Kalpesh Classes

The objective of taxation of income has undergone metamorphosis from time to time with various deeming provisions treating capital​​ receipts as income and disallowing revenue expenditure. Capital gains and lottery income, for example are instances of receipts deemed as income. Similarly disallowance of expenditure incurred in cash under section 40A(3) and specified unpaid liability under section 43B are instances of revenue expenditure being disallowed. These constitute divergences as between real and assessable income as a matter of State policy.​​ 

However, there are many disputes as to whether a particular receipt is income or a particular payment is really a revenue expenditure, on which one is not able to give a decisive answer.​​ The concept of real income is often used for deciding the issue one way or the other.​​ The courts have used this concept for ensuring that what is taxed, is as nearly real as possible within the constraints of statutory limitations.​​ 

The concept of real income came for critical analysis in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) where the issue related to the deductibility or otherwise of a provision by way of​​ interest suspense account, majority decisions holding that the concept of real income does not extend to a situation, where such provision is made on an ad hoc basis.​​ The Supreme Court in the judgment of Sabyasachi Mukharji J. in the leading judgment had laid down the following propositions as to what constitutes real income in the following words in State Bank of Travancore v. CIT [1986] 158 ITR 102 at page 155:​​ 

• It is the income which has​​ really accrued​​ or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.​​ 

• The concept of​​ real income would apply where there has been a surrender of income​​ which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue.​​ 

• Where a​​ debt has become bad, deduction in compliance with the provisions of the Act should be claimed​​ and allowed.​​ 

• Where the Act applies, the​​ concept of real income should not be so read as to defeat the provisions​​ of the Act.​​ 

• If there is any​​ diversion of income at source under any statute or by overriding​​ title, then there is no income to the assessee.​​ 

• The​​ conduct of the parties in treating the income in a particular manner is material evidence​​ of the fact whether income has accrued or not.​​ 

• Mere improbability of recovery, where the conduct of the assessee​​ is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry-but taking the interest merely in suspense account cannot be such evidence​​ to show that no real income has accrued to the assessee or been treated as such by the assessee.​​ 

• The concept of​​ real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within​​ well-recognised limits.

It was however conceded that application of the above principles in a particular case is not easy. There is no strait-jacket formula applicable for all occasions.​​ In a recent judgment, the Supreme Court in CIT v. Shiv Prakash Janak​​ Raj & Co. Pvt. Ltd. [1996] 222 ITR 583 had occasion to review the case law in a case where the assessee-company had claimed that the interest receivable by it, from a firm in which its shareholders and directors were interested, had been waived and that,​​ therefore, it would not be taxable. A number of citations were given and the concept of real income was canvassed in favour of the assessee. The Supreme Court found that the case law had always indicated that under mercantile system of accounting, accrual​​ of income had involved tax liability. The fact, that such income was not realised subsequently, is not a matter​​ which could be taken into consideration in determination of the income for that year. Similarly, where it is found that the assessee retains the​​ right to recover such accrued income as at the end of the year, it cannot retrospectively claim that such income is not taxable. In other words, the fact that the income was given up subsequent to the year cannot help the taxpayer and the concept of real​​ income cannot come to the assistance of such taxpayer as was found in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC).​​ 

The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession​​ or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year.​​ In examining any transaction and situation of this nature the​​ court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language.