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TMI Blog1997 (4) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ng it to generate and supply electricity to the consumers in Godhra area. The assessee-company is the successor of the said licensee. On the recommendations of a rating committee constituted under section 57(2) of the Electricity (Supply) Act, 1948, the State Government had fixed the charges for supply of electricity and motive power by the assessee-company with effect from February 1, 1952. After the amendment of the Electricity (Supply) Act, 1948, in 1956, the assessee-company increased the charges for motive power from January 1, 1963, to 35 np. per unit with a minimum of Rs. 7 per month for every installation and a few months thereafter on June 22, 1963, the assessee-company increased the rates for electricity supplied for lights and fans to 70 np. per unit with a minimum of Rs. 5 for every installation with effect from July 1, 1963. This unilateral increase in the rates for supply of motive power as well as electricity for lights and fans led to the institution of two representative suits by the consumers (Civil Suits Nos. 152 of 1963 and 50 of 1964) in the Court of Civil Judge (Senior Division) at Godhra wherein the right of the assessee-company to unilaterally increase the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company to recover the consumption charges at the enhanced rates. In the said suit it was claimed that the decision of this court was only of academic interest as, in April, 1965, the assessee-company began to purchase in bulk electrical energy at 10 paise per unit from the Gujarat Electricity Board and it had to work merely as distributing agency and had to collect the charges and not generate electrical energy and that the assessee-company would earn more profits even if it supplied electricity at 31 paise per unit to the consumers of motive power and that it would earn a reasonable return even on the basis of the existing rates. An interim injunction was granted by the trial court in that suit. A written statement was filed by the assessee-company contesting the said suit but when the suit came up for hearing no evidence was led to controvert the evidence produced on behalf of the consumers since at that point of time the undertaking of the assessee-company was under the management of the Collector of Godhra and he did not give any instructions to the lawyer appearing on behalf of the assessee-company with the result that the said lawyer reported no instructions. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Electricity Board which was done on the next day and thereafter the notification issued under rule 115(2) of the Defence of India Rules, 1971, was cancelled on May 4, 1974. Up to the assessment year 1963-64, the assessee-company was assessed on the basis of the accounts maintained according to the mercantile system. For the subsequent assessment years, i.e., from 1964-65 to 1967-68, the assessee-company deducted a total amount of Rs. 10,87,828 from the total earnings in respect of sale of electrical energy on the ground that the said amount was not actually recovered by it from the consumers since the consumers had filed a suit against the assessee-company and had obtained interim relief in that behalf. The particulars of the deductions made for the aforesaid four assessment years were as under : Assessment year Amount deducted (Rs.) 1964-65 2,59,777 1965-66 3,16,953 1966-67 3,89,761 1967-68 1,21,337 The aforesaid disputed amounts were shown by the assessee-company on the liabilities side in the balance-sheet under the head " Disputed increase in rates charged to customers (consumer), carried forward pending settlement of disputes in the District C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see during the previous year, and which was brought to tax by the Income-tax Officer, did not represent the income and, therefore, it could not be included in computation of the total income of the assessee ? " On the basis of the said reference, Income-tax Reference No. 288 of 1975 was registered in the High Court. Similarly in respect of the assessment years 1970-71 and 1971-72, the Income-tax Officer included the sums of Rs. 2,63,465 and Rs. 2,98,077, respectively, as income that had accrued to the assessee-company in those years and was taxable. The said addition was deleted by the Appellate Assistant Commissioner on appeal by the assessee-company and the said decision was upheld by the Tribunal. On an application moved by the Revenue the following question of law was referred to the High Court for its opinion : " Whether the Tribunal was right in law in holding that the amount of Rs. 2,63,465 for the assessment year 1970-71 and Rs. 2,98,077 for the assessment year 1971-72 which had accrued to the assessee during the previous year and which was brought to tax by the Income-tax Officer did not represent the income of the assessee and, therefore, was not liable to be included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mines and Power Department, dated March 19, 1969, the High Court has observed : " We do not know if this letter was a directive to the assessee under any provision of law but in any case it was in the form of a suggestion which, if accepted, enured for a period of six months only. Therefore, the contention of the learned Advocate-General that income could not be said to have accrued to the assessee in view of this letter received by the assessee within a few days after the Supreme Court dismissed the appeals filed by the consumers, does not appeal to us. In any case, the request made by the State Government was to maintain the status quo for a period of six months only. That letter did not take away the right of the assessee to recover consumption charges at the enhanced rates from its consumers." As regards the representative suit (Suit No. 118 of 1969) which was filed by the consumers in the court of the Civil Judge (Junior Division) at Godhra, the High Court has observed that " the said suit concerned the recovery of enhanced charges for the period subsequent to March 31, 1969, and not prior thereto ". The High Court rejected the contention urged on behalf of the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h income is to be made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis, i.e., accrual of the right to receive payment and the accrual of the liability to disburse or pay. In CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144, 148 (SC). It has been laid down : " Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt ; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise." This principle is applicable whether the accounts are maintained on cash system or under the mercantile system. If the accounts are maintained under the mercantile system what has to be seen is whether income can be said to have really accrued to the assessee-company. In H. M. Kashiparekh and Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avancore v. CIT [1986] 158 ITR 102 (SC), after considering the various decisions of this court, Sabyasachi Mukharji J. (as the learned Chief Justice then was), has said : " An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of the computation of income for the purpose of taxation is difficult to evolve. Besides, any strait-jacket formula is bound to create problems in its application to every situation, it must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well-settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of the real income theory. After accrual, non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was not able to realise the enhanced charges on account of pendency of the earlier representative suits of the consumers followed by the letter of the Under Secretary to the Government of Gujarat and the subsequent suit of the consumers and during the pendency of the subsequent suit the management of the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, 1971, and the undertaking was subsequently transferred to the Gujarat State Electricity Board. It is no doubt true that the letter addressed by the Under Secretary to the Government of Gujarat to the assessee-company had no legally binding effect but one has to look at things from a practical point of view. [See : R. B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC)]. The assessee-company, being a licensee, could not ignore the direction of the State Government which was couched in the form of an advice, whereby the assessee-company was asked to maintain status quo for at least six months and not to take steps to recover the dues towards enhanced charges from the consumers during this period. Before the expiry of the period of six months the subsequent suit had be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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