POONA ELECTRIC SUPPLY CO LIMITED BOMBAY IN BOTH THE APPEALS Vs. COMMISSIONER OFINCOME TAX BOMBAY CITY I BOMBAY IN BOTH THE APPEALS

JUDGEMENT

(1.) 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 Electric (Supply) Act, 1948, (Act 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 to "Consumers Benefit Reserve 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:

(2.) 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 S. 10(1) of the Indian Income-tax Act can be determined only after excluding the amount statutorily transferred to the "Consumers Benefit Reserve Account", for that amount represents a rebate to the customers of the excess amount collected from them. (2) As the reservation of a part of the said excess is a statutory condition subject to which the Company carries on its business, it is an expenditure wholly and exclusively incurred for the purpose of the Company's business and, therefore, it is an allowance deductible under S.10 (2) (xv) of the Income-tax Act for computing the profit of the appellant's business. (3) The Company follows the mercantile system of accounting and, therefore, the amount of rebate so reserved is deductible for arriving at the commercial profit of the Company in the year when the statutory liability arises and not when the amount is actually paid; and in the present case the statutory liability for the said two amounts arose in the accounting years of 1952 and 1953.

(3.) Learned Additional Solicitor General contended that under the relevant provisions of the Act the transference of a part of the said excess to the consumers benefit 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 S. 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.