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PETITIONER:

THE GODHRA ELECTRICITY CO. LTD. AHMEDABAD

Vs.

RESPONDENT:

THE COMMISSIONER OF INCOME TAX, GUJARAT-II, AHMEDABAD

DATE OF JUDGMENT: 03/04/1997

BENCH:

S.C. AGRAWAL, G.B. PATTANAIK

ACT:

HEADNOTE:

JUDGMENT:

J U D G M E N T

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

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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

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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.

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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

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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

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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

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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

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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

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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-

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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.