1962 (7) TMI 55 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sums set apart in the "consumers benefit reserve account" are deductible in computing the income, profits, and gains of the assessee's business assessable to tax.
2. Whether these sums represent over-charges to be refunded to consumers or part of the assessee's profits.
3. Whether the sums were diverted at the source before reaching the assessee as income.
4. Whether the sums can be claimed as an allowable deduction under section 10(2)(xv) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deductibility of Sums in "Consumers Benefit Reserve Account":
The assessee, a public limited company engaged in the distribution of electricity, claimed sums set apart in the "consumers benefit reserve account" as permissible allowances under section 10(2)(xv) of the Income-tax Act. The Income-tax Officer and the Appellate Assistant Commissioner rejected this claim, stating that the company had not divested itself of the ownership of these amounts, and they were still utilized in the business. The Tribunal, however, accepted the assessee's contention, stating that the amounts were allowable as expenditure under section 10(2)(xv) and affected the incomings, thus not forming part of the assessee's real profits.

2. Characterization of Sums as Over-charges or Profits:
The assessee argued that the sums set apart represented over-charges to be refunded to consumers as per the provisions of the Electricity Act, and therefore, should not be considered as the income, profits, and gains of the assessee. The Tribunal supported this view, stating that the real profit could only be ascertained after accounting for the amount set apart under the law for the benefit of consumers. The High Court, however, disagreed, stating that the sums set apart were part of the clear profits of the licensee and had to be included in the assessable income of the assessee.

3. Diversion of Sums at the Source:
The High Court considered whether the sums set apart were diverted at the source before reaching the assessee as income. It referred to various case laws, including Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax and Seth Motilal Manekchand v. Commissioner of Income-tax, which established that if an amount is legally claimable by another person, it should be excluded from the assessee's income. However, the Court found no provision in the Electricity Act conferring a legally enforceable right on consumers to claim a share in the excess of clear profits over the reasonable return. Therefore, the sums had not been diverted at the source and were part of the assessee's income.

4. Allowability of Sums as Deduction under Section 10(2)(xv):
The High Court examined whether the sums could be claimed as an allowable deduction under section 10(2)(xv) of the Income-tax Act. It concluded that the sums set apart for distribution to consumers could not be considered as expenditure laid out wholly or exclusively for the purpose of the business, as they were not incurred during the course of business or for earning profits. Thus, the sums were not allowable as deductions under section 10(2)(xv).

Conclusion:
The High Court answered the question referred to it in the negative, holding that the sums of Rs. 42,148 and Rs. 77,138 set apart in the assessment years 1953-54 and 1954-55, respectively, were not deductible in computing the income, profits, and gains from the assessee's business assessable to tax. The assessee was directed to pay the costs of the department.