Case: Hoshiarpur Electric Supply Co Vs. Commissioner Of Income Tax, Simla

1. The Income Tax Appellate Tribunal, Delhi Bench, stated under S. 66(1) of the Indian Income Tax Act the following question for decision of the High Court of Judicature of Chandigarhthe assessees receipts from consumers for laying service lines, (that is, not distributing mains) were trading receipts and whether the profit element therein, viz., service connection receipts minus service connection cost was taxable income in the assesseesThe High Court answered the question as follows. . . the companys receipts from the consumers for laying the service lines are trading receipts and the profit element therein being the difference between the service connection receipts and the service connection costs is taxable income in the hands of the company.With certificate granted under section 66 A(2) of the Income Tax Act, this appeal is preferred by the Hoshiarpur Electric Supply Company - hereinafter referred to as the assessee.4. The assessee is a licensee of an electricity undertaking. In the year of account, April 1, 1947 - March 31, 1948, the assessee received Rs. 12,530/- for new service connections granted to its customers. Out of this amount Rs. 5,929/- were spent for laying the service lines, and Rs. 1,338/- were spent for laying certain mains. The Income Tax Officer treated the entire amount of Rs. 12,530/- as trading receipt. In appeal to the Appellate Assistant Commissioner, the cost incurred for laying service lines and mains was excluded and the balance was treated as taxable income. In appeal, the Appellate Tribunal agreed with the Appellate Assistant Commissioner and held that the service connection receipts were trading receipts and that the "profit element" therein was taxable income in the hands of the assessee. In a reference under S. 66(1) of the Income Tax Act, the High Court substantially agreed with the view of the Tribunal.5. The assessee has installed machinery for producing electrical energy and has also laid mains and distributing lines for supplying it to its customers. The assessee makes no charge to the consumers for laying service lines not exceeding 100 ft. in length from its distributing main to the point of connection on the consumers property in accordance with cl. 6(1)(b) of the Schedule to the Indian Electricity Act,But where the length of a service line to be installed exceeds 100 ft., the cost is charged at certain rates by the assessee. The charge consists usually by cost of wiring copper as well as galvanised iron, service and other brackets, insulators, meter wiring, poles and appropriate labour and supervision charges. In the year of account, the assessee gave 229 new connections and received Rs. 12,530/- out of which Rs. 5,929/- have been regarded as taxable income. In the forms of account prescribed under the Indian Electricity Rules framed under S. 37 read with S. 11 of the Indian Electricity Act,the assessee credited service connection receipts to the revenue account and debited the corresponding cost of laying service lines to the capital account. But the classification of the receipts in the form of accounts is not of any importance in considering whether the receipt is taxable as revenue.

Court's reasoning:
8. The assessee only spends a part of the amount received by it from the consumers. It is not clear from the statement of the case whether amongst the 229 new connections given, there were any which were of a length less than 100 ft. Payments received by the assessee must of course be for service lines installed of length more than 100 ft., but it is not clear on the record whether the expenditure of Rs. 5,929 incurred by the assessee is only in respect of service lines which exceeded 100 ft. in length or it is expenditure incurred in respect of all service lines. It is however not disputed that a part of the amount received from the consumers remains with the assessee after meeting the expenses incidental to the construction of service lines. But an electric service line requires constant inspection and occasional repairs and replacement and expenses in this behalf have to be undertaken by the assessee. The amount contributed by the consumer for obtaining a new connection would of necessity cover all those services. The amount contributed by the consumer is in direct recoupment of the expenditure for bringing into existence an asset of a lasting character enabling the assessee to conduct its business of supplying electrical energy. By the installation of the service lines, a capital asset is brought into existence. The contribution made by the consumers is substantially as consideration for a joint adventure; the service line when installed becomes an appanage of the mains of the assessee, and by the provisions of the Electricity Act, the assessee is obliged to maintain it in proper repairs for ensuring efficient supply of energy. The assumption made by the Department that the excess remaining in the hands of the assessee, after defraying the immediate cost of installation of a service line must be regarded as a trading profit of the company is not correct. The assessee is undoubtedly carrying on the business of distributing electrical energy to the consumers. Installation of service lines is not an isolated or casual act; it is an incident of the business of the assessee. But if the amount contributed by the consumers for installation of what is essentially reimbursement of capital expenditure, the excess remaining after expending the costs of installation out of the amount contributed is not converted into a trading receipt. This excess - which is called by the Tribunal "profit element" - was not received in the form of profit of the business; it was part of a capital receipt in the hands of the assessee, and it was not converted into a trading profit because the assessee was engaged in the business of distribution of electrical energy, with which the receipt was connected.The receipts though related to the business of the assessee as distributors of electricity were not indicental to nor in the course of the carrying on of the assessees business; they were receipts for bringing into existence capital of lasting value. Contributions were not made merely for services rendered and to be rendered but for installation of capital equipment under an agreement for a joint venture. The total receipts being capital receipts the fact that in the installation of capital, only a certain amount was immediately expended, the balance remaining in hand, could not be regarded as profit in the nature of a trading receipt. On that view of the case, in our judgment, the High Court was in error in holding that the excess of the receipts over the amount expended for installation of service lines by the assessee was a trading receipt.