Facts

On 19-11-1922 the then Government of Bombay granted a licence under the Indian Electricity Act, 1910 to Lady Sulochana Chinubhai & Co. authorising it to generate and supply electricity to the consumers in Godhra area. The assessee- company was the successor of  the  said  licensee. On  the  recommendations of a 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  1-2-1952. After the amendment of the Electricity (Supply) Act, in 1956 the assessee-company increased the charges for motive power from 1-1-1963 to 35 np. per unit with a maximum of Rs. 7 per month for every installation and a few months thereafter    on 22-6-1963 the assessee-company increased the rates for electricity supplied for lights and fans to 70 np. per unit with a minimum of Rs. 5 of every installation  with effect from 1-7-1963. This unilateral increase in the rates for supply of motive power as well as electricity for lights and fans led to  the  institution of two representative suits by the consumers in the Court of Civil Judge (Senior Division) at Godhra wherein unilateral increase was challenged. The said suits  were decided by the trial court in favour of the consumers and the decree of the trial court was affirmed in appeal by the Assistant Judge, Panchmahals at Godhra. The second appeals filed by the assessee-company were dismissed by the learned single Judge of  the Gujarat High Court but the letters patent appeals filed by   the assessee-company were allowed by the Division Bench of the High Court by judgment dated 3-12-1968 and both the representative suits filed by the consumers were dismissed. The said judgment of the Division Bench of the Gujarat High Court was affirmed by Supreme Court by judgment dated 26-2-1969. 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 Supreme Court on 26-2-1969 some of the citizens of Godhra met 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 rates from the consumers. Thereafter the Under Secretaryto the Government of

 

 

Gujarat in the Industries, Mines and Power Department, addressed a letter dated 19-3-1969 to the assessee-company suggesting that the company may be advised   to maintain the status quo for the rates to  the  consumers 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. Thereafter on 16-5-1969 some of the consumers filed another representative suit 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. The said suit was decreed in favour of the consumers by the Civil Judge by his judgment dated 20-6-1974 and a declaration was granted to the effect that the assessee-company shall not recover the charges exceeding 31 np. per unit for lights andfans and 20 np. per unit for motive power.

Up to  the 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 recovered 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 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 (consumers), carried forward pending settlement of disputes in the District Court’. In the assessment year 1968- 69 there was an adjustment of the claim amounting   to Rs. 3,54,152 due to settlement of dispute with the railway authorities and the disputed balance stood reduced to Rs. 7,33,676. While making the assessment for the assessment year 1969-70 the ITO included the said amount of Rs. 7,33,676      on the ground that the suit filed against the assessee-company by the consumers was decided in favour of the assessee-company by Supreme 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 assessee-company on account of the decision of Supreme Court in the assessment year 1969-70. The said addition made by the ITO was, however, deleted by the AAC, 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 the earlier years for enhanced charges/rates in respect of motive power and electricity for lights and fans from the consumers.   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 rates had not crystallized. According 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 ITO did not represent the income which had accrued to     the assessee-company during the relevant previous year. Similarly, in respect of  the assessment years 1970-71, 1971-72 and 1972-73, the ITO included the certain sums as income.

On an application by the revenue the Tribunal referred question of law for the opinion of the Gujarat High Court as to whether the amount which had accrued     to the assessee, did not represent the income and therefore be excluded from the computation of total income. All the three references were disposed of by the  High Court by a common judgment.  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 Supreme Court on 26-2-1969, the High Court  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 19-3-1969, the High Court has observed that the letter was directive in nature and 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 which was filed by the consumers in the Court of Civil Judge (Junior Division) at Godhra, the High Court 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 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 against the assessee-company and in favour of   the revenue. Thereafter, the High Court granted certificate of fitness to appeal to Supreme Court against the said judgment.

 

Issues

The issue before the Supreme Court was, where assessee was not able to collect enhanced charges, in lieu of various disputes and pending litigations, whether entries made in its books of account represented only hypothetical income and hence could not be taxed as these charges never accrued to the assessee in spite     of the fact that assessee company followed mercantile system of accounting.

 

 

Views

Considering the principles laid down in various decisions of the Court  held that even though 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 were filed by the consumers which were decreed by the trial court and which decree was affirmed by the appellate court and the learned single Judge of the  High Court and it was only on 3-12-1968 that the letters patent appeals filed by    the assessee-company were allowed by the Division Bench of the High Court and the said suits were dismissed. But appeals were filed against the said judgment     by the consumers in Supreme Court and the same were dismissed by the judgment dated 26-2-1969. Shortly thereafter, on 19-3-1969, 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 months 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 16-5-1969 another representive suit was filed by the consumers wherein interim injunction was granted by the Court and which was finally decreed in favour of   the consumers on 23-6-1974. 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 by 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,  and the undertaking was subsequently transferred to the Gujarat State Electricity Board.

No doubt that the letter addressed by  the  Under Secretary to  the  Government  of  Gujarat to  the assessee-company had no legallybinding effect but one has  to look at things from practical point of view. The assessee-company, being a licensee, could not have ignored the direction of the 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 that period. Before  the expiry of  the period of six  months the subsequent suit had been filed by  the consumers and during the pendency of the said suit the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence   ofIndia Rules, and subsequently it was transferred to the Gujarat State Electricity

 

 

Board and, as a result, the assessee-company was not in a position to take steps     to recover the enhanced charges.

The High Court observed that the subsequent suit that was filed on 16-5-1969 related to recovery of enhanced charges for the period subsequent to 31-3-1969   and not prior thereto. Refuting the said findings the Supreme Court held that the suit was not confined to the period subsequent to 31-3-1969. On the other hand,  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 lights 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 Court observed that 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 considered by taking the probability or improbability of realisation in       a realistic manner.

 

Held

Allowing the appeal of the assessee the Court held that; even though 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. 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 amounts in question brought to tax by the Income-tax Officer did not represent income which had really accrued to the assessee-company during the relevant previous years. Court also observed that , no doubt, the Income-tax Act takes into account two points     of time at 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. The  judgement    of the High Court was thus reversed. (AY.  1969-70, 1970-71, 1971-72, 1972-73)   (CA No. 5638/83 dt. 3-4-1997)

Editorial: Decision of the Gujarat High Court in CIT v.  Godhra Electricity Co. Ltd. (1983) 140 ITR 657(Guj) (HC) is reversed. Refer CIT v. Shoorji Vallbhdas &  Co (1962) 46 ITR 144 (SC)

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