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REPORTABLE      

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JUDISDICTION

CIVIL APPEAL NO.125 OF 2013

Commissioner of Income Tax                ...Appellant

   Versus

M/s Excel Industries Ltd.             …Respondent

WITH

CIVIL APPEAL NO.5195 OF 2011

WITH

CIVIL APPEAL NO. 9101 OF 2013                    (Arising out of SLP(C) No.l9897 of 2012)  

                    AND

CIVIL APPEAL NO. 9100  OF 2013                    (Arising out of SLP(C) No.l9898 of 2012)  

J U D G M E N T

Madan B. Lokur, J.

1. Leave granted in the Special Leave Petitions.

2. The question for consideration in all these appeals is whether  

the benefit of an entitlement to make duty free imports of  

raw  materials  obtained  by  the  assessee  through  advance  

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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.

3. In our opinion, the income does not accrue in the year of  

export but in the year in which the imports are made.

4. The facts pertaining to Civil Appeal No. 125 of 2013 (M/s  

Excel Industries Limited for the Assessment Year 2001-02) are  

referred to for convenience.

5. The  assessee  maintains  its  accounts  on  a  mercantile  

basis.  In its return (revised on 31st March 2003) the assessee  

claimed a deduction of Rs.12,57,525/- under the head advance  

licence  benefit  receivable.  The  assessee  also  claimed  a  

deduction  in  respect  of  duty  entitlement  pass  book  benefit  

receivable  amounting  to  Rs.4,46,46,976/-.   These  benefits  

related to entitlement to import duty free raw material under the  

relevant import and export policy by way of reduction from raw  

material consumption.  According to the assessee, the amounts  

were excluded from its total income since they could not be said  

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to have accrued until imports were made and the raw material  

consumed.   

6.     During the assessment proceedings, the assessee relied  

upon a decision of the Income Tax Appellate Tribunal in Jamshri  

Ranjitsinghji  Spinning  and  Weaving  Mills v. Inspecting  

Assistant Commissioner [1992] 41 ITD 142 (Mum) and also  

the order of the Commissioner of Income Tax (Appeals) in its  

own case for the assessment years 1995-96 to 1997-98.

7. By his order dated 24th March 2004, the Assessing Officer  

did  not  accept  the  assessee’s  claim  on  the  ground  that  the  

taxability of such benefits is  covered by Section 28(iv)  of the  

Income Tax Act, 1961 (for short ‘the Act’) which provides that  

the value of any benefit or perquisite, whether convertible into  

money or not, arising from a business or a profession is income.  

According to the Assessing Officer, along with an obligation of  

export commitment, the assessee gets the benefit of importing  

raw material duty free. When exports are made, the obligation  

of the assessee is fulfilled and the right to receive the benefit  

becomes vested and absolute, at the end of the year. In the year  

under consideration, the export obligation had been made and  

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the  accounting  entries  were  based  on  such  fulfilment.  The  

Assessing Officer  distinguished  Jamshri on the ground that it  

pertained  to  the  assessment  year  1985-86  when  the  export  

promotion  scheme  was  totally  different  and  the  taxability  of  

such  a  benefit  was  examined  only  with  reference  to  Section  

28(iv) of the Act but “in the present case the taxability of such  

benefit is to be examined from all  possible angles as it forms  

part  of  the  profits  and  gains  of  business  according  to  the  

ordinary principles of commercial accounting.”       

8. The  assessee  took  up  the  matter  in  appeal  and  by  an  

order dated 15th September 2008 the Commissioner of  Income  

Tax (Appeals) referred to an earlier appellate order in the case  

of  the  assessee relevant  to  the  assessment  years  1999-2000  

and  2000-01 and following the conclusion arrived at in those  

assessment years, the appeal was allowed and it was held that  

the  advance  licence  benefit  receivable  amounting  to  

Rs.12,57,525/-  and  duty  entitlement  pass  book  benefit  of  

Rs.4,46,46,976/- ought not to be taxed in this year. Reliance was  

also placed on the order of the Income Tax Appellate Tribunal in  

the assessee’s own case for the assessment year 1995-96.

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9. Feeling aggrieved, the Revenue preferred a further appeal  

before the Income Tax Appellate Tribunal (for short ‘the ITAT)  

which referred to the issues raised by the Revenue and by its  

order dated 29th April 2011 dismissed the appeal upholding the  

view taken by the Commissioner of Income Tax (Appeals).     

10.   The Tribunal held that the issues were covered in favour of  

the assessee by earlier orders of the Tribunal in the assessee’s  

own cases. It had been held by the Tribunal in the earlier cases  

that income does not accrue until the imports are made and raw  

materials  are  consumed  by  the  assessee.  As  regards  the  

accounting  year  under  consideration,  it  was  found that  there  

was no dispute that it was only in the subsequent year that the  

imports  were  made  and  the  raw materials  consumed  by  the  

assessee.   

11.      The  Tribunal  also  took  the  note  of  the  fact  in  the  

assessee’s own cases starting from the assessment year 1992-

93 onwards these issues had been consistently decided in its  

favour.  It was also noted that for some of the assessment years  

namely 1993-94, 1996-97 and 1997-98 appeals were filed by the  

Revenue in the Bombay High Court but they were not admitted.  

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12.     Under  the  circumstances,  the  Tribunal  affirmed  the  

decision of the Commissioner of Income Tax (Appeals) on the  

issues raised.  

13.      The Revenue then preferred an appeal under Section  

260-A of the Act in respect of the following substantial question  

of law:

“Whether on facts and in circumstances of the  case and in law ITAT is justified in law in holding  by following its decision in the case of Jamshri  Ranjitsinghji Spinning & Weaving Mills Ltd. (41  ITD  142),  that  advance  license  benefit  and  DEPB benefits are taxable in the year in which  these are actually utilized by the assessee and  not in the year of receipts.”  

14.     By the impugned order, the High Court declined to admit  

the appeal filed by the Revenue under Section 260-A of the Act.  

15.    It  was  submitted  before  us  by  learned counsel  for  the  

Revenue that in view of the provisions of Section 28(iv) of the  

Act,  the  value  of  the  benefit  obtained by  the  assessee is  its  

income and is liable to tax under the head “Profits and gains of  

business or profession”. We are unable to accept the contention  

of learned counsel for the Revenue for several reasons.  

16.      Section 28 (iv) of the Act reads as follows:-

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“Profits and gains of business or profession.

28. The following income shall be chargeable to  income-tax under the head “Profits and gains of  business or profession” - ……………..

(iv)  the  value  of  any  benefit  or  perquisite,  whether  convertible  into  money  or  not,  arising  from business or the exercise of a profession; ……………”

17.    First of all, it is now well settled that income tax cannot  

be  levied  on  hypothetical  income.   In  Commissioner  of  

Income Tax v. Shoorji Vallabhdas and Co., [1962] 46 ITR  

144 (SC) it was held as follows:-

“Income-tax is a levy on income.  No doubt, the  Income-tax Act takes into account two points of  time at which the liability  to  tax is  attracted,  viz., the accrual of the income or its receipt; but  the substance of the matter is  the income. If  income does not result at all, there cannot be a  tax, even though in book-keeping, an entry is  made  about  a  ‘hypothetical  income’,  which  does  not  materialise.  Where  income  has,  in  fact, been received and is subsequently given  up in  such circumstances that  it  remains  the  income of the recipient, even though given up,  the tax may be payable.  Where, however, the  income can be said not to have resulted at all,  there is obviously neither accrual nor receipt of  income,  even  though  an  entry  to  that  effect  might,  in  certain  circumstances,  have  been  made in the books of account.”   

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18.   The  above  passage  was  cited  with  approval  in  Morvi  

Industries Ltd. v. Commissioner of Income-Tax (Central),   

[1971] 82 ITR 835 (SC) in which this Court also considered  

the  dictionary  meaning  of  the  word  “accrue”  and  held  that  

income can be said to accrue when it  becomes due.  It was  

then observed that: “........ the date of payment ....... does not  

affect the accrual of income. The moment the income accrues,  

the assessee gets vested with the right to claim that amount  

even though it may not be immediately.”  

19.   This  Court  further  held,  and  in  our  opinion  more  

importantly,  that  income  accrues  when  there  “arises  a  

corresponding  liability  of  the  other  party  from  whom  the  

income becomes due to pay that amount.”     

20.       It follows from these decisions that income accrues  

when it becomes due but it  must also be accompanied by a  

corresponding liability of the other party to pay the amount.  

Only then can it be said that for the purposes of taxability that  

the income is not hypothetical and it has really accrued to the  

assessee.

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21.   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.     

22.    In  Godhra Electricity Co. Ltd. v. Commissioner of  

Income Tax, [1997] 225 ITR 746 (SC) this Court reiterated  

the view taken in Shoorji Vallabhdas and Morvi Industries.  

23.    Godhra Electricity is rather instructive. In that case, it  

was noted that the High Court held that the assessee would be  

obliged to pay tax when the profit  became actually due and  

that income could not be said to have accrued when it is based  

on a mere claim not backed by any legal or contractual  right to  

receive  the  amount  at  a  subsequent  date.   The  High  Court  

however held on the facts of the case that the assessee had a  

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legal right to recover the consumption charge in dispute at the  

enhanced rate from the consumers.  

24.     This Court did not accept the view taken by the High  

Court  on  facts.  Reference  was  made  in  this  context  to  

Commissioner of Income Tax v. Birla Gwalior (P.) Ltd.,   

[1973] 89 ITR 266 (SC) wherein it was held, after referring to  

Morvi  Industries that  real  accrual  of  income  and  not  a  

hypothetical  accrual  of  income  ought  to  be  taken  into  

consideration. For a similar conclusion, reference was made to  

Poona  Electric  Supply  Co.  Ltd. v.  Commissioner  of  

Income Tax, [1965] 57 ITR 521 (SC)  wherein it  was held  

that income tax is a tax on real income.

25.      Finally  a  reference  was  made  to  State  Bank  of  

Travancore v. Commissioner of Income Tax, [1986] 158  

ITR 102 (SC) wherein the majority view was that accrual of  

income must be real, taking into account the actuality of the  

situation; whether the accrual had taken place or not must, in  

appropriate cases, be judged on the principles of real income  

theory.  The majority opinion went on to say:

“What has really accrued to the assessee has to  be found out  and what  has accrued must be  

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considered  from  the  point  of  view  of  real  income taking the probability  or  improbability  of  realisation  in  a  realistic  manner  and  dovetailing of 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”.

26.   This  Court  then considered the facts  of  the case and  

came to the conclusion (in  Godhra Electricity)  that no real  

income had accrued to the assessee in respect of the enhanced  

charges  for  a  variety  of  reasons.   One  of  the  reasons  so  

considered was a letter addressed by the Under Secretary to  

the  Government  of  Gujarat,  to  the  assessee  whereby  the  

assessee was “advised” to maintain  status quo in respect of  

enhanced charges for at least six months.   This Court took the  

view that though the letter had no legal binding effect but “one  

has to look at things from a practical point of view.” (See R.B.  

Jodha  Mal  Kuthiala  v.  Commissioner  of  Income  Tax,  

[1971] 82 ITR 570 (SC)).  This Court took the view that the  

probability or improbability of realisation has to be considered  

in a realistic manner and it  was held that there was no real  

accrual of income to the assessee in respect of the disputed  

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enhanced charges for supply of electricity.  The decision of the  

High Court was, accordingly, set aside.

27.    Applying the three tests laid down by various decisions of  

this  Court,  namely,  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  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.    

28.    Secondly, as noted by the Tribunal, a consistent view has  

been taken in favour of the assessee on the questions raised,  

starting with the assessment year 1992-93, that the benefits  

under the advance licences or under the duty entitlement pass  

book  do  not  represent  the  real  income  of  the  assessee.  C.A. No. 125 of 2013 etc. Page 12 of 16

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Consequently, there is no reason for us to take a different view  

unless there are very convincing reasons, none of which have  

been pointed out by the learned counsel for the Revenue.  

29.     In  Radhasoami  Satsang  Saomi  Bagh  v.  

Commissioner of Income Tax, [1992] 193 ITR 321 (SC)  

this  Court  did  not  think  it  appropriate  to  allow  the  

reconsideration of an issue for a subsequent assessment year if  

the  same  “fundamental  aspect”  permeates  in  different  

assessment  years.  In  arriving  at  this  conclusion,  this  Court  

referred  to  an  interesting  passage  from  Hoystead v.  

Commissioner of Taxation, 1926 AC 155 (PC) wherein it  

was said:

“Parties  are  not  permitted  to  begin  fresh  litigation  because of new views they may entertain of the law  of the case, or new versions which they present as to  what should be a proper apprehension by the court of  the  legal  result  either  of  the  construction  of  the  documents or the weight of certain circumstances. If  this  were  permitted,  litigation  would  have  no  end,  except  when  legal  ingenuity  is  exhausted.  It  is  a  principle  of  law that  this  cannot  be  permitted  and  there is abundant authority reiterating that principle.  Thirdly, the same principle, namely, that of setting to  rest rights of litigants,  applies to the case where a  point, fundamental to the decision, taken or assumed  by the plaintiff and traversable by the defendant, has  not been traversed. In that case also a defendant is  bound  by  the  judgment,  although  it  may  be  true  

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enough  that  subsequent  light  or  ingenuity  might  suggest some traverse which had not been taken.”

30.      Reference  was  also  made to  Parashuram Pottery  

Works Ltd. v. Income Tax Officer, [1977] 106 ITR 1 (SC)   

and then it was held:

“We are aware of the fact that strictly speaking  res  judicata  does  not  apply  to  income-tax  proceedings.  Again,  each  assessment  year  being a unit, what is decided in one year may  not  apply  in  the  following  year  but  where  a  fundamental  aspect  permeating  through  the  different assessment years has been found as a  fact  one  way  or  the  other  and  parties  have  allowed  that  position  to  be  sustained  by  not  challenging  the  order,  it  would  not  be  at  all  appropriate to allow the position to be changed  in a subsequent year.

“On  these  reasonings  in  the  absence  of  any  material change justifying the Revenue to take  a different view of the matter — and if  there  was  no  change  it  was  in  support  of  the  assessee — we do not think the question should  have been reopened and contrary to what had  been decided by the Commissioner of Income  Tax in the earlier proceedings, a different and  contradictory stand should have been taken.”

31.       It appears from the record that in several assessment  

years, the Revenue accepted the order of the Tribunal in favour  

of the assessee and did not pursue the matter any further but  

in respect of some assessment years the matter was taken up  

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in  appeal  before  the  Bombay  High  Court  but  without  any  

success.  That being so, the Revenue cannot be allowed to flip-

flop on the issue and it ought let the matter rest rather than  

spend the tax payers’ money in pursuing litigation for the sake  

of it.     

32.      Thirdly, the real question concerning us is the year in  

which the assessee is required to pay tax. 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.  

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33.     For the aforesaid reasons, we dismiss the civil appeals  

with no order as to costs, but with the hope that the Revenue  

implements its litigation policy a little more practically and a  

little more seriously.  

 …………………………J

       (R. M. Lodha)

          ..………………………J                 (Madan B. Lokur)

 …………………………J

       (Kurian Joseph) New Delhi, October 8, 2013

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