Hoshiarpur Electric Supply Co. Vs.
Commissioner of Income Tax, Simla  INSC 268 (6 December 1960)
CITATION: 1961 AIR 892 1961 SCR (2) 956
Income Tax--Assessee's receipts for installing
new electricity installations--If "Profit" or capital--Indian
Electricity Act, 1910 (9 of 1910), Schedule c. 6 (1)(b)--Indian Income-tax Act,
1922 (11 of 1922), s. 66(1).
The assessee, an electricity supply
undertaking, received certain sum of money for new service connections granted
to its customers. Part of this amount was spent for laying mains and service
lines. The Income-tax Officer treated the entire amount as trading receipt. In
appeal the Appellate Assistant Commissioners excluded the cost of laying
service lines and the mains and treated the balance as taxable income. The
Appellate Tribunal agreed with the Appellate Assistant Commissioner and held
that the service connection receipts were trading receipts and the "profit
element" therein was taxable income in the hands (1) A.C. 386;
(1929) 14 T.C. 433.
957 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. On appeal by the assessee, Held, that the High Court erred in
holding that the excess of the receipts over the amount spent by the assessee
for installation of service lines was a trading receipt. The receipts though
related to the business of the assessee as distributors of electricity were not
incidental to nor in the course of the carrying on of the assessee's business.
They were receipts for bringing into
existence capital of lasting value. The total receipts being capital receipts
the balance remaining after a part thereof was expended for laying service
lines and mains, could not be regarded as 'profit' in the nature of a trading
Commissioner of Income-tax v. Poona Electric
Supply Co. Ltd.,  14 I.T.R. 622 and Monghyr Electric Supply Co. Ltd. v.
Commissioner of Income-tax, Bihar and Orissa,  26 I.T.R. 15, discussed
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 328 of 1960.
Appeal from the order dated March 4, 1958, of
the Punjab High Court, Chandigarh, in Civil Reference No. 29 of 1952.
A. V. Viswanatha Sastri, R. Ganapathy Iyer
and G. Gopalakrishnan, for the appellant.
Hardyal Hardy and D. Gupta, for the
1960. December 6. The Judgment of the Court
was delivered by SHAH, J.-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 at Chandigarh:
"Whether the assessee's 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
assessee's hands?" The High Court answered the question as follows:
"...... the company's receipts from the
consumers for laying the service lines are trading receipts and 958 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 s. 66A(2) of the Income Tax Act,
this appeal is preferred by the Hoshiarpur Electric Supply Company hereinafter
referred to as the assessee.
The assessee is a licensee of an electricity
In the year of account, April 1, 1947March
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.
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 consumer's property in accordance with
cl. 6(1)(b) of the Schedule to the Indian Electricity Act, 1910. 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 of 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 959 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 Inc, 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.
The assessee contended that the service lines
when installed became the property of the assessee, because they were in the
nature of an extension of the assessee's distributing mains. On behalf of the
Revenue, it was urged relying upon the judgment of the High Court that the
service lines which are paid for by the consumers do not become the property of
the assessee. We do not think that it is open to us in an appeal from an order
under s. 66 of the Indian Income Tax Act to enter upon this question. The
Tribunal did not record a finding on the question whether the assessee was the
owner of the service lines. Undoubtedly, contributions were made by the
consumers towards the cost of the service lines installed by the assessee which
exceeded 100 ft. in length. Normally, a person who pays for installation of
property may be presumed to be the owner thereof; but such a presumption cannot
necessarily be made in respect of a service line, which so long as it is used
for supplying electrical energy remains an integral part of the distri- butting
mains of an electrical undertaking. The High Court was exercising advisory
jurisdiction, and the question as to who was the owner of the service lines
after they were installed could be adjudicated upon only by the Tribunal.
It was for the Tribunal to record its
conclusion on that question, but the Tribunal has recorded none. In our
judgment, the High Court was in error in assuming to itself jurisdiction
substantially appellate in character and in proceeding to decide the question
as to ownership of the service lines which is a mixed question of law and fact,
on which the Tribunal has given no finding.
960 The assessee contended that the amount
paid by the consumers for new connections is capital receipt and not liable to
tax, because the amount is paid by the consumers towards expenditure to be
incurred by the assessee in laying new service lines-an asset of a lasting
character. This question falls to be determined in the light of the nature of
the receipt irrespective of who remained owner of the materials of the service
lines installed for granting electrical connections to new customers.
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 the
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 961 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
cost 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
In Commissioner of Income-tax v. Poona
Electric Supply Co. Ltd. (1), it was held by a Division Bench of the Bombay
High Court that the amount received from the Government of Bombay by the Poona
Electric Company in reimbursement of expenses incurred for constructing new
supply lines for supplying energy to new areas not previously served, was a
capital receipt and not a trade receipt. The question of the taxability of the
"profit element" in the contribution received from the Government was
not expressly determined;
but the court in that case held that the
entire amount received by the Poona Electric Company from the Government as
contribution was a capital receipt.
In Monghyr Electric Supply Co. Ltd. v.
Commissioner of Income-tax, Bihar and Orissa (2), it was held that the amount
paid by consumers of electricity for meeting the cost of service connections
was a capital receipt in the hands of the electricity undertaking and not revenue
receipt and the difference between the amount received on account of service
connection charges and (1)  14 I.T.R, 622.
(2)  26 I.T.R. 15.
962 the amount immediately not expended was
not taxable as revenue.
The receipts though related to the business
of the assessee as distributors of electricity were not incident nor in the
course of the carrying on of the assessee's 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.
The appeal is allowed and the question
submitted to the High Court is answered in the negative. The assessee is
entitled to its costs in this court as well as in the High Court.