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CIT(A) upheld principle of Real Income Theory

One of clients, a European headquartered group is engaged in real estate and civil construction business in India through a Branch Office. BO’s income source comprised of revenue earned from executing real estate and construction contracts and also income from arbitration awards.


Case was selected for scrutiny assessment by Indian tax office. During the relevant year, the client had won several arbitration awards at the Arbitration Tribunal, with claims valued at around $50 million USD. However, these awards were challenged by the opposing parties in a higher court.

Consequently, the client did not recognize these claims as revenue in its books of accounts.

Tax Authority objections:
Tax officer alleged that realization of these arbitration awards was virtually certain as on the date of signing of Financial since assessee had been awarded these claims by Arbitration Tribunal and therefore, the same should have been considered as income for the relevant Assessment Year in accordance with Accounting Standard - 4, specifically, when cost related to such claims has already been charged to the P&L A/c.

Our arguments in appeal:
We have represented our client before CIT(A). During the hearings, we have primarily laid down emphasis on principles of real income theory which has been appreciated by the Apex court in many landmark cases notably being the case of C.I.T. v. Shoorji Vallabhdas & Co. [(1962) 46 I.T.R. 144] / [TS-1-SC-1962] holding as under –

“Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, via. the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise.”

We argued that in real income theory, only real or actual income and not the hypothetical income can be brought to tax. We further argued that our client did not have unconditional right to receive the income and hence, income does not qualify for accrual.

CIT(A) Ruling:
CIT(A) concurred with our view and held AO’s attempt to bring undecided arbitration award to tax as premature move which lacked legal substance and deleted the additions amounting to USD 50 million.

It ruled that Arbitration awards won by our client at Arbitration Tribunal level but further appealed by opposite party is not income as the company does not have an uncontested right to receive it. Till the time arbitration award is not adjudicated by higher court, our client can not be said to have any right to receive the money in the sense that no right had accrued or vested in this regard.