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 income because such appropriations are part of the statutory rate-regulation scheme and do not form part of the assessee's real (commercial) profits. Applying commercial accountancy principles under the mercantile system, an accrued statutory liability to return amounts to consumers may be deducted in the year of accrual. The clarification distinguishes statutory "clear profit" under the Electricity (Supply) Act scheme from assessable commercial profit and directs that refundable appropriations reduce taxable business income.

---

---

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.

---