TMI Blog1982 (2) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... January, 1963, to 35np. per unit with a minimum of Rs. 7 per month for every installation. A few months thereafter, that is, on 22nd June, 1963, the assessee increased the rates for lights and fans to 70 np. per unit with a minimum of Rs. 5 for every installation with effect from 1St July, 1963. This unilateral increase in the rates of motive power as well as for lights and fans led to the institution of two Suits Nos. 152/63 and 50/64, in the Court of Civil judge (Senior Division) at Godhra. By the said two suits the consumers challenged the right of the assessee to unilaterally increase the charges for motive, power and the rates for lights and fans as stated earlier. Those two representative suits were decided by the trial court in favour of the respective consumers. Against the said decision the assessee filed two separate appeals which were ultimately dismissed by the learned assistant judge, Panchmahals at Godhra. The assessee, therefore, filed two separate second appeals in this court which too were dismissed by a learned single judge of this court on. 11th April, 1966, vide: Godhra Elec. Co. Ltd. v. Somalal [1967] 8 GLR 686. The assessee feeling aggrieved by the decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, to the assessee suggesting that it may maintain the status quo for at least six months and in the meantime continue to supply electricity for the street lights as per the agreement. On receipt of this letter of request from the Government, it is the case of the assessee that it did not bring the increase to the profit and loss account for that year. Certain developments which took place subsequently and which are not brought out in the order of the Income-tax Appellate Tribunal were mentioned to us in the course of hearing of these references. We may briefly set out those facts in respect of which there is no controversy. It appears that the Gujarat Electricity Board, in exercise of the power conferred upon it by s. 6(1) of the Indian Electricity Act, 1910, read with cl. (2) of the terms of the licence, sought to exercise its option to purchase the electrical undertaking of the assessee by a notice dated 8th November, 1971. Thereupon the assessee filed Special Civil Application No. 1752 of 1972 challenging the validity of the said notice. During the pendency of that writ petition the Govt. of Gujarat issued an order under r. 115(2) of the Defence of India Rules, 1971, taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Advocate-General appearing on behalf of the assessee that an appeal was, in fact, filed but he was not able to produce the order, if any, passed in appeal. He, however, placed before us a subsequent order passed in the suit which goes to show that the plaintiffs by their application dated 27th July, 1979, sought permission of the court to withdraw the suit with liberty to file a fresh suit on the same cause of action, if and when necessary. The learned trial judge by his order of even date permitted the plaintiffs to withdraw the suit and reserved unto them the liberty sought. That is how the subsequent Suit No. 118 of 1969 terminated. It is clear from the statement of facts prepared by the Appellate Tribunal, and it was not disputed before us, that up to the assessment year 1963-64, the assessee was assessed on the basis of the accounts maintained -according to the mercantile system. In other words, the assessee maintained accounts according to the mercantile system prior to the enhancement of the rates in 1963. For the subsequent assessment years, that is, from 1964-65 to 1967-68, the assessee deducted the amount in respect of the enhanced charges on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting year 1971-72. Reference No. 171 of 1978 pertains to the claim made by the Department in respect of the said assessment year. As stated earlier, it is an admitted fact that up to the assessment year 1963-64, the assessments of the assessee were finalised on the basis of income declared by it on mercantile system of accounting. Under s. 5 of the I.T. Act, 1961, all assessees are chargeable in respect of income accruing, arising or received or deemed to accrue, arise or to be received in India. Section 145(1) next provides that income chargeable under the head " Profits and gains of business or profession " or " Income from other sources " shall be computed in accordance with the method of accounting regularly employed by the assessee. On a conjoint reading of these two provisions it is clear that the two main systems of accounting, namely, the cash system and the mercantile system appear to be based on, (i) actual receipts and actual outgoings or disbursements; and (ii) accrual of the right to receive payment and the accrual of the liability to disburse or pay. The choice of the method of accounting is left to the assessee and ordinarily the Revenue is bound by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime in the year 1963. Soon thereafter some of the consumers filed a suit against the assessee challenging the unilateral increase in the charges of the rates made by the assessee. The said litigation culminated in the judgment of the Supreme Court pronounced on 26th February, 1969. By the said judgment the Supreme Court upheld the assessee's right to unilaterally enhance the charges/rates in view of the amended provisions of the Electricity (Supply) Act. Now, s. 57 of the Supply Act, after its amendment in 1956, provides that the provisions of the Sixth Schedule shall be deemed to be incorporated in the licence of every licensee not being a local authority. It makes it obligatory on the licensee to comply with the provisions of the said Schedule and other provisions of the Electricity Act, 1910, besides the terms and conditions of the licence which are not inconsistent with the provisions of the said Act as well as the Schedule thereto. Section 57A(1) next provides that where the provisions of the Sixth Schedule are, under s. 57, deemed to be incorporated in the licence of any licensee, namely, (a) the Board, or (b) where no Board is constituted under the Act, the State Govt : (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with the non obstante clause lays down that the 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 first proviso lays down that such charges shall not be enhanced more than once in any year of account and the second proviso stipulates that the licensee shall not be deemed to have failed so to adjust his charges, if the clear profit, in any year of account, has not exceeded the amount of reasonable return by twenty per centum of the amount of reasonable return. The subsequent proviso says that if the charges subsequently fixed by the rating committee are lower than those notified by the licensee, the licensee shall refund to the consumers the excess amount recovered by him from them. Paragraph II(1) next provides that 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 appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or carry forward the same in the account of the licensee for distribution to the consumers at a future date in such manner as may be directed by the State Govt. Therefore, from the scheme of s. 57A(1) of the Supply Act read with the Sixth Schedule appended thereto, it becomes crystal clear that as interpreted by the Supreme Court the licensee has a unilateral right to enhance the rates and recover charges at the enhanced rates from the consumers. Even the appointment of a rating committee after the licensee has notified its decision to enhance the rates does not prevent the licensee from recovering consumption charges at the enhanced rates from the consumers but it is obliged to refund the excess amount in the manner set out in para. II(1) of the Sixth Schedule. When the question of refund arises for consideration, it must be shown that the charges recovered by the licensee exceeded 20 per cent. of the reasonable return and it is only then that para. II(1) of the Sixth Schedule comes into operation. In that case also one-third of the excess, albeit not exceeding five per cent. of the amount of reasonable return, shall remain at the disposal of the undertaking and of the balance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s they do not take a view contrary to the view indicated by us but it would suffice to mention those cases. They are Amalgamated Electricity Co. Ltd. v. N. S. Bathena AIR 1959 SC 711, Amalgamated Electricity Co. Ltd. v. N. S. Bathena, AIR 1964 SC 1598, Jhalawar Electric Power Supply Co. Ltd. v. Wadhwan City Municipality, AIR 1969 Guj 40, and Subhash Oil Industries v. State of U.P., AIR 1975 All 19. The learned Advocate-General next submitted that merely because the assessee had issued bills according to the enhanced rates, it cannot be said that income had accrued to the assessee since in fact even after the decision of the Supreme Court on 26th February, 1969, the State Govt. had given a direction to the company to maintain the status quo and some of the consumers had filed a representative suit challenging the assessee's right to recover the consumption charges at the enhanced rate in the court of the learned Civil judge (junior Division), Godhra. It is indeed true that after the Supreme Court pronounced in favour of the assessee on 26th February, 1969, the State Govt. wrote a letter to the assessee dated 19th March, 1969, which has been referred to in the order of the Appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an aggregate amount of Rs. 10,87,928 was deducted towards enhanced charges not realised during the assessment years 1964-65 to 1967-68, as per the split up given in para. 6 above. A sum of Rs. 3,54,152 was realised from the railway administration in the assessment year 1968-69, thus leaving a balance of Rs. 7,33,676 only. After the decision of the Supreme Court on 26th February, 1969, the Revenue sought to bring the aforesaid amount to tax in assessment year 1969-70, on the basis of the undertaking given by the assessee. The assessee had agreed to the amount being brought to tax if its action of unilateral increase was upheld by the Supreme Court. There is nothing on record to show that the Revenue had agreed to a shift to the cash or hybrid system in so far as the said claim is concerned. On the contrary, the undertaking suggests that the assessee undertook to offer the amount for tax as soon as the Supreme Court upheld its legal right to unilaterally increase the rates without waiting for the actual realisation of the dues. That would at best mean a postponement of the date of accrual to the date the Supreme Court upheld the assessee's right to enhance the rates but it is too mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x, even though in book-keeping, an entry is made about a " hypothetical income ", which does not materialise. In both these cases it is pertinent to note that income had accrued to the assessee but the assessee had given it up. It was in that context of the assessee and a mere entry in the assessee's books of account could not be treated as income liable to tax (sic). Reference may now be made to another decision of the Supreme Court in Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521. In that case the assessee-company had set apart a sum of Rs. 42,148 and Rs. 77,138 in the assessment years 1953-54 and 1954-55, respectively, under the head " Consumers' benefit reserve account " and claimed deduction of these sums in computing its profits liable to income-tax. The amounts thus credited by the assessee during the aforesaid assessment years was a part of the excess amount paid to it by the consumers which the assessee was in law liable to return to the consumers. It was in that set of circumstances that the Supreme Court came to the conclusion that since the amount represented the excess which the assessee was statutorily bound to refund to the consumers it could not be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f or there was some statutory or similar right or obligation. " Nothing was found in the statement of the case or in any of the documents annexed thereto forming part of it to show that the assessee had legal right to claim from the Municipality payment at the rate of 30 paise per unit. In the present case we have already pointed out earlier that the assessee had a legal right to claim consumption charges at the enhanced rates, whereas in the case cited, it was held by the High Court on an interpretation of the agreement that the assessee was bound to continue to supply electrical energy to the Municipality at the same rates as were specified in the said agreement. Therefore, this decision can be distinguished on facts. Reference was made by the learned Advocate-General to a decision of this court in CIT v. Western India Engineering Co. [1971] 81 ITR 712. That was a case in which the assessee, a building contractor, submitted bills for extra work at rates pitched a little high in view of the past experience to allow for deduction at the time of settlement of the bills. The assessee credited the amounts of the bills in his works account and subsequently transferred to his profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. In our opinion, therefore, this decision cannot be pressed into service by the assessee. The learned Advocate-General placed strong reliance on the decision of the Punjab and Haryana High Court in CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619. That was a case in which the assessee carried on business of finance and hire purchase. For the assessment year 1969-70 the assessee declared a loss of Rs. 2,60,322. The ITO noticed that there was an account in the name of Shri B. K. Bedi showing a sum of Rs. 10,81,931 due from him as on 1St April, 1968, which was reduced to Rs. 10,17,981 as on 31st March, 1969, but no interest was charged on this account. On being asked to explain, the assessee informed the ITO that the financial condition of Shri Bedi was such that there was no hope of recovery even of the principal amount and, therefore, it had not considered it necessary to charge any interest. No interest was actually charged or added to the amount due from Shri Bedi during the previous year notwithstanding the fact that it had received a sum of Rs. 1,05,000 from the said party during the said year on different dates as also an advance of Rs. 29,000 on 17th June, 1968. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely because the assessee was maintaining accounts according to the mercantile system, it could not be taxed on the basis of mere entries in its account books. The review of the aforesaid authorities goes to show that if an assessee because of business expediency forgoes a certain amount which it is legally entitled to claim from another party, the amount so forgone cannot be treated as the real income of the assessee notwithstanding the fact that it follows the mercantile system of accounting. It also becomes clear from these decisions that if an assessee has posted an entry in his account books in the belief that it is entitled to the said amount from another party but it is found as a matter of fact that the said amount is not legally due and payable by the said party to the assessee, the assessee cannot be taxed on the basis of a mere entry in the account books. Similarly, if any amount is credited by the assessee in its account books, the assessee will not be liable to be taxed on that amount if it is found that it is statutorily liable to refund the same to the party from which the said amount was recovered or received. In such set of circumstances, the doctrine of real in ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
