Income Tax Act | Hypothetical Income Appearing In Books Of Account Is Not Taxable: Meghalaya High Court

The Meghalaya High Court has held that the entries of the hypothetical income that occurred in the books of the company would not be considered as a 'real income' to levy 'income tax'.

The Court also said that once an order passed under Section 263 of the Income Tax Act by the Appellate Authority becomes final, then the Assessing Officer cannot order a re-assessment of income.

“Once the order under Section 263 of the Act, 1961 has become final and stood quashed, no question of passing another order will arise in view of invalid in the eye of law, as the opinion formed by the Assessing Officer is not sustained on the reasoning that revision under Section 263 is not permissible. When the order of assessment is found to be erroneous and prejudicial to the interest of Revenue, the right vests with the Principal Commissioner to review the order and since the said stipulation has not been satisfied, the order passed under Section 263 cannot stand on its leg.”, the bench comprising Chief Justice S. Vaidyanathan and Justice W. Diengdoh said.

In the present case, an assessment order was passed against the Company by the assessing officer under Section 263 of the Income Tax Act, 1961 after transactions of receiving hypothetical income via surcharges were recorded under the duty entitlement passbook of the Company.

However, the Appellate Tribunal reversed the assessing officer's order of assessment of hypothetical income and said that income tax could not be levied on hypothetical income that was never earned or received by the company.

Despite the Appellate Tribunal's order attaining finality, the assessment officer ordered a re-assessment of hypothetical income that appeared in the books of the company under Section 263 of the 1961 Act.

Affirming the Appellate Tribunal's decision, the Judgment authored by Chief Justice S. Vaidyanathan held that the income tax can only be levied on the real income derived by the company and not on the hypothetical income that was never received or earned by the company.

The High Court drew reference from the Supreme Court's case of Commissioner of Income-tax Vs. Shoorii Vallabhdas and Co., (1962) 046 ITR 0144, wherein it was held that a Hypothetical income is not a real income as it doesn't result in the receipt of income. The Court said that mere reflection of the hypothetical income (which doesn't materialize) in the books of the company would not grant power to the assessing officer to levy income tax.

Further, the Court held the order of re-assessment by the assessing officer as unsustainable in law. The Court reasoned that once the order under Section 263 of the Act, 1961 has become final and stood quashed by the Appellate Authority, then it would not be permissible for the Assessing Officer to pass an order of re-assessment.

Resultantly, the Court dismissed the Income Tax Appeal preferred by the Department against the Appellate Tribunal's decision.

Counsels for Appellant(s): Mr. S.C. Keyal, Adv with Mr. S. Pandey, Adv

Counsels for Respondent(s): Mr. Ved Jain, Adv with Mr. Nischay Kantoor, Adv, Mr. S. Dodeja, Adv, Mr. S. Jindal, Adv

Case Details: Principal Commissioner of Income Tax, Shillong Versus M/s North Eastern Electric Power Corporation Limited

Citation: 2024 LiveLaw (Megh) 20

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