2025 (6) TMI 162 - HC - Income Tax

Nature of receipts - Supply affording charges and Electrification Charges - Capital receipts OR Revenue receipts - HELD THAT - The assessee charged the supply affordable charges and electrification charges from the customer for facilitating the particular service. The assessee company recovered the cost and expenses towards laying of extensive line acquisition of fabrication of plant and machinery for affecting the supply of electricity to the consumer as one time charges hence it is not for the consumption of electricity or supply of any stock in trade. The nature of service line receipts are entirely different from the nature of electricity charges hence the service line receipts deserves to be reduced from the cost of the relevant plant and machinery. The energy charges are recovered from the consumer for the amount of electricity consumed by them at the prevailing tariff which is of a revenue nature. Hence the CIT(A) and ITAT have rightly held that both these receipts namely energy charges and service line receipts have a different characteristic and could not be treated as revenue receipts. CIT(A) and ITAT have duly considered the relevant regulations framed and notified by M.P. Electricity Regulation Commission constituted under M.P. Electricity Act 2003. Apart from that the issue raised before the ITAT Act had already been answered by the Apex Court way back in the year 1968 in the matter of Hoshiarpur Electric Supply Co. 1960 (12) TMI 6 - SUPREME COURT

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this appeal under Section 260 of the Income Tax Act, 1961, are:

(a) Whether the Income Tax Appellate Tribunal (ITAT) was justified in law in classifying the 'Supply Affording Charges' amounting to Rs. 32,25,00,000 and 'Electrification Charges' of Rs. 3,32,00,000 as capital receipts rather than revenue receipts?

(b) Whether the ITAT was justified in holding these receipts as capital receipts even though the assessee itself stated that such receipts were collected by way of charges from customers for facilitating a particular service?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of 'Supply Affording Charges' and 'Electrification Charges' as Capital or Revenue Receipts

Relevant legal framework and precedents: The principal legal framework involves the Income Tax Act, 1961, particularly the distinction between capital and revenue receipts for taxation purposes. The Court relied heavily on the precedent set by the Supreme Court in Hoshiarpur Electric Supply Co. v. Commissioner of Income-tax (1961), which dealt with the nature of receipts from consumers for installation of electric service lines.

Court's interpretation and reasoning: The Court noted that the assessee, an electricity distribution company, collected these charges as one-time payments from consumers for facilitating new connections by laying extensive lines and acquiring plant and machinery. These charges were not for the consumption of electricity or supply of stock in trade but were contributions towards creating capital assets-service lines-that have enduring value and require ongoing maintenance.

The Court emphasized that energy charges collected for actual electricity consumption are revenue receipts, whereas the service line receipts, including supply affording and electrification charges, are capital receipts. This distinction was supported by the regulatory framework under the Madhya Pradesh Electricity Regulation Commission and the Electricity Act, 2003, which governs the nature of such charges.

Key evidence and findings: The assessee's books of account, ledger, and other documents showed that the charges were one-time and related to capital expenditure. The Tribunal and Commissioner of Income Tax (Appeal) had examined these facts and held that the receipts were capital in nature.

Application of law to facts: Applying the principle from Hoshiarpur Electric Supply Co., the Court found that the amounts contributed by consumers were in direct recoupment of capital expenditure for assets of lasting character. The installation of service lines constitutes capital assets, and the amounts received are contributions towards these assets rather than trading receipts.

Treatment of competing arguments: The Revenue argued that these receipts should be treated as revenue receipts and added to the income on the ground that the assessee itself termed them as charges collected from customers. The Court rejected this, holding that the nomenclature used by the assessee does not override the substance of the transaction. The Court also dismissed the Revenue's assumption that the excess amount retained after meeting installation costs was a trading profit, clarifying that such excess remains a capital receipt.

Conclusions: The Court upheld the ITAT's classification of the supply affording charges and electrification charges as capital receipts, not revenue receipts.

Issue 2: Justification of ITAT's holding despite assessee's characterization of receipts as charges from customers

Relevant legal framework and precedents: The Court again referred to the Hoshiarpur Electric Supply Co. judgment, which clarified that the nature of a receipt depends on its substance and not merely on the label or description given by the assessee.

Court's interpretation and reasoning: The Court observed that although the assessee described these amounts as charges collected from customers, the legal nature of these receipts is determined by their purpose and effect. Since these charges were contributions towards capital assets facilitating electricity supply, they are capital receipts.

Key evidence and findings: The record showed that the charges were one-time and related to installation and capital expenditure, not recurring revenue from electricity consumption.

Application of law to facts: The Court applied the principle that the true nature of a receipt is to be determined by its substance and not by the terminology used. The fact that these were facilitation charges does not convert them into revenue receipts.

Treatment of competing arguments: The Revenue's contention that the amounts were revenue receipts because they were collected as charges was found to be legally untenable. The Court relied on the clear precedent that such contributions for capital installation are capital receipts.

Conclusions: The ITAT's holding was justified and legally sound in treating these receipts as capital receipts despite the assessee's description.

3. SIGNIFICANT HOLDINGS

The Court preserved and relied upon the following crucial legal reasoning from the Supreme Court's judgment in Hoshiarpur Electric Supply Co.:

"The amount contributed by the consumer is in direct recoupment of the expenditure for bringing into existence an asset of a lasting character enabling the assessee to conduct its business of supplying electrical energy. By the installation of the service lines, a capital asset is brought into existence. The contribution made by the consumers is substantially as consideration for a joint adventure; the service line when installed becomes an appanage of the mains of the assessee, and by the provisions of the Electricity Act, the assessee is obliged to maintain it in proper repairs for ensuring efficient supply of energy."

"The assumption made by the Department that the excess remaining in the hands of the assessee, after defraying the immediate cost of installation of a service line must be regarded as a trading profit of the company is not correct."

"The receipts though related to the business of the assessee as distributors of electricity were not incident nor in the course of the carrying on of the assessee's business; they were receipts for bringing into existence capital of lasting value."

Core principles established:

• Receipts from consumers towards installation of service lines or electrification charges that create capital assets are capital receipts, not revenue receipts.
• The substance of the transaction governs the classification of receipts, not the nomenclature or description used by the assessee.
• Excess amounts retained after meeting installation costs do not convert capital receipts into trading profits.

Final determinations on each issue:

• The ITAT was justified in law in holding the supply affording charges and electrification charges as capital receipts.
• The ITAT's holding was correct despite the assessee's own characterization of these amounts as charges collected from customers.
• The appeal filed by the Principal Commissioner of Income Tax was dismissed, affirming the ITAT's order.