The Meghalaya High Court recently ruled that income tax cannot be levied on hypothetical income recorded in a company’s books, as it does not constitute “real income.” The Court emphasized that once an order is finalized under Section 263 of the Income Tax Act, the Assessing Officer is precluded from ordering a re-assessment of income.
In a case involving the assessment of hypothetical income received through surcharges, the Appellate Tribunal overturned the assessing officer’s decision, asserting that income tax cannot be imposed on income that the company never earned or received. Despite the finality of the Tribunal’s decision, the assessing officer proceeded with re-assessing the hypothetical income under Section 263.
Chief Justice S. Vaidyanathan’s authored judgment upheld the Tribunal’s decision, stating that income tax should only be imposed on actual income earned by the company, not hypothetical income. The Court referred to the Supreme Court’s ruling in Commissioner of Income-tax Vs. Shoorii Vallabhdas and Co., (1962) 046 ITR 0144, where it was established that hypothetical income does not constitute real income and does not result in actual receipt of income.
Additionally, the Court found the assessing officer’s re-assessment order to be legally unsustainable. It reasoned that once the order under Section 263 stands quashed by the Appellate Authority, the Assessing Officer is not permitted to issue a re-assessment order.
Consequently, the Court dismissed the Income Tax Appeal filed by the Department against the Appellate Tribunal’s decision.
The case details are as follows:
Case Title: Principal Commissioner of Income Tax, Shillong v. M/s North Eastern Electric Power Corporation Limited
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
For more details, you can refer to the original judgment.