(2013) 358 ITR 295 (SC)
Profits and gains of business — charging section; method of accounting
In the year of utilisation. Income accrues only when a right to receive it becomes vested and enforceable; until the licence is used, the benefit is contingent and no real income has arisen.
Does the benefit of advance licences and duty entitlement passbook entitlements accrue as income in the year the licences are granted, or in the year they are actually used to import goods free of duty?
The assessee exported goods and became entitled, under export promotion schemes, to advance licences and passbook credits permitting duty-free import of raw materials. The Revenue sought to tax the face value of these entitlements as income in the year the licences were granted, treating them as a benefit arising from business that had accrued on grant. The assessee recognised the benefit only in the year in which the licences were actually utilised to import materials free of duty, on the footing that until then nothing had crystallised.
The appellate authorities and the High Court accepted the assessee's treatment, noting that the Revenue had consistently accepted the same treatment in other years. The Revenue appealed to the Supreme Court.
For the assessee
The entitlement is a right to import without duty at some future time. Whether any benefit is ever obtained depends on whether imports are made, whether the licence is used within its validity, and on the duty rates then prevailing. Income accrues when the right to receive becomes enforceable, which is on utilisation, not on grant.
For the Revenue
The licences had a market value on grant and could in principle be dealt with. A benefit arising from business is income when it arises, and deferring recognition to utilisation postpones tax without warrant.
The Court applied the settled principle that income accrues when a right to receive it becomes vested, and that a mere expectation or a contingent entitlement is not income. It held that on the grant of an advance licence the assessee obtained no enforceable right to any sum; what it had was the possibility of saving duty if and when it imported materials, which depended on future trading decisions and on circumstances outside its control. Until the licence was actually used, no real income had arisen, and taxing the face value of the entitlement would be taxing a hypothetical benefit. The Court laid emphasis on the concept of real income, observing that the Act taxes income that has actually accrued and not income that may never materialise. It also relied on consistency: the Revenue had accepted the assessee's treatment over many years and there was no justification for departing from it in the years under appeal, particularly where the dispute concerned only the year of taxability and the revenue effect was neutral over time.
Business income is charged under Section 26 of the IT Act 2025 with the method of accounting in Section 272. The real income principle it applies is invoked wherever the Revenue seeks to tax an entitlement, incentive, subsidy or credit before it has been realised, and is frequently paired with Balbir Singh Maini, which applies the same principle to capital gains.