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TMI Blog1962 (7) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in the Electricity Act, 1910, or in the licence granted to the licensee under that Act or of any other law, agreement or instrument applicable to the licensee would be void. Clause I of the Sixth Schedule provides that notwithstanding anything contained in the Indian Electricity Act, 1910 (except sub-section (2) of section 22A), and the provisions in the licence of a licensee, the licensee shall so adjust his rates 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 second proviso to that clause provides that the licensee shall not be deemed to have failed so to adjust his rates if the clear profits in any year of account has not exceeded the amount of reasonable return by fifteen per centum of the amount of reasonable return. The other provisions of clause I are not material for the present case. Sub-clause (1) of clause II is in the following terms: II (1). 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 reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Tribunal, and before it two contentions were raised. Firstly, it was argued that the income-tax authorities were in error in over-looking that the system of accounting adopted by the assessee was the mercantile system. The liability to make a refund to the consumers by virtue of the provisions of the Electricity Act had accrued, and was definite. A provision made to meet such a liability was not a reserve created for contingent liability and was, therefore, an allowable deduction. It was also argued that the said amounts were not in the true sense the income of the assessee at all, but, on the other hand, the income within the meaning of sub-section (1) of section 10 received by the assessee fell short by these two amounts and on this ground also the said amounts had to be allowed as deduction in computing the assessable profits of the assessee. These two contentions appear to have been accepted by the Tribunal. The Tribunal has recorded its finding in the following terms: We, therefore, hold that the two amounts were properly allowable, as expenditure under section 10(2)(xv) of the Income-tax Act. Not only so, but we think that it is proper to consider the deduction as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chedule enjoins a duty on the assessee to so adjust his rates for the sale of electricity that his clear profits in any year of account shall not as far as possible exceed the amount of reasonable return. If the rates charged result in clear profits exceeding reasonable return, clause II of the Sixth Schedule requires him to refund a certain portion thereof to the consumers in the form of proportional rebates on the amounts collected from the sale of electricity and meter rentals. In other words, the sums set apart represent the over-charge made by the assessee company which has to be returned to the consumers. It therefore cannot in any sense be termed as the income, profits and gains of the assessee arising to it out of its business. The amount therefore has to be excluded in the computation of the assessable income of the assessee. In the alternative, Mr. Kolah contends that, at any rate, by reason of these provisions, the said income at the very source has been diverted to the consumers and, therefore, not liable to be taxed in the hands of the assessee. Mr. Kolah also contended that it is expenditure laid out wholly and exclusively for the purpose of the assessee's busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot to have income tax upon it. With reference to that I have endeavoured in vain to grapple with what the counsel for the appellants were saying, in order to bring it to a definite point. There is no ground whatever for saying it, that I can see; there is nothing in the nature of things, there is nothing in the words of the Act, to say that when an income has been actually earned, when an actual profit upon which the tax is put has been earned and received by any person or corporation, Her Majesty's right to be paid the tax out of it in the least degree depends upon what they are to do with it afterwards, unless there is an express enactment, which I think there is in some cases, that they are to apply it to charities and other purposes. If the amount thus received is to be applied at their pleasure, they must pay the. tax. If it is to be paid over to shareholders or to creditors, or to anybody else, the Queen is still to have her tax. Although it is expressly said that she is to be paid 'before' they pay it over to any such person, it does not mean that she is not to be paid unless they are going to pay it over to any such person. It is impossible to construe it in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in Pondicherry Railway Company Ltd. v. Commissioner of Income-tax AIR 1931 PC 165 were that the appellant-assessee, Pondicherry Railway Company Limited, was incorporated in the U. K. with a registered office in London, and under a convention with the French Colonial Government it constructed a railway in the French Colony of Pondicherry under certain terms and conditions. Under one of its terms, the assessee company had agreed to pay to the French Government half of its net profits calculated, in the manner provided in the convention. The assessee company claimed the amount paid by it to the French Colonial Government under this term as a permissible allowance. This contention was not accepted by their Lordships of the Privy Council. It was held that what was paid to the French Colonial Government was part of the profits of the assessee company, and, therefore, was liable to be included in the assessable income of the company. Lord Macmillan, delivering the judgment of the Board of the Judicial Committee of the Privy Council, at page 251, observed: A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxes) [1939] 7 ITR 101 . The other decision in Union Cold Storage Co. Ltd. v. Adamson ( H.M. Inspector of Taxes) [1931] 16 Tax Cas 293, to which Mr. Kolah drew our attention, is of little assistance to the decision of the question raised before us. The principle deducible from the aforesaid decisions in our view is that once profit is earned, tax at that point is attracted to it irrespective of the manner of its disposal. Whether the assessee would have control over the profits or not is wholly immaterial for the purpose of ascertaining the tax liability of the assessee. Even if part of it goes back to persons who contribute towards making of those profits that by itself does not save tax liability thereon. We have already reproduced the provisions of section 57 and clauses I and II of the Sixth Schedule of the Electricity Act. To recapitulate, by virtue of section 57, the provisions of the Sixth and Seventh Schedules get incorporated in the licence of the licensee under the Electricity Act, and he is enjoined with a duty to comply with those provisions. Clause I of the Sixth Schedule requires a licensee to adjust his rates for the sale of electricity in such manner that his cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p in each case as mentioned in that sub-clause. Item (a) of sub-clause (2) gives the various heads of income. It may be mentioned that gross receipts from sale of energy, less discounts applicable thereby, and the rental of meters and other apparatus hired to consumers, are amongst the heads of income. Item (b) describes various heads of expenditure. It is an exhaustive list and it includes expenses (excluding interest on debentures and loans) admissible under the law for the time being in force in the assessment of Indian income-tax and arising from and ancillary or incidental to the business of electricity supply . Item (c) enumerates the heads of special appropriation, and it may be mentioned that all taxes on income and profits is one of the items of special appropriation which are to be deducted from income in ascertaining clear profits Tinder the provisions of the Sixth Schedule. Reasonable return is defined in sub-clause (9) of clause XVII of the Sixth Schedule. It is not necessary to go into the details of that definition. Having regard to the definition of clear profits it is abundantly clear that clear profits is a sum ascertained after income-tax chargeable on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of the profits after they have been earned. It cannot, therefore, be said that the amount set apart for the purpose of distribution amongst the consumers is not chargeable to tax on the ground that it represents over-charge. It is next to be seen whether the said two amounts of ₹ 42,142 and ₹ 77,138 were diverted at the very source to the consumers before they had reached the assessee as a part of its income. In all cases of tax, what has to be considered is what is the real income of the assessee. If on considering the transactions as a whole it is found that what appears to be the income of the assessee is legally claimable by some other person then that part has to be excluded from the computation of the income of the assessee, for the reason that that part of the income gets diverted at the very source of its earning to the person who has a legally enforceable claim in respect thereof against the assessee. The two decisions on which reliance is placed by Mr. Kolah on this aspect of the case lead to this conclusion. The facts in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax [1933] 1 ITR 135 (PC) are that the assessee had succeeded to the family anc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant case, to set apart the aforesaid sums for the purposes of distribution amongst the consumers, and whether on the failure on the part of the assessee to set apart and distribute these amounts amongst the consumers, the consumers could have any legally enforceable claim against the assessee to compel it to do so. We have not been shown any provisions in the Electricity Act which would confer a legally enforceable right on the consumers to claim a share in the excess of clear profits over the reasonable returns, nor have we come across any such provision in the Act. Under the general law also, the consumers, in our view, would have no such right. Section 57 read with the Sixth Schedule has not the effect of fixing the rate to be charged to the consumers to whom the electricity or meters are supplied. Clause I of the Sixth Schedule only gives a direction to the assessee to so adjust his rates for the sale of electricity that his clear profit in any year of account shall not, as far as possible, exceed the amount of reasonable return. But that does not mean that failure on the part of the assessee to so adjust the rates would render the rates charged illegal. Clause II is directo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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