Case Law Details
PCIT Vs Gravita Metal Inc. (Jammu and Kashmir High Court)
In the case of PCIT Vs Gravita Metal Inc., the Jammu and Kashmir High Court addressed the issue of excise duty exemption and its taxability under the Income Tax Act. The Income Tax Appellate Tribunal (ITAT) had dismissed the Revenue’s appeal and allowed the respondent’s appeal. The respondent, a taxpayer, had claimed an excise duty refund as a capital receipt and sought exemption under Section 10 of the Income Tax Act. The Revenue contested the claim, arguing that excise duty refunds should be considered income as per the amended Section 2(24)(xviii) of the Act. The High Court ruled that excise duty exemption, in this case, did not fall under the definition of income and could not be taxed under the Income Tax Act. The court clarified that under the mercantile accounting system, hypothetical income cannot be taxed, only actual income. Therefore, the excise duty exemption was deemed a capital receipt, and not a taxable income. The appeal filed by the Principal Commissioner of Income Tax was dismissed, upholding the ITAT’s decision.
FULL TEXT OF THE JUDGMENT/ORDER OF JAMMU AND KASHMIR HIGH COURT
1. This appeal is directed against the order dated 15.06.2023 passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar for the assessment year 2016-17, whereby the appeal filed by the appellant being ITA No.594/Asr/2019 came to be dismissed, whereas the appeal filed by the respondent herein being ITA No.587/Asr/2019 came to be allowed.
2. The facts-in-brief are that the assessee-respondent herein had filed the return of income on 12.10.2016 for the assessment year 2016-17 declaring income of rupees nil after setting off brought forward losses of Rs.1,83,50,597/-. However, during the assessment proceedings it was noticed by the appellant-department that the assessee had claimed excise duty refund of Rs.5,15,25,900/- as capital receipt and had claimed exemption under Section 10 of the I.T. Act, 1961. The appellant-department was of the view that in view of amendment in finance I.T. Act, 2015 and as per the amended section 2(24) (xviii) of the I.T. Act, 1961, any assistance in the form of subsidy, grant etc. provided by the government or any authority is to be conceded as income. Therefore, the appellant-department was of the view that since the excise duty refund also falls in this category as on 11.12.2018, as such the assessee was asked to explain and show cause, as to why, the excise duty refund of Rs.5,15,25,900/- taken as capital receipt and claimed as exemption u/s 10, may not be conceded as revenue receipt and taxed accordingly.
3. In response to the show cause notice the assessee-respondent herein submitted his reply and, besides other things, it was stated that during the aforementioned year the firm did not receipt any excise refund and just for accounting purposes and quantification before the Supreme Court, the notional amount was booked.
4. However, the appellant-department being not satisfied with the reply of assessee-respondent herein, vide assessment order dated 21.12.2018 held that the assessee had furnished inaccurate particulars of income by claiming Rs.5,15,25,900/- as capital receipt corresponding to the excise duty refund instead of revenue receipt as per amended section 2(24)(xviii) of the I.T. Act. Accordingly, penalty proceedings were also initiated against the assessee for furnishing inaccurate particulars of income.
5. Against the said assessment order dated 21.12.2018 the assessee- respondent herein filed an appeal before the Commissioner of Income Tax (Appeals), Jammu, being CAJ/10327/2018-2019. The Commissioner of Income Tax (Appeals), Jammu, vide order dated 17.05.2019, while partly allowing the appeal held that the amount of Rs.3,29,76,575/- cannot be taxed as income for the year 2016-17 on the ground that the Excise Department was under no obligation to pay balance 64% of the excise duty collected by the assessee during the said year. Thus, it was directed to the Assessing Officer to delete the addition of Rs.3,29,76,575/-. However, the addition of balance amount of Rs.1,85,49,324/-, which is 36% of the net excise duty, was treated as income of the assessee in view of Notification No.19 of 2008 and amended Section 2(24)(xviii) of the Income Tax Act.
6. Aggrieved of the said order of Commissioner of Income Tax (Appeals), Jammu, both – the appellant-department herein as well as assessee-respondent herein, filed two different appeals before the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar. However, the Income Tax Appellate Tribunal vide common order dated 15.06.2023 dismissed the appeal being ITA No.594/Asr/2019 filed by the appellant-department for the assessment year 2016-17, whereas the appeal filed by the assessee-respondent herein being ITA No.587/Asr/2019 came to be allowed. Hence, the present appeal on behalf of Principal Commissioner of Income Tax, appellant herein.
7. Heard learned counsel appearing for the parties, considered their rival contentions and also perused the appeal file.
8. Admittedly, the assessee-respondent herein had been following the mercantile system of accounting and this has also been admitted by the Income Tax Department in its assessment order dated 21.12.2018. In this system, incomes and expenses are recorded in the books of accounts, as and when they are earned or incurred, irrespective of the fact whether they are actually received or paid. Therefore, where accounts are kept on mercantile basis, the profits or gains are credited, though they are not actually realized, and, the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. In the mercantile system of accountancy, the book profits are taken for the purpose of assessment of tax, though the credit amount is not realized or the debit amount is not actually disbursed; meaning thereby, in the present case, the impugned amounts as brought to tax by the Income Tax Officer did not represent the income which had really accrued to the assessee-respondent herein during the relevant assessment year.
9. It is settled law that income tax cannot be levied on hypothetical income and only real income can be taxed. Therefore, recording of entries in the books of accounts is not conclusive to determine the income under the provisions of law. As such, we are in full agreement with the learned regional Income Tax Tribunal, that whether an amount is to be considered as income or not is to be determined on the basis of the Income Tax Law and not on the basis of the entries made in the books of accounts; that no tax can be charged on an amount which is not actually earned and that the learned Tribunal was right, in deleting the addition of Rs.3,29,76,575/- as hypothetical income which has not actually accrued, which was otherwise 64% of the excise duty recognized by the assessee in its books of accounts.
10. The next contention of the appellant is that in view of insertion of Clause (xviii) to Section 2(24) of the Act, introduced by the Finance Act, 2015, any subsidy, grant, cash incentive, duty drawback, waiver, concession and reimbursement referred to in the said clause is considered as income and only because the word ‘exemption’ is not mentioned therein, it is not open for the tax payers to interpret the same as per their own convenience.
11. Admittedly, as per Black’s Law Dictionary (Sixth Edition) ‘exemption’ means freedom from a general duty or service; immunity from a general burden, tax, or charge, immunity from service of process or from certain legal obligations, as jury duty, military service, or the payment of taxes. Whereas, ‘subsidy’ means a grant of money made by government in aid of the promoters of any enterprise, work, or improvement in which the government desires to participate, or which is considered a proper subject for government aid, because such purpose is likely to be of benefit to the public.
12. In the present case, the assessee is exempted from making payment of excise duty to the extent of 36% of the total excise duty collected, meaning thereby the same is not subsidy given to meet the cost of the project. Therefore, we are also in full agreement with the learned Tribunal that exemption from excise duty does not fall in the definition of income as envisaged under Section 2(24)(xviii) of the Act and that the amount of Rs.1,85,49,324/- is not an income but a capital receipt not taxable under the provisions of the Income Tax Act.
13. Viewed thus, we do not find any merit in the appeal and the same is, accordingly, dismissed along with connected CM(s), if any.
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