The Godhra
Electricity Co. Ltd. Ahmedabad Vs. The Commissioner pf Income Tax, Gujarat-Ii, Ahmedabad
[1997] INSC 386 (3
April 1997)
S.C.
AGRAWAL, G.B. PATTANAIK
ACT:
HEADNOTE:
S.C.
AGRAWAL, J. :
These
appeals by certificate granted under section 261 of the Income Tax Act 1961
(hereinafter referred to as the Act) have been filed by the Godhra Electricity
co. Limited, (hereinafter referred to as the assessee company ) against the
judgment of the Gujarat High Court dated February 24-25 1982 in Income Tax References
Nos. 288 of 1975 ,73 of 1978.
Income
Tax Reference no. 288 of 1975 related to the assessment year 1969 -70 while
Income Tax Reference No. 73 of 1978 related to the assessment years 1970-71 and
1971-72 and Income Tax Reference No. 171 of 1978 related to assessment year
1972-73.
On
November 19, 1922 the then Government of Bombay granted a licence under the
Indian Electricity Act, 1910 to Lady Sulochana Chinubhai & Company authorising
it to generate and supply electricity to the consumers in Godhra area. The assessee
company is the successor of the said licensee. On the recommendations of rating
committee constituted under section 57(2) of the Electricity (supply) act, 1948
the State Government had fixed the charges for supply of electricity and motive
power by the assessee company with effect from February 1, 1952. After the amendment of the Electricity (supply) act, 1948
in 1956 the assessee company increased the charges for motive power from January 1, 1963 to 35 np. per unit with a maximum
of Rs. 7 per month for every installation and a few months thereafter on June 22, 1963 the assessee-company increased the
rated for electricity supplied for light and fans to 70 np. per unit with a
minimum of Rs. 5 of every installation with effect from July 1, 1963 this
unilateral increase in the rates foe supply of motive power as well as
electricity for lights and fans led to the institution of two representative
suits by the consumers (civil suits Nos. 152 of 1963 and 50 of 1964 in the
court of Civil Judge (senior Division) at Godhra wherein in the right of the assessee
company to unilaterally increase the charges in respect of motive power and
lights and fans was challenged the said suits were decided by trial court in favour
of the consumers and the decree of the trial court was affirmed in appeal by
the Assistant judge Panchmahals at Godhra. The second appeals filed by the assessee
company were dismissed bu the learned single judge of the Gujarat High Court on
April 11, 1966 but the letters patent Appeals (L.P.As.
Nos. 42 and 43 of 1966 filed by the assessee company against the said judgment
of the learned single judge were allowed by the Division Bench of the High
Court by judgment dated December
3, 1968 and both the
representative suits filed by the consumers were dismissed. It was held that
under the Electricity supply act, 1948 as amended in 1956 the assessee company
was entitles to enhance the charges unilaterally subject to the conditions
prescribed in the sixth schedule to the said Act.
the
said judgment of the Division Bench of the Gujarat High court was affirmed by
this court by judgment dated February 26, 1969
in Jindas oil mill ors. v. Godhra Electricity co. 1969 (3) SCR 836. During the pendency
of this litigation in the various courts the assessee-company was not able to realise
the enhanced charges from the consumers. after the decision of this court on
February 26, 1969 some of the citizens of Godhra mer the minister of Industries
mines and power government of Gujarat with a view to persuading him to intervene
and restrict the assessee-company from recovering the enhanced rated from the
consumers thereafter the under secretary to the Government of Gujarat in the
Industries Mines and power department addressed a letter dated march 19, 1969
to the assessee-company suggesting that the company may be advised to maintain
the status quo for the rates to the consumers are concerned and also to
continue the existing street light agreement for at least six months. The chief
Electrical Inspector was requested to go through the accounts of the assessee-company
for year to year and report to the Government the actual position about the
reasonable return earned by the assessee-company on may 16, 1969 some of the
consumers filed another representative suit (suit No.
118 of
1969 against the assessee-company in the Court of civil judge (junior Division
) at Godhra challenging the right of the assessee-company to recover the
consumption charges at the enhanced rates. In the said suit it was claimed that
the decision of this court was only of academic interest as in April, 1965 the assessee-company
began to purchase in bulk electrical energy and that the assessee- company
began to purchase in bulk electrical energy at 10 paise per unit from the
Gujarat Electricity board and it had to work merely as distributing agency and
had to collect the charges and not generate electrical energy and that the assessee-company
would earn more profits even if it supplied electricity at 31 paise per unit to
the consumers of motive power and that it would earn a reasonable return even
on the basis of the existing rates an interim injunction was granted by the
trial Court in that suit a written statement was filed by the assessee-company
contesting the said suit but when the suit came up for bearing no evidence was
led to controvert the evidence produced on behalf of the consumers since at
that point of time the undertaking of the assessee- company was under the
management of the collector of Godhra and he did not give any instructions to
the favour appearing on behalf of the assessee-company with the result that the
said lawyer reported no instructions. The said suit was decreed in favour of
the consumers by the civil judge by his judgement dated June 20, 1974 and a declaration was granted to
the effect that the assessee-company shall not recover the charges exceeding 31
np. per unit for lights and fans and 20 np. per unit for motive power. The
interim injection which had been granted against disconnection or dis-
connection or discontinuance of the supply was made absolute on the same terms
on which it was initially granted. during the course of hearing before the High
Court it was stated by the learned Advocate General appearing for the assessee-
company that an appeal was in fact filed against the said judgement but the
plaintiffs by their application dated July 27, 1979 sought permission of the
court to withdraw the suit with liberty to file a fresh suit on the same cause
of action and when necessary and the trial judge by order of even date permitted
the plaintiffs to withdraw the suit with liberty to file a fresh suit on the
same cause of action if and when necessary and the trial judge by order of even
date permitted the plaintiffs to withdraw the suit and granted them the liberty
sought while the said suit was pending before the trial court the Gujarat state
electricity board in exercise of power conferred on it by section 6(1) of the
Indian electricity Act 1910 read with clause (2) of the terms of the licence
sought to exercise its option to purchase the electrical undertaking of the assessee-company
by issuing a notice dated November 81971. the assessee- company filed a writ
petition (special civil Application no. 1752 of 1972 in the Gujarat High court
challenging the validity of the said notice. During the pendency of the said
writ petition the government of Gujarat issued an order under Rule 115(2) of
the defence of India rules 1971 taking over the management of the undertaking
of the assessee - company with effect from November 19 1972 and the collector
of Godhra was authorised by the said order to take over the management of the
undertaking of the assessee company the said writ petition was ultimately
dismissed by the High court by is judgment dated October 16-17 of 1973 in the
appeal filed by the assessee -company against the said judgment in this court
an interim order was passed directing the collector of Godhra to hand over the
undertaking to the Gujarat state electricity board and in accordance with the
said direction the Government of Gujarat on December 20 1973 instructed the
collector of Godhra to hand over the management of the undertaking to the
Gujarat state Electricity board which was done on the next day and thereafter
the notification issued under Rule 115(2) of the defence of Indian Rules 1971
was cancelled on may 4 1974.
Upto
assessment year 1963 -64 the assessee-company was assessed on the basis of the
accounts maintained according to the mercantile system for the subsequent
assessment years i.e from 1964-65 to 1967-68 the assessee-company deducted a
total amount of Rs. 10,87,828\- from the total earnings in respect of sale of
electrical energy on the ground that the said amount was not actually recovers
by it from the consumers since the consumers had filed a suit against the assessee-company
and had obtained interim relief in that behalf. The particulars of the
deductions made for the aforesaid four assessment years were as under:-
------------------------------------------------------------ Assessment Year
Amount Deducted ------------------------------------------------------------
1964-65 Rs. 2,59,777/- 1965-66 Rs. 3,16,953/- 1966-67 Rs. 3,89,761/- 1967-68 Rs.
1,21,337/- ----------------------------------------------------------- The
aforesaid disputed amounts were shown by the assessee-company on the liability
side in the balance sheet under the head "Disputed increase in rates
charged to customers(consumer) carried forward pending settlement of disputes
in the District court" IN the assessment year 1968 -69 there was an adjustment
of the claim amounting to Rs. 3,54,152/- while making the assessment for the
assessment year 1969-70 the income Tax officer included the said amount of Rs.
7,33,676/- on the ground that the suit filed against the assessee-company be
the consumers was decide in favour of the assessee-company by this court during
the accounting year 1968-69 and the assessee-company has the legal right to
recover the said amount and on the basis of the accountancy followed by the assessee-company
the amount of Rs. 7,33,676/- will have to be taxed as the income that has
accrued to the asseeeee-company on account of the decision of this court in the
assessment year 1969-70. The said addition made by the income tax officer was
however deleted by the appellate assistant commissioner on appeal on appeal on
the view that no legally enforceable claim had accrued to the assessee-company
during the previous year by which it could recover the arrears of motive power
and electricity for lights and fans from the consumers the income tax appellate
tribunal (hereinafter referred to as the tribunal on further appeal held that
the question of fixing a reasonable return was still an open issue since it was
a subject matter of further litigation wherein as a result of the decision of
civil judge junior division Godhra the assessee-company was restrained from
recovering the charges more than the 31 paise per unit for lights and fans and
20 paise per unit for motive power from the customers and that the right to
receive the increased rated had not crystallized accounting to the Tribunal the
claim at the increased rates as made by the assessee-company and on the basis
of which necessary entries were made in the books, represented only
hypothetical income and the impugned amount as brought to tax by the income Tax
officer did not represent the income which had accrued to the assessee- company
during the relevant previous year. On an application by the Revenue the
Tribunal referred following question of law for the opinion of the Gujarat High
court :- "whether the Tribunal was right in law in holding that the amount
of Rs. 7,33,676/- which had accrued to the assessee during the previous year
and which was brought to tax by the Income tax officer did not represent the
income and therefore could not be included in computation of the total income
of the assessee." ON the basis of the said reference Income Tax Reference
No. 288 of 1975 was registered in the High court.
Similarly
in respect of assessment years 1970-71 and 1971-72 the Income tax officer included
the sums of Rs. 2,63,465/- and Rs. 2,98,077/- respectively as income that had
accrued to the assessee-company in those years and was taxable the said
addition was deleted by the Appellate Assistant commissioner on appeal by the
Tribunal on application moved by the Revenue the following question of law was
referred to the High court for its opinion :- "Whether the tribunal was
right in law in holding that the amount of Rs. 2,63,465/- for assessment year
1970-71 and Rs. 2,98,077/- for assessment year 1970-72 which had accrued to the
assessee during the previous year and which was brought to tax by the income
tax officer did not represent the income of the assessee and therefore not
liable to be included in computation of the total income of the assessee ?"
On the basis the said reference Income Tax Reference No. 73 of 1978 was
registered in the High court .
For
the assessment year 1972-73 the income tax officer included a sum of Rs. 3,17,741/-
as income that had accrued and was taxable in the hands of the assessee company
which addition was deleted by the Appellate Assistant commissioner and the said
order of the Appellate Assistant commissioner was upheld by the tribunal the
following questions were referred by the tribunal to the high court for
opinion.
"1.
whether the income tax appellate tribunal was right in holding that the amount
of Rs.
3,17,741/-
which had accrued to the assessee during the previous year and which was
brought to tax by the income tax officer did not represent the income and
therefore it could not be included in the computation of the total income of
the assessee ?
2.
Whether on the facts and in the circumstances of the cast the receipt of Rs. 3,17,741/-
could be subjected to tax in the assessment year in question as the income of
the assessee ? On the basis the said reference, Income tax reference No. of
1978 was registered in the High court.
All
the three references were disposed of by the High court by a common judgment
dated February 24-25 1982 the High court has held that the assessee-company was
following the mercantile system of accounting and that even under this system
in order to visit the assessee-company with the obligation to pay tax the
profit must become actually due no matter when it is received and that income
cannot be said to have accrued to an assessee-company if it is based on a mere
claim not backed by any legal or contractual right to receive the amount at a
subsequent date. the High court has held that in the mercantile system of
accounting it is the real income as distinguishes from a hypothetical income
which can be brought to tax. In view of the decision of the Division Bench of
the High court allowing the letters patent Appeals of the assessee-company
which judgment was affirmed by this court on February 26 1969 the High court
has held that the assessee-company had a legal right to recover the consumption
charge at the enhanced rate from the consumers as regards the letter from the
under secretary to the Government of Gujarat Industries Mines and power
Department dated March 19, 1969 the High court has observed :- "We do not
know if this letter was a directive to the assessee under any provision of law
but in any case it was it was in the from of a suggestion which, if accepted enured
for a period of six months only therefore the contention of the learned
advocate general that income could not be said to have accrued to the assessee
within a few days after the supreme court dismissed the appeals filed by the
consumers does not appeal to us in any case the request made by the state
Government was to maintain the status quo for a period of six months only that
letter did not take away the right of the assessee to recover consumption
charges at the enhanced rates from its consumers." As regards the
representative suit (suit No. 118 of 1969) which was filed by the consumers in
the court of civil judge (junior division at Godhra the high court has observed
that "the said suit concerned the recovery of enhanced charges for the
period subsequent to 31st march 1969 and not prior thereto " The High
court rejected the contention urged on behalf of the assessee-company that no
real income had accrued to the assessee-company in the facts and circumstances
of this case since the assessee-company was legally entitled to recover the
consumption charges from the consumers at the enhanced rates and at no point of
time had the assessee-company forgone or given up its right to recover the
enhanced rates from its consumers on that view of the matter the High court
answered the questions mentioned above against the assessee-company and in favour
of the Revenue by order dated January 15, 1983 the Hight Court granted
certificate of fitness to appeal to this court against the said judgment. Hence
these appeals.
Shri
S. Ganesh the learned counsel appearing for the assessee-company has submitted
that in the facts and circumstances of this case it must be held that no real
income had accrued to the assessee-company on account of enhanced charges for
electricity since the assesseee-company was not able to recover the said
enhanced charges from the consumers in view of the protracted litigation during
the period from 1963 to 1969 and thereafter on account of the letter from the
under secretary to the Government of Gujarat dated March 19 1969 asking the assessee-company
not to charge the enhanced rates for at least six months and the subsequent
suit (suit no. 118 of 1969) filed by the consumers in 1969 and the taking over
of the management of the assessee-company by the collector Godhra in pursuance of
the order passed under Rule 115(2) of the Defence of India Rules 1971. It has
been urged that though the assessee- company was following the mercantile
system of accounting but in the mercantile system also tax can be imposed only
if there is real income and income tax cannot be imposed on hypothetical
income. The learned counsel has placed reliance on the decisions of this court
in commissions of Income Tax Bombay city-I V. Messrs. Shoorji Vallabhdas and
Co., (1962) 46 ITR 144; Commissioner of Income tax West Bengal-II V. Birla Gwalior
(P) Ltd. (1973) 89 ITR 266; Poona Electric Supply Co. Ltd. V. Commissioner of
Income tax Bombay City-I (1965)57 ITR 521 R.B Jodha Mal Kuthiala V.
Commissioner of income tax Punjab (1971) 82 ITR 570 and state bank of Travancore
v. commissioner of Income tax Kerala (1986) 158 ITR 102.
Under
the Act income charged to tax is the income that is received or is deemed to be
received in India in the previous year relevant to
the year for which assessment is made or on the income that accrues or arises
or is deemed to accrue or arise in India during such year. The computation of such income is to be made in
accordance with the method or accounting with the method or accounting
regularly employed by the assessee. It may be either the cash system where
entries are made on the basis of actual receipts and actual outgoings or
disbursements or it may be the mercantile system where entries are made on
accrual basis i.e. accrual of the right to receive payment and the accrual of
the liability to disburse or pay. In commissioner of Income tax Bombay city-I
v. Messrs. Shoorji Vallabhdas and co.(supra) it has been laid down :-
"Income tax is a levy on income no doubt the Income Tax act takes into
account two points of time all which the liability to tax is attracted viz the
accrual of the income or its receipt; but the substance of the matter is the
income. if income does not result at all there cannot be a tax even though in
book keeping an entry is made about a hypothetical income which does not materialise."[P.
148] This principle is applicable whether the accounts are maintained on case
system or under the mercantile system. If the accounts are maintained under the
mercantile system what has to be seen is whether income can be said to have really
accrued to the assessee-company. in H.M. Kashiparekh & co. Ltd. v.
commissioner of Income Tax (1960) 39 ITR 706 the Bombay High court had said :-
"Even so, (the failure to produce account losses we shall proceed on the
footing that the assessee- company having followed the mercantile system of
account there must have been entries made in its books in the accounting year
in respect of the amount of commission in our judgment we would not be
justified in attaching any particular importance in this case to the fact that
the company followed mercantile system of accounting. They would not have any
particular bearing in applying the principle of real income in the facts of
this case".
The
said view was approved by this court in commissioner of Income Tax v. Birla Gwalior
(p) Ltd.
(supra)
where the assessee maintained its accounts on the mercantile system. In that
case this court after referring to the decision in Morvi Industries Ltd. V.
commissioner of Income Tax, (1971)82 ITR 835 which was also a case where the
accounts were maintained on mercantile system has said :- "Hence it is
clear that this court in Morvi Industries case did emphasise the fact that the
real question for decision was whether the income had really accrued of not it
is not a hypothetical accrual of income that has got to be taken into
consideration but the real accrual of the income "[p. 273] In Poona
Electric supply co. Ltd. V. commissioner of Income Tax Bombay city-I (supra )
this court has said :- "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." In that case the court has approved the following
principle laid down by the Bombay High court in H.M. Kashiparekh & co. Ltd.
v. commissioner of Income tax (supra):- "The principle of real income is
not to be so subordinated as to amount virtually to a negation of it when a
surrender or concession or rebate in respect or 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 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 will lay greater emphasis on the business aspect of
the matter viewed as whole when that can be done without disregarding statutory
language." In state bank of Travancore v. commissioner of income tax Kerala
(supra ) after considering the various decisions of this court sabyasachi Mukharji
J. (as the learned chief justice then was ) has said :- "An acceptable
formula of co- relating the notion of real income in conjunction with the
method of accounting for the purpose of taxation is difficult to evolve besides
any strait jacket formula is bound to create problems in its application to
every situation it must depend upon the facts and circumstances of each case
when and how does an income accrue and what are the consequences that follow
from actual of income as well settled the accrual must be real taking in go
account the actuality of the situation whether an accrual has taken place or
not must in appropriate cases be judged on the principles of real income theory
After accrual non charging of tax on the same because of certain conduct based
on the ipse dixit of a particular assessee cannot be accepted in determining
the question whether it is hypothetical income or whether real income has materialised
or not various factors will have to be taken into account it would be difficult
and improper to extend the concept of real income to all cases depending upon
the ipse dixit of the assessee which would then become a value judgment only
what has really accrued to the assessee has to be find out and what has accrued
must be considered from the point of view of real income taking the probability
or improbability of realisation in a realistic manner and dovetailing of these
factors together but once the accrual takes place on the conduct of the parties
subsequent to the year of closing an income which has accrued cannot be made
"no income ." [P. 154] If the matter is examined in the light of the
aforementioned principles laid down by this court it must be held that even
thought the assessee-company was following the mercantile system of accounting
and had made entries in the books regarding enhanced charges for the supply
made to the consumers no real income had accrued to the assessee- company in
respect of those enhanced charges in view of the fact that soon after the assessee-company
decided to enhance the rates in 1963 representative suits (civil suits Nos. 152
of 1963 and 50 of 1964) were filed by the consumers which were decreed by the
trial court and which decree was affirmed by the appellate court and learned
single judge of the High court and it is only on December 3 1968 that the
letters patents Appeals filed by the assessee-company were allowed by the
division bench of the high court and the said judgment by the consumers in this
court and the same were dismissed by the judgment of this court and the same
were dismissed by the judgment of this court dated February 26 1969. shortly
thereafter on march 19 1969 the under secretary to the Government of Gujarat
wrote a letter advising the assessee-company to maintain the status quo for the
rates to the consumers for at least six moths and the chief Electrical
inspector was directed to go through the accounts of the assessee-company from
year to year and to report to the Government about the actual position about
the reasonable returns earned by the assessee-company on may 16 1969 another
representative suit (suit no 118 of 1969) was filed by the consumers wherein
interim injunction was granted bu the court and which was finally decreed in favour
of the consumers on June 23 1974 it would thus appear that after the decision
was taken by the assessee-company to enhance the charges it was not able to realise
the enhanced charges on account of pendency of the earlier representative suits
of the consumers followed bu the letter of the under secretary to the
government of Gujarat and the subsequent suit of the consumers and during the pendency
of the subsequent suit the management of the undertaking of the assessee-company
was taken over by the Government of Gujarat under the Defence of India rules
1971 and the undertaking was subsequently transferred to the Gujarat state
Electricity Board.
It is
no doubt true that the latter addressed bu the under secretary to the
Government of Gujarat to the assessee-company had no legally binding effect but
one has to look at things from practical point of view [see : R.B. Jodha Mal Kuthiala
v. commissioner of Income tax Punjab (supra)]. The assessee-company being a
licensee could not ignore the direction of he state government which was
couched in the form of an advice whereby the assessee- company was asked to
maintain the status quo for at least six months and not to take steps to
recover the dues towards enhanced charges from the consumers during this period
Before the expiry of the period of six months the subsequent suit had been
filed by the consumers and during the pendency of the said suit the undertaking
of the assessee- company was taken over bu the government of Gujarat under the defence
of India Rules 1971 and subsequently it was transferred to the Gujarat state
Electricity Board and as a result the assessee-company was not it a position to
take steps to recover the enhanced charges.
The
High court has observed that the subsequent suit that was filed on May 16 1969 related to recovery of enhanced charges for the
period subsequent to March
31, 1969 and not prior
thereto. We have however perused the judgment of the joint Judge (junior
Division) Godhra dated June
20 1974 in the said
suit which was annexed as Annexure "d" to the statement of the case.
The said judgment does not show that the suit was confined to the period
subsequent to march 31, 1969. On the other hands it shows that the plaintiffs
in that suit were challenging the enhancement in charges made in 1963 and had
sought a declaration that the assessee- company was not entitled to recover
more than 31 paise per unit for light and fans and 20 paise per unit for motive
power and the trial court while decreeing the said suit had given a declaration
in these terms. The said declaration is not confined to the period subsequent
to March 31,1969.
The
question whether there was real accrual of income to the assessee-company in
respect of the enhanced charges for supply of electricity has to be considers
by taking the probability or improbability of realisation in a realistic
manner. If the matter is considered in this light it is not possible to hold
that there was real accrual of income to the assessee-company in respect of the
enhanced charges for supply of electricity which were added by the income tax
officer while passing the assessment orders in respect of the assessment years
under consideration. The Appellate Assistant commissioner was right in deleting
the said addition made by the income tax officer and the tribunal had rightly
held that the claim at the increased rates as made by the assessee-company on
the basis of which necessary entries were made represented only hypothetical
income and the impugned amounts as brought to tax by the income tax officer did
represent the income which had really accrued to the assessee-company during
the relevant previous years. The High court in our option was in error in
upsetting the said view of the Tribunal .
In the
result the appeals are allowed the impugned judgment of the high court is set
aside and the questions referred bu the tribunal for options are answered in favour
of the assessee-company and against the Revenue. But in the circumstances there
will be no order as to costs.
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