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TMI Blog1973 (7) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... city Co. Ltd. also purchased the undertakings with all the assets minus certain assets and certain specified liabilities of four other companies, namely, Malegaon Electricity Co. (P.) Ltd., Dohad Electricity Co. Ltd., Chalisgaon Electricity Co. Ltd. and Bhusawal Electricity Co. Ltd., supplying electrical energy to the various towns forming part of their name by separate but identical agreements. A specimen of one of these agreements, the one which was entered into with Malegaon Electricity Co. Ltd. for Malegaon supply, dated September 19, 1951, has been annexed as annexure " B " to the statement of the case. The assessees in this reference are Amalgamated Electricity Co. Ltd. (hereinafter called the Amalgamated "), Ajmer Elecricity Co. Ltd. (hereinafter called the Ajmer ") and Malegaon Electricity Co. (P.) Ltd. (hereinafter called "the Malegaon.") and each one of these assessees is interested in one or the other questions that have been referred to us for our opinion. Since out of 10 questions that have been referred to this court rival contentions were urged before us only in respect of two or three questions an since in respect of the remaining questions there was not much dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal rejected the claim and, therefore, at the instance of the assessee this question has been referred to this court for its opinion. Mr. Mehta for the assessee has fairly stated that the point raised in the question is covered by the Privy Council decision in Indian Iron & Steel Co. Ltd. v. Commissioner of Income-tax, and in view of this decision the question will have to be answered against the assessee. In view of the said Privy Council decision we answer the question in the negative against the assessee. Question No. 3 pertains to gratuity paid by the assessee, the Amalgamated, to the employees of one or the other companies of which were amalgamated with it in respect of the period prior to amalgamation, which payment was claimed as admissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, and the question runs as follows : " Whether the gratuity paid by the assessee to employees of the companies, which were amalgamated with it, in respect of the period prior to amalgamation, is admissible as a deduction under section 10(1) or 10(2)(xv) of the Indian Income-tax Act, 1922 ? It appears that the assessee (the Amalgamated) claimed Rs. 4,218 and Rs. 878 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment of gratuity made to the erstwhile employees of the companies which were amalgamated with the assessee and who upon amalgamation became the employees of the assessee will have to be regarded as business expenditure allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question is, therefore, answered thus : The gratuity paid is admissible as a deduction under section 10(2)(xv) of the Act. Questions Nos. 4 and 5 are questions on which rival contentions were urged before us at the Bar and these questions could be considered together. These questions run as follows : " (4) Whether, having regard to the provisions of the Electricity (Supply) Act, 1948, and the provisions of the 6th Schedule thereto, the amounts respectively credited to the consumers' benefit reserve, the tariffs and dividends control reserve and contingency reserve were the income of the assessee ? " " (5) Whether, having regard to the provisions of the Electricity (Supply) Act, 1948, and the provisions of the 6th Schedule thereto, the amounts respectively credited to the consumer' benefit reserve, the tariffs and dividends control reserve and the contingency reserve are admissible dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned years, claimed the aforesaid transfers to the particular reserve in the corresponding assessments as a deduction and the claim for deduction was based on the provisions contained in the 6th Schedule to the (Electricity Supply) Act, 1948, and in particular clauses II, III, IV and V thereof. In substance, the contention of the assessees in respect of the aforesaid various amounts which had been transferred to the three types of reserves was that all these were statutory reserves created according to the provisions of the Electricity (Supply) Act, 1948, that these were compulsory transfers required to be made under the provisions of the said Act, that the amounts upon their transfer to the respective reserves were either not available to the assessees at all or were available only for a limited purpose as indicated in the 6th Schedule and as such these amounts should be excluded while computing the net profits of the assessees under section 10(1) of the Act. In the alternative, it was claimed that these amounts should be allowed as deduction under section 10(2)(xv) of the Act. The Income-tax Officer disallowed the claim in respect of the transfers made to these three types of res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raph I of the said Schedule incorporates one of the foremost principles which is applicable in the case of every licensee, namely, every licensee shall so adjust his charges 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 expressions " clear profit " and " reasonable return " have been defined in paragraph XVII of that Schedule. In other words, the object of the Act and the Sixth Schedule thereto is to statutorily rationalise and regulate the supply of electricity in the interest of the public and for electrical development. The principles embodied in the Sixth Schedule are intended only to achieve this object. In this case we are concerned with the provisions contained in paragraphs II, III, IV and V of the 6th Schedule which deal with the creation, regulation and utilization of the three types of reserves concerned in this reference. Paragraph II of the Sixth Schedule contemplates creation of tariffs and dividends control reserve as well as reserve meant for the benefit of the consumers which could be styled as " consumers' benefit rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the undertaking under the terms of its licence any balance remaining in the tariffs and dividends control reserve shall be handed over to the purchaser and maintained as such by the purchaser and it has been further provided that where the undertaking is purchased by the Board or the State Government, the amount of this reserve could be deducted from the price payable to the licensee. Sub-paragraphs (2) and (3) of paragraph II, therefore, clearly bring out the aspects that the tariffs and dividends control reserve is available to the licensee only for a limited purpose mentioned therein and on transfer of the undertaking the said reserve has to be maintained as such by the transferee and if the transferee happens to be the Board or the State Government the item of that reserve will not be allowed any compensation in the matter of payment of price that will be received by the licensee. Coming to the contingencies reserve, paragraph III of the Sixth Schedule provides that it is created either from existing reserve or from the revenues of the undertaking irrespective of the question whether the licensee has made any profit or not in that accounting year and the quantum to be appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions from out of the excess of the clear profit over the reasonable return to the consumers' benefit reserve under paragraph II of the Sixth Schedule of the Electricity (Supply) Act, 1948, was the subject-matter of a decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax . He pointed out that after referring to the relevant provisions of the Electricity (Supply) Act, 1948, and the provisions contained in the Sixth Schedule thereto and after considering the object with which these provisions had been enacted, the Supreme Court has taken the view that such transfers or appropriations to the consumers' benefit reserve did not form part of the assessee's real profits and to arrive at the taxable income of the assessee from business under section 10(1) of the Indian Income-tax Act, 1922, such amounts so transferred or appropriated had to be deducted. Relying upon this decision, which in terms covers the case of transfers or appropriations to consumers' benefit reserve under para graph II of the Sixth Schedule of the Electricity (Supply) Act, 1948, he contended that question No. 4 referred to this court in so far as it relates to the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the business under section 10(1) of the Act, the said amounts have to be deducted from its total income." It will appear clear from the aforesaid reasoning that to arrive at the aforesaid conclusion the Supreme Court took into account not merely the source from which amounts came to be transferred or appropriated to the consumers' benefit reserve but also the fact that under paragraph II of the Sixth Schedule the said reserve was not available to the assessee (licensee) for any of its purposes whatsoever and that it was required to be disbursed for the benefit of the consumers only in the manner indicated in that paragraph. In fact, having regard to this provision, the Supreme Court in the earlier part of its judgment illustrated the point by observing as follows : " In substance there cannot be any difference between a businessman collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs. Y to them and another businessman collecting Rs. X alone. The amount returned is not apart of the profits at all." As stated earlier, in view of the aforesaid decision of the Supreme Court, so far as transfers or appropriations of amounts to the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is court. In our view, since the question which arises for our consideration pertains to an all-India fiscal statute like the Indian Income-tax Act, for the sake of maintaining uniformity, it is desirable that we should follow the decision of the Kerala High Court on this question. Even otherwise, we would like to point out that the Kerala High Court has referred to the decision of the Supreme Court in Poona Electric Supply Co.'s case and has applied the ratio of that case to the transfers or appropriations made to the contingencies reserve by the assessees before it. After considering the relevant provisions, contained in paragraphs III, IV and V of the Sixth Schedule, the Kerala High Court has concluded its discussion on this question in paragraph 14 of its judgment in the following terms : "Bearing in mind the fact that the amount under the contingencies reserve is not available to the assessee for any purposes of his own or even for any purpose other than those indicated in paragraph V of the Sixth Schedule and also noticing the object of the creation of this reserve and further noting the provision that it is a diversion from the revenue, we think that the diversion is one wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to this reserve were available to the licensee only for the purpose of maintaining reasonable return to the shareholders in future years whenever there would be a shortfall and as such it was clear that this reserve could never be drawn upon by the assessee in the concerned year of account. Thirdly, he pointed out that on the purchase of the undertaking this reserve or the balance remaining thereunder is required to be handed over to the purchaser to be maintained by the latter as such, which means that even the purchaser is not able to use it except for the purpose mentioned in sub-paragraph (2) of paragraph II and further that if the purchase of the undertaking was by the Board or the State Government the amount of the reserve is not to be compensated while determining the price payable by the Board or the State Government in respect of the undertaking. Relying upon these aspects which emerge from the provisions contained in paragraph II of the Sixth Schedule Mr. Mehta contended that the amounts that were transferred to this reserve could not be said to be available to the assessee for the year of account for any purpose whatsoever and as such the transfers would fall within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctric Supply Co.'s case came to the conclusion that the amounts transferred to the consumers' benefit reserve will have to be regarded as amounts in respect of which deduction could be claimed by the assessee for arriving at the real profits of the assessee, mainly relying on the aspect of the purpose for which such reserve could be drawn upon, namely, that the same was not available to the licensee (assessee) for any of its purposes at all but had to be disbursed for the benefit of the consumers only ; in other words, emphasis was laid on the restricted manner in which the reserve could be dealt with or disbursed rather than on the source from which it was created. The other aspect on which reliance has been placed by Mr. Hajarnavis also requires serious consideration. Under sub-paragraph (2) of paragraph II of the Sixth Schedule, this reserve would be drawn upon by the licensee only to the extent by which the " clear profit " is less than the " reasonable return " in any year of account, obviously for the purpose of maintaining the permissible dividend or return to the licensee or its shareholders. It is true that this reserve is apparently intended to be used for the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the amounts credited to this reserve are out of " clear profit " of the assessee, transfers to this reserve are intended to serve the public generally, meaning the consumers who are to be charged tariffs by the assessee. Thirdly, on the purchase of the undertaking this reserve is required to be handed over to the transferee and the transferee is required to maintain it as such and under the proviso to subparagraph (3) of paragraph II it is clear that when the undertaking is purchased by the Board or the State Government no allowance is made in respect of the said reserve while determining the price payable by the Board or the State Government in respect of the undertaking so purchased. In other words, subject to a limited use which the licensee can make of this reserve as indicated in sub-paragraph (2) of paragraph II which use ultimately enures for the benefit of the consumers, if the undertaking is taken over by the State Government or the board, this reserve is completely lost to the licensee or its shareholders without getting anything in return therefor. One more aspect in this context may be mentioned. Ordinarily under paragraph I of the Sixth Schedule the licensee is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount refunded to the consumers from the consumer's benefit reserve (temporary deposit) was the income of the assessee ? " " (7) Whether the payment of Rs. 36,000 from out of the amounts reserved in the earlier years to the consumers in the previous year is a proper deduction in the assessment of 1952-53 under any of the provisions of the Act ? " In view of the facts which are disclosed by the profit and loss account of the Amalgamated for the accounting year ended March 31, 1951, in which year the question arises, it happens to us that question No. 6 will have to be reframed. Question No. 3 as framed by the Tribunal seems to be based on the assumption that the sum of Rs. 36,000 in respect of which relief was claimed by the assessee was the amount which had to be refunded to the consumers from the consumers' benefit reserve, but actually the profit and loss account of the assessee for the year ended March 31, 1951, does not bear out that assumption. In the relevant profit and loss account the amount of Rs. 36,000 is shown on the credit side as being the amount less received in respect of sale of energy made by the assessee to its consumers. The very first item on the credit side ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, in the year of account rebate of Rs. 36,000 was also claimed under the caption " Amount refundable to consumers ". In our view, this item of Rs. 36,000 will have to be regarded as provision for refund out of considerations of business expediency and, in this view of the matter, we feel that the said amount could not be regarded as income of the assessee for the assessment year 1951-52. Question No. 6 as reframed, therefore, is answered in the negative and in favour of the assessee. In view of the above answer to question No. 6, it is unnecessary to deal with or answer question No. 7. Question No. 8 pertains to the claim made by the assessees (Amalgamated and Malegaon) in respect of multiple shift allowance in regard to electric meters that had been installed in the premises of their consumer-constituents and the question runs as follows : " (8) Whether electrical meters fall under item III(3) C (ii) or III(3) C (iii) of rule 8 of the Indian Income-tax Rules and whether they are entitled to multiple shift allowance as prescribed in rule 8 ? " The assessees, viz., Amalgamated and Malegaon, had installed electric meters in the premises of all their constituents and the Amalgama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted at general rate under (i) and at special rates under (ii) applicable to the whole of the machinery and plant used in certain specified concerns and also at special rates under (iii) applicable to other machinery and plant under this clause (iii) the assets falling under " Machinery and plant " are further classified or sub-divided, that is to say, machinery and plant-ropeway structures, salt works, electrical machinery generally, machinery used in the production and exhibition of cinematograph films, electric supply undertakings and so on and so forth and this sub-classification is indicated by (3)A, (3)B, (3)C, (3)D, (3)E and so on. In our view, in order to decide the question as to whether the assessees are entitled to multiple shift allowance in respect of their meters or not, it will have to be first seen as to under what classification and sub-classification these particular assets of the assessees, namely, meters installed in their constituents' premises fall and, looked at from this angle, it seems to us clear that the meters could be classified as assets of " electric supply undertakings " and the question of granting relief will have to be considered under entry III(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur opinion, on that account it cannot be said that electric machinery in clause E should be read as excluding from its scope overhead cables and wires. The use of the expression 'electric plant, machinery, boilers' in clause E appears to have been made in a comprehensive sense so as to include parts of the plant as well as electric machinery. Clause E seems to be in the nature of an exception to clause C and where it concerns electric supply undertakings, a consolidated rate is fixed for electric plant, machinery, boilers, without reference to the various parts which go to make up the plant, machinery or boilers. " In our view, therefore, relief of multiple shift allowance would be available to the assessees since, in our view, the meters in question would fall under rule 8 III(3) E (i). Mr. Hajarnavis, however, contended that before the taxing authorities and the Tribunal competition was between the two provisions, one under rule 8 III(3)C(ii) and rule 8 111(3)C(iii) and no point was canvassed before the authorities that relief (multiple shift allowance) could be claimed on the ground that the meters would fall under rule 8 III(3)E. That undoubtedly is true. But we do not think ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration the provisions of the second proviso. " In view of this we answer the question in favour of the revenue. Turning to the last question, the same runs as follows : "Whether the wealth-tax assessable under the Wealth-tax Act, for the assessment years 1958-59 and 1959-60, is a proper deduction in the income-tax assessments of the respective years under any of the provisions of the Act ? " The assessee, namely, the Amalgamated, is the only assessee interested in this question and Mr. Mehta appearing for the assessee has fairly stated before us that the question will have to be answered against the assessee as the matter could be taken to have been concluded by the provisions of the Act 41 of 1972. By section 2 of the Income-tax (Amendment) Act, 1972 (41 of 1972), section 40 of the Income-tax Act, 1961 (being the principal Act), has been amended and a new sub-clause has been inserted with retrospective effect, the new sub-clause being (ii-a)--inserted after sub-clause (ii) of clause (a) of section 40, and it runs as follows : "(ii-a) any sum paid on account of wealth-tax ". In other words, by reason of this addition of sub-clause (ii-a) to the list of amounts which are de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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