1962 (7) TMI 55 - HC - Income Tax

Taxability of Appropriated Profits: statutory appropriation after profits are ascertained does not exclude them from taxable income.

Sums set apart under Clause II of the Sixth Schedule to the Electricity (Supply) Act, 1948 constitute part of the assessee's clear profits when ... Clear profits - reasonable return - apportionment or distribution of profits - diversion of income at source - deductibility under section 10(2)(xv) - incorporation of Sixth Schedule into licence and duty to comply - Tariffs and Dividends Control ReserveClear profits - reasonable return - apportionment or distribution of profits - Characterisation of the sums set apart under Clause II of the Sixth Schedule as part of the assessee's clear profits and whether they are taxable when earned. - HELD THAT: - Clause I and II of the Sixth Schedule, as incorporated into the licence by section 57, require adjustment of rates so that 'clear profits' do not exceed the 'reasonable return' and, where clear profits exceed reasonable return, prescribe an apportionment of that excess. 'Clear profits' are defined after making various deductions including income-tax payable in respect of the business. Clause II directs that portions of the excess be retained, appropriated to a tariffs and dividends control reserve, or distributed to consumers. On a fair reading, the part directed to be distributed to consumers is a portion of the clear profits of the licensee and therefore represents distribution of profits after they have been earned. The legislative scheme effects apportionment of profits post-earning; it does not convert those sums into non-income at the point of earning. Established authorities recognise that profits, once earned, attract tax irrespective of their subsequent application unless there is an express statutory diversion of income to another person. Accordingly, the sums set apart under Clause II form part of the assessee's clear profits and are taxable when they come into existence as profits.The sums set apart are part of the assessee's clear profits and are taxable when earned.Diversion of income at source - incorporation of Sixth Schedule into licence and duty to comply - Whether the sums were diverted at source to consumers so as never to become the assessee's income. - HELD THAT: - The question is whether, as a matter of law, the consumers acquired a legally enforceable right in the excess receipts before those sums became income of the assessee. The Sixth Schedule and section 57 do not fix rates charged to consumers nor create a statutory charge in favour of consumers over receipts; Clause II is directory in directing distribution of clear profits and supplies no penal consequence for non-compliance except where rates are fixed under section 57A. Refund obligations arise where rates are fixed under the rating-committee procedure (fourth proviso to Clause I and section 57A), but no such statutory mechanism here diverts the receipts at source to consumers. Absent a legally enforceable claim by consumers or an express statutory appropriation that operates before profits arise, the sums were not diverted at source and therefore remained part of the assessee's income when earned.There was no diversion of the amounts at source to the consumers; the consumers had no statutory enforceable right to those sums prior to their becoming the assessee's profits.Deductibility under section 10(2)(xv) - Tariffs and Dividends Control Reserve - Whether the amounts set apart can be deducted as expenditure under section 10(2)(xv) of the Income-tax Act. - HELD THAT: - Section 10(2)(xv) permits deductions for expenditure laid out wholly and exclusively for the purpose of the business. The sums in question were not incurred outgoings or payments made in the course of earning profits but were apportionments of profits after ascertainment of 'clear profits' under the Electricity Act. They did not constitute expenditure incurred for the purpose of earning income, nor were they payments made pursuant to a legally enforceable charge that would remove them from the assessee's income prior to assessment. The tariffs and dividends control reserve and the portion retained by the licensee similarly do not amount to deductible business expenditure.The amounts set apart are not deductible as expenditure under section 10(2)(xv).Final Conclusion: Reference answered in the negative: the sums set apart by the assessee for distribution under Clause II of the Sixth Schedule formed part of its clear profits and were not deductible in computing assessable income for assessment years 1953-54 and 1954-55; no diversion at source was established and the claim under section 10(2)(xv) fails. Costs awarded to the department. Issues: Whether the sums of Rs. 42,142 (A.Y.1953-54) and Rs. 77,138 (A.Y.1954-55) set apart by the licensee under Clause II of the Sixth Schedule to the Electricity (Supply) Act, 1948 were deductible in computing the assessee's income, profits and gains from business for those assessment years.Analysis: Clause I and Clause II of the Sixth Schedule to the Electricity (Supply) Act, 1948 require adjustment of rates so that clear profits do not, as far as possible, exceed the amount of reasonable return, and prescribe apportionment of any excess of clear profits over reasonable return including retention, appropriation to a tariffs and dividends control reserve, and distribution to consumers by rebate. 'Clear profits' under the Sixth Schedule are defined after deducting income-tax and specified appropriations; thus clear profits are profits ascertained under that statute and include amounts remaining after taxation. The statutory scheme directs distribution of part of those clear profits to consumers after the profits have been earned. No provision in the Electricity (Supply) Act, 1948 or in the Sixth Schedule confers upon consumers a legally enforceable right to the excess clear profits at the source before those amounts become the assessee's profits. The legislative provisions for fixing rates under section 57A and the separate refund obligation when rates are fixed under section 57A distinguish refunds for charging excessive rates from the statutory distribution of clear profits. The Income-tax Act computes taxable 'profits and gains' under section 10(1) and allows specified deductions under section 10(2); a statutory direction to distribute part of already-ascertained profits does not convert those profits into non-income at the point they come into existence. Precedents establish that profits on their coming into existence attract tax, and subsequent appropriation or statutory apportionment of those profits does not negate their character as income unless there is a legal diversion at source to another party enforceable against the taxpayer.Conclusion: The two sums set apart under Clause II of the Sixth Schedule are part of the assessee's clear profits and were not diverted at the source to consumers or otherwise excluded from the assessee's income; they were not deductible in computing the assessee's assessable income for the stated assessment years.Ratio Decidendi: Amounts that constitute profits on their coming into existence are taxable when earned; a statutory requirement to appropriate or distribute part of such profits after they are ascertained does not prevent those amounts from being income of the taxpayer unless there is a legally enforceable diversion of the income at source to another person.