TMI Blog1965 (4) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. - - - - - Dated:- 19-4-1965 - Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SUBBA RAO J.---The appellant, the Poona Electric Supply Co. Ltd., hereinafter called " the company ", carried on the business of distribution of electricity in the City of Poona under a licence issued by the Government. Under the relevant provisions of the Electricity (Supply) Act, 1948 (54 of 1948), hereinafter called " the Act ", the company's " clear profit " in any year should not, as far as possible, exceed the amount of " reasonable return " as defined under the Act. The excess, if any, after making some deductions, the company has to distribute to its consumers in the form of rebate. During the assessment years 1953-54 and 1954-55 the company claimed deduction of two amounts of Rs. 42,148 and Rs. 77,138 for the said two years from its taxable income as they were credited t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit reserve account would only amount to apportionment or distribution of the profit after it has been earned and, therefore, it is not a deductible item for ascertaining the profit of the company under section 10(1) of the Income-tax Act. (2) The said amounts could not be said to be an expenditure wholly and exclusively incurred for the purpose of the business, as the expenditure was not incurred either during the course of the business or for the purpose of earning the profits of the business, but was only apportioned or distributed from and out of the profits already earned. To appreciate the rival contentions and to arrive at a satisfactory solution it will be necessary to notice the relevant provisions of the Act and of the Income-tax Act. The gist of the relevant provisions may be stated thus : No person can supply electric energy in any area unless he has obtained a licence from the State Government under section 3(1) of the Indian Electricity Act, 1910 (9 of 1910). The Act, i.e., the Electricity (Supply) Act, 1948, provides for the rationalization of the production and supply of electricity and generally for taking measures conducive to electrical development. One of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excess was only a distribution out of the profits. There is plausibility in this argument and at the first blush it appears to be attractive. But there is an obvious fallacy underlying the argument and that arises from the fact that the argument equates the expression " clear profit " with that of commercial profits. The object of the Act and that of the Sixth Schedule thereto, as aforesaid, is to statutorily rationalize and regulate the rates chargeable for the energy supplied in the interest of the public and for electrical development. The rules embodied in the Sixth Schedule to the Act are intended only to achieve that object. Under the said rules certain appropriations and certain deductions have to be made to arrive at the clear profit ; otherwise the items may be manipulated to sustain a demand for abnormal rates. The rules have no concern with income-tax ; though for the purpose of arriving at the clear profit the taxes paid are also deductible. If this distinction is borne in mind, the problem presented is easily and readily solved. Under section 10(1) of the Income-tax Act, tax shall be payable by an assessee under the head " profits and gains of business " in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement or otherwise is perfectly immaterial. The tax is payable upon the profits realized, and the meaning to my mind is rendered plain by the words 'payable out of profits'." The distinction between payment out of profits and a payment to earn profits is unexceptionable. The difficulty is to ascertain in each case whether a particular payment falls under one or other of the two categories. The statement in the aforesaid observations that a payment conditional on profits being earned cannot be a payment made to earn profits has been modified and explained by the Privy Council in Indian Radio and Cable Communications Co. Ltd. v. Commissioner of Income-tax. There, their Lordships were dealing with a case of a joint venture by two companies; and Lord Maugham pointed out thus: " It may be admitted that as Mr. Latter contended, it is not universally true to say that a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits. The typical exception is that of a payment to a director or a manager of a commission on the profits of a company." To that extent the principle laid do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in consideration of their giving to the company the full benefit of their technical and financial knowledge and experience, and giving to the company and its directors advice to the best of their ability. The question arose whether in computing the profits of the company for the purpose of income-tax, the company was entitled to deduct the sums so paid as being money wholly and exclusively laid out or expended for the purposes of the trade within rule 3(a) of Cases I and II. Greene M.R. pithily observed thus: "Once you realise that as a matter of construction the word 'profits' may be used in one sense for one purpose and in another sense for another purpose, I think you have the real solution of the difficulties that have arisen in this case." Applying that test, the Master of the Rolls held that : " In the present case there are two funds of so-called profits which come into the picture. The first one is the fund which has to be ascertained for the purpose of calculating the 20 per cent.. . Now when that amount has been ascertained, that fund has ceased to have any usefulness at all, and it then becomes necessary to ascertain what are the divisible profits, and for that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impose, without right of reimbursement, a tax on what is a charge upon his income." The concept of " real income " is also expounded in the decision of the Bombay High Court in H. M. Kashiparekh Co. Ltd. v. Commissioner of Income-tax. There, under the managing agency agreement the managing agent was under a duty to forgo up to one-third of its commission where the profits of the managed company were not sufficient to pay a dividend of 6 per cent. The contention of the revenue that such a surrender of the commission under the provisions mentioned in the agreement was not deductible for the purpose of income-tax was negatived. The principle has been succinctly stated in the head-note thus: " The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate statutes, to deduct payment of moneys wholly and exclusively laid out or expended for the purpose of trade. It was held in that case that the said payments were all voluntary payments and were not made for the purpose of the trade. This decision has no bearing on the question raised before us. The said decisions lead to the following result : Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits. The latter are statutorily fixed for a specified purpose. If we bear in mind these two principles there will be no difficulty in answering the question raised ..... X X X X Extracts X X X X X X X X Extracts X X X X
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