K.S. Jhaveri, J. - This Tax Appeal u/s. 260A of the Income-tax Act, 1961 is filed against the order dated 23.11.2006 passed by the Income-tax Appellate Tribunal, Ahmedabad in ITA No. 2665/Ahd/2005 raising the following substantial question of law;
"Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that disputed income is exigible to tax even when the same has not accrued to the assessee?"
2. The facts in brief are that the assessee was awarded contract for hiring services for compression of natural gas at Ankleshwar by ONGC. The assessee raised bill as per the contract. However, on account of some dispute with ONGC, the assessee showed only 50% of the contractual amount as its income in its return on the ground that the remaining amount has not been accrued. However, the Assessing Officer took the view that since income had accrued to the assessee, the income was fully taxable. Against the order of Assessing Officer, appeal was filed before the CIT (A). However, the CIT (A) dismissed the appeal filed by the assessee. Being aggrieved by the same, the assessee filed second appeal before the Tribunal. However, the Tribunal dismissed the appeal filed by assessee, by impugned order dated 23.11.2006. Hence, this appeal.
3. We have heard learned counsel for both the sides and perused the documents on record.
4. Mr. S.N. Soparkar, learned Senior Advocate appearing for the assessee, submitted that the revenue authorities as also the Tribunal committed serious error in law in taxing income which had never accrued to the assessee on account of the dispute between the parties. It was submitted that under the mercantile system of accounting, only real income can be brought under the tax bracket. Notional or hypothetical income cannot be taxed, as has been done by the authorities below. Hence, the impugned order passed by the Tribunal deserves to be quashed and set aside.
5. Mrs. Mauna Bhatt, learned Standing Counsel appearing for the Revenue, submitted that accrued income has not been shown by the assessee in its return and therefore, the Tribunal was justified in confirming the orders passed by the authorities below.
6. It transpires from the record that assessee was following the mercantile system of accounting. The revenue authorities made the addition of accrued income on the ground that assessee had carried out work according to the satisfaction of ONGC and had raised the bill at the agreed rate. Therefore, it is not a case where the assessee had not carried out the contractual work. In fact, the ONGC had undertaken to make interim payment of the agreed rate till the contractual issues were resolved. We find that the Assessing Officer made addition on the ground that income had accrued during the year though the assessee had not received the actual income.
7. In this background, it would be relevant to refer to a judgment of the Apex Court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295/219 Taxman 379/38 taxmann.com 100 wherein, the Apex Court made the following observations in Paras 20 & 21 of the judgment;
"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.
21. Insofar 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."
8. Considering the principle rendered in the aforesaid decision and in view of the fact that ONGC had disputed the liability, it cannot be said that there was any corresponding liability on the ONGC to pay the accrued amount to the assessee. Only when a corresponding liability arises on the ONGC to pay up the accrued amount, the income will become taxable. Thus, the authorities below as also the Tribunal seriously erred in holding that the disputed income is exigible to tax.
9. Thus, we answer the question in the negative, i.e. in favour of the assessee and against the Revenue. The appeal stands disposed of accordingly. No order as to costs.