Taxap/912/2008 Of Commissioner Of Income Tax-I v. Asian Finstock Limited

C/TAXAP/912/2008 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 912 of 2008 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE J.B.PARDIWALASd/-andHONOURABLE MR. JUSTICE BHARGAV D. KARIASd/-==========================================================1Whether Reporters of Local Papers may be allowed toYESsee the judgment ?2To be referred to the Reporter or not ?YES3Whether their Lordships wish to see the fair copy ofNOthe judgment ?4Whether this case involves a substantial question ofNOlaw as to the interpretation of the Constitution ofIndia or any order made thereunder ?==========================================================COMMISSIONER OF INCOME TAX-I, VersusASIAN FINSTOCK LIMITED ========================================================== Appearance:MRS MAUNA BHATT (174) for the Appellant(s) No. 1MR SN DIVETIA (1378) for the Opponent(s) No. 1MR VIVEKKUMAR CHAVDA (6666) for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALAandHONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 06/03/2020 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1This Tax Appeal under Section 260A of the Income Tax Act, 1961[for short, 'the Act, 1961'] is at the instance of the Revenue and isdirected against the order passed by the Income Tax Appellate Tribunal,Ahmedabad, 'A' Bench, Ahmedabad dated 6[th] July 2007 in the ITANo.164/Ahd/2000 for the assessment year 1996-97. 2This Tax Appeal was ordered to be admitted on the followingsubstantial question of law: “Whether the Appellate Tribunal is right in law and on factsin deleting the addition of Rs.3.50 crores made by the Assessing Officerand confirmed by the CIT(A) in respect of profit earned from trading inshares of KHEL, when the assessee was following mercantile system ofaccounting and the amount was shown as income but credited to“Suspense Account?” 3The aforesaid substantial question of law formulated by this Courtwhile admitting the Tax Appeal arises in the following factualbackground: 4The respondent assessee filed its return of income dated 30[th]November 1996 showing total loss of Rs.37,17,921/-. The proceedingsunder Section 143(1)(a) of the Act concluded on 29[th] October 1997 withan adjustment of Rs.14,000/-. Notice under Section 143(2) of the Actwas issued to the respondent assessee within the prescribed period. Theassessee company is engaged in the business of trading of shares,investment and finance. In the return of income, the assessee companyshowed profit on trading in shares of Kamakshi Housing Finance Ltd.(for short, 'KHFL') amounting to Rs.2,78,87,259/-. The said amount wasnot shown in the profit and loss account, but, instead was transferred tothe “suspense account”. The amount was shown in the balancesheet onthe credit side under the head of “sundry creditors”. In the report of the company, it came to be stated that the company's profit on account ofthe trading activities in the shares of the KHFL could not be realised asthe amount due on that account had been freezed by the Bombay StockExchange in accordance with the directions issued by the SEBI, Mumbai.Thus, it was claimed that as the transaction could not attain finality onaccount of the dispute between the company and the BSE – SEBI, theprofit accrued in favour of the assessee company could not be shown asprofit. 5The Assessing Officer declined to accept the case of the assesseecompany as discussed above. The findings recorded by the AssessingOfficer in the assessment year reads thus: company, it came to be stated that the company's profit on account ofthe trading activities in the shares of the KHFL could not be realised asthe amount due on that account had been freezed by the Bombay StockExchange in accordance with the directions issued by the SEBI, Mumbai.Thus, it was claimed that as the transaction could not attain finality onaccount of the dispute between the company and the BSE – SEBI, theprofit accrued in favour of the assessee company could not be shown asprofit. 5The Assessing Officer declined to accept the case of the assesseecompany as discussed above. The findings recorded by the AssessingOfficer in the assessment year reads thus: ”2.2 The assessee's contention has been examined. It is proved from theabove submission that the assessee company has already earned the profitin respect of the above trading on account of the auction of the shares ofKHFL since the delivery had not been made. On account of this auction,the assessee has admitted that it had earned a profit ofRs.3,50,15,800/-(as against the amount of Rs.2,78,87,259/- mentionedin the return). It is also admitted in its reply that the profit actuallyaccrued to it, but not received because of SEBI, Bombay conducting theinvestigation of manipulation of share prices. However, since the assesseecompany is following the mercantile system of accounting, whatever profithas accrued and become due to it has to be taken into account for thecurrent year's income. If the SEBI, Bombay has conducted an enquiryregarding the manipulation of shares prices of the KHFL',˙ and as aconsequence of this enquiry has impounded the auction proceeds as perdirection issued to the BSE and the difference between the auction priceand the standard rate which they have allowed to the assesses has beenimpounded to be deposited to the credit of the Investors Protection Fund ofBSE, this doesn't affect the fact that the front had actually become due tothe assessee on account of the auction having been conducted. Thesubsequent action of the SEBI under the SEBI Act is in the nature of apenalty or fine imposed for infringement of the provisions of SEBI Act andthe norms/regulations for fair trading in shares. Because of Infringementof the provisions… this action has been taken by SEBI which is of a penalnotice, by virtue of which the sale proceeds exceeding the standard ratefixed have been impounded. Therefore, the mere fact that the assessee hasnot accepted the standard rate allotted to it and challenged the auction ofthe SEBI/BSE in the Hon'ble Gujarat High Court doesn't affect the position that the total profit earned at Rs.3,50,15,800/- is to be treated as taxableincome for the year under consideration. The assessee's action in creditingthis profit earned to the suspense account and showing in the liability sideof the balance-sheet under the head “suspense account” also proved thisfact that the profit has accrued to the assessee and become due and onlybecause of the subsequent dispute,, the assessee is trying to claim thisamount as not the income of the current year which is not acceptable. 2.3As regards the claim of loss of Rs.14,81,177/- incurred in the samescrip excluding the auction sale, there is no justification regarding theassessee company not having taken into account these particulartransactions in the books of accounts. No justification with corroborativeevidence of the claim of genuineness of the loss could be furnished.Therefore, this claim is not entertainable. Accordingly, the amount of Rs.3,50,20,260/- being profit onaccount of trading in shares of KHFL is being added to the assessee'sincome. [Addition Rs.3,50,20,260/-] 3In accordance with the above discussion, the total income of theassessee company is recomputed as under: Loss as per return of income (-) Rs.37,17,921/-Add Adjustment u/s.143(1)(a)Rs.14,000(-) Rs.37,03,921 Add: Additions as per order:i) Profit on trading of loss of sharesRs.3,50,15,800Total income ..Rs.3,13,11,879i.e. …Rs.3,13,11,880 Accordingly, the amount of Rs.3,50,20,260/- being profit onaccount of trading in shares of KHFL is being added to the assessee'sincome. [Addition Rs.3,50,20,260/-] 3In accordance with the above discussion, the total income of theassessee company is recomputed as under: Loss as per return of income (-) Rs.37,17,921/-Add Adjustment u/s.143(1)(a)Rs.14,000(-) Rs.37,03,921 Add: Additions as per order:i) Profit on trading of loss of sharesRs.3,50,15,800Total income ..Rs.3,13,11,879i.e. …Rs.3,13,11,880 Assessed u/s. 143(3) of the I.T. Act on total income of (-)Rs.3,13,11,880/-. Issue demand notice and challan accordingly. Issuepenalty proceedings u/s. 271(1)(c) of the I.T. Act.” 6The respondent assessee being dissatisfied with the assessmentorder referred to above went in appeal before the Commissioner ofIncome Tax. The Commissioner (Appeals) dismissed the appeal holding as under: “3.2....The appellant company was incorporated on 15.12.94. The mainobject of the company was to carry on the business as an Investmentcompany and to invest, acquire and hold and otherwise deal ln shares,stocks, debentures, debenture-stock, bonds etc. The company filed Its return of Income for the A.Y.96-97 relevantto financial year 1995-96 on 30th November, 1996 showing loss ofRs.37,17,921/-. The return was processed u/s 143(1)(a) on 29.10.97 andadjustment of Rs.14,000/was made. Thereafter, the assessmentproceedings were initiated and notices u/s 143(2) and 143(1) wereissued. The appellant company In the course of business activities hadpurchased 418800 shares of Kamakshi Housing Finance Ltd. During thefinancial year 1995-96 for Rs.2,16,70,945/-. Out of these shares, theappellant company sold 77,200 shares of Kamakshi Housing Finance Ltd.For sale consideration of Rs.29,93,519/-. This transaction resulted in lossof Rs.14,81,177/-. In the month of February, 1996 the Mumbai StockExchange invited offers for sale of Rs.94,000/shares of Kamakshi HousingFinance Ltd. The appellant company participated In the auction andoffered to sell 94,400 shares of Kamakshi Housing Finance Ltd. For anaverage price of Rs.370/per share. The offer of the company was acceptedand in accordance with the said offer, the company was entitled to receiveRs.3,50,20,260/on the pay-out date after the date of settlement. The appellant company delivered the requisite number of shares tothe Mumbai Stock Exchange through its three brokers. However, before thedate of payout, the Mumbai Stock Exchange under the instructions fromSEBI issued an order that the payment for the auction sale of 94,400shares of Kamakshi Housing Finance Ltd. Has not to be made at the pricefixed in the auction and passed an order freezing the payout. Accordingly,the BSE did not make any payment to the appellant company on thepay-out date. The order of the SEBI/BSE was not acceptable to theappellant company and representation in this regard was sent to the BSEas well as SEBI. Since there was no positive response, the appellantcompany has filed a Special Civil Application in the High Court of Gujaratwhich is pending for disposal. Since there was a dispute with regard to the amount receivable onthe auction of 94,400 shares of Kamakshi Housing Finance Ltd. Theappellant company could not arrive at any profit or loss on the offer forauction of such shares before the end of Asstt. year ending on 31.3.96, During the course of assessment proceedings written submissions in thisregard were filed under letter dated 19th February, 1999. However, the Assessing Officer has rejected the appellantcompany's claim for loss of Rs.14.81 Lacs on sale of 77,200 shares andalso considered the disputed auction sale price of Rs.3.50 crores which isinclusive of purchase price of Rs.60,09,478 + Rs.2,90,10,782/- disputedpront in respect of 94,400 shares of Kamakshi Housing Finance Limited,as taxable profit. The Assessing Officer has also initiated penaltyproceedings u/s 271(1)(c) of the I.T.Act, and hence this appeal. During the course of assessment proceedings written submissions in thisregard were filed under letter dated 19th February, 1999. However, the Assessing Officer has rejected the appellantcompany's claim for loss of Rs.14.81 Lacs on sale of 77,200 shares andalso considered the disputed auction sale price of Rs.3.50 crores which isinclusive of purchase price of Rs.60,09,478 + Rs.2,90,10,782/- disputedpront in respect of 94,400 shares of Kamakshi Housing Finance Limited,as taxable profit. The Assessing Officer has also initiated penaltyproceedings u/s 271(1)(c) of the I.T.Act, and hence this appeal. 3.3I have considered the facts of the case and the submission made onbehalf of the appellant In the statement of facts. It Is seen that theappellant has already earned Income of Rs.2,78,87,250/-. The appellanthas already shown this Income as profit but credited to Suspense Account.Since it is the income of the appellant, the Assessing Officer was justified intreating this as income of the appellant. Merely, because there are somedisputes does not mean that the character of the Income has changed.Therefore, the action of the Assessing Officer is upheld.” 7The respondent assessee being dissatisfied with the order passedby the Commissioner (Appeals) referred to above went in further appealbefore the Income Tax Appellate Tribunal. The Appellate Tribunal whileallowing the appeal on the point in question held as under: “13We have heard the rival submissions, perused the orders of thelower authorities and the material available on record. We find that theundisputed facts of the case are that the assessee, during the year underconsideration in the course of business activity, had purchased 418800shares of KHEL for Rs.2,16,70,945/-, The assessee sold 77200 shares outof the said shares for a consideration of Rs.29,93,519/and incurred loss ofRs.14,81,177/-. The assessee, in the month of February 1996, participatedin the auction of shares at BSE and offered for sale of 94400 shares at anaverage price of Rs.370/per share for total consideration ofRs.3,50,20,260/-. The assessee gave delivery of the shares and the offer ofthe assessee was accepted. But in 'the meanwhile, vide order dated9.1.1997 of the BSE on the instruction of SEBI stopped the payment ofsale consideration of Rs. 94400 shares for the reason that there wasmanipulation of share price. Accordingly, on the payout day, three sharebrokers, namely, S/Shri Bharat B. Shah, Kirit J. Shah and Sharukh N.Tara were not paid the sale consideration for the shares and they, in turn,did not make the payment for the shares to the assessee company. The assessee made representation to BSE and SEBI and as no positive responsewas received by the assessee, the assessee company held a special civilapplication in the High Court of Gujarat which is pending for disposal. Inthe circumstances, the assessee company did not show the profit earned onsale of 94400 shares at Rs.2,78,87,259/in the profit and loss account butshowed the same as liability in the balance sheet under the head “SuspenseAccount.” The Assessing Officer was of the view that as the assessee hasgiven delivery of the shares and has credited the amount of profit earnedfrom the sale of 94400 shares in the suspense account, the income hasaccrued to the assessee and hence the same was the income of the assesseefor the year under consideration. Accordingly, he made the addition forthe entire sale consideration of Rs.3,50,15,800/to the income of theassessee. The Ld.CIT(A) confirmed the said order of the Assessing Officer.In these facts and circumstances of the case, we are of the consideredopinion that the BSE on the instruction of the SEBI had stopped thepayment of sale consideration of 94400 shares on account ofmanipulation in share price and, therefore, the payment was not made tothree brokers through whom the assessee has entered into the saletransaction. Therefore, the brokers also could not make the payment of thesale consideration of the shares to the assessee company. We find that theabove fact of non receipt of payment of shares in the above circumstancesis not in dispute. We find that a formal restraint order was passed by theSEBI on 9.1.97 and the same is dispute as on date before the Hon'bleGujarat High Court. Ld. A/R of the assessee submitted before us that thepayment for the aforesaid transaction has yet not been received by theassessee and the matter is still in dispute before the Gujarat High Court.The above fact could not be disputed by the Ld. D/R. In the above facts andcircumstances in our considered opinion no real income could be treated asaccrued in favour of the assessee in respect of the above transaction. In ourconsidered opinion, till the dispute is settled by the Hon'ble Gujarat HighCourt, it cannot be held that any real income has accrued to the assesseein relation to the aforesaid transaction Our above view finds support fromthe decision of the Hon'ble Supreme Court CIT Vs. Hindustan Housing &Loan Development Trust, 161 ITR 524(SC) and UCO Bank CIT , 237 IT R889(SC). Therefore, we set aside the orders of the lower authorities on theissue and direct the AO to delete the addition made of Rs.3,50,15,800/-.” 8The Revenue being dissatisfied with the order passed by theAppellate Tribunal is here before this Court with the present appeal. Appellate Tribunal is here before this Court with the present appeal. 9Ms. Mauna Bhatt, the learned senior standing counsel appearingfor the Revenue vehemently submitted that the Appellate Tribunalcommitted a serious error in passing the impugned order. She would 8The Revenue being dissatisfied with the order passed by theAppellate Tribunal is here before this Court with the present appeal. Appellate Tribunal is here before this Court with the present appeal. 9Ms. Mauna Bhatt, the learned senior standing counsel appearingfor the Revenue vehemently submitted that the Appellate Tribunalcommitted a serious error in passing the impugned order. She would submit that the assessee company indisputably was managing its accountaccording to the mercantile system. The mercantile system of accountingdiffers substantially from the cash system of book keeping. Under thecash system, it is only the actual cash receipt and actual cash paymentsthat are recorded as credits and debits; whereas under the mercantilesystem, the credit entries are made in respect of the amounts dueimmediately they became legally due and before they are actuallyreceived. According to the learned senior standing counsel, therespondent company actually sold the shares of KHFL and earned profit.The physical delivery of the shares in favour of the brokers had alsotaken place. The shares were actually sold and the amount realised fromthe sale proceeds of the shares came to be credited in the account of thebrokers. According to the learned senior standing counsel, thereafter,whatever may be the dispute between the brokers and BSE – SEBI, is notrelevant. It is argued that the concept of real income would apply wherethere has been a surrender of income which in theory may have accrued,but, in the reality of the situation, no income had resulted because theincome did not really accrue. Mere improbability of recovery, cannot betreated as evidence of the fact that income has not resulted or accrued tothe assessee. It is argued that the mere fact that an amount due to therespondent assessee had been carried to the suspense account and theBSE – SEBI was withholding the payment on account of a pendingdispute with the brokers cannot be held to mean that the income hadnot accrued to the assessee. The date of accrual is the date on which theamount has been accrued by the assessee. It is argued that the date onwhich the shares were sold and the amount towards the sale proceedscame to be appropriated in the account of the brokers, the income couldbe said to have been accrued to the assessee as the assessee could besaid to have acquired a legal right to receive such amount from itsbrokers. 10In such circumstances referred to above, Ms. Bhatt prays thatthere being merit in this appeal, the same be allowed and the substantialquestion of law as formulated be answered in favour of the Revenue andagainst the assessee. 11On the other hand, this Tax Appeal has been vehemently opposedby Mr. Divetia, the learned counsel appearing for the respondentassessee. According to Mr. Divetia, no error, not to speak of any error oflaw could be said to have been committed by the Appellate Tribunal inpassing the impugned order. The learned counsel would submit that theincome accrues when it becomes due, but, it must also be accompaniedby a corresponding liability of the other party to pay the amount. Onlythen can it be said that for the purposes of taxabilty that income is nothypothetical and it has really accrued to the assessee. According to Mr.Divetia, it is not in dispute that the shares of the KHFL came to be soldby the respondent assessee and the assesse earned profit in the saidtransaction. However, before the assessee could receive the amount, theaccounts of the brokers came to be freezed by the BSE – SEBI and insuch circumstances, the assessee company had no other option, but toshow the amount out of the said transaction in the “suspense account”.According to Mr. Divetia, at best, it could be said that his client earned ahypothetical income which failed to materialise and its money value,therefore, cannot be said to be the income of the assessee. 12In such circumstances referred to above, the learned counselappearing for the respondent assessee prays that there being no merit inthis Tax Appeal, the same be dismissed and the substantial question oflaw as formulated may be answered in favour of the assessee and againstthe Revenue. 13Having heard the learned counsel appearing for the parties andhaving gone through the materials on record, the only question that fallsfor our consideration is whether the Appellate Tribunal committed anyerror in passing the impugned order. 14Although the payment was deffered in favour of the respondentassessee on account of the dispute raised by the BSE – SEBI with thebrokers, yet it cannot be said that the accrual of income was postponedsimply because the brokers were unable to realise the amount in favourof the respondent assessee. The income can be held to accrue when theassessee acquired a right to receive that income. In E. D. Sassoon andCo. Ltd. vs. C. I.T. (1 954) 26 ITR 27 : (AIR 1954 SC 470), theprinciple that income must be held to accrue on the date when a debtbecomes due has been affirmed. In C.I.T. vs. K.R.M.T.T. ThiagarajaChetty (1953) 24 ITR 525 : (AIR 1953 SC 527), it was further heldthat the mere fact that an amount due to the assessee has been carriedto the suspense account and company was withholding payment onaccount of a pending dispute cannot be held to mean that the incomehas not accrued to the assessee. The date of accrual is the date on whichthe right to receive the income has been acquired by the assessee. Theassessee herein acquired the right to receive the requisite amount theday the shares came to be sold. The right to receive the requisite amountcannot be said to have arisen on the date when the BSE – SEBI raisedthe dispute. 15In the aforesaid context, we may refer to and rely upon a decisionof the Supreme Court in the case of Commissioner of Income Tax,Amritsar vs. Shivprakash Janak Raj and Company Private Limitedreported in 1996(11) SCC 530. We quote the relevant observations: 15In the aforesaid context, we may refer to and rely upon a decisionof the Supreme Court in the case of Commissioner of Income Tax,Amritsar vs. Shivprakash Janak Raj and Company Private Limitedreported in 1996(11) SCC 530. We quote the relevant observations: “9In State Bank of Travancore v. Commissioner of Income Tax,Kerala [(1986) 158 I.T.R.102], the facts were the following: theappellant-Bank maintained its accounts on the basis of mercantile system.It was charging interest on the loans advanced by it. Some of the loanshad become "sticky", i.e., their recovery had become extremely doubtful.The Bank, however, charged interest on these loans also, debiting theaccount of the concerned parties. But instead of carrying the interestamount to the profit and loss account, the appellant remitted the saidinterest amount to a separate account called "the Interest SuspenseAccount". In the course of its assessment, the Bank claimed that havingregard to the poor financial condition of the said debtors and the poorchances of recovery of interest from them, the interest amount due fromthem was taken to the "Interest Suspense Account" to avoid showinginflated profits by including hypothetical and unreal income and furtherthat the interest on such sticky advances was not its real Income and,hence, not taxable. Both the Tribunal and the High Court rejected the plea.On appeal, this Court, by majority, Sabyasachi Mukharji and RanganathMisra,JJ., [Tulzapurkar,J. dissenting] affirmed the decision of the HighCourt. This Court held that the interest on sticky advances did accrue tothe appellant-Bank according to the mercantile system of accounting andthat, indeed, the appellant had debited the respective parties with interest.The appellant, however, did not chose to treat the debt as bad debts butcarried the interest amount to the 'Interest Suspense Account". Merecrediting of the said interest amount to, what it called the "InterestSuspense Account", without treating it as a bad debt or irrecoverableinterests was repugnant to Section 36 (1)(vii) and Section 32(3) of theAct and that the concept af real income does not help the appellant-Bank.It was observed that the concept of real income cannot he so read as todefeat the object and the provisions of the Act. Sabyasachi Mukharji,J., inhis opinion, discussed all the relevant cases on the subject including MorviIndustries Limited and Birla Gwalior (P) Ltd. as well as the derision of thisCourt in Shoorji Vallabhdas & Co. and stated the proposition emergingtherefrom in the following words: "(1) It is the income which has really accrued or arisen to theassessee that is taxable. Whether the income has really accrued orarisen to the assessee must be Judged in the light of the reality ofthe situation. 2) The concept of real income would apply where there has been asurrender of income which in theory may have accrued but in thereality of the situation, no income had resulted because the incomedid 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 beso read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statuteor by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particularmanner is material evidence of the fact whether income has accruedor not. (7) Mere improbability of recovery, where the conduct of theassessee is unequivocal, cannot be treated as evidence of the factthat income has not resulted or accrued to the assessee. Afterdebiting the debtor's account and not reversing that entry - buttaking the interest merely in suspense account cannot be suchevidence to show that no real income has accrued to the assessee orbeen treated as such by the assessee. (5) If there is any diversion of income at source under any statuteor by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particularmanner is material evidence of the fact whether income has accruedor not. (7) Mere improbability of recovery, where the conduct of theassessee is unequivocal, cannot be treated as evidence of the factthat income has not resulted or accrued to the assessee. Afterdebiting the debtor's account and not reversing that entry - buttaking the interest merely in suspense account cannot be suchevidence to show that no real income has accrued to the assessee orbeen treated as such by the assessee. (8) The concept of real income is certainly applicable in judgingwhether there has been income or not but, in every case, it must beapplied with care and within well-recognised limits." To the argument of real income pressed with great persistence in that case,the learned Judge responded in the following words: "We were invited to abandon legal fundamentalism. With aproblem like the present one, it is better to adhere to the basicfundamentals of the law with clarity and consistency than to becarried away by common cliches. The concept of real incomecertainly is a well-accepted one and must be applied in appropriatecases but with circumspection and must not Be called in aid todefeat the fundamental principles of the law of income-tax asdeveloped." 10We respectfully agree with the propositions as well as theobservations of the learned Judge with respect to the plea of real income.” 16We may also refer to a Division Bench decision of the BombayHigh Court in the case of Meherbai N. Sethna vs. Commissioner ofIncome-tax reported in 1994(209) ITR 453. We quote the relevantobservations: “2. The assessee is an individual. The assessment year is 1975-76. Thecontroversy relates to includibility of dividend and interest income whichaccrued to the assessee in Ceylon in computation of his income under theIncome-tax Act, 1961, for the assessment year under consideration. Thecontention of the assessee is that in view of the restrictions on remittancefrom Ceylon to India during the relevant assessment year, the amount ofdividend and interest is not includible in the computation of his income.This contention of the assessee was rejected by the Income-tax Officer. Theappeals of the assessee against the orders of the Income-tax Officer werealso rejected by the Appellate Assistant Commissioner and the Income-taxAppellate Tribunal. Hence this reference at the instance of the assessee. 3. We have carefully considered the contention of the assessee. We,however, do not find any merit in the same. There is no dispute in regardto the accrual of income to the assessee from dividend and interest duringthe year under consideration in Ceylon. Nor is there any dispute regardingthe existence of restrictions in Ceylon on remittance of money to Indiaduring the relevant year. The only controversy is regarding the effect ofsuch restriction on accrual of income to the assessee or includibility of thesame in the computation of income of the assessee. In our opinion, section5 of the Act provides a complete answer. Section 5 deals with the scope oftotal income. It provides : "Subject to the provision of this Act, the total income of anyprevious year of a person who is a resident includes all income fromwhatever source derived which - (a) is received or is deemed to bereceived in India in such year by or on behalf of such person; or (b)accrues or arises or is deemed to accrue or arise to him in Indiaduring such year; or (c) accrues or arises to him outside Indiaduring such year." "Subject to the provision of this Act, the total income of anyprevious year of a person who is a resident includes all income fromwhatever source derived which - (a) is received or is deemed to bereceived in India in such year by or on behalf of such person; or (b)accrues or arises or is deemed to accrue or arise to him in Indiaduring such year; or (c) accrues or arises to him outside Indiaduring such year." 4. The uncontroverted facts of this case are that (i) the assessee is aresident in India and (ii) the income from dividend and interest accrued tohim during the year under consideration in Ceylon. Such income clearlyfalls within the scope of his total income in view of section 5 of the Act.The only ground on which the assessee objects to its inclusion in his totalincome is the restrictions in Ceylon on the remittance of money to India.This factor, in our opinion, does not have any bearing on the computationof total income of the assessee. Despite such restriction, income whichaccrued to the assessee outside India falls within the scope of total incomeunder section 5 of the Act. Accrual of income outside India in the previousyear is the only relevant factor. This view of ours also gets support fromsection 220(7) of the Act which reads : "Where an assessee has been assessed in respect of income arising outside India in a country the laws of which prohibit or restrict theremittance of money to India, the Income-tax Officer shall not treatthe assessee as in default in respect of that part of the tax which isdue in respect of that amount of his income which, by reason ofsuch prohibition or restriction, cannot be brought into India, anshall continue to treat the assessee as not in default in respect ofsuch part of the tax until the prohibition or restriction is removed." 5. It is clear from the above sub-section that it is intended to mitigate thehardship that may be caused to the assesses who are assessed in respect ofincome arising to them outside India in a country the laws of whichprohibit or restrict the remittance of money to India by relieving themfrom the obligation to pay the tax which is due in respect of such incomeuntil the removal of the prohibition or restriction on remittance. It wasnecessitated only because in the case of a person who is a resident, incomearising outside Indian forms part of his total income under sections 5 ofthe Act notwithstanding the existence of any restriction or prohibitions insuch country on its remittance to India. We are, therefore, of the clearopinion that in the instant case notwithstanding the restrictions imposedby the Ceylon Government on remittance, the whole of the dividend of Rs.9,353 and interest of Rs. 410 which accrued to the assessee during therelevant previous year in Ceylon is liable to be assessed in his hands for theassessment year 1975-76.” 17The Supreme Court in the case of Godhra Electricity Co. Ltd. vs.Commissioner of Income-tax [1997] 25 ITR 746 (SC) has verysuccinctly explained the position of law as regards the concept of realincome. We quote the relevant observations: “10Under the Act income charged to tax is the income that is receivedor is deemed to be received in India in the previous year relevant to theyear for which assessment is made or on the income that accrues or arisesor is deemed to accrue or arise in India during such year. The computationof such income is to be made in accordance with the method or accountingwith the method or accounting regularly employed by the assessee. It maybe either the cash system where entries are made on the basis of actualreceipts and actual outgoings or disbursements or it may be the mercantilesystem where entries are made on accrual basis i.e. accrual of the right toreceive payment and the accrual of the liability to disburse or pay. Incommissioner of Income tax Bombay city-I v. Messrs. Shoorji Vallabhdasand co.(supra) it has been laid down :- "Income tax is a levy on income no doubt the Income Tax act takes "Income tax is a levy on income no doubt the Income Tax act takes into account two points of time all which the liability to tax isattracted viz the accrual of the income or its receipt; but thesubstance of the matter is the income. if income does not result atall there cannot be a tax even though in book keeping an entry ismade about a hypothetical income which does not materialise."[P.148] This principle is applicable whether the accounts are maintained on casesystem or under the mercantile system. If the accounts are maintainedunder the mercantile system what has to be seen is whether income can besaid to have really accrued to the assessee-company. in H.M. Kashiparekh& co. ltd. v. commissioner of Income Tax (1960) 39 ITR 706 the BombayHigh court had said :- "Even so, (the failure to produce account losses we shall proceed onthe footing that the assessee- company having followed themercantile system of account there must have been entries made inits books in the accounting year in respect of the amount ofcommission in our judgment we would not be justified in attachingany particular importance in this case to the fact that the companyfollowed mercantile system of accounting. They would not have anyparticular bearing in applying the principle of real income in thefacts of this case". The said view was approved by this court in commissioner of Income Taxv. Birla Gwalior (p) Ltd. (supra) where the assessee maintained itsaccounts on the mercantile system. In that case this court after referring tothe decision in Morvi Industries Ltd. V. commissioner of Income Tax,(1971)82 ITR 835 which was also a case where the accounts weremaintained on mercantile system has said :- "Hence it is clear that this court in Morvi Industries case didemphasise the fact that the real question for decision was whetherthe income had really accrued of not it is not a hypothetical accrualof income that has got to be taken into consideration but the realaccrual of the income "[p. 273] In Poona Electric supply co. Ltd. V. commissioner of Income Tax Bombaycity-I (supra ) this court has said :- "Income tax is a tax on the real income i.e. the profits arrived at oncommercial principles subject to the provisions of the income taxact." In that case the court has approved the following principle laid down bythe Bombay High court in H.M. Kashiparekh & co. Ltd. v. commissioner ofIncome tax (supra):- "The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender orconcession or rebate in respect or managing agency commission ismade agreed to or given on grounds of commercial expediencysimply because it takes place some time after the close of anaccounting year In examining any transaction and situation of thisnature the court would have more regard to the reality andspeciality of the situation rather than the purely theoretical ordoctrinaire aspect of it will lay greater emphasis on the businessaspect of the matter viewed as whole when that can be donewithout disregarding statutory language." In state bank of Travancore v. commissioner of income tax Kerala (supra )after considering the various decisions of this court sabyasachi Mukharji J.(as the learned chief justice then was ) has said :- In state bank of Travancore v. commissioner of income tax Kerala (supra )after considering the various decisions of this court sabyasachi Mukharji J.(as the learned chief justice then was ) has said :- "An acceptable formula of co- relating the notion of real income inconjunction with the method of accounting for the purpose oftaxation is difficult to evolve besides any strait jacket formula isbound to create problems in its application to every situation itmust depend upon the facts and circumstances of each case whenand how does an income accrue and what are the consequencesthat follow from actual of income as well settled the accrual mustbe real taking in go account the actuality of the situation whetheran accrual has taken place or not must in appropriate cases bejudged on the principles of real income theory After accrual noncharging of tax on the same because of certain conduct based onthe ipse dixit of a particular assessee cannot be accepted indetermining the question whether it is hypothetical income orwhether real income has materialised or not various factors willhave to be taken into account it would be difficult and improper toextend the concept of real income to all cases depending upon theipse dixit of the assessee which would then become a valuejudgment only what has really accrued to the assessee has to befind out and what has accrued must be considered from the point ofview of real income taking the probability or improbability ofrealisation in a realistic manner and dovetailing of these factorstogether but once the accrual takes place on the conduct of theparties subsequent to the year of closing an income which hasaccrued cannot be made "no income ." [P. 154] 11If the matter is examined in the light of the aforementionedprinciples laid down by this court it must be held that even thought theassessee-company was following the mercantile system of accounting andhad made entries in the books regarding enhanced charges for the supplymade 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 11If the matter is examined in the light of the aforementionedprinciples laid down by this court it must be held that even thought theassessee-company was following the mercantile system of accounting andhad made entries in the books regarding enhanced charges for the supplymade 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 1963representative suits (civil suits Nos. 152 of 1963 and 50 of 1964) werefiled by the consumers which were decreed by the trial court and whichdecree was affirmed by the appellate court and learned single judge of theHigh court and it is only on December 3 1968 that the letters patentsAppeals filed by the assessee-company were allowed by the division benchof the high court and the said judgment by the consumers in this court andthe same were dismissed by the judgment of this court and the same weredismissed by the judgment of this court dated February 26 1969. shortlythereafter on march 19 1969 the under secretary to the Government ofGujarat wrote a letter advising the assessee-company to maintain thestatus quo for the rates to the consumers for at least six moths and thechief Electrical inspector was directed to go through the accounts of theassessee-company from year to year and to report to the Governmentabout the actual position about the reasonable returns earned by theassessee-company on may 16 1969 another representative suit (suit no118 of 1969) was filed by the consumers wherein interim injunction wasgranted bu the court and which was finally decreed in favour of theconsumers on June 23 1974 it would thus appear that after the decisionwas taken by the assessee-company to enhance the charges it was not ableto realise the enhanced charges on account of pendency of the earlierrepresentative suits of the consumers followed bu the letter of the undersecretary to the government of Gujarat and the subsequent suit of theconsumers and during the pendency of the subsequent suit themanagement of the undertaking of the assessee-company was taken overby the Government of Gujarat under the Defence of India rules 1971 andthe undertaking was subsequently transferred to the Gujarat stateElectricity Board.” “14The question whether there was real accrual of income to theassessee-company in respect of the enhanced charges for supply ofelectricity has to be considers by taking the probability or improbability ofrealisation in a realistic manner. If the matter is considered in this light itis not possible to hold that there was real accrual of income to theassessee-company in respect of the enhanced charges for supply ofelectricity which were added by the income tax officer while passing theassessment orders in respect of the assessment years under consideration.The Appellate Assistant commissioner was right in deleting the saidaddition made by the income tax officer and the tribunal had rightly heldthat the claim at the increased rates as made by the assessee-company onthe basis of which necessary entries were made represented onlyhypothetical income and the impugned amounts as brought to tax by theincome tax officer did represent the income which had really accrued tothe assessee-company during the relevant previous years. The High courtin our option was in error in upsetting the said view of the Tribunal.” 18Having regard to the aforesaid discussion, we are of the view thatthe Appellate Tribunal committed an error in passing the impugnedorder. 19In the result, this appeal succeeds and is hereby allowed. Theimpugned order passed by t he Appellate Tribunal is hereby quashed andset aside. The substantial question of law as formulated is answered infavour of the Revenue and against the assessee. (J. B. PARDIWALA, J) CHANDRESH (BHARGAV D. KARIA, J)