Decided on July 23,1962

Poona Electric Supply Company Limited Respondents


TAMBE, J. - (1.)THIS is a reference under sub -section (1) of section 66 of the Indian Income -tax Act. The assessee is a public limited company engaged in the business of distribution of electricity in the City of Poona. It is a licensee within the meaning of sub -section (6) of section 2 of the Electricity (Supply) Act (54 of 1948) (hereinafter referred to as the Electricity Act). Section 57 of the Electricity Act provides that the provisions of the Sixth Schedule and the Seventh Schedule shall be deemed to be incorporated in the licence of every licensee, not being a local authority, and it further enjoins a duty on the licensee to comply with the provisions of the said Schedules notwithstanding any provisions to the contrary either in the Electricity Act, 1910, or the licence granted to him thereunder or any other law, agreement or instrument. The section also provides that any provisions contrary to the provisions of the Sixth and the Seventh Schedules contrary in the Electricity Act, 1910, or in the licence granted to the licensee under that Act or of any other law, agreement or instrument applicable to the licensee would be void. Clause I of the Sixth Schedule provides that notwithstanding any thing contained in the Indian Electricity Act, 1910 (except sub -section (2) of section 22A), and the provisions in the licence of a licensee, the licensee shall so adjust his rates for the sale of electricity whether by enhancing or reducing them that his clear profit in any year of account shall not, as far as possible, exceed the amount of reasonable return. The second proviso to that clause provides that the licensee shall not be deemed to have failed so to adjust his rates if the clear profits in any year of account has not exceeded the amount of reasonable return by fifteen per centum of the amount of reasonable return. The other provisions of clause I are not material for the present case. Sub -clause (1) of clause II is the following terms : 'II (1). If the clear profit of a licensee in any year of account is in excess of the amount of reasonable return, one -third of such excess, not exceeding five per cent. of the amount of reasonable return, shall be at the disposal of the undertaking. Of the balance of the excess, one -half shall be appropriated to a reserve which shall be called the Tariffs and dividends Control Reserve and the remaining half shall either be distributed in the form of a proportional rebate on the amounts collected from the sale of electricity and meter rentals or carried forward in the accounts of the licensee for distribution to the consumers in the future, in such manner as the State Government may direct.'
(2.)PURPORTING to act under Clause II of the Sixth Schedule, the assessee set apart a sum of Rs. 42,142 and a sum of Rs. 77,138 and credited them to an account styled as 'consumers benefit reserve account', in the assessment years 1953 -54 and 1954 -55, respectively, corresponding accounting years being calendar year 1952 and calendar year 1953. The assessee claimed these amounts as permissible allowance under section 10(2) (xv) of the Income -tax Act. It appears that in the earlier years the practice of the department had been that the amounts credited to the 'consumers benefit reserve account' were not allowed as deductions in those years but were so allowed in years as and when rebate was actually distributed amongst the consumers, and it also appears that no objection was raised thereto by the assessee. Following this practice the Income -tax Officer rejected the claim of the assessee. The assessee took an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed the appeal. He observed : 'But I think that in crediting these sums to a reserve account, the company had not actually divested itself of the ownership of the amounts. They are still being utilised in the business of the company. No separate trust on the lines of a provident fund trust has been created for the purpose of receiving these sums every year. As such the credits are not made in favour of a different body but merely in the company's books, being adjustments from one head to another. Thus there is no transfer of actual ownership of those sums in these years. In these circumstances, I feel that the view taken by the Income -tax Officer which is based on the past practice, viz., that the payments out of these reserves should be allowed as and when they are actually paid to the consumers, is the right one.'
The assessee took a further appeal to the Tribunal, and before it two contentions were raised. Firstly, it was argued that the income -tax authorities were in over -looking that the system of accounting adopted by the assessee was the mercantile system. The liability to make a refund to the consumers by virtue of the provisions of the Electricity Act had accrued, and was definite. A provision made to meet such a liability was not a reserve created for contingent liability and was, therefore, and allowable deduction. It was also argued that the said amounts were not in the true sense the income of the assessee at all, but, on the other hand, the income within the meaning of sub -section (1) of section 10 received by the assessee fell short by these two amounts and on this ground also the said amounts had to be allowed as deduction in computing the assessable profits of the assessee. These two contentions appear to have been accepted by the Tribunal. The Tribunal has recorded its finding in the following terms : 'We, therefore, hold that the two amounts were properly allowable, as expenditure under section 10(2) (xv) of the Income -tax Act. Not only so, but we think that it is proper to consider the deduction as falling under section 10(1) itself because it does not affect the out goings but it affects the incomings which are to be short -accounted for having once been accounted for in excess of that stipulated in clause I of the Sixth Schedule of the Electricity Act. After all what has to be taxed is the real profit and the real profit could only be ascertained after taking into account the amount which had to be set apart under the law for the benefit of the consumers and which could never be the property of the assessee, and, therefore, its profits.'

(3.)AT the instance of the department, the Tribunal has drawn up a statement of the case and referred to us the following question of law : 'Whether the two sums of Rs. 42,148 in the assessment year 1953 -54 and Rs. 77,138 in the assessment year 1954 -55 were deductible in computing income, profits and gains from the assessee's business assessable to tax ?'

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