Statutory appropriation of profits does not amount to diversion at source or deductible business expenditure.

Amounts credited to the consumers benefit reserve account under the Sixth Schedule to the Electricity (Supply) Act, 1948 are treated as part of a licensee's earned clear profits, not as an exclusion from income at the stage of computation. The scheme does not create a legally enforceable right in consumers before accrual, so the sums are not diverted at source and remain income of the assessee when earned. They are also not deductible as business expenditure under section 10(2)(xv) of the Income-tax Act, 1961, because the setting apart of profits is a statutory appropriation after profits arise, not an outgoing incurred to earn them.

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Issues: (i) Whether the amounts credited to the consumers benefit reserve account under the Sixth Schedule to the Electricity (Supply) Act, 1948 formed part of the assessee's taxable business profits. (ii) Whether those amounts were diverted at source before reaching the assessee as income. (iii) Whether the amounts were allowable as business expenditure under section 10(2)(xv) of the Income-tax Act, 1961.

Issue (i): Whether the amounts credited to the consumers benefit reserve account under the Sixth Schedule to the Electricity (Supply) Act, 1948 formed part of the assessee's taxable business profits.

Analysis: The clear profits of a licensee were computed after taking income-tax into account, and clause II of the Sixth Schedule provided only for the manner of distribution of excess profits. The amounts directed to be distributed to consumers were therefore treated as part of the profits already earned, and not as an exclusion from income at the stage of computation.

Conclusion: The amounts formed part of the assessee's taxable business profits and were not excludible on the footing that they were merely over-charges.

Issue (ii): Whether those amounts were diverted at source before reaching the assessee as income.

Analysis: No provision in the Electricity (Supply) Act, 1948 conferred on consumers a legally enforceable right to claim the excess clear profits. Clause I regulated rates and clause II directed distribution of excess profits, but the scheme did not operate as a diversion of income before accrual. The statutory language also distinguished between an express refund of excess rates under section 57A and the distribution of clear profits under clause II.

Conclusion: The amounts were not diverted at source and remained the assessee's income when earned.

Issue (iii): Whether the amounts were allowable as business expenditure under section 10(2)(xv) of the Income-tax Act, 1961.

Analysis: The setting apart of the sums was not expenditure incurred wholly and exclusively for the purpose of the business. It was a statutory appropriation of profits after they had arisen, and not an outgoing made to earn the profits.

Conclusion: The amounts were not deductible as business expenditure under section 10(2)(xv) of the Income-tax Act, 1961.

Final Conclusion: The reference was answered against the assessee, and the disputed sums were held to be taxable and not deductible in the relevant assessment years.

Ratio Decidendi: A statutory direction to distribute a portion of earned profits does not amount to diversion at source where the recipient has no legally enforceable claim before accrual; such amounts remain taxable profits and are not deductible merely because they must later be applied for the benefit of others.

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