The real profit of a businessman under S. 10 (1) of the Income-tax Act cannot obviously include the amount returned by him by way of rebate to the consumers under statutory compulsion.

Headnote:
ELECTRICITY ACT - SECTION 57(1) - INCOME TAX ACT - SECTION 10(1) - SECTION 10(2)(XV) - 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.
Fact of the Case:

The appellant, Poona Electric Supply Co., Ltd., carried on the business of distribution of electricity in the city of Poona under a licence issued by the Government. 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.
Finding of the Court:

The Court held that 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.
Issues: 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.
Ratio Decidendi: The Court held that the real profit of a businessman under S. 10 (1) of the Income-tax Act cannot obviously include the amount 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 alone. The amount returned is not a part of the profits at all.
Final Decision: The Court answered the question referred to the High Court in the affirmative and in favour of the assessee. The order of the High Court was set aside. The appeals were allowed with costs.

Judgment

SUBBA RAO, J.: 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:

"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.

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.

4. To appreciate the rival contentions and to arrive at a satisfactory solution it will be necessary to notice the relevant provisions of the Act and of the Income-tax Act.

5. The gist of the relevant provisions may be stated thus: No person can supply electric energ

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