Real business income excludes amounts held for return to consumers, and accrued refund liability is deductible under mercantile accounting.

Amounts collected under statutory compulsion and credited to a Consumers' Benefit Reserve Account were held not to be part of real business income, because they were retained only for return to consumers by rebate or future distribution and not earned as profits. That amount was therefore deductible in computing taxable business income. The obligation to refund the sums also accrued during the relevant accounting years, and under the mercantile system the accrued liability was deductible in those years. The revenue challenge to the deduction failed, and the High Court's answer was set aside.

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Issues: (i) Whether the amounts credited to the Consumers' Benefit Reserve Account represented part of the assessee's real profits or were deductible in computing business income. (ii) Whether the liability to return the amounts to consumers was deductible in the assessment years on the mercantile system of accounting.

Issue (i): Whether the amounts credited to the Consumers' Benefit Reserve Account represented part of the assessee's real profits or were deductible in computing business income.

Analysis: The statutory scheme under the Electricity (Supply) Act, 1948 regulated the licensee's clear profit for public control of electricity rates, but that statutory clear profit was distinct from commercial profit for income-tax purposes. The amounts in question were part of the excess collected from consumers and were retained only for return to them by rebate or future distribution. Such sums were not part of the assessee's real income and could not be treated as profits earned by the business.

Conclusion: The amounts were not part of the assessee's real profits and were deductible in computing taxable business income under section 10(1) of the Indian Income-tax Act, 1922.

Issue (ii): Whether the liability to return the amounts to consumers was deductible in the assessment years on the mercantile system of accounting.

Analysis: Under the mercantile system, expenditure or liability is taken into account when it accrues, not when it is actually paid. The obligation to return the amounts arose during the relevant accounting years, so the accrued liability was deductible in those years.

Conclusion: The liability was deductible in the relevant assessment years.

Final Conclusion: The appeal succeeded, the High Court's answer was set aside, and the revenue's challenge to the deduction failed.

Ratio Decidendi: Amounts collected under statutory compulsion and retained only for return to consumers do not form part of real business income, and an accrued liability under the mercantile system is deductible in the year of accrual.

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