Law: Income Tax Act, 1961

Section: 144B

Income-tax----Income---Accounting---Real income principle---Mercantile system of accounting---Mere posting of entry in accounts maintained on mercantile system---Not sufficient---Amount claimed by assessee from provincial Government over and above the price tentatively agreed and entered in accounts maintained on mercantile system---Provincial Government rejecting assessee's claim---Amount entered in accounts not assessable. In order to tax an income, one has to see whether it is the real income or whether the income has materialised. What is necessary to be considered is the true nature of the transaction and whether in fact the transaction has resulted in profit or loss to the assessee. Once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. Even under, the mercantile system of accounting, it is only the accrual of real income which is chargeable to tax. The income should not be hypothetical income, but real income. If income is given up unilaterally by the assessee after it had accrued, he could not escape liability to tax. When income is in fact received but subsequently given up, it remains the income of the recipient and tax is payable. When income has not resulted at all, there is neither accrual nor receipt of income even if there is an entry to that effect in the books of account. Mere posting of an entry in the account books would not always supply conclusive evidence on the question whether the disputed amount has accrued to the assessee or not. Mere effort on the part of the assessee to realise the amount by sending a bill or making a claim or filing a suit for recovery would not, in law, make it income which has accrued in the year in question. The transfer of the amount to the profit and loss account is bereft of my significance. The assessee was a public sector undertaking engaged in the manufacture and sale of pharmaceutical products. The entire production of the assessee was supplied to the Kerala Government. There was an agreement between the assessee and the State Government that if the price structure fixed by the Government was lower than the price fixed by the assessee, the excess payment…

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