Holding

Receipts directly linked to the construction of the plant are capital receipts that reduce the cost of assets and are not taxable as income; a hypothetical entry that does not reflect real income is likewise not assessable.

Summary

Bokaro Steel Ltd., a government‑owned corporation, was in the process of constructing its steel plant and had not yet commenced business. During the assessment years it received (i) rent for quarters provided to contractors’ workers, (ii) hire charges for plant and machinery supplied to contractors, (iii) interest on advances made to contractors, (iv) royalty for stones excavated from its land, and (v) an entry for interest on locomotives that was later reversed as a hypothetical transaction. The Income‑Tax Appellate Tribunal held that the first four receipts were capital in nature, reducing the cost of construction, and therefore not taxable; the High Court affirmed this view and also held that the hypothetical interest entry did not constitute real income. The Supreme Court upheld the Tribunal and High Court decisions, declaring that receipts intrinsically linked to the setting‑up of plant are capital receipts and not assessable as income, and that a mere accounting entry for hypothetical income cannot be taxed. The appeals were dismissed.

Issues considered

Whether rent received for housing contractors’ workers, hire charges for plant and machinery, interest on advances to contractors and royalty for stones excavated are taxable as income or capital receipts.
Whether interest earned on short‑term deposits by a company before commencement of business is taxable as income.
Whether an accounting entry for interest on locomotives that was later reversed, representing hypothetical income, is assessable under the Income‑Tax Act.

Legislation cited

Income Tax Act, 1961s. 10(5), s. 22, s. 256(1), s. 28, s. 56

Subjects

capital receiptincome taxconstruction phaserenthire chargesroyaltyinteresthypothetical incometaxabilitypre‑commencement of business

Judgment

A COMMISSIONER OF INCOME TAX, BIHAR-II, PATNA.
v.
BO KARO STEEL LTD. BOKARO

DECEMBER 18, 1998

B [SUJATA V. MANOHAR AND G.B. PATTANAIK, JJ.]

Income Tax Act, 1961-Assessee-Bokaro Steel Limited-During
construction offactory and before commencement of business sums received
by it as : (a) rent for housing workers and staff employed by contractors; (b)
C hire charges for plant and machinery given to the contractors for use in
construction work of assessee; (c) interest from advances made to the
contractors by assessee for purpose of facilitating work of construction-
Held, these are receipts of capital nature and cannot be taxed as income-
These receipts being inextricably linked with the setting up of the capital
D structure of the assessee-company, reduced cost of construction and could
not be held to be income of assessee from any independent source.

Capital Receipt-Royalty-Assessee-Company receiving certain
amount by way of royalty charged from contractor for use of stones lying on
assessee 's land for construction work-Cost of the plant to the extent of such
E royalty received reduced for the assessee-Royalty received-Held to be a
capital receipt.

Income-Hypothetical income-Assessee making an entry in its books
of accounts showing certain amount as income from interest received from
another company for the eight locomotives supplied by the assessee-comparry
F to them-Entry reversed in the next year since the other company replaced
the eight locomotives lent by the assessee company to it by new ones-Said
entry reflecting only hypothetical income and the assessee not receiving any
:-ea! income-View of the High Court that this entry did not reflect that real
income of the assessee and hence not exigible to income-tax; upheld

G The assessee-company, a corporation wholly owned by the Govt of India
was incorporated in January 1964 with the object to construct and own
integral iron and steel works. During the assessment years under
consideration, the work of construction of the company's factory and
installation of the plant was in the process of completion. The company had
H not started any business during the assessment year in question. During
680
C.I.T. v. BOKARO STEEL LTD . 681
. this period, the assessee company received the following payments: (1) A
Payment for the quarters given to the contractors for the residence of their
workmen engaged in the construction activity of the assessee's plant; (2)
Interest for the advance made to the contractors to enable.them to execute
the large scale construction work smoothly; this interest was later adjusted
against the dues of the contractors; (3) Income in the form of hire charges B
for the plant machinery given to the contractors on hire for the purpose of
construction work; (4) Amount received by way of royalty charged from the
contractor for use of stones excavated from the assessee's land for
construction work; and (5) Interest from a certain sum said to have been
accrued to the assessee during the assessment year 1971-72 from another
company for eight locomotives supplied by the assessee-company to the other C
company. This entry was however reversed in the next year because eight
new locomotives were supplied by the other company to the assessee and no
interest income actually accrued to the assessee.

The Income-tax Appellate Tribunal held that all the amounts (under
items 1 to 4) received by the assessee were in the nature of capital receipts D
which could be set off against the capital expenditure incurred by the assessee
during the relevant assessment years. Hence, these amounts could not be
taxed as income. Reference was made to the High Court by the Income-tax
Appellate Tribunal. The reference was answered in favour of the assessee
and against the appellant thereby upholding the view of the Tribunal. Hence, E
the present appeals.

Dismissing the appeals, this Court

HELD. 1.1. If the assessee receives any amounts which are inextricably
linked with the process of setting up its plant and machinery, such receipts F
will go to reduce the cost of .its assets. These are receipts of a capital nature
and cannot be taxed as income. (691-A)

1.2. The activities of the assessee in co.nnection with all these three
receipts namely, (1) rent for housing workers and staff employed by
contractors for the construction activity of the assessee's plant; (2) hire G
-._,_. charge for plant and machinery given to the contractors for use in
construction work of assessee; (3) interest from advances made to the
contractors by assessee for purpose of facilitating work of construction, are
directly connected with or are incidental to the work of constructio11 of its
plant undertaken by the assessee. To facilitate the work of the contractor,
the assessee permitted the contactor to use the premises of the assessee for H
682 SUPREME COURT REPORTS [1998) SUPP. 3 S.C.R.

A housing its staff and workers engaged in the construction activity of the
assessee's plant. Had ttiis facility not been provided by the assessee, the
contractors would have had to make their own arrangements and this would
have been reflected in the charges of the contractors for the construction
work: The same is true of the hire charge for plant and machinery which
was given by the assessee to the contractor for the assessee's construction
-
B work. The receipts in this connection also go to compensate the assessee for
the wear and tear on the machinery. The advances which the assessee made
to the contractor was as much to ensure that the work of the contractors
proceeded without any financial hitches as to help the contractors. The
arrangements which were made between the assessee-company and the
C contractors pertaining to these three receipts are arrangement which are
intrinsically connected with the construction of its steel plant. The receipts
have been adjusted against the charges payable to the contractors and have
gone to reduce the cost of construction. They have, therefore, been rightly
held as capital receipts and not income of the assessee from any independent
source. [688-G-H; 689-A-EJ
D
1.3 While interest earned by investing borrowed capital in short term
deposits is an independent source of income not connected with the
construction activities or business activities of the assessee, the same cannot
be said in the present case where the utilisation of various assets of the
E company and the payments received for such utilisation are directly linked
with the activity of setting up the steel plant of the asseessee. The receipts
are inextricably linked with the setting up of the capital structure of the
assessee company. They must, therefore, be viewed as capital receipts going
to reduce the cost of construction. (690-D-EJ

F Additional Commissioner of Income-Tax, New Delhi v. Indian Drugs &
Pharmaceuticals Ltd., (1983) 141 ITR 134, affirmed.

Challapalli Sugars Ltd v. Commissioner ofIncome-Tax, A.P., (1975) 98
ITR 167, relied upon.

Tuticorin Alkali Chemicals & Fertilizers Ltd. v. Commissioner ofIncome
G Tax, (1997) 227 ITR 172, referred to.
2. The land had been allowed to be utilised by the contractors for the
purpose of excavating stones to be used in the construction work of assessee's
steel plant. The cost of the plant to the extent of such royalty received, is
reduced for the assessee. It is, therefore, rightly taken as a capital receipt.
H [691-B-CJ
C.I.T. v. BOKARO STEEL LTD. [SUJATA Y. MANOHAR, J.] 683
3. The entry in the books of accounts which was initially made as A
interest from a certain sum said to have been accrued to the assessee from
another company for eight locomotives supplied by the assessee - company
to the other company was reversed the next year because in fact the nature
of the transaction was changed and the assessee did not receive any real
income. The High Court has, therefore, rightly held this entry as not B
reflecting the real income of the assessee and hence not exigible to income-
tax. The entry in the books which was made was about a hypothetical income
which did not materialise and the entry was reversed in the next year. Since
this entry reflected only hypothetical income, it could not be brought as
income. Only real income can be brought to tax. [691-C-E; 692-C-D]

Godhra Electricity Co. Ltd v. Commissioner of Income-Tax, (1997)
c
225 ITR 746, followed.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2544-45 of
1998 Etc.
D
From the Judgment and Order dated 21.10.97 of the Patna High Court
in T.C. Nos. 41 and 42 of 1978.

Ranbir Chandra, S. Rajappa, (K.N. Nagpal), for B.K. Prasad for the
Appellant.
E
S. Ganesh K.J. John and Ms. Manju Mishra for the Respondents.

The Judgment of the Court was delivered by

, MRS. SUJATA V. MANOHAR, J. Civil Appeal Nos. 2544-45of1988
pertain to assessment year 1972-73 while Civil Appeal Nos. 642-48 of 1989 F
pertain to assessment years 1965-66 to 1971-72. The Income-tax Appellate
Tribunal had referred the following questions to the High Court for
determination under Section 256(1) of the Income-tax Act, 1961 :-

At the instance of the Revenue:
G
Assessment year I 965-66:

Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that the hire charges of Rs.
56 received by the assessee-company for letting out the plant and
machinery to the contractors were not taxable? H
684 SUPREME COURT REPORTS [1998] SUPP. 3 S.C.R.

A Assessment year 1966-67:

(1) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that the hire charges of Rs.
7,224 received by the assessee-company for letting out of the plant
and machinery to the contractors were not taxable?
B
(2) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in holding that the royalty of Rs. 8,530 received
from the contractor was not taxable as it was of capital nature and not
revenue?

C Assessment year 1967-68:

(1) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that the hire charges of Rs.
12, 195 received by the assessee-company for letting out of the plant
and machinery to the contractors were not taxable?
D (.;.) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in holding that the royalty of Rs. 1,22,902
received from the contractors was not taxable as it was capital in
nature and not revenue?

Assessment year 1968-69:
E
(1) Whether, on the facts and in the circumstances of the case, the
Tribuna1 was justified in law in holding that the hire charges of Rs.
17,913 received by the assessee-company for letting out of the plant
and machinery to the contractors were not taxable?

F (2) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in holding that the royalty of Rs. 65, 799 received
from the contractor was not taxable as it was of capital in nature and
not revenue?

Assessment year 1969-70:
G
(I) Whether, on the facts and in the circumstances of the case, the ..,..
Tribunal was justified in law in holding that the hire charges amounting
to Rs. 46,342 received by the assessee-company for letting out of foe
plant and machinery to the contractors were not taxable?

H (2) Whether, on the facts and in the circumstances of the case, the
C.l.T.v. BOKARO STEEL LTD. [SUJATA V. MANOHAR,J.J 685
Tribunal was justified in law in holding that the royalty of Rs. 25,928 A
received from the- contractors was not taxable as it was of capital
nature and not revenue?

Assessment year 1970-71:

(I) Whether, on the facts and in the circumstances of the case, the B
Tribunal was justified in law in holding that the interest received by
the assessee-company on the amount of Rs.7,50,502 advanced to the
contractors was not taxable?

(2) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that the hire charges of Rs. C
182 received by the assessee-company for letting out the plant and
machinery to the contractors were not taxable?

(3) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in holding that the royalty ofRs.13,052 received
from contractors is not taxable as it is of capital nature and not D
revenue?

(4) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding miscellaneous receipt of Rs.
49 as not taxable?
E
Assessment year 1971-72:

(I) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that the interest received by
the assessee-company on the amount of Rs. 14,98,993 advanced to
the contractor was not taxable? F
(2) Whether, on the facts and in the circumstances of the case, the
tribunal was justified in law in holding that the hire charges of
Rs.3,68,442 received by the assessee-company for letting out the plant
and machinery to the contractors were not taxable?
G
·~· (3) Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in holding that the royalty of Rs. 6,504 received
from the contractors is not taxable as it is capital in nature and not
revenue?

(4) Whether, on the facts and in the circumstances of the case, the H
686 SUPREME COURT REPORTS (1998] SUPP. 3 S.C.R.

A Tribunal was justified in law in holding that the interest received
amounting to Rs.7,39,332 by the assessee-company on the amount
advanced to Mis. Hindustan Steel Ltd. is not taxable?"

For the assessment year 1972-73 a consolidated reference was made at the 'lI
instance of the revenue as well as the assessee and the following questions
B were referred:-

"(I) Whether on the facts and in ·the circumstances of the case, the
receipts arising from the letting out of the quarters to the outsiders,
such as employees of the contractors engaged in the construction of
the plant can be treated as the income of the assessee and/or, in any
c event, should be adjusted against the cost of construction so as to
reduce such cost?

(2) Whether on the facts and in the circumstances of the case, the
receipts from the letting out of the properties to outsiders, such as the
employees of the contractors engaged in the construction of the plant
D are to be assessed as income from property 'Under section 22 of the
Income-tax Act, 1961, or the said income should be assessed under
section 28 of the Income-tax Act, 1961, as business income or in any
event, under section 56 of the Income-tax Act, 1961, as income from
other sources?
E (3) Whether on the facts and in the circumstances of the case, the
receipts arising from the letting out of the quarters to the outsiders,
such as employees of the contractors engaged in the construction of
the plant can be treated as the income of the assessee and/or, in any
event, should be adjusted against the cost of construction so as to
F reduce such cost?

(4) Whether on the facts and in the circumstances of the case, the
interest received from the bank. on short-term deposits is liable to be
assessed as the income of the assessee or such interest should
reduce the cost of construction of the assessee _and, therefore, would
G not constitute the income of the assessee?
..,.
The assessee is a corporation wholly owned by the Government of
India. It was assessed in the status of a company.

The assessee-company, Mis Bokaro Steel Ltd., was incorporated in January
H 1964. Its object was to construct and own an integral iron and steel works.
C.I.T. v. BOKARO STEEL LTD. [SUJATA V.MANOHAR,J.) 687
During the assessment years under consideration, the work of construction A
of the company's factory and installation of the plant was in the process of
completion. The company had not started any business during the assessment
years in question.

(!) During this period the company had given to the contractors
quarters for the residence of the staff and workers employed by the B
contractors who had been engaged by the assessee-respondent for
carrying out the work of construction. The assessee charged the
contractors for the use of the quarters so given to the contractors for
the residence of his workmen who were engaged in the construction
activity of the assessee's plant. C
(2) Secondly, during the assessment years in question the assessee
had entered into supplementary agreements with its contractors under
which the assessee had made certain advances to the contractors to
enable them to execute the large scale construction work smoothly.
The assessee had agreed to advance these advances to the D
contractors on payment of interest. The contractors thus did not have
to raise funds from outside agencies. For the assessee-company, this
arrangement primarily meant payment in advance of the amounts of
the contractors' bills for which the assessee-company had charged
interest. This interest was later adjusted against the dues of the
contractors. E
(3) For the purpose of the construction work the assessee had given
on hire certain plant and machinery to the contractors. Against the
letting of plant and machinery the assessee received from the
contractors income in the form of hire charges. It was not the business
of the assessee-company to let out plant and machinery to others. F
The assessee-company permitted its use only to its own contractors
for the construction work done by the contractors for the assessee-
company. The Tribunal has found that the assessee-company charged
hire charges for such use of plant and machinery in order to cover the
maintenance and wear and tear of the plant and machinery belonging G
to the assessee.

(4) The assessee-company allowed the contractors to use the stones
lying on the assessee's land for construction work. The stones lying
on the assessee's company's land we1e the capital assets of the
assessee-company. The assessee charged the contractor a certain H
688 SUPREME COURT REPORTS [1998) SUPP. 3 S.C.R. _

A amount by way of royalty for excavation and use of these stones for
construction work.

(5) The assessee had, during the assessment year 1971-72 shown in
its accounts as income from interest a certain sum said to have been
accrued to the assessee froni Mis Hindustan Steel Limited for eight
B locomotives supplied by the assessee-company to Mis Hindustan
Steel Limited. The assessee-company, however, reversed this entry in
the next year because eight new locomotives were supplied by Mis
Hindustan Steel Limited to the assessee and no interest income actually
accrued to the assessee.

C We have to consider whether the amounts received by the assessee
under these five heads can be treated as income of the assessee for the
relevant assessment years. The Tribunal has held that all these amounts
(under items I to 4) received by the assessee have gone to reduce the cost
of construction. These are in the nature of capital receipts which can be set
D off against the capital expenditure incurred by the assessee during the relevant
assessment years. This view has been upheld by the High Court and hence
the department has come by way of the present appeals.

During these assessment years, the respondent-assessee had invested
the amounts borrow~d by it for the construction work which were not
E immediately required, in short-term deposits and earned interest. It has been
held in these proceedings that the receipt of interest amounts to income of
the assessee from other sources. The assessee has .not filed any appeal from
this finding which is given against it. In any case, this question is now.
concluded by a decision of this Court in Tuticorin Alkali Chemicals and
F Fertilizers Ltd v. Commissioner ofIncome-tax, (1997) 227 11'R 172. Hence, we
are not called upon to examine that issue.

We will take the first three heads under which the assessee has received
certain amounts. These are, the rent charged by the assessee to its contractors
for housing workers and staff employed by the contractor for the construction
G work of the assessee including certain amenities granted to the staff by the
asse_ssee. Secondly, hire charges for plant and machinery which was given to
the contractors by the assessee for use into the construction work of the
assessee and thirdly, interest from advances made to the contractors by the
assessee for the purpose of facilitating the work of construction. The activities
of the assessee in connection with all these three receipts are directly connected
H with or are incidental to the work of construction of its plant undertaken by
C.l.T. v. BOKARO STEEL LTD.[SUJATA V. MANOHAR, J] 689
the assessee. Broadly speaking, these pertain to the arrangements made by A
the assessee with its contractors pertaining to the work of construction. To
facilitate the work of the contractor, the assessee permitted the contractor to
use the premises of the assessee for housing its staff and workers engaged
in the construction activity of the assessee's plant. This was clearly to
facilitate the work of construction. Had this facility not been provided by the B
assessee, the contractors would have had to make their own arrangements
and this would have been reflected in the charges of the contractors for the
construction work. Instead, the assessee had provided these facilities. The
same is true of the hire charges for plant and machinery which was given by
the assessee to the contractor for the assessee's _i:onstruction work. The
receipts in this connection also go to compensate ~he assessee for the wear C
and tear on the machinery. The advances which 'the assessee made to the
contractor to facilitate the construction activity of putting together a very
large project was as much to ensure that the work of the contractors proceeded
without any financial hitches as to help the contractors. The arrangements
which were made between the assessee-company and the contractors pertaining
to these three receipts are arrangements which are intrinsically connected D
with the construction of its steel plant. The receipts have been adjusted
against the charges payable to the contractors and have gone to reduce the·
cost of construction. They have, therefore, been rightly held as capital receipts
and not income of the assessee from any independent source.
E
In the case of Addi. Commissioner of Income-tax, New Delhi v. Indian
Drugs and Pharmaceuticals Ltd., (1983) 141 !TR 134, the Delhi High Court
considered a case where the work of construction of the factory of the
· assessee was in progress and production had not commenced. Receipts from
sale of tender forms and supply of water and electricity to the contractors
engaged in construction as also receipts on account of sale of stones, boulders, F
grass and trees were held to be receipts not from independent sources but
were considered as inextricably linked with the process of setting up of
business. These were directly related to the capital structure of business and
were held to be capital in nature. We agree with this view taken by the Delhi
High Court.
G
The appellant, however, relied upon the decision of this Court in
Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-
tax (supra). That case dealt with the question whether investment of borrowed
funds prior to commencement of business, resulting in earning of interest by
· the assessee would amount to the assessee earning any income. This Court H
690 SUPREME COURT REPORTS (1998] SUPP. 3 S.C.R.

A held that if a person borrows money for business purposes, but utilises that
money to earn interest, however temporarily, the interest so generated will be
his income. This income can be utilised by the assessee whichever way he
likes. Merely because he utilised it to re-pay the interest on the loan taken,
will not make the interest income as a capital receipt. The department relied
B upon tl:ie observations made in that judgment (at page 179) to the effect that
it the company, even before it commences business, invests surplus funds in
its hands for purchase of land or house property and later sells it at profit,
the gain made by the company will be assessable under the head "capital
gains". Similarly, if a company purchases rented house and gets rent, such
rent will be assessable to tax under Section 22 as income from house property.
C Likewise, the company may have income from other sources. The company
may also, as in that case, keep the surplus funds in short-term deposits in
order to earn interest. Such interest will be chargeable under Section 56 of the
Income-tax Act. This Court also emphasised the fact that the company was
not bound to utilise the interest so earned to adjust it against the interest paid
on borrowed capital. The company was free to use this income in any manner
D it liked. However, while interest earned by investing borrowed capital in short-
term deposits is an independent source of income not connected with the
construction activities or business activities of the assessee, the same cannot
be said in the present case where the utilisation of various assets of the
company and the payments received for such utilisation are directly linked
E. with the activity of setting up the steel plant of the assessee. These receipts
are inextricably linked with the setting up of the capital structure of the
assessee-company. They must, therefore, be viewed as capital receipts going
to reduce the cost of construction. In the case of Chal/apal/i Sugars Ltd. v.
Commissioner of Income-tax, A.P., (1975) 98 !TR 167, this Court examined the
question whether interest paid before the commencement of production by a
F company on amounts borrowed for the acquisition and installation of plant
and machinery would form a part of the actual cost of the asset to the
assessee within the meaning of that expression in Section 10(5) of the Indian
Income-tax Act, 1922 and whether the assessee will be entitled to depreciation
allowances and development rebate with reference to such interest also. The
G Court held that the accepted accountancy rule for determining cost of fixed
assets is to include all expenditure necessary to bring such assets into
existence and to put them in working condition. In case money is borrowed
by a newly started company which is in the process of constructing and
erecting its plant, the interest incurred before the commencement of production
of such borrowed money can be capitalised and added to the cost of the fixed
H assets created as a result of such expenditure. By the same reasoning if the
C.l.T. v. BOKARO STEEL LTD. [SUJATA V. MANOHAR,J.] 691
assessee receives any amounts which are inextricably linked with the process A..
of setting up its plant and machinery, such receipts will go to reduce the cost
of its assets. These are receipts of a capital nature and cannot be taxed as
income.

The same reasoning would apply to royalty received by the assessee
company for stone etc. excavated from the assessee company's land. The B
land had been allowed to be utilised by the contractors for the purpose of

- excavating stones to be used in the construction work of assessee' s steel
plant. The cost of the plant to the extent of such royalty received, is reduced
for the assessee. It is therefore, rightly taken as a capital receipt.

In the assessment year I 971-72, the assessee had shown in its books C
of accounts a sum of Rs.7,39,232 as income from interest received from
Hindustan Steel Ltd. for the eight locomotives supplied by the assessee-
company to them. The entry in this regard was reversed in the next year since
Mis. Hindustan Steel Ltd .. had replaced the eight locomotives lent by the
assessee-company to it by new ones, The entire nature of the transaction was D
changed between the parties. There was a resolution of the assessee-company
in this regard and the income from interest did not result at all as the original
agreement ceasetl to be operative ab initio. The entry in the books which was
made was about a hypothetical income which did not materialise and the
entry was reversed in the next year. Both the Tribunal as well as the High
Court have held that since this entry reflected only hypothetical income, it E
could not be brought to tax as income. Only real income can be brought to
tax.

In support of this finding, the assessee has drawn our attention to a
decision of this Court in Godhra Electricity Co. Ltd. v. Commissioner of
Income-tax, (I 997) 225 ITR 746 where the Court, inter alia, examined the case F
system and the mercantile system of accounting in the context of hypothetical
income. The computation of income is made in accordance with the method
of accounting regularly employed by the assessee. It may be either the case
system where entries are made on the basis of actual receipts and actual
outgoings or disbursements; or it may be the mercantile system where entries G
are made on accrual basis, that is to say, accrual of the right to receive
... payment and the accrual of the liability to disburse or pay. However, in both
cases unless there is real income, there cannot be any income-tax. Considering
the facts before it, the Court said that although the assessee-company was
following the mercantile system of accounting and had made entries in the
books regarding enhanced charges for the supply of electricity made to its H
692 SUPREME COURT REPORTS (1998] SUPP. 3 S.C.R.

A consumers, no real income had accrued to the assessee-company in respect
of those enhanced charges in view of the fact that soon after the assessee-
company decided to enhance the rate, representative suits were filed by the
consumers which were decreed by the court and ultimately, after various
proceedings which took place, the assessee-company was not able to realise ,
the enhanced charges. The Court held that no real income had accrued to
B assessee-company and hence the entries in respect of enhanced charges did
not reflect the real income of the assessee and could not be brought to tax
by the Income-tax Officer.

In the present case also the entry which was initially made as interest
C was reversed the next year because in fact the nature of the transaction was
changed and the assessee did not receive any real income. The High Court
has, therefore, rightly held this entry as not reflecting the real income of the
assessee and hence not exigible to income-tax. Jn the premises, the appeals
are dismissed. There will, however, be no order as to costs.

D M.P. Appeals dismissed.