Case: Poona Electric Supply Co. Ltd Vs. Commissioner Of Income-Tax, Bombay

any transaction and situation of this nature, the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language. 9. Now let us look at two of the cases on which strong reliance is placed on behalf of the Revenue. In Mersey Docks and Harbour Board v. Lucas, (1883) 2 Tax Case 25 the harbour board was empowered by Act of Parliament to levy dock dues to be applied in maintaining the concern and in paying interest on moneys borrowed; any surplus income remaining after meeting these charges was directed to be applied in forming a sinking fund to extinguish the debt incurred in the construction of the docks. It went to reduce the capital liability. The question was whether the sum carried to the sinking fund, and the surplus carried to the following years accounts, were "profits" within the meaning of the Income-tax Acts. The House of Lords held that the surplus was profit assessable to the income-tax. In this case the surplus income formed the sinking fund and was utilized to pay off the debts of the harbour board; therefore, the Court rightly held that the said amount was utilised by the board from and out of its profits and, therefore, the said surplus could not be an allowable deduction. The decision of the Queens Bench Division in Paddington Burial Board v. Commrs. of Inland Revenue, (1884) 2 Tax Cas 48 was also based on the same principle. Under a public Act of Parliament a burial ground was provided out of the poor rates, and fees were charged to persons using it; any surplus of income over expenditure was applied in aid of the poor rates as required by the Act. It was held that the surplus was a profit assessable to income-tax. It will be seen that the burial ground was managed on behalf of the Parish of Paddington and the surplus was applied for the benefit of the parishners. In the words of Day, J., it was a business carried on for the benefit of the rate-payers of the parish of Paddington. This case also, therefore, dealt with payments out of profits utilised for the benefit of those on whose behalf the business was conducted. In Young v. Racecourse. Betting Control Board, (1959) 38 Tax Cas 452 the question that arose was whether the Racecourse Betting Control Board was entitled in computing the profits of the trade of totalisator operator for the years 1953-54 and 1954-55 to deduct certain payments. The Board would be entitled, under the appropriate statutes, to deduct payment of moneys wholly and exclusively laid out or expended for the purpose of trade. It was held in that case that the said payments were all voluntary payments and were not made for the purpose of the trade. This decision has no bearing on the question raised before us. 10. The said decisions lead to the following result: Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e, between the commercial profits and statutory profits. The latter are statutory fixed for a specified purpose. If we bear in mind these two principles there will be no difficulty in answering the question raised. 11. The appellant Company is a commercial undertaking. It does business of the supply of electricity subject to the provisions of the Act. As a business concern its real profit has to be ascertained on the principles of commercial accountancy. As a licensee governed by the statute its clear profit is ascertained in terms of the statute and the schedule annexed thereto. The two profits are for different purposes - one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the "Consumers Benefits Reserve Account". They were a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of the assessees real profits. So, to arrive at the taxable income of the assessee from the business under S. 10(1) of the Act, the said amounts have to be deducted from its total income. 12. In this view it is not necessary to express our opinion on the question whether the said amounts would be allowable deductions under S. 10(2)(xv) of the Act. 13. The next question is whether the amounts so reserved for future payment were deductible in computing the income, profits or gains from the assessees business for the assessment years 1953-54 and 1954-55. It is not disputed that the assessee adopts the mercantile system of accounting. The liability to return the amounts was incurred by the assessee during the relevant accounting years. This Court held in Calcutta Co. Ltd. v. Commr. of Income-tax West Bengal, 1959-37 ITR 1 : (AIR 1959 SC 1165 ) that where an assessee maintained his accounts on mercantile basis, the accrued liability and the estimated expenditure which it would incur in discharging the same could be deducted from the income of the accounting year in which the said liability accrued. Indeed, this legal position was not contested on behalf of the Revenue.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]9. Now let us look at two of the cases on which strong reliance is placed on behalf of the Revenue. InMersey Docks and Harbour Board v. Lucas, (1883) 2 Tax Case 25the harbour board was empowered by Act of Parliament to levy dock dues to be applied in maintaining the concern and in paying interest on moneys borrowed; any surplus income remaining after meeting these charges was directed to be applied in forming a sinking fund to extinguish the debt incurred in the construction of the docks. It went to reduce the capital liability. The question was whether the sum carried to the sinking fund, and the surplus carried to the following years accounts, were "profits" within the meaning of the Income-tax Acts. The House of Lords held that the surplus was profit assessable to the income-tax. In this case the surplus income formed the sinking fund and was utilized to pay off the debts of the harbour board; therefore, the Court rightly held that the said amount was utilised by the board from and out of its profits and, therefore, the said surplus could not be an allowable deduction. The decision of the Queens Bench Division inPaddington Burial Board v. Commrs. of Inland Revenue, (1884) 2 Tax Cas 48was also based on the same principle. Under a public Act of Parliament a burial ground was provided out of the poor rates, and fees were charged to persons using it; any surplus of income over expenditure was applied in aid of the poor rates as required by the Act. It was held that the surplus was a profit assessable to income-tax. It will be seen that the burial ground was managed on behalf of the Parish of Paddington and the surplus was applied for the benefit of the parishners. In the words of Day, J., it was a business carried on for the benefit of the rate-payers of the parish of Paddington. This case also, therefore, dealt with payments out of profits utilised for the benefit of those on whose behalf the business was conducted. In Young v. Racecourse. Betting Control Board, (1959) 38 Tax Cas 452 the question that arose was whether the Racecourse Betting Control Board was entitled in computing the profits of the trade of totalisator operator for the years 1953-54 and 1954-55 to deduct certain payments. The Board would be entitled, under the appropriate statutes, to deduct payment of moneys wholly and exclusively laid out or expended for the purpose of trade. It was held in that case that the said payments were all voluntary payments and were not made for the purpose of the trade. This decision has no bearing on the question raised before us10. The said decisions lead to the following result: Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e, between the commercial profits and statutory profits. The latter are statutory fixed for a specified purpose. If we bear in mind these two principles there will be no difficulty in answering the question raised11. The appellant Company is a commercial undertaking. It does business of the supply of electricity subject to the provisions of the Act. As a business concern its real profit has to be ascertained on the principles of commercial accountancy. As a licensee governed by the statute its clear profit is ascertained in terms of the statute and the schedule annexed thereto. The two profits are for different purposes - one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the "Consumers Benefits Reserve Account". They were a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of the assessees real profits. So, to arrive at the taxable income of the assessee from the business under S. 10(1) of the Act, the said amounts have to be deducted from its total income12. In this view it is not necessary to express our opinion on the question whether the said amounts would be allowable deductions under S. 10(2)(xv) of the Act13. The next question is whether the amounts so reserved for future payment were deductible in computing the income, profits or gains from the assessees business for the assessment years 1953-54 and. It is not disputed that the assessee adopts the mercantile system of accounting. The liability to return the amounts was incurred by the assessee during the relevant accounting years. This Court held in Calcutta Co. Ltd. v. Commr. of Income-tax West Bengal, 1959-37 ITR 1  : (AIR 1959 SC 1165  ) that where an assessee maintained his accounts on mercantile basis, the accrued liability and the estimated expenditure which it would incur in discharging the same could be deducted from the income of the accounting year in which the said liability accrued. Indeed, this legal position was not contested on behalf of the Revenue.