http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 10  

PETITIONER: POONA ELECTRIC SUPPLY CO. LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 19/04/1965

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1966 AIR   30            1965 SCR  (3) 818  CITATOR INFO :  RF         1967 SC 477  (6)  RF         1973 SC2486  (8)  R          1973 SC2766  (9)  R          1986 SC 368  (16)  MV         1986 SC 757  (15)

ACT:   Income-tax  Act (11 of 1922) s. 10(1)--Profit  arrived  at after  deducting amounts according to  Electricity  (Supply) Act, 1948---Taxable income--If deductions can be allowed.

HEADNOTE: The  appellant-company was a commercial  undertaking,  doing the  business  of  supply  of  electricity  subject  to  the provisions  of  Electricity  (Supply)  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 not exceed the amount of reasonable return as defined in the Act;  but  that  if an excess was  collected,  the  licensee should  distribute half of that excess by way of  rebate  to the   consumers,   or   carry  the  amount  forward  in  the accounts for distribution to the consumers. For the purposes of  the  Act,  during the  accounting  years,  the  assessee 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, held against the assessee.  In   it  appeal to this Court the appellant contended  that there was a distinction between commercial accurancy,. As a’ 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 10  

commercial  accountancy.  As  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 amount  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 making the permissible deductions. There is  a  clear  cut distinction between  deductions  made  for ascertaining  the  profits  and distributions  made  out  of profits.  It  is  a  question of fact to  be  found  on  the relevant   circumstances,   having   regard   to    business principles.  Another 819 distinction that should be borne in mind is that between the real  and  the  statutory  profits,  that  is  between   the commercial  profits  and 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 ,obviously  include  the amounts returned by him by  way  of rebate  to the consumers, under statutory  compulsion,  from the statutory profits. [822C, 827E, F] Case law referred to.

JUDGMENT:     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  Reference No. 61 of 1961.     A. V. Viswanatha Sastri, S.N. Vakil, T.A.  Ramachandran, 1.  B. Dadachanji, O.C. Mathur and Ravinder Narain, for  the appellant (in both the appeals).     Niren  De,  Additional Solicitor-General,  R.  Ganapathy lyer  and  R.N.  Sachthey,  for  respondent  (in  both   the appeals).     A.V.  Vishwanatha Sastri, M.N. Shroff and 1. N.  Shroff, for the Intervener (in all the appeals). The Judgment of the Court was delivered by     Subba  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 10  

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. 42,1481-  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." 820 A  Division  Bench  of  the said  High  Court  answered  the question  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: (1) There is a 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 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 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 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 been earned and, therefore, it is not  a  deductible item for ascertaining the profit  of  the Company  under s. 10(1) of the Income-tax Act; (2) the  said amounts  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,  but was only apportioned or distributed from  and out of the profits already earned.     To  appreciate the rival contentions and to arrive at  a satisfactory  solution  it will be necessary to  notice  the relevant provisions of the Act and of the Income-tax Act.     The gist of the relevant provisions may be stated  thus: No  person can supply electric energy in any area unless  he has  obtained a licence from the State Government  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  the  production  and  supply   of electricity and generally for taking 821 measures  conducive  to electrical development. One  of  its

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 10  

main  objects  is to prevent such  licensees  from  charging unreasonable rates 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 licence in any year of account  is in  excess of the amount of reasonable return, one-third  of such  excess,  not  exceeding  7  1/2%  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 licence  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 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  scheme of the provisions is that a part of the excess collected  is returned to the consumers by way of a rebate.  The  question is  whether  the  amount so returned or  returnable  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 all the 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 the 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  expression  "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 Act 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 to  sustain a demand for abnormal rates.  The rules have  no concern 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. 10 (1) of the Income-tax Act, tax shall be  payable by  an  assessee  under  the  head  "profits  and  gains  of business"  in respect of profits and gains of  any  business

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 10  

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 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 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(1). under  an  agreement with the French Colonial Government the railway company  had to  pay  to  the said Government half  of  its  net  profits calculated  as  provided thereunder.  One of  the  questions 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  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 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 of the profits."               The  learned Lord, after citing with  approval               the  principle  laid down by  Lord  Chancellor               Halsbury in Gresham Life Assurance .Society v.               Styles(2), proceeded to observe:                   "The  word  ’profits’  I think  is  to  be               understood in its natural and proper  sense...               in  a  sense  which no  commercial  man  would               misunderstand.  But once an individual or                  (1) [1931] L.R. 58 A.C. 239, 251-252, 252.                (2) [1892] A.C. 309.               823               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 has 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 difficulty  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 Cornpony, Ltd., v.  The  Commissioner of Income-tax,   Bombay  Presidency  & AdenC). There, their Lordships were dealing with a case of a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 10  

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  the  purpose  of  earning  such               profits.   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.(2)   has   been modified. Lord Macmillan himself in a later decision in  The Union Cold Storage Co. Ltd., v. Adamson (H. M. Inspector  of Taxes)(3)  explained  his observations  in  the  Pondicherry Railway Co.’s case (2). There, the appellant-company  leased lands  and  premises   abroad   under  a  deed  reserving  a particular rent per annum.  The deed provided 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  at 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  allowable  as  deductions   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(2) were pressed upon the House in support of  the contention   (1) (1937) 5 I.T.R. 270, 277.    (2) L.R. 58 A.C. 239.   (3) (1931) 16 A.C. 328, 331. 824 on  behalf  of  the Revenue, Lord  Macmillan  explained  his earlier observations thus:                   "When, therefore, in the passage  referred               to by the Attorney-General 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 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 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 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 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(1) 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 their technical and financial knowledge  and experience,  and  giving to the company  and  its  directors

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 10  

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) 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 purpose and in another sense               for another purpose, I think you have the real               solution of the difficulties that have  arisen               in this case."               Applying  that test, the Master of  the  Rolls               held that:                  "In the present case there are two funds of               so-called profits which come into the picture.               The  first  one is the fund which  has  to  be               ascertained  for the purposes  of  calculating               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, and 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. 101, 105, 106, 108-109.               829                     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  by               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 profits?"                   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 "prof its"  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  purposes and the question to be decided  in  each case  is whether the amount claimed as deduction is  payable out  of  the real profits. The Judicial Committee  again  in Raja  Bejoy  Singh Dudhuria v. Commissioner  of  Income-tax, Calcutta(1)  emphasized  the concept of real income  in  the context of payment of income-tax.  Lord Macmillan,  speaking

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 10  

for  the  Board, after adverting to the Imperial  System  of income-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." (1) L.R. (1933) 60 I.A. 196, 202. 826 The  concept  of  "real income" is  also  expounded  in  the decision of the Bombay High Court in H.M. Kashiparekh &  Ca. Ltd.  v.  Commissioner  of Income-tax,  Bombay   North  (1). 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 of 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 head note thus:                   "The principle of real income is not to be               subordinated  as  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               dose 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.  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."     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(3)   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 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 sinking  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 incometax. 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 10  

rightly held that the said amount was utilised by the  board from and out of its profits and, therefore, the said surplus could  not be an allowable deduction.  The decision  of  the Queen’s  Bench  Division  in  Paddington  Burial  Board   v. Commissioners  of  Inland Revenue(3) 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 (1) (1960) 39 I.T.R. 706, 707. (2) (1883) 2 T.C. 25. (3) (1884) 2 T.C. 46.        827 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  Paddington 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 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  Betting  Control Board(1) the question that arose was whether the  Racecourse Betting Control Board was entitled in computing the  profits of  the trade of totalisatot 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 all voluntary payments and were not  made for the purpose of the trade.  This decision has no  bearing on the question raised before us.   The said 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 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 the statutory profits,  i.e.,  between the   commercial profits and statutory profits.  The  latter are  statutorily fixed for a specified purpose.  If we  bear in mind these two principles there will be no difficulty  in answering the question raised.   The appellant-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 part 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  profits.   So, to  arrive  at  the  taxable income of the  assessee from the business    (1) (1959) 38 T.C. 452 (H.L.).

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 10  

(D)5SCI--14 828 under  s.  10(1)  of the Act, the said amounts  have  to  be deducted 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 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   Court  held  in  Calcutta  Co.   Ltd.,   v. Commissioner  Income-tax,  West  Bengal(1)  that  where   an assessee  maintained 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  in  which  the  said liability  accrued.   Indeed, this legal  position  was  not contested on behalf of the Revenue.     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. 829