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TMI Blog1965 (4) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Account. " The Income-tax Officer disallowed the claim; and on appeal the Appellate Assistant Commissioner agreed with the Income-tax Officer. On a further appeal, the Income-tax Appellate Tribunal accepted the contention of the appellant and allowed the deductions. At the instance of the revenue, the Tribunal submitted the following question of law to the High Court of Judicature at Bombay for its opinion : " 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 ?" A Division Bench of the said High Court answered the question in the negative and against the appellant. The present appeals have been filed by the company after obtaining the requisite certificate from the High Court. The argument of Mr. A. V. Viswanatha Sastri, learned counsel for the appellant, may be summarized thus: (1) There is a distinction between commercial profit of a company and " clear profit " under the Act---one is arrived at on commercial principles and the other is regulated by the statute; the real profit of a company under section 10(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch licensees from charging unreasonable rates to the detriment of the consumers. Under section 57(1) of the Act the provisions of the Sixth Schedule and the Table appended to the Seventh Schedule thereto are deemed to be incorporated in the licence of every licensee. Paragraph I of the Sixth Schedule imposes a duty on every such licensee to so adjust his rates for the sale of electricity by periodical revision that his clear profit in any year shall not, as far as possible, exceed the amount of " reasonable return ". The expressions " clear profit " and " reasonable return " are defined. Under paragraph II thereof 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 7 1/2% of the amount of reasonable return, shall be at the disposal of the undertaking; one-half of the said excess 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 future in such manner as the State Government may direct. It is, therefore, clear from thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness carried on by him. The said profits and gains are not profits regulated by any statute, but profits in a business computed on business principles. They are business profits and not statutory profits. They are real profits and not notional profits. The real profit of a businessman under section 10(1) of the Income-tax Act cannot obviously include the amounts returned by him by way of rebate to the consumers under statutory compulsion. It is as if he received only from the consumers the original amount minus the amount he returned to them. 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 a part of the profits at all. In this context some of the decisions cited at the Bar may be of some help. In Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax, under an agreement with the French Colonial Government the railway company had to pay to the said Government half of its net profits calculated as provided thereunder. One of the questions that arose in the appeal was whether the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rry Railway Co. has been modified. Lord Macmillan himself in a later decision in Union Cold Storage Co. Ltd. v. Adamson explained his observations in the Pondicherry Railway Co.'s case. There, the appellant-company leased lands and premises abroad under a deed reserving a particular rent per annum. The deed provided that if at the end of any financial year it was found that after providing for this rent the result of the company's operations was insufficient to pay both interest on its charges and debentures and dividends at fixed rates on its preference shares and also at least 10 per cent. on its ordinary shares, the rent for the year was to be abated to the extent of the deficiency, repayment of rent already paid being made if necessary. The question raised in that case was whether such repayments made were allowable as deductions in assessing the company's income to income-tax. The House of Lords held that they were allowable deductions. When the observations of Lord Macmillian in the Pondicherry Railway Co.'s case were pressed upon the House in support of the contention on behalf of the revenue, Lord Macmillan explained his earlier observations thus: " When, therefore, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would bring in depreciation, but would also take into account the sum that had been paid out to the Skoda Works, and the Corporation upon the taking of the first account." Romer L.J. put the test in a different way when he said : " Is the payment that has to be made by the trader under the contract in question a mere division of profits with another party or is it a payment to the other party, the amount of which is ascertained by reference to the profits ?" MacKinnon L.J. stated much to the same effect thus : " The whole question in this, as in other cases, is whether this, which is an annual payment, is an annual payment to be taken into account in order to ascertain the profits, or is it an annual payment payable out of the profits after they have been ascertained ? I think the true facts of this case are that it is of the former character. The difficulty in the case arises largely because of the necessary ambiguity in the word 'profits' and the fact that in this agreement 'profits ' as a word does appear ; but 'profits', as I think, quite clearly of a different description from the annual profits or gains with which one is concerned in assessing the income-tax." This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language. " Now let us look at two of the cases on which strong reliance is placed on behalf of the revenue. In Mersey Docks and Harbour Board v. Lucas the harbour board was empowered by Act of Parliament to levy dock dues to be applied in maintaining the concern and in paying interest on moneys borrowed; any surplus income remaining after meeting these charges was directed to be applied in forming a sinking fund to extinguish the debt incurred in the construction of the docks. It went to reduce the capital liability. The question was whether the sum carried to the sinking fund, and the surplus carried to the following year's accounts, were " profits " within the meaning of the Income-tax Acts. The House of Lords held that the surplus was profit assessable to income-tax. In this case the surplus income formed the sinking fund and was utilised to pay off the debts of the harbour board ; therefore, the court rightly held that the said amount was utilised by the board from and out of its profits and, therefore, the said surplus could not be an allowable deduction. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes business of the supply of electricity subject to the provisions of the Act. As a business concern its real profit has to be ascertained on the principles of commercial accountancy. As a licensee governed by the statute its clear profit is ascertained in terms of the statute and the schedule annexed thereto. The two profits are for different purposes---one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the " Consumers' Benefit Reserve Account ". They were a part of the excess amount paid to it and reserved to be returned 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. In this view it is not necessary to express our opinion on the question whether the said amounts would be allowable deductions under section 10(2)(xv) of the Act. The next question is whether the amounts so reserved for future payment were deductible in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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