1965 (4) TMI 20 - SC - Income Tax

Court rules amounts in 'Consumers' Benefit Reserve Account' not taxable income, affirming mercantile accounting system.

Poona Electric Supply Company Limited Versus Commissioner Of Income-Tax, Bombay City I

The court ruled in favor of the appellant, holding that the amounts credited to the 'Consumers' Benefit Reserve Account' were not part of the appellant's ... Whether the two sums of ₹ 42,148 in the assessment year 1953-54 and ₹ 77,138 in the assessment year 1954-55 were deductible in computing income, profits and gains from the assessee's business assessable to tax ? Held that:- The appellant-company is a commercial undertaking. It does business of the supply of electricity subject to the provisions of the Act. As a business concern its real profit has to be ascertained on the principles of commercial accountancy. As a licensee governed by the statute its clear profit is ascertained in terms of the statute and the schedule annexed thereto. The two profits are for different purposes---one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the ' Consumers' Benefit Reserve Account '. They were a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of the assessee's real profits. So, to arrive at the taxable income of the assessee from the business under section 10(1) of the Act, the said amounts have to be deducted from its total income. Appeal allowed. Issues Involved:1. Distinction between commercial profit and 'clear profit' under the Electricity (Supply) Act, 1948.2. Deductibility of amounts transferred to 'Consumers' Benefit Reserve Account' under section 10(1) and section 10(2)(xv) of the Indian Income-tax Act.3. Applicability of the mercantile system of accounting for the deductions in the assessment years 1953-54 and 1954-55.Issue-wise Detailed Analysis:1. Distinction between Commercial Profit and 'Clear Profit' under the Electricity (Supply) Act, 1948:The appellant, Poona Electric Supply Co. Ltd., carried on the business of electricity distribution under a government-issued license. The company's 'clear profit' should not exceed the 'reasonable return' as defined under the Act. If there is an excess, it must be distributed to consumers as a rebate. The company claimed deductions for amounts credited to the 'Consumers' Benefit Reserve Account' for the assessment years 1953-54 and 1954-55, which were disallowed by the Income-tax Officer and the Appellate Assistant Commissioner but allowed by the Income-tax Appellate Tribunal. The High Court, however, ruled against the company, leading to the present appeal.2. Deductibility of Amounts Transferred to 'Consumers' Benefit Reserve Account' under Section 10(1) and Section 10(2)(xv) of the Indian Income-tax Act:The appellant argued that the amounts transferred to the 'Consumers' Benefit Reserve Account' should be excluded from taxable income as they represent a rebate to consumers. This rebate is a statutory condition for carrying on the business and should be considered an expenditure wholly and exclusively incurred for business purposes under section 10(2)(xv). The Additional Solicitor-General contended that these amounts were merely an apportionment of profits after they were earned and thus not deductible.The court examined the relevant provisions of the Act and the Income-tax Act, noting that the Act aims to rationalize electricity rates to prevent unreasonable charges. The 'clear profit' is calculated after making specific deductions, including taxes, and any excess collected must be returned to consumers. The court distinguished between commercial profits and statutory profits, emphasizing that the real profit under section 10(1) does not include amounts returned to consumers under statutory compulsion. These amounts are not part of the profits but are akin to a businessman returning an excess amount collected by mistake.3. Applicability of the Mercantile System of Accounting for the Deductions in the Assessment Years 1953-54 and 1954-55:The court noted that the appellant follows the mercantile system of accounting, where liabilities are recorded when they arise, not when they are paid. The liability to return the amounts to consumers was incurred during the relevant accounting years, making it deductible in those years. This principle was supported by the court's decision in Calcutta Co. Ltd. v. Commissioner of Income-tax, where it was held that accrued liabilities and estimated expenditures could be deducted in the accounting year they arose.Conclusion:The court concluded that the amounts credited to the 'Consumers' Benefit Reserve Account' were not part of the appellant's real profits and should be deducted from its total income to arrive at the taxable income under section 10(1). This made it unnecessary to consider their deductibility under section 10(2)(xv). The court also affirmed that under the mercantile system of accounting, the liability to return the amounts arose in the relevant accounting years, making them deductible in those years. Thus, the court answered the question referred to the High Court in the affirmative, in favor of the assessee, and allowed the appeals with costs.Appeals allowed.