Income does not accrue in the year of export but in the year in which imports are made

The income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount

Under what circumstances, Section 28(iv) of the Income Tax Act, 1961 shall be attracted, was the issue that arose for consideration before the Apex Court. Section 28 lay down income chargeable to income-tax under the head “Profits and gains of business or profession” and sub-clause (iv) deals with the value of any benefit or perquisite, whether convertible into money or not, arising from business or in the exercise of a profession.

It was reaffirmed that no income tax can be levied on hypothetical income. The income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount.” A hypothetical income in form of benefits may or may not materialise and its money value therefore cannot be ascertained as income of the Assessee.

There are three tests to examine the liability, namely, (i) whether the income accrued to the Assessee is real or hypothetical; (ii) whether there is a corresponding liability of the other party; and (iii) the probability or improbability of realisation of the income by the assessee has to be considered from a realistic and practical point of view

The present appeal dealt with the question as to 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 relevant year in which exports are made or in the year in which the duty free imports are made?

Based on the above three test, even if 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. 

Even otherwise there was consistent view taken in earlier proceedings in favour of the Assessee that the benefits under the advance licences or under the duty entitlement pass book does not represent real income of the Assessee. The Revenue therefore cannot be allowed to flip-flop on the issue. 

Commissioner of Income Tax vs. M/s Excel Industries Ltd.
(SC, 08.10.2013)