defers the accrual in the hands of the Assessee.

 

• CIT Vs. Shoorji Vallabhdas & Co.[1962] 46 ITR 144 (SC) faced a similar challenge as wo to when did the income Accrue ?

     Facts

• For the A.Y. 1948-49 Assessee-firm was managing agents of two companies.
• It was entitled to receive as its commission, at the rate of 10 per cent of freight charged –
• In 1948 on request of managed companies assessee agreed to reduce commission to 2½ per cent from 10 per cent –
• In assessment proceedings, ITO took view that amount of larger commission (@10%) had already accrued during relevant previous year and same was thus assessable as “Income” –

Held

• Since reduction in share of commission was part of agreement entered into by assessee-firm agreed upon before the end of the year, larger income (@10%) neither accrued nor was received by assessee during relevant assessment year and thus only 2½ is what that can be said to have accrued and assessable in the hands of the Assessee.

 

• Morvi Industries Vs CIT [1971] 82 ITR 835 (SC)

 

Facts

• The assessee-company, as the managing agent of its 100 per cent subsidiary company, was entitled to receive a fixed office allowance plus a commission out of the net profits and an additional commission on all purchases of cotton and an equal amount on all sales of cloth and yarn.
• The managed-company's accounting year closed on the 30th day of December and that of the appellant-company on the 30th day of June every year. Clause 2(e) of the managing agency agreement dated 30th December, 1946, contained the following term as to when the commission would be due and payable:

"(e) The said commission shall be due to the agents yearly on the thirty-first day of December or any other date on which the company's yearly accounts close in each and every year during the continuance of this agreement and shall be payable and be paid immediately after annual accounts of the said company have been passed by the board of directors, and auditors of the company and by the company in general meeting".

• For the assessment years 1956-57 and 1957-58, the managed company suffered losses and consequently, the commission payable on the net profits was nil.
• The assessee-company relinquished the managing agency commission after it became due but before it was payable in terms of clause 2(e) of the agreement, on the ground that the managed company had been suffering heavy losses in the past years. It also relinquished the fixed office allowance.
• The ITO included the relevant amounts in the assessee's total income, on the ground that the fixed office allowance having been given to enable it to recoup the expenses incurred on behalf of the managed company, the relinquishment was ex-gratia, and that the commission having been forgone after it had become due, it was taxable on accrual basis.
• On reference, the High Court observed that the accrual of income was complete within the accounting year of the managed company and as no relinquishment had been done before the amount became due, the case strictly came within the ambit of section 4(1)(b)(i). The relinquishment, it was further observed, was a unilateral act of the assessee.
• On Appeal before the Supreme Court

Held

• The Supreme Court observed that in the present case, the Assesse has relinquished its rights after the income was accrued, after the completion of the year. Once the income accrues to him, it is his right and company’s liability to pay him the said amount. It is a different matter that by way of an agreement the payment was differed to a later date, that does shifts the accrual of income. Thus relinquishing the right to recovery does not mean that the income never accrued.

 

• Thus from the above cited cluster of 3 cases, it can be said that the concept of Real Income shall be checked upon at the time of Accrual and not at the time of receipt.

 

• Evolution of the law thereafter

 

• Godhara Electricity Co. Ltd. Vs. CIT [1997] 91 Taxman 351 (SC)/225 ITR 746

Facts

• The assessee-company, a licencee to generate and supply of electricity to its consumers enhanced the charges for electricity and motive power in 1963.
• Suits filed by the consumers challenging enhancement were allowed by the lower courts except the Division Bench of the High Court.
• The Supreme Court in 1969 ultimately decided case in favour of the assessee.
• Shortly thereafter, the Under Secretary to the Government of Gujarat wrote a letter advising the assessee-company to maintain the status quo for the rates to the consumers for at least six months.
• While so, the consumers also filed another representative suit wherein interim injunction was granted and finally decreed in favour of the consumers by the lower court.
• During pendency of the subsequent suit the management of the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, 1971.
• During pendency of these litigations the assessee-company was not able to realise the enhanced charge from the consumers for the assessment years 1969-70 to 1972-73.
• The Assessing Officer while making the assessment included the disputed amount in the hands of the assessee-company on the ground that it was following mercantile system of accounting and it had the legal right to recover the said amount.
• The first appellate authority, however, deleted the additions and that was affirmed by the Tribunal after holding that the increased tariff income recorded by the Assessee in its books is nothing but a Hypothetical Income.
• But on reference, the High Court upheld the view taken by the Assessing Officer.
• On Appeal to the Supreme Court

Held

• In the instant case even though the assessee-company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the fact that soon after the assessee-company decided to enhance the rates in 1963 representative suits were filed by the consumers which were decreed by the trial court and which decree was affirmed by the appellate court and the High Court and it was only on 3-10-1968 that the letters patent appeals filed by the assessee-company were allowed by the Division Bench of the High Court and the said suits were dismissed But appeals were filed against the said judgment by the consumers in the Supreme Court and the same were dismissed by the judgment of the Supreme Court dated 26-2-1969. Shortly thereafter, on 19-3-1969, the Under Secretary to the Government of Gujarat wrote a letter advising the assessee-company to maintain the status quo for the rates to the consumers for at least six months.
• No doubt, the letter addressed by the Under Secretary to the Government of Gujarat to the assessee-company, had no legally binding effect but one has to look at things from practical point of view that the assessee-company, being a licensee, could not ignore the direction of the State Government which was couched in the form of an advice, whereby the assessee-company was asked to maintain the status quo for at least six months and not to take steps to recover the dues towards enhanced charges from the consumers during this period Before the expiry of the period of six months the subsequent suit had been filed by the consumers and during the pendency of the said suit the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, and subsequently, it was transferred to the Gujarat State Electricity Board and, as a result, the assessee-company was not in a position to take steps to recover the enhanced charges.
• The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity had to be considered by taking the probability or improbability of realisation in a realistic manner
• If the matter was considered in this light it was not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the AO while passing the assessment orders in respect of the assessment years under consideration

 

• Thus Supreme Court now laid down two interesting points that needs to be considered while determining the Real income. The same are as under

1. To look at things from practical point of view that the assessee-company.
2. Probability or improbability of realisation in a realistic manner

 

• Thus before this law was laid down, the concept of real income was a pure question of law/ theoretical. However after this Judgment, the examination of facts and entire scenario becomes an important criteria while determining the real income in a given situation.

 

• At this juncture, the following tests laid down by the Hon’ble Supreme Court needs to be summarised
• Whether the income accrued to the assessee is real or hypothetical;
• Whether there is a corresponding liability of the other party and
• The probability or improbability of realisation of the such income by the assessee considered from a realistic and practical point of view

 

• The above three tests were applied by the Supreme Court in

 

 

• CIT Vs Excel Industries Ltd. [2013] 358 ITR 295

Facts

• The assessee maintained its accounts on mercantile basis. In its return the assessee claimed deductions under the head 'advance license benefit' receivable and 'duty entitlement pass book benefit' receivable.
• The Assessing Officer did not accept the assessee's claim on the ground that the taxability of such benefits was covered by section 28(iv).
• The Commissioner (Appeals) relying upon orders passed in case of assessee in earlier assessment years, held that benefits in question could not be brought to tax in assessment year in question.
• The Tribunal as well as the High Court upheld the order of the Commissioner (Appeals).
• On appeal to the Supreme Court: The Question raised before was 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

• In so far as the present case is concerned, 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.
• Thus Applying three tests as ie. Whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee at the time of exports and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.

 

3. Where did the Concept of Real Income Failed and Why?

 

• The point needs to be noted is that the concept of whether income accrued/ arisen or not, needs to be looked in to only at the stage of Accrual. The following judgments, clarifies this point as under and explains where the concept of real income failed and why ?

 

• State Bank of Travancore Vs CIT [1986] 158 ITR 102(SC)

Facts

• The assessee, a subsidiary bank of the State Bank of India, was following the mercantile system of accounting.
• In the course of its banking business the assessee used to charge interest on advances, including even those which it considered doubtful of recovery, termed as 'sticky advances', by debiting the concerned parties but, instead of carrying the same to its 'profits and loss account', it credited the same to a separate account called 'Interest suspense account'.
• According to the assessee, the principal amounts of these 'sticky advances' had become not bad or irrecoverable, but extremely doubtful of recovery.
• In its returns, the assessee had disclosed such interests separately and claimed that the sums were not taxable as income of the concerned years. The assessee's claim was rejected by the ITO, the Tribunal as well as the High Court.
• On appeal before the Supreme Court, the assessee contended: (i ) that what was chargeable to income-tax in respect of a business, was profits and gains of that business actually resulting from the transactions of the previous year,

(ii) that even under the mercantile system of accounting, accrual of 'real income' in the commercial sense only was chargeable to tax and this must accrue in substance according to the realities of the situation, that if regard was had to realities of the situation as well as the actual commercial principles, it would be evident that in cases of banks, financial institutions and money-lenders, the bulk of the income was usually earned by way of interest and as such there could not be any accrual of real income from interest on doubtful advances or sticky advances and, therefore, the entries made in respect of such accounts in case of all such traders following the mercantile system of accounting only reflected hypothetical income which did not materialise,

(iv) that, therefore, it was proper to carry such interest to 'Interest suspense account', as carrying the same to 'profit and loss account' would amount to showing unreal and inflated profits, thereby leading to improper and illegal distribution or remittance thereof,

(v) that Reserve Bank's instructions contained in several circulars issued by the Board which lent support to the assessee's stand were in consonance with the accepted principles of accountancy and had held the field for over 53 years, and

(vi) that since such claims had been allowed to be exempted for more than half of century, the practice had transformed itself into law, and this position should not have been deviated from.

        Held

• The question of how far the concept of real income entered into the question of taxability in the facts and circumstances of this case and how far and to what extent the concept of real income should intermingle with the accrual of income will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed the feasibility.
• Besides, any strait-jacket formula is bound to create problems in its application to every situation.
• It must depend on the facts and circumstances of each case when and how income accrues and what consequently follow from the accrual of income.
• Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of real income theory.
• After accrual, non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted.
• In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account.
• It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out, and what has accrued must be considered from the point of view of real income, taking the probability or improbability of realisation in a realistic manner and dovetailing these factors together, but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made 'no income'. In this connection the following proposition emerge:

(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.

(2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation no income had resulted because the income did not really accrue.

(3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act.

(5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee.

(6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not.

(7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry, but taking the interest merely in suspense account, cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee.

(8) The concept of real income is certainly applicable in judging whether there has been income or not, but in every case it must be applied with care and within well-recognised limits, and must not be called in aid to defeat the fundamental principles of law of income-tax as developed.

• Keeping in view the legal position set out above, the impugned interest on sticky advances in the instant case was taxable as the assessee's income of the years in question.

 

• Shiv Prakash Janak Raj & Co. (P.) Ltd. 222 ITR 583 (SC)

Facts

• The assessee-company had advanced a loan to the firm on which it was charging interest. However, in respect of the assessment year 1968-69, the assessee-company passed a resolution before the end of the accounting year deciding not to charge interest from the firm in view of the difficult financial position of the firm. For the next three assessment years the assessee passed resolutions to waive interest at the request of the firm. The resolutions were passed after the expiry of the relevant accounting year in question. The Assessing Officer taking the view that inasmuch as the loans were interest-bearing loans and because the assessee-company had relinquished the interest without any commercial considerations and further because the directors/shareholders of the assessee-company were interested in the firm, it was a case of collusion between them to evade the tax liability, brought to tax the interest income on accrual basis. The AAC found that inasmuch as the resolution to waive the interest was passed after the expiry of the accounting year and further because the assessee-company was following the mercantile system of accounting, the interest must be held to have already accrued to the assessee before it was waived. He, therefore, dismissed the appeal of the assessee. The Tribunal also confirmed the order of the AAC. On reference, however, the High Court allowed the assessee's appeal following the decision in CIT Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC). The High Court held that in view of the said decision, the principle of earlier decision in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) could not be applied to the instant case.
• On the revenue's appeal before the Supreme Court:

Held

• The resolution waiving interest was passed after the expiry of the relevant accounting year in question. The assessee-company was maintaining its accounts on mercantile basis. The Tribunal had found it as a fact that the waiver was not based upon any commercial considerations. Of course, no entries were made in the accounts of the assessee-company, or for that matter in the accounts of the firm, in respect of four assessment years concerned therein, that any interest was received or paid On those facts, it had to be held that in the assessment years in question, the interest had accrued to the assessee notwithstanding the fact that no entries might have been made in the accounts of the assessee to that effect. The waiver of interest after the expiry of the relevant accounting year only meant that the assessee was giving up the money which had accrued to it. It could not be said, in the circumstances, that the interest amount had not accrued to the assessee. Therefore, the Tribunal was right in taking the view it did.
• There is no contradiction or inconsistency between the holding in Birla Gwalior (P.) Ltd.'s case (supra) and in Morvi Industries Ltd.'s case (supra)
• So far as the contention of the assessee that applying the real income theory, it must be held that no interest had really accrued to or received by the assessee was concerned, the concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room - nor would be permissible for the Court - to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules.

 

• Shri Mahila Sewa Sahakari Bank Ltd. 395 ITR 324 (Guj.)

 

• Summary : The concept of real income can be applied at the Accrual stage and not thereafter. The same cannot be employed so as to defeat the provisions of the Act and the Rules.

 

 

4. Relevancy of Accounting Entry Vis a Vis the Concept of Real Income

 

• For the purpose of understanding, it would be worthwhile to go through the provisions of the Act, which affects this topic. Section 145 of the Act, reads as under :-

Method of accounting.

145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

 

• Now Question arises, can an entry, its absence or otherwise in the books of accounts determine the taxability of Income ?

 

• Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs CIT [1997] 227 ITR 172

Facts

• The assessee-company during construction and establishment of its factory, before commencement of manufacturing activities, invested funds borrowed for the purpose of setting up factories in short-term deposits with banks and earned interest thereon.
• In its return, it disclosed the interest earned as income from other sources and after setting off same against business loss claimed carry forward of remaining loss.
• Later on, it filed revised return claiming that interest and finance charges along with other production expenses will have to be capitalised and, therefore, the interest income should go to reduce the pre-production expenses which would ultimately be capitalised and as such, the interest income was not exigible to tax.
• The ITO as well as the Tribunal rejected the assesse's claim.
• In view of the conflicting decisions of various High Courts on the issue, the Tribunal made reference to the Supreme Court under section 257.

Held

• In the present case, whether a particular receipt is of the nature of income and falls within the charge of section 4 is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy Council and also this Court.
• It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability.
• It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation.
• The Court further held that It is true that the Apex Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice.

       

• CIT Vs U.P. State Industrial Development Corporation [1997] 225 ITR 703 (SC)

Facts

• The assessee, a State-owned financial institution, had been financing industries. One of the clauses for financing the companies by the assessee was that on the shares of such companies subscribed by the public, the assessee would be entitled to commission as well as brokerage on the sale of shares and in case the shares were not subscribed by the public in toto, the assessee was obliged to subscribe those shares at face value but was entitled to underwriting commission and brokerage in the same manner as if the shares were subscribed by the public.
• The method adopted by the assessee was that instead of crediting the underwriting commission and brokerage to its profit and loss account in the case of such companies the shares of which had to be subscribed by the assessee itself, it used to reduce the cost of the shares held by it as stock-in-trade.
• While the Assessing Officer added the entire underwriting commission and brokerage as part of taxable income, the AAC held that the brokerage on the shares held by the assessee could not be included in the income and it had to be adjusted against the cost of the shares.
• The Tribunal held that the practice followed by the assessee was in accordance with accountancy principles and that the underwriting commission in respect of the shares held by the assessee would reduce the cost of the shares and would not be separately assessable as the assessee's income.
• The High Court upheld the order of the Tribunal holding that the transaction in substance resulted in the assessee purchasing those shares for a consideration which was equal to the face value of the shares as reduced by the amount of commission and brokerage and in such a case, the amount of underwriting commission and brokerage merely went to reduce the value of the shares and it could not be considered to be the income of the assessee.
• On appeal to Supreme Court:

Held

• The accounting practice followed by the assessee in the instant case was in consonance with general principles of accountancy governing underwriting accounts.
• It is a well-accepted proposition that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute.
• The Tribunal, after referring to authoritative books on accountancy, had found that the assessee was maintaining the accounts correctly in accordance with the principles of accountancy applicable to underwriting accounts and keeping in view the said principles the underwriting commission on the shares which were not subscribed by the public and were purchased by the assessee could not be treated as profit earned by the assessee in the transaction and the said commission could only be treated as reducing the price of the shares purchased by theassessee. The Tribunal had also stated that there was no contrary provision in the Act.
• The revenue had not shown that the accountancy practice followed by the assessee was repugnant to any provision of the Act. In the circumstances, it must be held that the Tribunal and the High Court had not committed any error in taking the view that the underwriting commission earned by the assessee in respect of the shares which were riot subscribed by the public and were purchased by the assessee, would not be treated as a part of its taxable income.

 

• CIT Vs Virual Soft Systems Ltd. [2018] 404 ITR 409 (SC)

Facts

• The assessee a registered company filed return of income for relevant assessment year declaring loss of Rs. 70.24 lakhs while claiming an amount of Rs 1.65 crores as deduction for lease equalization charges.
• On scrutiny, the Assessing Officer, after perusal of the return and hearing the parties, disallowed deduction claimed as the lease equalization charges and added the same to the income of the assessee under the IT Act, 1961.
• On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer and dismissed the appeal.
• On further appeal, the Tribunal allowed the appeal of the assessee while setting aside the orders passed by Commissioner (Appeals) and the Assessing Officer.
• On appeal by revenue, the High Court dismissed the appeals at the preliminary stage while confirming the decision of the Tribunal.
• On appeal by revenue to the Supreme Court:

Held

• The ICAI is an expert body, created by the Parliament under the Chartered Accountants Act, 1949. The ICAI's publication on the subject indicates that the Guidance Note on Accounting for Leases was issued by it for the first time in 1988 which was later on revised in 1995. The Guidance Note reflects the best practices adopted by the accountants throughout the world. The ICAI is a recognized body vested with the authority to recommend accounting standards for ultimate prescription by the Central Government in consultation with the National Advisory Committee of Accounting Standards for the presentation of true and fair financial statements.
• Section 211 of the Companies Act, 1956 as it stood before the amendment dealt with 'the Form and contents of balance-sheet and profit and loss account'. Sub clause (3C) of section 211 was added vide 1999 amendment with retrospective effect.
• The method of accounting provided in the Guidance Note of 1995, on the one hand, adjusts the inflated cost of interest of the assets in the balance sheet. Secondly, it captures 'real income' by separating the element of capital recovery (essentially representing repayment of principal amount by the lessee, the principal amount being the net investment in the lease), and the finance income, which is the revenue receipt of the lessor as remuneration/reward for the lessor's investment.
• As per the Guidance Note, the annual lease charge represents recovery of the net investment/fair value of the asset lease term. The finance income reflects a constant periodic rate of return on the net investment of the lessor outstanding in respect of the finance lease. While the finance income represents a revenue receipt to be included in income for the purpose of taxation, the capital recovery element (annual lease charge) is not classifiable as income, as it is not, in essence, a revenue receipt chargeable to income tax.
• The bifurcation of the lease rental is, by no stretch of imagination, an artificial calculation and, therefore, lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax. Moreover, there is no express bar in the IT Act which bars the bifurcation of the lease rental. This bifurcation is analogous to the manner in which a bank would treat an EMI payment made by the debtor on a loan advanced by the bank. The repayment of principal would be a balance sheet item and not a revenue item. Only the interest earned would be a revenue receipt chargeable to income tax. Hence, there is no force in the contentions of the Commissioner that whole revenue from lease shall be subjected to tax under the IT Act

 

• The Ratio that can be drawn out of the three Judgments is that any accounting entry which is not contrary to the law, is permissible so as to decide the question of “Real Income”.

 

 

5. Concept of Real Income while Valuing the Closing Stock

 

• The true purpose of crediting the value of unsold stock, is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realized on the years trading. It is a misconception to think that any profit "arises out of the valuation of the closing stock" and the situs of its arising or accrual is where the valuation is made. [1]However the courts have gone in to the methods of valuation in order to get the real income out of the financial statements.

 

• United Commercial Bank Vs CIT [1999] 240 ITR 355

Facts

• The assessee, a nationalised bank, following the mercantile system of accounting,
• The Assessee as per the RBIs directive valued all the securities (closing stock) on cost while preparing the financial statements.
• It claimed a notional loss of Rs. 7.45 crore on account of closing stock of securities at the market value.
• Since the revenue had accepted the same method for over last 30 years, the IAC accepted the same but the Commissioner proceeded for revision under section 263.
• He held that the assessee-bank had no right to calculate profit and loss arising out of investment trading account as it had excluded the same from the preparation of its final accounts.
• He held that unless a bank itself accepted the position by incorporating such loss/profit in the final accounts, it would have no right to put across such hypothetical loss for the purpose of income-tax assessment.
• On appeal, however, the Tribunal set aside the order of the Commissioner and accepted that of the IAC.
• On the revenue's appeal, the High Court, rejecting the Tribunal's order, affirmed the order of the Commissioner.
• On Appeal to the Supreme Court

Held

• What is taxable under the Act is the really accrued or arisen income. On the basis of the method of accountancy regularly employed by the assessee, the real income is pointed out in the income-tax return submitted by the assessee. This cannot be ignored by holding that in a balance sheet which is required to be statutorily maintained in a particular form, market value of the shares and securities is not mentioned or is mentioned in brackets.
• For the purpose of income-tax whichever method is adopted by the assessee, a true picture of the profits and gains, that is to say, the real income is to be disclosed. For determining the real income, the entries in a balance sheet required to be maintained in the statutory form may not be decisive or conclusive. In such cases, it is open to the ITO as well as the assessee to point out the true and proper income while submitting the income-tax return.
• For reasons, the Central Government, in exercise of the powers conferred by section 53 of the Banking Regulation Act, and on the recommendation of the RBI, permitted the assessee not to disclose the market value of its investment in the balance sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on mercantile system, it was entitled to show its real income by taking into account the market value of such investments in arriving at the real taxable income. On that basis, therefore, the Assessing Officer had taxed the assessee.
• From the various decisions of the Supreme Court, it can be held that (1) for valuing the closing stock, it is open to the assessee to value it at cost or market value, whichever is lower; (2) in the balance sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn, a taxpayer is free to employ for the purpose of his trade his own method of keeping accounts and, for that purpose, to value stock-in-trade either at cost or market price; (3) a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation; (4) the concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within the recognised limits; (5) whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation; (6) under section 145 of the Act, in a case where accounts are correct and complete but the method employed is such that in the opinion of the ITO the income cannot be properly deduced therefrom, the computation shall be made in such manner and on such basis as the ITO may determine.
• The assessee-bank was valuing the stock-in-trade at cost for the purpose of statutory balance sheet and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the department and there was no justifiable reason for not accepting the same. Preparation of the balance sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That could not be discarded by the departmental authorities, on the ground that the assessee was maintaining balance sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare balance sheet in the prescribed form and it had no option to change it. For the purpose of income-tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the instant case. Therefore, the order of the High Court was to be set aside.

 

• Sanjeev Woolen Mills vs CIT [2005] 279 ITR 434 (SC)

Facts

• The assessee-firm was engaged in the export of woollen blankets. Since the account year, 1986-87, the assessee followed the method of accounting, under which the stock of raw-material/semi-finished goods was valued at cost price and finished goods at the market price.
• For the assessment year 1992-93, the assessee valued the opening stock at the market rate of Rs. 90 per kg. and it valued the closing stock at the higher market-rate of Rs. 130 per kg. and claimed deduction under section 80HHC.
• In the subsequent assessment year 1993-94, the assessee valued the opening stock at Rs. 130 per kg. for the finished goods and there was no closing stock. For the assessment year 1993-94, the assessee returned a loss.
• The Assessing Officer found that the said method in the assessment year 1992-93 resulted in abnormal gross profit ratio and, accordingly, he concluded that by valuing the closing stock at market rate the assessee had artificially inflated the profits in order to get benefit under section 80HHC in the first year and to suppress the profits of the second year which amounted to tax planning with intent to defraud the revenue.
• The Assessing Officer further ruled that by following the aforementioned method, the assessee effectively showed to earn income out of itself, which was totally against the basic principles of accountancy and law. The Assessing Officer invoking section 145, adopted the method of valuing closing stock at cost or market price, whichever was lower, and made addition.
• On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer that the valuation of the closing stock required valuing of closing stock either at cost or at market price, whichever was lower.
• On second appeal, the Tribunal allowed the assessee's claim holding that if any firm had been employing the market value method for a long time consistently, it could not be considered as against the principles of accountancy nor the method adopted for defrauding the revenue and, accordingly, directed that valuation of finished goods as made by the assessee be accepted. Regarding the opening sock of the second year, the Tribunal had allowed the assessee to value it as the closing stock of the first year.
• On appeal, the High Court while setting aside the order of the Tribunal upheld that of the Assessing Officer.
• On Appeal to the Supreme Court

Held

• It is a settled law that the true profit of business for an accounting period cannot be ascertained without taking into account the value of the stock in trade remaining at the end of the period and that such valuation is a necessary element in the process of determining the trade result of the period. The principle on which the method of valuation of closing stock is done is also well settled.
• In L.A. Firm v. CIT [1991] 189 ITR 285, the Supreme Court said that as against the valuation of the stock at cost or market value, whichever is lower, valuation of the closing stock at the market value will invariably create a problem.
• In the instant case, the method adopted by the assessee was to value the closing stock at the market value irrespective of the fact whether the market value of the stock at the relevant time was more than the cost value of the stock, which necessarily resulted in an imaginary or notional profit to the assessee which it had not actually received. In fact such a notional imaginary profit could not be taxed. It is well settled principle that a firm cannot make profit out of itself. The transaction which is not business transaction and does not derive immediate pecuniary gain is not subjected to tax. In the instant case, by showing the market value of the closing stock the assessee had earned potential profit out of itself inasmuch as the stock-in-trade remained with the assessee at the closing of the accounting year. Secondly, putting the stock at the market value did not and could not bring in any real profit which was necessary for taxing the income under the Act. Thirdly, it is a settled principle of the Income-tax Law that it is the real income which is taxable under the Act.

 

• CIT vs Bannari Amman Sugars Ltd. [2012] 249 ITR 738 (SC)

Facts

• The assessee-company engaged in the business of manufacture and sale of sugar.
• By virtue of the provisions of the Essential Commodities Act, 1955 and the Sugar Control Order read with the Notification issued thereunder, a sugar manufacturer (assessee in this case) was required to sell 40% of his sugar production at the notified levy price to the Public Distribution System. At the relevant time, on an average, the levy price came to be less than the manufacturers' cost of production.
• t was found that even the existing sugar manufacturing units had become unviable and uneconomical. Therefore, an incentive scheme was framed, as suggested by the Sampat Committee. The said Incentive Scheme provided for an inducement for persons to set up new sugar factories or to expand the existing one. Under the Scheme, 40 per cent of the total sugar production was permitted to be sold at market price. However, the Scheme provided that excess amount realized by the manufacturer over the levy price by sale of incentive sugar would be utilized only for repayment of loans taken from the banks/financial institutions for establishing the new unit(s). In regard to utilization of excess realization towards repayment of loans, the sugar mills were directed to file certificate of chartered accountant subject to which further release orders would be issued by the Directorate of Sugar.
• Assessee filed its return of income for assessment year 1997-98. In its return of income, confined to its Karnataka unit, assessee valued the closing stock of incentive sugar (free sugar) at levy price. The Department valued the closing stock of incentive sugar at cost whereas the assessee claimed that the said stock should be valued at levy price which was less than the cost.

Held

 

• The Scheme came up for consideration before the Supreme Court in the case of CIT Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392/ 174 Taxman 87 in which this Court held that the excess amount realized by the manufacturer over the levy price by sale of incentive sugar should be treated as a capital receipt which was not taxable under the Income Tax Act, 1961.
• Now if the Stock is valued at cost, the difference between the cost price and levy price would be treated as a revenue receipt and tax shall be levied on such difference which cannot be permitted in the given circumstances.

 

• Summary : The concept of real income if it comes in conflict of the law, it would have to give away. However, if the concept of real income is in accordance with the requirement of law, you will have to go with the concept of Real Income.

 

6. DIVERSION OF INCOME BY OVERIDING TITLE

 

• Sithaldas Tirathdas Vs CIT [1961] 41 ITR 367 (SC)

Facts

• The assessee claimed deduction from his total income of the amount paid under a consent decree as maintenance to his wife and children.
• The ITO however disallowed said deduction and same was confirmed by the AAC and the Tribunal.
• On reference, the High Court held that the income to the extent of the decree must be taken to have been diverted to the wife and children, and never became income in the hands of the assessee and hence, was an allowable deduction.
• On appeal to the Supreme Court:

Held

• Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow.
• It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied.
• The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.
• The instant case was one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own.
• The case was one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income.

 

• Murlidhar Himatsingka vs CIT [1966] 62 ITR 323 (SC)

Facts

• The assessee, 'M', was carrying on business under the name and style of a firm 'FM'. He was also a partner in registered firm, 'BG'.
• On 21-12-1949, a deed of partnership was executed by the said 'M' and his two sons, 'H' and 'R' and a grandson 'P'.
• The deed recited that 'M' had become too old and infirm to look after the various businesses and that 'H' and 'R' were already practically managing the business and that they had signified their intention to become the partners of the said firm 'FM' and had agreed to contribute capital, rupees ten thousand, rupees five thousand and rupees five thousand respectively.
• The parties further agreed to become and be partners in the business mentioned in the deed.
• The deed further provided that the profits and losses for the share of the said 'M' as partner in the firm of 'BG' would belong to the present partnership e., 'FM' and would be divided and borne by the parties in accordance with the shares as specified but the capital with its assets and liabilities would belong exclusively to 'M'.
• For the assessment year 1955-56, the ITO included the income from the share in the registered firm of 'BG' in the individual assessments of 'M'. 'M' appealed to the AAC who held that as 'M' was a partner in the registered firm of 'BG' his share had to be assessed in his hands. He further held that the agreement was merely an arrangement which came into force after the profits were earned and not before they were earned. He held that this agreement being a subsequent disposition of profits, after they had been earned, had to be disregarded. The Tribunal upheld the order of the AAC.
• On reference, the High Court held that instant case was a case of diversion of income by 'M' after it had accrued to him and it was not a diversion at the source by any overriding interest, and hence share income from 'BG' was includible in total income of 'M'.
• On appeal TO Supreme Court :

Held

• The agreement dated 21-12-1949, constituted a sub-partnership in respect of M's share in 'BG'. Sub-partnerships have been recognised in India and registration accorded to them under the Indian Income-tax Act.
• The question that arose whether the interest of the sub-partnership in the profits received from the main partnership was of such a nature as diverted the income from the original partner to the sub-partnership. Suppose that 'A' is carrying on a business as a sole proprietor and he takes another person 'B' as a partner. There is no doubt that the income derived by 'A' after the date of the partnership cannot be treated as his income; it must be treated as the income of the partnership consisting of 'A' and 'B'. What difference does it make in principle where 'A' is not carrying on a business as a sole proprietor but as one of the partners in a firm. There is no doubt that there is this difference that the partners of the sub-partnership do not become partners of the original partnership. This is because the law of partnership does not permit a partner, unless there is an agreement to the contrary, to bring strangers into the firm as partners. But as far as the partner himself is concerned, after the deed of agreement of sub-partnership, he cannot treat the income as his own.
• In the case of sub-partnership the sub-partnership creates a superior title and diverts the income before it becomes the income of the partner. In other words, the partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership.
• In conclusion it was held that the High Court was in error in holding that there was no question of an overriding obligation in this case and that the income remained the income of 'M' in spite of the sub-partnership created by him under the agreement dated 21-12-1949.
• The object of section 23(5)(a) of the 1922 Act is not to assess the firm itself but to apportion the income among the various partners. After the income has been apportioned, the ITO has to find whether it is the partner who is assessable or whether the income should be taken to be the real income of that other person. If it is the real income of another firm, it is that firm which is liable to be assessed under section 23(5)(a) of the 1922 Act.
• In the result, the appeal were accepted and the judgment of the High Court was set aside.

 

 

• CIT Vs Sunil J. Kinariwala [2003] 259 ITR 10 (SC)

Facts

• The assessee, partner of a firm, was having 10 per cent share therein.
• He created a trust by a deed of settlement assigning 50 per cent out of his 10 per cent right, title and interest (excluding capital), as a partner in the firm, and a sum of Rs.5,000 out of his capital in the firm in favour of the said trust.
• The assessee claimed that 50 per cent of the income attributable to his share from the firm stood transferred to the trust resulting in diversion of income at source and the same could not be included in his total income for the purpose of his assessment.
• The ITO rejected the assessee's claim holding that it was a case of application of income and not diversion of income at source.
• The AAC allowed the assessee's appeal and directed that sum transferred to the trust be excluded from the assessee's total income. On revenue's appeal, the Tribunal, however, reversed the order of the AAC.
• On reference, the High Court reversed the order of the Tribunal.
• On Appeal before the Supreme Court.

Held

• Under the scheme of the Act, it is the total income of an assessee, computed under the provisions of the Act, that is assessable to income-tax. So much of the income which an assessee is not entitled to receive by virtue of an overriding title created in favour of a third party would get diverted at source and the same cannot be added in computing the total income of the assessee.
• The principle is simple enough but more often than not, as in the instant case, the question arises as to what was the criteria to determine, when does the income attributable to the assessee get diverted by over- riding title? The determinative factor is the nature and effect of the assessee's obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be diversion of income by overriding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title.
• Following various decisions of the Privy Council, the Supreme Court and also of various High Courts, it was to be held that the order under challenge could not be sustained.
• It was, accordingly, set aside. Consequently, the share of the income of the assessee assigned in favour of the trust had to be included in the total income of the assessee.

Held

• The income that has actually accrued to the respondent is taxable. What income has really occurred to be decided, not by reference to physical receipt of income, but by the receipt of income in reality. Given the fact that the respondent had acted only as a broker and could not claim any ownership on the sum of Rs. 14.74 crores and that the receipt of money was only for the purpose of taking demand drafts for the payment of the differential interest payable by Indian Bank and that the respondent had actually handed over the said money to the Bank itself, it is to be held that the respondent held the said amount in trust to be paid to the public sector units on behalf of the Indian Bank based on prior understanding reached with the bank at the time of sale of securities and, hence, the said sum of Rs. 14.74 crores cannot be termed as the income of the respondent. In view of the above discussion, the decision rendered by the High Court requires no interference.

 

7. Test of Real Income Applied on any other Head of Income

 

• CIT vs Balbir Singh Maini [2017] 398 ITR 531

Facts

• The assessee were members of the Punjabi Cooperative Housing Building Society Ltd. The society consisted of 95 members and was the owner of 21.2 acres of land. A tripartite Joint Development Agreement (JDA) for development of 21.2 acres of land was entered into between the owner, e., Punjabi Cooperative Housing Building Society Ltd., HASH and THDC. Under the JDA, it was agreed that HASH and THDC viz., the developers would undertake to develop 21.2 acres of land owned and registered in the name of the society. The agreed consideration was to be disbursed by THDC through HASH to each individual member of the society, and different amounts and flats were payable and allotable to members having different plot sizes.
• The developers made payments only up to the 2nd instalment payment, and 7.7 acres of land was conveyed as mentioned, which had suffered payment of capital gains tax. The problem which arose for the subsequent assessment years was that, due to pending proceedings, in the High Court, the necessary permissions for development were not granted, as a result of which the JDA did not take off the ground.
• For the relevant assessment year, the assessee filed return, declaring certain taxable income. In course of assessment the Assessing Officer held that since physical and vacant possession had been handed over under the JDA, the same would tantamount to 'transfer' within the meaning of section 2(47)(ii), (v) and (vi).
• The Tribunal confirmed the order of Assessing Officer.
• The High Court held that the Tribunal and the authorities below were not right in holding the assessee to be liable to capital gains tax in respect of land for which no consideration had been received and which stood cancelled and incapable of performance due to various orders passed by the Supreme Court and the High Court in PILs. Therefore, the assessee's appeal was allowed.
• On revenue's appeal:

Held

• The JDA was between the housing society, who was referred to as the owner, and two developers. Strewn throughout the agreement is the fact that the owner, being absolutely seized and possessed of the property, was desirous of assigning its development rights for developing the same.
• A reading of the JDA in the present case would show that the owner continues to be the owner throughout the agreement, and has at no stage purported to transfer rights akin to ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose - the purpose being to develop the property, as envisaged by all the parties. Therefore, of this clause will also not rope in the present transaction
• In the facts of the present case, it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, where for want of statutory permissions, the entire transaction of development of land envisaged in the JDA fell through. At all that, there will be no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under section 45 read with section 48.
• In the present case, the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessee by the developers and therefore, the assessee have not acquired any right to receive income under the JDA. This being so, no profits or gains 'arose' from the transfer of a capital asset so as to attract sections 45 and 48.

SUMMARY

1.   What is Income?

·        Kamakshya Narain Singh 11 ITR 513 (PC)

·        Navinchandra Mafatlal 26 ITR 758(SC)

·        Bhogilal Laherchand 25 ITR 50  (SC)

·        Sardar Baldev Singh 40 ITR 605 (SC)

·        Balaji 43 ITR 393 (SC)

·        Navnitlal C Jhaveri 56 ITR 198 (SC)

·        Sanyasi Rao 219 ITR 330 (SC)

2.   What is Real?

·        E.D. Sasson & Co. Ltd. 26 ITR 27 (SC)

·        Shooraji Vallabhdas & Co. 46 ITR 144 (SC)

·        Morvi Industries Ltd 82 ITR 835 (SC)

·        Godhra Electricity Co. Ltd. 225 ITR 746 (SC)

·        Excel Industries Ltd. 358 ITR 295 (SC)

3.   Where Concept of Real Income Failed and Why?

·        State Bank of Travancore 158 ITR 102(SC)

·        Shri Mahila Sewa Sahakari Bank Ltd. 395 ITR 324 (Guj.)

·        Shiv Prakash Janak Raj & Co. (P.) Ltd. 222 ITR 583 (SC)

4.   Real Income Vis a Vis Accounting

·        Tuticorin Alkali Chemicals 227 ITR 172 (SC)

·        Road Infra. Dev. Corp. of Raj. Ltd.        96 taxmann.com 155(Raj.)

·        U.P. State Inds.Dev. Corporation 225 ITR 703 (SC)

·        Virtual Soft Systems Ltd. 404 ITR 409 (SC)z

5.   Concept of Real income and Valuation of Stock

·        United Commercial Bank 240 ITR 355 (SC)

·        Chainrup Sampatram 24 ITR 481 (SC)

·        Sanjeev Woollen Mills 279 ITR 434 (SC)

·        Bannari Amman Sugars Ltd. 349 ITR 708 (SC)

6.   Real Income Vs. Diversion of Income

·        Sitaldas Tirathdas 41 ITR 367 (SC)

·        Raja Bijoy Singh Dudharia 1 ITR 135 (Bom.)

·        Murlidhar Himatsingka 62 ITR 323 (SC)

·        Sunil J Kinariwala 259 ITR 10 (SC)

·        T. Jayachandran 406 ITR 1 (SC)

7.   Applicability of Concept on Other Heads 

·        Balbir Singh Maini 398 ITR 531(SC) 

[1] Chainrup Sampatram vs CIT [1953] 24 ITR 481 (SC)