I raised my rates and booked the higher billing in my accounts, but customers sued and I could never collect. Must I still pay tax on it?
No. The Supreme Court held that although the company kept its books on the mercantile system and had passed entries for the enhanced charges, no real income accrued to it. Whether income has accrued must be judged by taking the probability or improbability of realisation in a realistic manner, not by the entries. Here representative suits by consumers, an injunction, a State Government letter advising the company to hold its rates, and the later takeover of the undertaking meant the enhanced charges could never be collected. The entries represented hypothetical income only, and the additions were rightly deleted.
Decided by the Supreme Court (Supreme Court of India - S.C. Agrawal and G.B. Pattanaik, JJ (judgment by Agrawal, J)) on 1997-04-03, reported as AIR 1997 SC 2350; (1997) 4 SCC 530; (1997) 225 ITR 746; (1997) 91 Taxman 351; 1997 AIR SCW 2239. It bears on section 5, section 145, section 28 of the Income Tax Act 1961, in Assessment & Scrutiny matters.
This is the case practitioners cite for the real income principle, and it is cited more than almost any other. Its value is that it shows the principle working on facts rather than as a slogan. The Court accepts the discipline the earlier authorities impose - accrual cannot be undone by the ipse dixit of the assessee, and once income has accrued, later conduct of the parties cannot turn it into no income - and then finds that on these facts accrual never happened at all. It also holds that an obstacle need not be legally binding to defeat accrual: a State Government letter that was only advice, which a licensee could not in practice ignore, counted, because one has to look at things from a practical point of view.
Binding on every court and authority in India.
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The assessee supplied electricity in the Godhra area as successor to a licensee under the Indian Electricity Act, 1910. In 1963 it unilaterally raised its charges for motive power and then for light and fans. Consumers brought two representative suits challenging the increase. They succeeded before the trial court, the appellate court and a single judge of the Gujarat High Court, and only on 3 December 1968 did a Division Bench allow the company's Letters Patent Appeals; the Supreme Court affirmed that on 26 February 1969. Weeks later the Under Secretary to the Government of Gujarat wrote advising the company to maintain the status quo on rates for at least six months, and asked the Chief Electrical Inspector to examine its accounts. On 16 May 1969 consumers filed a fresh representative suit, obtained an interim injunction, and in June 1974 obtained a decree limiting the recoverable rates. Meanwhile the undertaking was taken over by the Government of Gujarat under the Defence of India Rules and later transferred to the Gujarat Electricity Board. The company had entered the enhanced charges in its books; the Income-tax Officer taxed them for assessment years 1969-70 to 1972-73.
The appeals were allowed, the High Court's judgment set aside and the referred questions answered in favour of the assessee, with no order as to costs. No real income had accrued to the company in respect of the enhanced charges, notwithstanding the mercantile system and the entries in its books. The Appellate Assistant Commissioner had rightly deleted the additions and the Tribunal had rightly held that the claim at the increased rates, and the entries founded on it, represented only hypothetical income, and that the sums taxed did not represent income which had really accrued in the relevant previous years. The High Court had erred in upsetting the Tribunal. The Court also corrected the High Court on the facts: the 1969 suit was not confined to the period after 31 March 1969, since the decree of 20 June 1974 challenged the 1963 enhancement itself and declared the recoverable rates without limiting the declaration to any later period.
The Court applied the principles it had already settled on real income. Income that has accrued cannot be treated as not having accrued because of what the assessee later chooses to do; the concept cannot be extended to every case on the assessee's ipse dixit, which would make it a value judgment. But what has really accrued must be found out, and that is done by taking the probability or improbability of realisation in a realistic manner and weighing the relevant factors together. Applying that, the Court traced the history from 1963 onwards and found that at no point in the years in question could the company have realised the enhanced charges. The representative suits stood in the way until December 1968 and, once they were out of the way, the Government's letter arrived within weeks. That letter had no legally binding effect, but the Court held one has to look at things from a practical point of view, following R.B. Jodha Mal Kuthiala: a licensee could not ignore a direction of the State Government couched as advice. Before the six months expired the second suit was filed with an injunction, and while it was pending the undertaking was taken over and then transferred away, so the company was in no position to recover. The entries in the books therefore recorded a claim, not an accrual, and the Tribunal's conclusion followed from the material.
It is no doubt true that the letter addressed by the under secretary to the Government of Gujarat to the assessee-company had no legally binding effect but one has to look at things from practical point of view.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that although the company kept its books on the mercantile system and had passed entries for the enhanced charges, no real income accrued to it. Whether income has accrued must be judged by taking the probability or improbability of realisation in a realistic manner, not by the entries. Here representative suits by consumers, an injunction, a State Government letter advising the company to hold its rates, and the later takeover of the undertaking meant the enhanced charges could never be collected. The entries represented hypothetical income only, and the additions were rightly deleted. This was decided by the Supreme Court (Supreme Court of India - S.C. Agrawal and G.B. Pattanaik, JJ (judgment by Agrawal, J)) and bears on section 5, section 145, section 28 of the Income Tax Act 1961. It is reported as AIR 1997 SC 2350; (1997) 4 SCC 530; (1997) 225 ITR 746; (1997) 91 Taxman 351; 1997 AIR SCW 2239. This is the case practitioners cite for the real income principle, and it is cited more than almost any other. Its value is that it shows the principle working on facts rather than as a slogan. The Court accepts the discipline the earlier authorities impose - accrual cannot be undone by the ipse dixit of the assessee, and once income has accrued, later conduct of the parties cannot turn it into no income - and then finds that on these facts accrual never happened at all. It also holds that an obstacle need not be legally binding to defeat accrual: a State Government letter that was only advice, which a licensee could not in practice ignore, counted, because one has to look at things from a practical point of view. If it applies to you, the first step is this: Do not treat the accounting entry as the end of the enquiry; assemble what actually stood in the way of realisation in the year - suits, injunctions, regulatory directions, takeover.
The assessee supplied electricity in the Godhra area as successor to a licensee under the Indian Electricity Act, 1910. In 1963 it unilaterally raised its charges for motive power and then for light and fans. Consumers brought two representative suits challenging the increase. They succeeded before the trial court, the appellate court and a single judge of the Gujarat High Court, and only on 3 December 1968 did a Division Bench allow the company's Letters Patent Appeals; the Supreme Court affirmed that on 26 February 1969. Weeks later the Under Secretary to the Government of Gujarat wrote advising the company to maintain the status quo on rates for at least six months, and asked the Chief Electrical Inspector to examine its accounts. On 16 May 1969 consumers filed a fresh representative suit, obtained an interim injunction, and in June 1974 obtained a decree limiting the recoverable rates. Meanwhile the undertaking was taken over by the Government of Gujarat under the Defence of India Rules and later transferred to the Gujarat Electricity Board. The company had entered the enhanced charges in its books; the Income-tax Officer taxed them for assessment years 1969-70 to 1972-73. The matter was decided on 1997-04-03 by the Supreme Court (Supreme Court of India - S.C. Agrawal and G.B. Pattanaik, JJ (judgment by Agrawal, J)). On those facts the Supreme Court held as follows. The appeals were allowed, the High Court's judgment set aside and the referred questions answered in favour of the assessee, with no order as to costs. No real income had accrued to the company in respect of the enhanced charges, notwithstanding the mercantile system and the entries in its books. The Appellate Assistant Commissioner had rightly deleted the additions and the Tribunal had rightly held that the claim at the increased rates, and the entries founded on it, represented only hypothetical income, and that the sums taxed did not represent income which had really accrued in the relevant previous years. The High Court had erred in upsetting the Tribunal. The Court also corrected the High Court on the facts: the 1969 suit was not confined to the period after 31 March 1969, since the decree of 20 June 1974 challenged the 1963 enhancement itself and declared the recoverable rates without limiting the declaration to any later period.
The Court applied the principles it had already settled on real income. Income that has accrued cannot be treated as not having accrued because of what the assessee later chooses to do; the concept cannot be extended to every case on the assessee's ipse dixit, which would make it a value judgment. But what has really accrued must be found out, and that is done by taking the probability or improbability of realisation in a realistic manner and weighing the relevant factors together. Applying that, the Court traced the history from 1963 onwards and found that at no point in the years in question could the company have realised the enhanced charges. The representative suits stood in the way until December 1968 and, once they were out of the way, the Government's letter arrived within weeks. That letter had no legally binding effect, but the Court held one has to look at things from a practical point of view, following R.B. Jodha Mal Kuthiala: a licensee could not ignore a direction of the State Government couched as advice. Before the six months expired the second suit was filed with an injunction, and while it was pending the undertaking was taken over and then transferred away, so the company was in no position to recover. The entries in the books therefore recorded a claim, not an accrual, and the Tribunal's conclusion followed from the material. In the words reproduced by the source cited on this page: "It is no doubt true that the letter addressed by the under secretary to the Government of Gujarat to the assessee-company had no legally binding effect but one has to look at things from practical point of view."
It was decided by the Supreme Court on 1997-04-03 and is reported as AIR 1997 SC 2350; (1997) 4 SCC 530; (1997) 225 ITR 746; (1997) 91 Taxman 351; 1997 AIR SCW 2239. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 5, section 145, section 28, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed, the High Court's judgment set aside and the referred questions answered in favour of the assessee, with no order as to costs. No real income had accrued to the company in respect of the enhanced charges, notwithstanding the mercantile system and the entries in its books. The Appellate Assistant Commissioner had rightly deleted the additions and the Tribunal had rightly held that the claim at the increased rates, and the entries founded on it, represented only hypothetical income, and that the sums taxed did not represent income which had really accrued in the relevant previous years. The High Court had erred in upsetting the Tribunal. The Court also corrected the High Court on the facts: the 1969 suit was not confined to the period after 31 March 1969, since the decree of 20 June 1974 challenged the 1963 enhancement itself and declared the recoverable rates without limiting the declaration to any later period. It arises in Assessment & Scrutiny matters, on section 5, section 145, section 28 of the Income Tax Act 1961, and was decided by Supreme Court of India - S.C. Agrawal and G.B. Pattanaik, JJ (judgment by Agrawal, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the impediment existed when the income is said to have accrued, not that recovery later became difficult; a debt that accrued and then went bad is a different claim. Put non-binding but practically compelling obstacles on record, with the correspondence; this case turned partly on a letter that had no legal force. Avoid resting the claim on your own decision not to bill or not to pursue recovery - that is the ipse dixit the Court says will not do.
Searched for later treatment; none was found. That is not the same as a source affirming it. A citator search returns 811 later decisions citing the judgment, which is the standard authority cited on real income. None of the decisions named here was found applying or following it. In the Bombay High Court's judgment of 16 June 2026 in CIT (IT) v Gemological Institute of America Inc. the judgment appears only in the list of authorities placed by counsel - 'In support of the proposition that only the real income can be brought to tax, Mr. Mistri placed reliance on the following decisions:- (a) Godhra Electricity Co. Ltd. Vs. CIT (1997) 225 ITR 746 (SC)' - and the Court does not take it up. No decision of the Allahabad High Court of 11 December 2003 in National Handloom Development Corporation v DCIT could be located on two differently worded searches. Nothing overruling or doubting the judgment was found either. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested text is a poor transcription, with names, dates and figures garbled in places and punctuation largely absent; I have taken only what is unambiguous, and the reported date of the 1974 decree appears in the text both as 20 June and 23 June 1974. The long passage the Court quotes on real income is a quotation from its own earlier decision, whose name is not legible in the harvested text, so I have not attributed it. The judgment does not set out the amounts added for each assessment year. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed, the High Court's judgment set aside and the referred questions answered in favour of the assessee, with no order as to costs. No real income had accrued to the company in respect of the enhanced charges, notwithstanding the mercantile system and the entries in its books. The Appellate Assistant Commissioner had rightly deleted the additions and the Tribunal had rightly held that the claim at the increased rates, and the entries founded on it, represented only hypothetical income, and that the sums taxed did not represent income which had really accrued in the relevant previous years. The High Court had erred in upsetting the Tribunal. The Court also corrected the High Court on the facts: the 1969 suit was not confined to the period after 31 March 1969, since the decree of 20 June 1974 challenged the 1963 enhancement itself and declared the recoverable rates without limiting the declaration to any later period.
TaxSphere, “Godhra Electricity Co Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/godhra-electricity-co-ltd-v-cit/ (validity last checked 2026-08-29)
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