Hypothetical income cannot be taxable: Karnataka High Court

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MUMBAI: Future notional income or hypothetical income which is yet to be realised cannot be taxable on an assumption that the money would be received at some point, Karnataka High Court has ruled.

The court was ruling in the matter of Karnataka state government versus the income tax department. As per the details of the case the tax department had taxed future income that the state government would have received from transmission of electricity, a Deloitte tax note read.

Karnataka government charges “wheeling charges” which are kind of revenue for the electricity it supplies to other state governments. The tax department said that while the state government had debited the expenses towards the wheeling charges in the current financial year, it had not added the revenue part in the accounts.

“The expenditure towards transportation / wheeling was debited to the books of accounts. The taxpayer could not be permitted not to offer the wheeling charges to tax merely on the ground that the revenue was not realised in the relevant financial year,” the tax department said.

In relation to the Accounting Standards to be followed by taxpayer following mercantile system of accounting), defined the expression ‘accrual’ to mean the revenue and cost accrued that is recognised as they were earned or incurred and recorded in the financial statements of the period to which they relate,” the Karnataka High Court ruled.

The Deloitte note said that the HC held that the income from wheeling charges never accrued to the taxpayer and was hypothetical income and not real income. Thus, the income could not have been subjected to tax and in view of accounting standards, the taxpayer had rightly decided not to recognise the wheeling charges for the relevant year.

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