# POONA ELECTRIC SUPPLY CO. LTD v. COMMISSIONER OF INCOME-TAX, BOMBAY

- **Citation:** [1965] 3 S.C.R. 818
- **Court:** Supreme Court of India
- **Decided:** 1965-04-19
- **Case number:** Civil Appeals Nos. 633 and 634 of 1964
- **Bench:** K. Subba Rao, J. C. Shah, S. M. Sum
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/poona-electric-supply-co-ltd-v-commissioner-of-income-tax-bombay-3464
- **Pages:** 11

## Headnote

Income-tax Act (11 of 1922) s. 10(1)-Projit arrived at after deducting amount. according to Electricity (Supply) Act, 1943-Taxoblc inceme--If deductions can be allowed.
The appellant-company was a commercial undertaking, doing the
business of supply of electricity .subject to the provisions of Electricity
(5upply) Act, 1948. For the purpose of rationalization of rates and
keeping them under control, the licensee was directed by the Act to
adjust the rates in such a way that the clear profit in any year did 1;1ot
exceed the amount ot reasonable return as defined in the Act; but
that if an excess was collected, the licensee should distribute half
of that exces• by way of rebate to the consumers, 9r carry the
amount forward in the accounts for distribution to the consumers.
For the purposes of the-Act, during the accounting years, the asses.-
see credited certain amounts which formed part of the excess collected to the "Consumers Benefit Reserve Account", and claimed
deduction of those amounts from the taxable income. The" Income
Tax Officer and the Appellate Assistant Commissioner disallowed
the .claim, but the Tribunal allowed the deductions. The High Court,
on a reference, hel\! against the assessee.
In its appeal to this Court, the appellant contended inter alia
that there was a distinction between commercial profit and "clear
profit" under the Electricity (Supply) Act and that the real or commercial profit under s. 10(1) of the Income Tax Act, 1922, could be
determined only after excluding the amounts statutorily transferred
to the "Consumers Benefit Reserve Account", for, that amount represented a rebate to the consumers, of the excess amount collected
from them.
HELD: As a business concern the real profit of the appellant had
to be ascertained on the principles of commercial a.ccountancy. & a
licensee governed by the statute its "clear profit" was ascertained
in terms of the statute and the schedule annexed thereto. The two
profits are for different purposes-one for commercial and tax purposes and the other for statutory purposes in order to maintain a reasonable level of rates. The amounts for which deduction was claimed
were a part of the excess ainount paid to the assessee and reserved
to be returned to the consumers. They did not form part of the assessee's. real profits, and therefore, to arrive at the taxable income
of the assessee from the business, under s. 10(1) of the Income-tax
Act the said amounts had to be deducted from its total income.
[827G-828A]
,
The income tax is a tax on the real income, that is, the real profits arrived at on commercial principles- subject to the provisions of
the Income-tax Act. The real profit can be ascertained only by mU:-
ing the permissible deductions. There is a clear cut distinction betwe_en deductions made for ascertainin!I the profits and distributions
made out of profits. It is a question df fact to be found on the relevant circumstances, having regard to business principles. Anoth_.
818
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l'OO:\A ELECTHIC CO. t'. C.I.T. (Sulba Jlao, J.)
819
distinction that should, be borne in mind is that between the real
and the statutory profits. that is between the commercial profits ond
statutory profits. The latter are statutorily fixed for a specified purpose. The real profit of a businessman under s. 10(1) of the Incometax Act cannot obviouslv include the amounts returned by him by
\\·ay of' rebate to the co.nsumers, under statutory compulsion, from
the statutory profits. [822C, 827E. F]
Case la\\' referred to.

## Text

POONA ELECTRIC SUPPLY CO. LTD.
v.
COMMISSIONER OF INCOME-TAX, BOMBAY
April 19, 1965
[K. SUBBA RAO, J. C. SHAH AND S. M. Sum, JJ.)
Income-tax Act (11 of 1922) s. 10(1)-Projit arrived at after deducting amount. according to Electricity (Supply) Act, 1943-Taxoblc inceme--If deductions can be allowed.
The appellant-company was a commercial undertaking, doing the
business of supply of electricity .subject to the provisions of Electricity
(5upply) Act, 1948. For the purpose of rationalization of rates and
keeping them under control, the licensee was directed by the Act to
adjust the rates in such a way that the clear profit in any year did 1;1ot
exceed the amount ot reasonable return as defined in the Act; but
that if an excess was collected, the licensee should distribute half
of that exces• by way of rebate to the consumers, 9r carry the
amount forward in the accounts for distribution to the consumers.
For the purposes of the-Act, during the accounting years, the asses.-
see credited certain amounts which formed part of the excess collected to the "Consumers Benefit Reserve Account", and claimed
deduction of those amounts from the taxable income. The" Income
Tax Officer and the Appellate Assistant Commissioner disallowed
the .claim, but the Tribunal allowed the deductions. The High Court,
on a reference, hel\! against the assessee.
In its appeal to this Court, the appellant contended inter alia
that there was a distinction between commercial profit and "clear
profit" under the Electricity (Supply) Act and that the real or commercial profit under s. 10(1) of the Income Tax Act, 1922, could be
determined only after excluding the amounts statutorily transferred
to the "Consumers Benefit Reserve Account", for, that amount represented a rebate to the consumers, of the excess amount collected
from them.
HELD: As a business concern the real profit of the appellant had
to be ascertained on the principles of commercial a.ccountancy. & a
licensee governed by the statute its "clear profit" was ascertained
in terms of the statute and the schedule annexed thereto. The two
profits are for different purposes-one for commercial and tax purposes and the other for statutory purposes in order to maintain a reasonable level of rates. The amounts for which deduction was claimed
were a part of the excess ainount paid to the assessee and reserved
to be returned to the consumers. They did not form part of the assessee's. real profits, and therefore, to arrive at the taxable income
of the assessee from the business, under s. 10(1) of the Income-tax
Act the said amounts had to be deducted from its total income.
[827G-828A]
,
The income tax is a tax on the real income, that is, the real profits arrived at on commercial principles- subject to the provisions of
the Income-tax Act. The real profit can be ascertained only by mU:-
ing the permissible deductions. There is a clear cut distinction betwe_en deductions made for ascertainin!I the profits and distributions
made out of profits. It is a question df fact to be found on the relevant circumstances, having regard to business principles. Anoth_.
818
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l'OO:\A ELECTHIC CO. t'. C.I.T. (Sulba Jlao, J.)
819
distinction that should, be borne in mind is that between the real
and the statutory profits. that is between the commercial profits ond
statutory profits. The latter are statutorily fixed for a specified purpose. The real profit of a businessman under s. 10(1) of the Incometax Act cannot obviouslv include the amounts returned by him by
\\·ay of' rebate to the co.nsumers, under statutory compulsion, from
the statutory profits. [822C, 827E. F]
Case la\\' referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 633 and
634 of 1964.
Appeals from the judgement and order dated July 23 and 24,
1962 of the Bombay High Court in Income-tax R:eference No. 61
of 1961.
A. V. Vfa1m11atha Sastri, S. N. Vakil, T. A. Ramachandran,
J. B. Dadachanji, 0. C. Mathur and Ravinder Narain, for the
appellant (in both the appeals).
Niren De, Additional Solicitor-General, R. Ganapathy Iyer
and R. N. Sachthey, for respondent (in both the appeals).
A. V. Vishwanatha Sastri, M. N. Shroff and /. N. Shroff, for
the Intervener <in all the appeals).
The Judgment of the Court was delivered by
Sobba 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
Electricity (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.n
820
SUPREME
COURT
REPORTS
[1965] 3 s.c.&.
A Division Bench of the. said High Court answered the question A
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.
The argument of Mr. A. V. Viswanatha Sastri, learned counsel for the appellant, may be summarised thus: (!) There is, a B
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
C
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· D
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 E
arose in the accounting years of 1952 and 1953.
Learned Additional Solicitor General contended that (1) 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 F
been earned and, therefore, it is not a deductible item for ascertaining the profit of the Company under s. IO(l) of the Income-tax
Act; (2) the said amol!nts 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,
G
but was only apportioned or distributed from and out of the profits
already earned.
To appreciate the rival conientions and to arrive at a satiafactory solution it will be necessary to notice the relevant provisions of the Act and of the Income-tax Act.
The gist of the relevant pro.visions may be stated thus: No
person can supply electric energy m any area unless he has obtained a licence from the State Gov'ernment under s. 3(1) of the
Indian Electricity Act, 1910 (9 of 1910). The Act, i.e., The
Electricity (Supply) Act, 1948, provides for the rationalization of
ile production and supply of electricity and generally for taking
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POONA ELEC'rRIC co. v C.I.T. {Bubb~ Rao, J.)
8~1
measures conducive to electrical development. One of its main
objects is to prevent such licensees from charging unreasonablerates to the detriment of the consumers. Under s. 57(1) of the Act
the provisions of the Sixth Schedule and the table appended. to the·
Seventh Schedule thereto are deemed to be incorporated in the·
licence of every licensee. Paragraph I of the Sixth Schedule imposes a duty on every such licensee to so adjust his rates for the·
sale of electricity by periodical revision that his clear profit in
any year shall not, as far as possible,
exceed the amount of
"reasonable return".
The expressions "clear profit" and "reasonable return" are defined. Under Para. II thereof 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 7! %
of the amount of reasonable return, shall be at the disposal of the
undertaking; one half of the said excess shall either be distributed
in the form of a proportional rebate on the amounts collected
from the sale of electricity and meter rentals or carried forward
in the accounts of the licensee for distribution to the consumers in
future in such manner as the State Government may direct. It is,
therefore, clear from these
provisions that for the purpose of
rationalization of rates and keeping them· under control the licensee
is directed to adjust his rates in such a way that his clear profit
in any year. shall not, as far as possible, exceed the amount of
reasonable profit; but if an excess is collected, the licensee shall
E distribute half of that excess in the form of a proportional rebate
to the consumers or carry forward the same in his accounts for
future distribution to the consumers.
Briefly stated, the schemeof the provisions is that a part of . the excess collected is returned
to the consumers by way of a rebate. The question is whether
F
the amount so returned or retur.nable by the licensee to his consumers is deductible for ascertaining his taxable income from his
business under s. 10(1) or s. 10(2)(xv) of the Income-tax Act.
Learned Additional Solicitor General took us though the various paragraphs of the Sixth Schedule to the Act and argued that
under them the licensee's clear profit was arrived at after alf the
G deductions were made, including the appropriations for all taxes
on income and profits and, therefore, the distribution of a part of
the excess was only a distribution out of the profits. There is
plausibility in this argument and at tht' first blush- it appears to be
attractive. But there is an obvious fallacy underlying the argument
and that arises from the fact that the argument equates the expresH
sion "clear profit" with that of commercial profits. The object of
the Act and that of the Sixth Schedule thereto, as aforesaid, is to
statutorily rationalize and regulate the rates chargeable for the
energy supplied in the interest of the public and for electrical development. The rules embodied in the Sixth Schedule to the Aot
are intended only to achieve that object. Under the said rules
certain appropriations and certain deductions have to be made to
arrive at the clear profit; otherwise the items may be manipulated
822
SUl'REl!E COURT REPORTi
(1965] 3 s.C.R.
to susiain a demand for abnormal rates. The rules have no conA
cern with income-tax; though for the purpose of arriving at the
clear profit the taxes paid are also deductible. If this distinction
is borne in mind, the problem presented is easily and readily
solved.
Under s. lO(i) of the Income-tax Act, tax shall be payable by B
an assessee under the head "profits and gains of business" in respect
of profits and gains of any business carried on by him. The said
profits and gains are not profits regulated by any statute, but
profits in a business computed on business principles. They are
business profits and not statutory profits. They are real profits
and not notional profits. The real profit of a businessman under c
s. 10(1) of the Income-tax Act cannot obviously include the
amounts 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 D
addition to Rs. X by mistake and returning Rs. Y to them and
another businessman collecting Rs. X alone. The amount returned is not a part of the profits at all.
In this context some of the decisions cited. at the Bar may
be of some help.
In Pondicherry Railway Co., Ltd. v. Commissioner of Income-tax, Madras('). under an agreement with the French E
Colonial Government the railway company had to pay to the said
Government half of its net profits calculated as provided thereunder. One of the questioni that arose in the appeal was whether
the appellant-company was entitled to deduct the payments made
under the agreement with the said Government as being expenditure incurred solely for the purpose of earning such profits within F
s. 10(9) of the Income-tax Act. In dealing with the question, Lord
Macmillan observed:
"A payment out of profits and conditional on profits being
earned cannot accurately be described as a payment
made to earn profits. It assumes that profits have first
G
come into existence. But profits on their coming into
existence attract tax at that point, and the revenue is
not concerned with the subsequent application qf the
profits."
The learned Lord, after citing with approval the principle laid
down by Lord Chancellor Halsbury in Gresham Life Assurance B
Society v. Styles('), proceeded to observe:
"The word 'profits' I think is to be understood in its natural
and proper sense ... in a sense which no. ~~mercial
man would misunderstand. But once an md1V1dual or
(') 119311 L.R. 58 A.C. 239, 251-252, 252,
I') [1892] A.O. 309.
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FOONA ELECTRIC co. v. C.LT. (Subba Rao, J.)
8~3
a company has in that proper sense ascertained what
are the profits of his business or his trade, the destination of those profits or the charge which ha~ been made
on those profits by previous agreement or otherwise
is perfectly immaterial. The tax is payable upon the
profits realized, and the meaning to my mind is rendered plain by the words 'payable out of profits."
The distinction between payment out of profits and a payment
to earn profits is unexceptionable. The di!Rculty is to ascertain
in each case whether a particular payment falls under one or other
of the two categories. The statement in the aforesaid observations
that a payment conditional on profits being earned cannot be a
payment made to earn profits has been modified and explained by
the Privy Council in The Indian Radio and Cable Communications
Company, Ltd., v. The Commissioner of Income-tax, Bombay
Presidency & Aden('). There, their Lordships were dealing with a
case of a . joint venture by two companies; and Lord Maugham
pointed out thus:
"It may be admitted that, as Mr.
Latter contended, it
is not universally true to say that a payment the making
of which is conditional on profits being earned cannot
properly be described as an expenditure incurred for
E
the purpose of earning such
profit~. The typical
exception is that of a payment to a director or a manager of a commission on the profits of a company."
To that extent the principle laid down by Lord Macmillan in the
case of Pondicherry Railway Co.(') has been modified. Lord
F
Macmillan himself in a later decision in The Union Cold Storage
Co. Ltd., v. Adamson (H. M. Inspector of Taxes)(') explained his
observations in the Pondicberry Railway Co.'s case('). There, the
appellant-company leased lands and premises
abroad
under a
deed reserving a particular rent per annum. The deed provided
G
H
that if at the end of any financial year it was found that after providing for this rent the result of the Company's operations was
insufficient to pay both interest on its charges and debentures and
dividends at fixed rates on its preference shares and also al least
10 per cent, on its ordinary shares, the rent for the year was to be
abated to the extent of the deficiency, repayment of rent already
paid being made if necessary.
The question raised in that case
was whether such repayments made were ailowable as deduction.
in assessing the Company's income to income-tax. The House
of Lords held that they were allowable deductions.
When the
observations of Lord Macmillan in the Pondicherry Railway Co.'s
case(') were pressed upon the House in support of the contention
(') (1937) 5 I.T.R. 270, 277.
(') (1931) 16 A.C. 328, 331.
(') L.R. 58 A.C. c39.
8!14
SUPRBMB
COURT
REPORTS
.[1965] 3 B.C.R.
on behalf of the Revenue, Lord Macmillan explained his earlier
A
observations thus:
,
"When, therefore, in the passage referred to by the AttorneyGeneral in the Pondicherry case I said that "a payment out of profits and conditional on profits. being
earned cannot accurately be described as a payment B
made to earn profits", I was dealing with a case' in
which the obligation was, first of all, to ascertain the
profits in a prescribed manner, after providing for all
f
outlays incurred in earning them, and then to divide
them. Here the question is whether or not a deduction
for rent has to be made in ascertaining the profits, and
the question is not one of the distribution of profits at O
all."
·-
Though a contractual term of payment of rent operated after the
profits were ascertained and on the insufficiency to meet certain
obligations was discovered, the House of Lords did not find any
difficulty in holding that the deductions for rent were made only
D
for ascertaining the profits and not for distributing the same. The
decision of the Court of Appeal in British Sugar Manufacturers,
Ltd. v. Harris (Inspector of Taxes(') is rather instructive. There,
a company carrying on a manufacturing business agreed with two
other companies to pay them a stated percentage of its "net profits"
in consideration of their giving to the company the full benefit of
E
their technical and financial knowledge and experience, and giving
to the company and its directors advice to the best of their ability.
The question arose whether in computing the profits of the company for the purpose of income-tax, the company was entitled to
deduct the sums so paid as being money wholly and exclusively
laid out or expended for the purposes of the trade within Rule 3(a)
F
of Cases I and II. Greene, M. R., pithily observed thus:
"Once you realise that as a matter of construction the word
"profits" may be used in one sense for one purpOie
and in another sense for another purpose, I think you
have the real solution of the difficulties that have arisen
G
in this case."
Applying that test, the Master of the Rolls held. that:
"In the present case there are two funds of so-called profit§
which come into the picture. The first one is the fund
which has to be ascertained for the purposes of calcuH
lating the 20 per cent. ..................... Now when that
amount has been ascertained, that fund has ceased to
have any usefulness at all, and it then becomes necessary to ascertain what are the divisible profits, a::id for
that purpose, to take another account, which not only
would bring in depreciation, but would also take into
(1) [1939] 7 I.T.R. IOI, 105, 106, 108-109.
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POONA ELECTRIC co. v. C.I.T. (Subba Rao, J.)
8211
account the sum that had been paid out to the Skoda ·
works, and the Corporation upon the taking of the first
account."
Romer, L. J., put the test in a different way when he said:
"Is the payment that has to be made hy the .trader under
the contract in question a mere division of profits with
another party or is it a payment to the other party, the
amount of which is ascertained by reference to the pro·
fits?"
MacKinnon, L. J., stated much to the same effect thus:
"The whole question in this, as in other cases, is whether
this, which is an annual payment, is an annual payment
to be taken into account in order to ascertain the
profits, or is it an annual payment payable out of the
profits after they have been ascertained? I think the
true facts of this case are that it is of the former
character. The difficulty in the case arises largely
because of the necessary ambiguity in the word "profits" and the fact that in this agreement "profits" as
a word does appear; but "profits", as I think, quite
clearly of a different description from the annual profits
or gains with which one is concerned in assessing the
income~tax."
This decision accepts the principle that a contract or a statute
may provide for the ascertainment of two profits for different pm·
poses and the question to be decided in each case is whether the
amount claimed as deduction is payable out of the real profits.
F The Judicial Committee again in Raja Bejoy Singh Dudhuria v.
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Commissioner of Income-tax, Calcutta(') emphasized the concept
of real income in the context of payment of income-tax.
Lord
Macmillan, speaking for the Board, after adverting to the Imperial
System of inco_me-tax legislation, proceeded to observe:
"The correlative of the obligation to return as income sums
which are really charges upon the taxpayer's income
is the right to reimbursement of the tax on such
charges. The Indian Income-tax Act makes no similar
provision for the deduction of tax at the source and
the consequent reimbursement of the taxpayer in the
case of such a charge as that to which the revenues of
the appellant are subject ............................ , . that
the omission from the Indian Act of any such provision
points rather to an intention to tax, in Lord Davey's
phrase, only "the real income" of the taxpayer, than to
an intention to impose, without right of reimbursement,
a tax on what is a charge upon his income."
(') L.R. (1933) 60 I.A. 196, 202.
826
SUPRE14ll: COURT REPORTS
[1~£n} 3 s.c.R.
The concept of "real income" is also expounded in the decision
A
of the Bombay High Court in H. M. Kashiparekh & Co .. Ltd. v.
Commissioner of Income-tax, Bombay North('). There, under
the managing agency agreement the managing agent was under a
duty to forgo up to one-third of its commission where the profits
of the managed company were not sufficient to pay a dividend of
6 per cent. The contention of the Revenue that such a surrender
Bof the commission under the provisions mentioned in the agreement was not deductible for the purpose of income-tax was
negatived. The principle has been succinctly stated in the headnote thus:
"The principle of real income is not to be subordinated as c
to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing
agency commission is made, agreed to or given on
grounds of commercial expediency, simply because it
takes place some time after the close of an accounting
year. In examining any transaction and situation of D
(
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."
E
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(') 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
F
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 sinkini:
fund, and the surplus carried to the following year's accounts, were
"profits" within the meaning of the Income-tax Acts. The House
of Lords held that the surplus was profit assessable to the incomeG
tax. In this case the surplus income formed the sinking ,fund and
was utilised to pay off the debts of the harbour board; therefore,
the Court rightly held that the said amount was utilised by the
]Joard from and out of its profits and, therefore, the said surplus
could not be an allowable deduction. The decision of the Queen's
11
Bench Division in Paddington Burial Board v. Commissioners of
Inland Revenue(') 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
(') (!D~O) 39 I.T.R. 706, 707.
(') (1883) 2 T.C. 25.
(') (18841 2 T.C. 46.
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POONA ELECTRIC ce. 1'. C.I.T. (8ubba Rao, J.)
827
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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 Pa.ddington 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
:B
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
(H. M. Inspector of Taxes) v. Racecourse Bi(fing Control Board(')
the question that arose was whether the Racecourse Betting Control
Board was entitled in computing the profits of the trade of totalisaC tor 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 a!l voluntary payments and were not
made for the purpose of the trade.
This decision has no bearing
D
on the question raised before us.
The saio decisions lead to the following results: 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 profits can be ascertained
only by making the permissible
E
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
r
the statutory profits. i.e., between the
commercial profits and
statutory profits. The latter are statutorily fixed for a specified
purpose.
[f we bear in mind these two principles there will be no
difficulty in answering the question raised.
G
B
The appe!lant-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 Benefit Reserve Account". They were pa\j of the
excess amount paid to it and reserved to be returned to the consumers.
They did not form part of the asessee's real pr9fits.
So, to
arrive at the taxable income of the assessee from the business
(') (1959) 38 T.C. 452 (H.L.).
LP(D)5SCf-14
82ti
'sUPRI<:ME
COUUT
R~l'Olfl'S
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under s. 10(1) of the Act, the said amounts have to be deducted
A
from its total income.
"
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.
The next question is whether the amounts so reserved for
B
future payment were deductible in computing the income, profits
or gains from the assessee's 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 C'..ourt held in Calcutta Co. Ltd., v. Commissioner C
of Income-tax, West Bengal(') that where an assessee ml!intained
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 iR which
the said liability accrued.
Indeed, this legal position was not contested on behalf of the Revenue.
D
In the result we answer the question referred to the High
Court in the affirmative and in favour of the assessee. The order
of the High Court is set aside. The appeals are allowed with costs.
Appeals allowed.
(1) (1969) 87 LT.B. I,
" '
,.