Hoshiarpur Electric Supply Co. v. Commissioner of Income-tax, Simla

956 SUPREME COURT H,EPORTS [1961] .... _•y6o_ if they are due from customers for goods supplied or . . _**ommsssiofier**_ _o_ _/_ [loans ] I [to ][constituents or transactions ] h . [of ][a similar kind. ] b _Income-ta•_ n every case t e test is, was the de t due as an _Bombay_ ' incident to the business; if it is not of that character . . _C_ _v._ it will be a capita.I loss. Thus a loan advanced by a _M /s._ _Abd«llabhai_ firm of Solicitors to a company in the formation of _Abdulkad••_ which it acted as legal adviser is not deductible on its _Kapu•_ _J._ becoming irrecoverable because that is not a part of the profession of a Solicitor: _C._ _I._ _R._ v. _Hagart_ &: _Burn Murdoch_ ( [1] ). In our opinion the High Court was in error in answering the question in favour of the respondent. We therefore allow this appeal, set aside the judgment and order of the High Court and answer the question against the respondent. The appellant will have his costs in this Court and in the High Court. _Appeal_ _allowed._ _**z960**_ _**Dece1nber 6.**_ COMMISSIONER OF INCOME TAX, SIMLA HOSHIARPUR ELECTRIC SUPPLY CO. _v._ (J. L. KAPUR, M. HIDAYATULLAH and J.C. SHAH, JJ.) _Income Tax-Assessee's_ _receipts_ _for installing_ _new_ _electricity_ _installations-If "Profit"_ _or capital-Indian Electricity Act, I9IO_ (9 _of I9IO),_ _Schedule_ _c._ _6 (I)(b)-Intlian Income-tax Act,_ _x9n_ (II _of x922),_ s. 66(r). 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 Commisner excluded the cost of laying service lines and the mains and treated the balance as taxable income. The Appellate Tribunal agreea 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 (t) [1929] A.C. 386; (1929) 14 T.C. 43~· 2 S.C.R. SUPREME COURT REPORTS 957 of the assessee. In a reference under s. 66(1·) of the Income-tax _.r960_ Act, the High Court substantially agreed with the view of the . Tribunal. On appeal by the assessee, H~shiarpur _Elec-_ _H eld,_ that the High Court errea in holding that the excess _Irie_ _Supply_ _Co._ of the receipts over the amount spent by the assessee for instal- . v .. lation of service lines was a trading receipt. The receipts _Commisston•r._ _[0]_ _1_ though related to the business of the assessee as distributors of _Income-tax, Simla_ 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 ~ trading receipt. _Commissioner of Income-tax_ v. _Poona_ Elect~ic _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. ·CIVIL APPELL.A.TE 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 respon{J.ent. 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 _fol-_ lows: - ·. - . . " ...... the company's receipts from the consumers for laying the service lines are trading receipts and 121 ###### _I_ _Shah_ _J._ SUPREME COURT REPORTS [1961] _'9_ _[60 ]_ the profit element therein being the difference bet _Hoshia•pur_ _El"-_ ween the service connection receipts and the service - _tric_ _supply_ _co._ connection costs is taxable income in the hands of the v. company. " _Commissioner. of_ WiLh certificate granted under s. 66A(2) of the _Iucome-tax,_ _Simla_ Income Tax Act, this appeal is preferred by the _Shah_ _J._ 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, 1947Ma.rch 31, 1948, the as~essee 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 ma.ins 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 nia.ins and distributing lines for supplying it to its customers. The a.ssessee niakes 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(l){b) of the Schedule to the Indian Electricity Act, 1910. But where the length of \lo 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 a:nd appropriate labour and supervision charges. In the year of account, the a.ssessee gave 229 new co:nnectipns f # ##### • ___ Jt,, #### . ### -· ..... ## .. -t l 2 s.c.R. SUPREME COURT REPORTS 959 and received Rs. 12,530 out of which Rs. 5,929 _x96o_ have been regarded as taxable income. In the forms _H_ _h' -P Et_ of account prescr1 e 'b d un d er th e n I d' ian El ec t ' r101 't y _Irie os_ _iar supply co._ "' _ec-_ Rules framed under s. 37 read with s. 11 of the Indian v. · Electricity Act, the assessee credited service connec- _Commissioner_ _of_ tion receipts to the revenue account and debited the _Income·tax, Simla_ corresponding cost of laying service lines to the capital _Shah_ _],;_ 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 wh~ther 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 suppl,;ying electrical energy remains an integral part of the distri _Shah_ _],;_ 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 SUPREME COURT REPORTS [1961] r96o The assessee contended that the amount paid by the consumers for new connections is capital receipt _H_ _**os**_ _h_ _**iar**_ _[. ][-P ]_ _**ur**_ _[El ]_ _ec·_ b,, 1 [;;, ] _[supply ]_ _[co. ]_ [and ][not ] 1 [1a ][. ] [bl ][e ][to ][tax, ] [ecause ] [the ][amount ] [1s ] [paid ] [by ] v. the consumers towards expenditure to be incur,red by _Commission"_ _of_ the assessee in laying new service lines-an asset of a _Income-la<. Simla_ lasting character. This question falls to be determin - ed in the light of the nature of the receipt irrespective _s•ah_ _[1 ]_ - 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 dis puted 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 la.sting character enabling the a.ssessee to conduct its business of supplying electrical energy. By the installation of the service lines, a capital asset is brought into existence. The contribution made by the consumers is substantially as consideration for a joint adventure; the service line when installed becomes an appanage of the mains of the assessee, and by the provisions of the Electricity Act, the assessee is oblig ed to maintain it in proper repairs for ensuring efficient supply of energy. The assumption made by the 2 S.C.R. SUPREME COURT REPORTS 961 Department that the excess remaining in the hands of _r9_ _[60 ]_ the assessee, after defraying the immediate cost of _Hoshiarpur Elec·_ installation of a service line must be regarded as a _tric_ _supply co._ trading profit of the company is not correct. The v. assessee is undoubtedly carrying on the business of _Commissioner._ _[0]_ _!_ distributing electrical energy to the consumers. In- _Income-tax,_ _Simla_ stallation of service lines is not an isolated or casual _Shah]._ 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 pa.rt of a capital receipt in the hands of the assessee, and it was not converted into a trading profit because the a.ssessee 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 Go._ _Ltd._ (1), it wa.s 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 a.s contribution was a capital receipt. In _lifonghyr Electric Supply Go. Ltd._ v. _Commissio-_ _ner of Income-tax, Bihar and Orissa_ e), it was held that the amount paid by consumers of electricity for meet. ing 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 _Shah]._ (1) [1946] 14 I.T.R. 622. (2) [19!i4] 26 J.T.R. 15. 962 SUPREME COURT REPORTS **[1961)** _**x960**_ _ the amount immediately not expended was not tax_Hoshiarpur Efoc-_ able as revenue. _t.ic_ _supply_ _Co._ The receipts though related to the business of the . _v'._ assessee as distributors of electricity were not inciden_Commissioncr_ _of_ t l - th f h - f _I_ _**ncome- ax,**_ _t_ _S_ _**im**_ _[. ]_ 1 _**a**_ [a ], [to ] b . [norm ] h e course o t e carrymg on o the asses_ see s usmess; t ey were receipts for bringing into exist_Shah_ _J._ ence capital of lasting value. Contributions were not ma.de merely for services rendered and to be rendered, but for installation of capital equipment under an agreement for a joint venture. The total receipts being capital receipts, the fact that in the installation of capital, only a certain amount was immediately expended, the balance remaining in hand, could not be regarded as profit in the nature of a trading receipt. On that view of the case, in our judgment, the High Court was in error in holding that the excess of the receipts over the amount expended for installation of service lines by the assessee was a trading receipt. The appeal is allowed and the question submitted to the High Court is answered in the negative. The assessee is entitled to its costs in this court as well as in the High Court. _Appeal allowed._ _**1960**_ _**Dacember**_ **7** SHRI MANNA LAL AND ANOTHER _v._ COLLECTOR OF JHALAW AR AND OTHERS (B. P. SINHA, c. J., s. K. DAS, A. K. SARKAR, N. RAJA GOPALA AYYANGAR and **J.** **L.** MUDHOLKAR, JJ.) _Public_ _Demand-Loan_ _due_ _to_ _Jhalawar State_ _Bank-Assets_ _transferred_ _to_ _United State of Rajasthan under covenant, later_ _vested_ _in State of Rajasthan-If recoverable_ _as_ _a public demand-Certifi-_ _cate--Reqt<irements,_ _if_ _applicable_ _to_ _loans due_ _to_ _Government-_ _Special_ f~cilities _to_ ~overnment _as_ _f!anker, whet':er discriminatory-_ _Constitut1on_ _of India, Art. r4-Ra;asthan Public Demands Recovery_ _Act, r952 (Raj. V_ _of_ _1952),_ _s._ _4·_ The Jhalawar State Bank was originally a Bank belonging ' to the rulin!,l State of Jhalawar and its assets, including moneys