Exemption from excise duty does not fall in the definition of income as envisaged under Section 2(24)(xviii) of the Income Tax Act.
In a recent judgment, Hon’ble High Court of Jammu & Kashmir and Ladakh held that exemption from excise duty does not fall in the definition of income as envisaged under Section 2(24)(xviii) of the Income Tax Act, 1961 (the Act) and said exemption was not an income but a capital receipt.
ABCAUS Case Law Citation:
4512 (2025) (04) abcaus.in HC
In the instant case, the Revenue had challenged the order passed by the ITAT holding that exemption from excise duty does not fall in the definition of income as envisaged under Section 2(24)(xviii) of the Act.
The respondent assessee had filed the return of income declaring income of rupees nil after setting off brought forward losses. However, during the assessment proceedings it was noticed by the department that the assessee had claimed excise duty refund as capital receipt and had claimed exemption under Section 10 of the Act.
The department was of the view that in view of amendment in finance Act, 2015 and as per the amended section 2(24) (xviii) of the Act, any assistance in the form of subsidy, grant etc. provided by the government or any authority is to be conceded as income.
Therefore, the assessee was asked to explain and show cause, as to why, the excise duty refund taken as capital receipt and claimed as exemption u/s 10, may not be conceded as revenue receipt and taxed accordingly.
In response to the show cause notice the assessee submitted that during the aforementioned year the firm did not receipt any excise refund and just for accounting purposes and quantification before the Supreme Court, the notional amount was booked.
However, the department being not satisfied with the reply of assessee, held that the assessee had furnished inaccurate particulars of income by claiming capital receipt corresponding to the excise duty refund instead of revenue receipt as per amended section 2(24)(xviii) of the Act.
Accordingly, penalty proceedings were also initiated against the assessee for furnishing inaccurate particulars of income.
Against the said assessment order the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who partly allowed the appeal and held that part of the amount cannot be taxed as income for the relevant Assessment Year on the ground that the Excise Department was under no obligation to pay balance 64% of the excise duty collected by the assessee during the said year. Thus, it was directed to the Assessing Officer to delete the addition for 64%. However, the addition of balance amount which was 36% of the net excise duty, was treated as income of the assessee in view of Notification No.19 of 2008 and amended Section 2(24)(xviii) of the Income Tax Act.
Aggrieved of the said order of Commissioner of Income Tax (Appeals), the department as well as assessee filed appeals before the Income Tax Appellate Tribunal. However, the Income Tax Appellate Tribunal vide common order dismissed the appeal filed by the department and allowed the appeal of the assessee.
The Hon’ble High Court observed that assessee had been following the mercantile system of accounting. In this system, incomes and expenses are recorded in the books of accounts, as and when they are earned or incurred, irrespective of the fact whether they are actually received or paid. Therefore, where accounts are kept on mercantile basis, the profits or gains are credited, though they are not actually realized, and, the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. In the mercantile system of accountancy, the book profits are taken for the purpose of assessment of tax, though the credit amount is not realized or the debit amount is not actually disbursed; meaning thereby, in the present case, the impugned amounts as brought to tax by the Income Tax Officer did not represent the income which had really accrued to the assessee during the relevant assessment year.
The Hon’ble High Court further observed that it is settled law that income tax cannot be levied on hypothetical income and only real income can be taxed. Therefore, recording of entries in the books of accounts is not conclusive to determine the income under the provisions of law.
The Hon’ble High Court expressed full agreement with the ITAT that whether an amount is to be considered as income or not is to be determined on the basis of the Income Tax Law and not on the basis of the entries made in the books of accounts; that no tax can be charged on an amount which is not actually earned and that the Tribunal was right, in deleting the addition as hypothetical income which has not actually accrued.
The Hon’ble High Court further observed that the contention of the Revenue was that in view of insertion of Clause (xviii) to Section 2(24) of the Act, introduced by the Finance Act, 2015, any subsidy, grant, cash incentive, duty drawback, waiver, concession and reimbursement referred to in the said clause is considered as income and only because the word ‘exemption’ is not mentioned therein, it is not open for the tax payers to interpret the same as per their own convenience.
The Hon’ble High Court noted that admittedly, as per Black’s Law Dictionary (Sixth Edition) ‘exemption’ means freedom from a general duty or service; immunity from a general burden, tax, or charge, immunity from service of process or from certain legal obligations, as jury duty, military service, or the payment of taxes. Whereas, ‘subsidy’ means a grant of money made by government in aid of the promoters of any enterprise, work, or improvement in which the government desires to participate, or which is considered a proper subject for government aid, because such purpose is likely to be of benefit to the public.
The Hon’ble High Court further noted that in the present case, the assessee was exempted from making payment of excise duty to the extent of 36% of the total excise duty collected, meaning thereby the same was not subsidy given to meet the cost of the project.
The Hon’ble High Court held that in view of the above, the ITAT rightly held that exemption from excise duty does not fall in the definition of income as envisaged under Section 2(24)(xviii) of the Act and that the amount under question was not an income but a capital receipt not taxable under the provisions of the Income Tax Act.
Accordingly, the appeal of the Revenue was dismissed.
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