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PETITIONER: HOSHIARPUR ELECTRIC SUPPLY CO.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, SIMLA

DATE OF JUDGMENT: 06/12/1960

BENCH: SHAH, J.C. BENCH: SHAH, J.C. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1961 AIR  892            1961 SCR  (2) 956

ACT: 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).

HEADNOTE: 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)[1929] 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 receipt. Commissioner  of  Income-tax v. Poona  Electric  Supply  Co. Ltd.,  [1946] 14 I.T.R. 622 and Monghyr Electric Supply  Co. Ltd. v. Commissioner of Income-tax, Bihar and Orissa, [1954] 26 I.T.R. 15, discussed and applied.

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JUDGMENT: 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 respondent. 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  bet   ween 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  undertaking. 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

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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- buting  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

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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 connected. 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) [1946] 14 I.T.R, 622. (2) [1954] 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 inciden t 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

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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.                                        Appeal allowed.