Friday 11 October 2013

Supreme Court lays down principles on evaluating “real” accrual of income for levy of tax

 
This Tax Alert summarizes a recent ruling of the Supreme Court of India (SC) in the case of Excel Industries Ltd. (Taxpayer) wherein the issue was whether the benefit of entitlement granted against export obligation to make duty-free imports of raw materials is taxable in the year in which the export is made or in the year in which the duty-free import is made.
While ruling on this aspect, the SC observed that an income is taxable under the Indian Tax Laws (ITL) if (a) the income is “due”; (b) there exists a corresponding liability on the other party to pay such sum; (c) there exists a “real”, and not a “hypothetical”, income; and (d) there is a plausibility of realization of benefits by the taxpayer in realistic and practical point of view. Real income can be said to have accrued for the purposes of taxation under the ITL once all these tests are satisfied.
As no “real” income but only a “hypothetical” income accrued to the Taxpayer in the tax year of export, the same would not be taxable in the said year but in the year in which the import is made and entitlement is actually exploited.
The present ruling lays down the key principles for evaluating when an income is said to accrue for the purposes of taxability under the ITL. The ruling reiterates that it is only a real income, and not hypothetical income, which can be taxed in India. Further, for real income to accrue under the ITL, the income should be due; there should be a corresponding liability to pay; and there is a plausible realization of such income in a realistic and practical view point. In case these tests are not satisfied, there can be no accrual of real income but hypothetical income and, accordingly, there can be no levy of tax under the ITL.
The decision of the SC, which is the highest judicial forum in India, is binding on the lower Courts/ Tribunals.

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