1965 (4) TMI 20 - SC - Income Tax

Deductibility of statutory consumer rebates confirmed as allowable against business income when accrued under the mercantile system.

Amounts credited to a Consumers' Benefit Reserve Account representing excess clear profit refundable to consumers are deductible in computing business ... Real income - statutory profit versus commercial profit - deductibility of rebates/returns to consumers - deductions for ascertaining profits - mercantile system of accounting - accrued liability as deductible expenditureReal income - statutory profit versus commercial profit - deductibility of rebates/returns to consumers - deductions for ascertaining profits - Whether sums credited to the Consumers' Benefit Reserve Account were deductible in computing the assessee's income from business for the assessment years 1953-54 and 1954-55 - HELD THAT: - The Court held that income-tax is leviable on the 'real income'-profits computed on commercial principles-and that statutory 'clear profit' under the Electricity (Supply) Act, 1948, is a distinct, purpose specific statutory profit. Amounts representing a statutory rebate to consumers (the sums credited to the Consumers' Benefit Reserve Account) were part of the excess collected to be returned to consumers and did not form part of the assessee's real profits. Consequently those amounts are deductible from the receipts in computing taxable business profits under section 10(1) of the Income tax Act, since in substance the company received only the net amount after the statutory return to consumers. The Court relied on the distinction between deductions required to ascertain profits and distributions made out of profits and applied authorities emphasising that where an appropriation is in reality a return to customers and not a distribution of realized commercial profit, it cannot be treated as part of taxable profit.The sums credited to the Consumers' Benefit Reserve Account are deductible in computing the assessee's taxable business income for AY 1953-54 and AY 1954-55; the question is answered in the affirmative in favour of the assessee.Mercantile system of accounting - accrued liability as deductible expenditure - Whether the amounts reserved for future payment (Consumers' Benefit Reserve) were deductible in the assessment years when the liability accrued under the mercantile system of accounting - HELD THAT: - The Court accepted that the assessee follows the mercantile system of accounting and that the liability to return the amounts arose in the relevant accounting years. Citing the principle that under mercantile accounting accrued liabilities and estimated expenditures chargeable to the year in which they arise may be deducted, the Court held that the reserved sums were deductible in the accounting years in which the statutory liability accrued. The revenue did not contest the legal position established by precedent that accrual basis liabilities of this character are allowable when accounts are maintained on a mercantile basis.Under the mercantile system the liability having accrued in the relevant accounting years, the reserved amounts were deductible for the respective assessment years.Final Conclusion: The High Court's negative opinion is set aside. The reference question is answered in the affirmative for the assessee; the appeals are allowed and the order of the High Court is reversed. Issues: Whether the amounts credited to the Consumers' Benefit Reserve Account (Rs. 42,148 for 1953-54 and Rs. 77,138 for 1954-55) are deductible in computing the assessee's income, profits and gains from its business for the relevant assessment years.Analysis: The Court distinguished between commercial (real) profits assessable under section 10(1) of the Income-tax Act, 1961 and statutory 'clear profit' as ascertained under the Electricity (Supply) Act, 1948 and its Sixth Schedule. The Sixth Schedule and paragraph II require a licensee to return part of any excess clear profit to consumers by rebate or by carrying it forward for future distribution; those appropriations are part of the statutory scheme to regulate rates. Income-tax is levied on real profits determined by commercial accountancy principles, allowing deductions properly falling to be made in computing profit. Where an assessee follows the mercantile system and a liability to return amounts to consumers accrues in the accounting year, the accrued statutory liability may be deducted in that year (consistent with the principle in Calcutta Co. Ltd. v. Commissioner of Income-tax). The amounts credited to the Consumers' Benefit Reserve Account were part of excess collected to be returned to consumers and did not form part of the assessee's real profits; therefore they are not taxable profits when computing income under section 10(1).Conclusion: The amounts credited to the Consumers' Benefit Reserve Account are deductible from the assessee's business income for the relevant assessment years; the question referred is answered in the affirmative and in favour of the assessee.