Amalgamated Electricity Co. Ltd. v. Commissioner Of Income-Tax, Bombay City I.

Tulzapurkar, J.:— In this reference as many as 10 questions have been referred to this court for its opinion, some at the instance of the assessee and some at the instance of the department and the basic or primary facts out of which these several questions arise may be stated thus:

There is a public limited company called the Amalgamated Electricity Co. Ltd., which carries on the business of supplying electrical energy, originally to Bulsar, Bhiwandi and Belgaum. On 1st April, 1951, it took over two other electric supply companies known as Ajmer Electric Supply Co. Ltd. and Jalgaon Electric Supply Co. Ltd. under separate amalgamation agreements sanctioned by this court by two orders dated 20th July, 1951. Copies of the orders sanctioning the amalgamation together with agreements of amalgamation in the case of each have been annexed as annexure “A” to the statement of the case. The Amalgamated Electricity Co. Ltd. also purchased the undertakings with all the assets minus certain assets and certain specified liabilities of four other companies, namely, Malegaon Electricity Co. (P.) Ltd., Dohad Electricity Co. Ltd., Chalisgaon Electricity Co. Ltd. and Bhusawal Electricity Co. Ltd., supplying electrical energy to the various towns forming part of their name by separate but identical agreements. A specimen of one of these agreements, the one which was entered into with Malegaon Electricity Co. Ltd. for Malegaon supply, dated September 19, 1951, has been annexed as annexure “B” to the statement of the case.

2. The assessees in this reference are Amalgamated Electricity Co. Ltd. (hereinafter called “the Amalgamated”), Ajmer Elecricity Co. Ltd. (hereinafter called “the Ajmer”) and Malegaon Electricity Co. (P.) Ltd. (hereinafter called “the Malegaon”) and each one of these assessees is interested in one or the other questions that have been referred to us for our opinion. Since out of 10 questions that have been referred to this court rival contentions were urged before us only in respect of two or three questions and since in respect of the remaining questions there was not much dispute between the parties inasmuch as those questions had either been covered by the decided cases or by certain provisions of the enactment it will not be necessary to set out in detail the facts pertaining to each one of those 10 questions and we shall set out the facts in detail only with regard to those questions in respect of which rival submissions or contentions have been urged before us and answer those questions in the light of the submissions made before us.

3. Question No. 1 pertains to the item of depreciation which was claimed by the assessee—Amalgamated—for 6 months' period in respect of assets purchased by it from the four companies and the question runs as follows:

“Whether the Amalgamated Electricity Co. Ltd. is entitled to depreciation of Rs. 1,58,546 on the assets of the four private companies, viz., Dohad Electricity Co. Ltd, Chalisgaon Electricity Co. Ltd., Bhusawal Electricity Co. Ltd. and Malegaon Electricity Co. (P.) Ltd. for the period April 1, 1951, to September 30, 1951?”

4. This question had been referred to us by the Tribunal at the instance of the assessee and Mr. Mehta appearing for the assessee has stated before us that he does not wish to press this reference so far as this question is concerned and, therefore, the question need not be answered. In view of the statement made by Mr. Mehta we do not answer the question that has been framed for our opinion.

5. Question No. 2 pertains to the claim of the Amalgamated in respect of deduction of unabsorbed depreciation of the two companies, viz., Jalgaon Electricity Co. Ltd. and Ajmer Electricity Co. Ltd. for the assessment year 1952-53, and the question runs as follows:

“Whether, the Amalgamated Electricity Co. Ltd. is entitled to set off in its own assessments the depreciation of the two companies, Jalgaon Electricity Co. Ltd. and Ajmer Electricity Co. Ltd. that remained unabsorbed in their respective assessments as for assessment year 1951-52?”

6. It appears that these two companies, viz., Jalgaon Electricity Co. Ltd. and Ajmer Electricity Co. Ltd. had to their credit certain sums as their unabsorbed depreciation at the time of amalgamation and on the basis of the amalgamation that came into operation the assessee, viz., the Amalgamated, claimed for the assessment year 1952-53, a deduction of the said unabsorbed depreciation which was available to the said two companies. The Tribunal rejected the claim and, therefore, at the instance of the assessee this question has been referred to this court for its opinion. Mr. Mehta for the assessee has fairly stated that the point raised in the question is covered by the Privy Council decision in Indian Iron & Steel Co. Ltd. v. Commissioner of Income-tax [1943] 11 I.T.R 328 P.C., and in view of this decision the question will have to be answered against the assessee. In view of the said Privy Council decision we answer the question in the negative against the assessee.

7. Question No. 3 pertains to gratuity paid by the assessee, the Amalgamated, to the employees of one or the other companies of which were amalgamated with it in respect of the period prior to amalgamation, which payment was claimed as admissible deduction under section 10;2)(xv) of the Indian Income-tax Act, 1922, and the question runs as follows:

“Whether the gratuity paid by the assessee to employees of the companies, which were amalgamated with it, in respect of the period prior to amalgamation, is admissible as a deduction under section 10(1) or 10(2)(xv) of the Indian Income-tax Act, 1922?”

8. It appears that the assessee (the Amalgamated) claimed Rs. 4,218 and Rs. 878 paid in the years ended March 31, 1952, and March 31, 1954, the previous years for the assessment years 1952-53 and 1954-55, as gratuity paid to various persons who were formerly the employees of one or the other of the companies which amalgamated with the assessee and by reason thereof also became its employees during the relevant previous years. The claim was disallowed by the Income-tax Officer as well as by the Appellate Assistant Commissioner, but in the appeal that was preferred before the Tribunal, the Tribunal accepted the claim in respect of this payment which was made by way of gratuity. The Tribunal took the view that since the assessee had taken over the business of the companies which were amalgamated with it in a running condition, it stepped into the shoes of the constituent companies and the business liabilities of the constituent companies formed the business liability of the assessee-company itself and since the payments were made to the retiring employees on account of business considerations, the same should have been allowed as a business deduction. At the instance of the department, question No. 3 has been referred to this court for its opinion. Mr. Hajarnavis, appearing for the revenue, fairly conceded that in view of clauses 2 and 4 of the scheme of amalgamation the claim will have to be allowed. Clauses 2 and 4 of the scheme of amalgamation (at page 27 of the paper-book) run as follows:

“2. All the liabilities and duties of the transferor-company be also transferred with effect from the date when this scheme is sanctioned by the court without further act or deed to the transferee company pursuant to the said section 153A so as to become the liabilities and duties of the transferee-company:

“4. The transferee company will on such transfer take over all such employees other than the managing agents of the transferor company as are willing to join the transferee company as far as possible on the same terms on which they were employed by the transferor-company and their services with the transferor-company prior to such taking over will not be treated as having been broken for the purposes of provident fund, gratuity and leave or for any other purpose and will be reckoned for such purpose from the date of their respective appointment with the transferor-company.”

9. In our view, having regard to these aforesaid clauses which appear in the scheme of amalgamation, the payment of gratuity made to the erstwhile employees of the companies which were amalgamated with the assessee and who upon amalgamation became the employees of the assessee will have to be regarded as business expenditure allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question is, therefore, answered thus: The gratuity paid is admissible as a deduction under section 10(2)(xv) of the Act.

10. Questions Nos. 4 and 5 are questions on which rival contentions were urged before us at the Bar and these questions could be considered together. These questions run as follows:

“(4) Whether, having regard to the provisions of the Electricity (Supply) Act, 1948, and the provisions of the 6th Schedule thereto, the amounts respectively credited to the consumers' benefit reserve, the tariffs and dividends control reserve and contingency reserve were the income of the assessee?”

“(5) Whether, having regard to the provisions of the Electricity (Supply) Act, 1948, and the provisions of the 6th Schedule thereto, the amounts respectively credited to the consumer' benefit reserve, the tariffs and dividends control reserve and the contingency reserve are admissible deductions under section 10(2)(xv) or section 10(1) of the Indian Income-tax Act, 1922?”

11. Now, the facts pertaining to these two questions in which the Amalgamated, the Malegaon and the Ajmer are interested may be stated: The Amalgamated credited in its books from out of its revenue account at the end of each year the following reserves:

Reserves 31-3-51 31-3-52 31-3-53 31-3-54 31-3-55 31-3-56 31-3-57 31-3-58 31-3-59 Rs. Rs. Rs. Rs. Rs Rs. Rs. Rs. Rs. Contingency Reserve 8,239 37,009 32,871 35,728 38,821 73,732 60,677 59,513 51,135 Tariff and Dividend Control Reserve 12,944 19,948 8,345 8,466 3,818 33,300 6,633 2,930 Consumers' Benefit Reserve. 12,944 19,948 8,466 3,817 33,299 15,720 398

12. The other two assessees, namely, the Malegaon and the Ajmer, had also created reserves of the above type in their books of the last two years ended March 31, 1950, and March 31, 1951, before their merger with the amalgamated as shown below:

Reserves Malegaon Ajmer Es. Rs. Rs. Rs. 31-3-1950 31-3-1951 31-3-1950 31-3-1951 Contingency 4,641 5,391 6,400 7,531 Tariff and Dividend Control 3,411 1,067 — 2,683 Consumers' Benefit 3,411 1,067 — 2,683

13. The aforesaid assessees in each of the concerned years claimed the aforesaid transfers to the particular reserve in the corresponding assessments as a deduction and the claim for deduction was based on the provisions contained in the 6th Schedule to the (Electricity Supply) Act, 1948, and in particular clauses II, III, IV and V thereof. In substance, the contention of the assessees in respect of the aforesaid various amounts which had been transferred to the three types of reserves was that all these were statutory reserves created according to the provisions of the Electricity (Supply) Act, 1948, that these were compulsory transfers required to be made under the provisions of the said Act, that the amounts upon their transfer to the respective reserves were either not available to the assessees at all or were available only for a limited purpose as indicated in the 6th Schedule and as such these amounts should be excluded while computing the net profits of the assessees under section 10(1) of the Act. In the alternative, it was claimed that these amounts should be allowed as deduction under section 10(2)(xv) of the Act. The Income-tax Officer disallowed the claim in respect of the transfers made to these three types of reserves. The Appellate Assistant Commissioner upheld this disallowance except in respect of the amounts transferred or appropriated to the consumers' benefit reserve. In other words, so far as the amounts transferred or appropriated to the consumers' benefit reserve were concerned, he distinguished the same from the other amounts which were transferred or appropriated to the contingency reserve and tariff and dividend control reserve, in that unlike those transferred to contingency reserve and tariff and dividend control reserve the amounts transferred or appropriated to the consumers' benefit reserve were never available for the benefit of the assessees. He thus took the view that each assessee was entitled to claim it as deduction from the assessable income. When the matter was carried further, the Income-tax Appellate Tribunal reversed the view of the Appellate Assistant Commissioner so far as the transfers to the consumers' benefit reserve were concerned and confirmed the Income-tax Officer's view in regard thereto. It also confirmed the disallowance with regard to transfers or appropriations that had been made to contingency reserve and tariff and dividend control reserve. At the instance of the concerned assessee, therefore, questions Nos. 4 and 5 have been referred by the Tribunal to this court for its opinion.

14. Now, in order to appreciate the rival submissions that have been made by counsel before us touching these transfers made by the assessees in the relevant assessment years to these three types of reserves, it will be necessary to set out the relevant provisions of the Electricity (Supply) Act, 1948, and the 6th Schedule thereunder. The Electricity (Supply) Act, 1948, provides for the rationalisation of the production and supply of electricity and generally for taking measures conducive to electrical development and for all matters incidental thereto. Section 55(1) of the Act provides that every licensee shall comply with such reasonable directions as the Board may from time to time give him for the purpose of achieving the maximum of economy and efficiency in the operation of his undertaking or any part thereof. Under section 57, the provisions of the Sixth Schedule shall be deemed to be incorporated in the licence of every licensee, not being a local authority. The Sixth Schedule deals with financial principles and their application and paragraph I of the said Schedule incorporates one of the foremost principles which is applicable in the case of every licensee, namely, every licensee shall so adjust his charges for the sale of electricity whether by enhancing or reducing them that his “clear profit” in any year of account shall not, as far as possible, exceed the amount of “reasonable return”. The expressions “clear profit” and “reasonable return” have been defined in paragraph XVII of that Schedule. In other words, the object of the Act and the Sixth Schedule thereto is to statutorily rationalise and regulate the supply of electricity in the interest of the public and for electrical development. The principles embodied in the Sixth Schedule are intended only to achieve this object. In this case we are concerned with the provisions contained in paragraphs II, III, IV and V of the 6th Schedule which deal with the creation, regulation and utilization of the three types of reserves concerned in this reference. Paragraph II of the Sixth Schedule contemplates creation of tariffs and dividends control reserve as well as reserve meant for the benefit of the consumers which could be styled as “consumers' benefit reserve”, while paragraph III deals with creation of what is called “contingencies reserve”. The source from which these reserves are to be created, the manner in which, the extent to which and the purpose for which, these reserves are to be drawn upon have also been indicated in these paragraphs II, III, IV and V. Under paragraph 11(1) it is provided that, if the “clear profit” of a licensee in any year of account is in excess of the amount of “reasonable return”, one-third of such excess, not exceeding five per cent, of the amount of reasonable return, shall be at the disposal of the undertaking; of the balance of the excess, one-half shall be appropriated to a reserve which shall be called the tariffs and dividends control reserve and the remaining half 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. In other words, under paragraph II(1) after keeping one-third of the excess (of the clear profit over and above the reasonable return) at the disposal of the undertaking, one-half of the remaining excess is to be appropriated towards the tariffs and dividends control reserve and the remaining half is to be appropriated towards consumers' benefit reserve for being distributed to the consumers in the manner indicated above. It is, therefore, clear that the amounts transferred to consumers' benefit reserve are at no time available to the licensee for any of its purposes, but these have to be utilised exclusively for the consumers' benefit. Under paragraph 11(2) it is provided that the tariffs and dividends control reserve shall be available for disposal by the licensee only to the extent by which the “clear profit” is less than the “reasonable return” in any year of account. In other words, the tariff and dividends control reserve as its name suggests is intended to be drawn upon by the licensee only for the purpose of replenishing the “clear profit” of any year in which the same falls short of “reasonable return” and only to the extent of the shortfall—a provision intended to maintain the dividend or return to the shareholders of the licensees. However, under paragraph 11(3) it has been provided that on the purchase of the undertaking under the terms of its licence any balance remaining in the tariffs and dividends control reserve shall be handed over to the purchaser and maintained as such by the purchaser and it has been further provided that where the undertaking is purchased by the Board or the State Government, the amount of this reserve could be deducted from the price payable to the licensee. Sub-paragraphs (2) and (3) of paragraph II, therefore, clearly bring out the aspects that the tariffs and dividends control reserve is available to the licensee only for a limited purpose mentioned therein and on transfer of the undertaking the said reserve has to be maintained as such by the transferee and if the transferee happens to be the Board or the State Government the item of that reserve will not be allowed any compensation in the matter of payment of price that will be received by the licensee.

15. Coming to the contingencies reserve, paragraph III of the Sixth Schedule provides that it is created either from existing reserve or from the revenues of the undertaking irrespective of the question whether the licensee has made any profit or not in that accounting year and the quantum to be appropriated is under paragraph IV(1) related to the original cost of the fixed assets. Under paragraph IV(2) the sums appropriated to the said reserve are required to be invested in securities authorised under the Indian Trusts Act and such investment shall be made within a period of six months of the close of the year of account in which such appropriation is made. Paragraph V indicates the manner and the purpose for which the contingencies reserve could be drawn upon. It provides that the contingencies reserve shall not be drawn upon during the currency of the licence and this rule is subject to an exception and the exception provides that it shall be drawn upon for meeting such charges as the State Government may approve as being: (a) expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented; (b) expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal; and (c) compensation payable under any law for the time being in force and for which no other provision is made. Sub-paragraph (2) of paragraph V shows that on the purchase of the undertaking the contingencies reserve is to be handed over to the purchaser and he has to maintain it as such. If the undertaking is purchased by the Board or the State Government, the amount of the reserve, after deduction of the amount of compensation, if any, payable to the employees of the outgoing licensee, is to be handed over to the Board or the State Government. Under the provision in the Electricity Act, 1910, relating to the price fixation, when the Board or the State Government takes over the undertaking of the licensee, no allowance is made in the purchase price for the amount of contingencies reserve.

16. The aforesaid provisions clearly indicate the nature of the three types of reserves, the sources from which they are to be created, the manner in which, the extent to which and the purposes for which, these could be drawn upon or utilised and it is in the light of these provisions that the claim of the assessee will have to be considered.

17. Out of the three types of reserves, we shall first deal with the asses-see's claim for a deduction in respect of the amounts transferred to the consumers' benefit reserve. Mr. Mehta, appearing for the assessee, contended before us that the transfers or appropriations from out of the excess of the clear profit over the reasonable return to the consumers' benefit reserve under paragraph II of the Sixth Schedule of the Electricity (Supply) Act, 1948, was the subject-matter of a decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax. He pointed out that after referring to the relevant provisions of the Electricity (Supply) Act, 1948, and the provisions contained in the Sixth Schedule thereto and after considering the object with which these provisions had been enacted, the Supreme Court has taken the view that such transfers or appropriations to the consumers' benefit reserve did not form part of the assessee's real profits and to arrive at the taxable income of the assessee from business under section 10(1) of the Indian Income-tax Act, 1922, such amounts so transferred or appropriated had to be deducted. Relying upon this decision, which in terms covers the case of transfers or appropriations to consumers' benefit reserve under paragraph II of the Sixth Schedule of the Electricity (Supply) Act, 1948, he contended that question No. 4 referred to this court in so far as it relates to the question of allowing a deduction on that account is concluded. Mr. Hajarnavis appearing for the revenue fairly stated that the position was as stated by Mr. Mehta. The question, therefore, so far as it relates to transfers or appropriations made to the consumers' benefit reserve will have to be answered in favour of the assessee. However, we may briefly indicate the reasons for which the Supreme Court came to that conclusion as, in our view, it may have some bearing on the claim for deduction made by the assessee in respect of transfers or appropriations done to the other two types of reserves. At page 530 of the report this is what the Supreme Court has observed:

“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 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. 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 specific purpose. If we bear in mind these two principles there will be no difficulty in answering the questions 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 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 a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of the assessee's real profits. So, to arrive at the taxable income of the assessee from the business under section 10(1) of the Act, the said amounts have to be deducted from its total income.”

18. It will appear clear from the aforesaid reasoning that to arrive at the aforesaid conclusion the Supreme Court took into account not merely the source from which amounts came to be transferred or appropriated to the consumers' benefit reserve but also the fact that under paragraph II of the Sixth Schedule, the said reserve was not available to the assessee (licensee) for any of its purposes whatsoever and that it was required to be disbursed for the benefit of the consumers only in the manner indicated in that paragraph. In fact, having regard to this provision, the Supreme Court in the earlier part of its judgment illustrated the point by observing as follows:

“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.”

19. As stated earlier, in view of the aforesaid decision of the Supreme Court, so far as transfers or appropriations of amounts to the consumers' benefit reserve are concerned, question No. 4 will have to be answered in favour of the assessee and we answer the same accordingly.

20. Dealing next with the amounts transferred by the assessees to the contingencies reserve, Mr. Mehta appearing for the assessee contended that even these transfers or appropriations will have to be deducted while computing the real profits of the assessees as these transfers or appropriations would fall within the ratio of the aforesaid Supreme Court decision. Besides, Mr. Mehta pointed out that the question about such transfers or appropriations made by licensees to the contingencies reserve under paragraph III of the Sixth Schedule came up for consideration before the Kerala High Court in the case of Cochin State Power & Light Corporation Ltd. v. Commissioner of Income-tax and was decided by that court in I.T Reference No. 109 of 1970 on 8th December, 1972. A cyclostyled copy of the judgment of the Kerala High Court in the case was made available to us by Mr. Mehta. He pointed out that after considering the relevant provisions contained in paragraphs III, IV and V of the Sixth Schedule and having regard to the principal object of the Act and the Sixth Schedule, the Kerala High Court has taken the view that the creation of this reserve was apparently with the primary object of making available sufficient resources for meeting commitments necessary for the efficient running of the business, commitments which, if the licensee failed, to meet, would really affect the consumers. It also took the view that since the contingencies reserve was not available to the assessee for any purposes of its own or for any purposes other than those indicated in clauses (a), (b) and (c) of paragraph V(1) of the Sixth Schedule, the appropriation was one which was deductible in determining the real profit. He, therefore, urged that the transfers or appropriations made by the assessees in the instant case to the contingencies reserve should be permitted to be deducted while computing the real profits of the assessees for the relevant years. On the other hand, Mr. Hajarnavis for the revenue wanted to contend before us that certain aspects of the matter had not been considered by the Kerala High Court when it decided that question and, therefore, the decision need not be regarded as correctly deciding the question and need not be followed by this court. In our view, since the question which arises for our consideration pertains to an all-India fiscal statute like the Indian Income-tax Act, for the sake of maintaining uniformity, it is desirable that we should follow the decision of the Kerala High Court on this question. Even otherwise, we would like to point out that the Kerala High Court has referred to the decision of the Supreme Court in Poona Electric Supply Co.'s case and has applied the ratio of that case to the transfers or appropriations made to the contingencies reserve by the assessees before it. After considering the relevant provisions contained in paragraphs III, IV and V of the Sixth Schedule, the Kerala High Court has concluded its discussion on this question in paragraph 14 of its judgment in the following terms:

“Bearing in mind the fact that the amount under the contingencies reserve is not available to the assessee for any purposes of his own or even for any purpose other than those indicated in paragraph V of the Sixth Schedule and also noticing the object of the creation of this reserve and further noting the provision that it is a diversion from the revenue, we think that the diversion is one which is deductible in determining the real profit. There is the further fact that the assessee does not get even compensation on account of this reserve as and when the undertaking is purchased and even the purchaser has to maintain the reserve as such. Therefore, in spite of the distinction that we have pointed out in regard to certain features between this reserve and the consumers' benefit reserve with which the Supreme Court was concerned in the Poona Electric Supply Company's case, we feel that the amount covered by the contingencies reserve is a diversion by reason of overriding obligation created by the statute and, therefore, for determining the commercial profits of the assessee, the amount of this reserve has to be deducted.”

21. In other words, it is clear that the Kerala High Court was considerably influenced, and in our view rightly, by three or four aspects of this contingencies reserve, namely, the source from which this reserve is created, the purpose for which this reserve could be drawn upon as mentioned in paragraph V, that this reserve was not available to the assessee for any purposes of its own, that the assessee would not get any compensation on account of this reserve as and when the undertaking would be purchased and that the purchaser is required to maintain the reserve as such. We, therefore, feel that substantial reasons have been given by the Kerala High Court for coming to the conclusion that the transfers or appropriations made by the assessee to the contingencies reserve should be deducted while computing the real profit of the assessee. In this view of the matter, the question, so far as it relates to transfers or appropriations made by the assessees to the contingencies reserve in the instant case before us, will have to be answered in favour of the assessees. We accordingly answer the question in favour of the assessees.

22. Turning to the transfers or appropriations made by the assessees to the tariffs and dividends control reserve, Mr. Mehta for the assessee supported the claim for deduction in that behalf on two or three aspects which appear clear from paragraph II of the Sixth Schedule.. In the first place, he contended that the amounts were transferred or appropriated to this reserve by the assessees not voluntarily but out of compulsion under the statute. Secondly, he pointed out that the amounts so transferred or appropriated to this reserve were available to the licensee only for the purpose of maintaining reasonable return to the shareholders in future years whenever there would be a shortfall and as such it was clear that this reserve could never be drawn upon by the assessee in the concerned year of account. Thirdly, he pointed out that on the purchase of the undertaking this reserve or the balance remaining thereunder is required to be handed over to the purchaser to be maintained by the latter as such, which means that even the purchaser is not able to use it except for the purpose mentioned in sub-paragraph (2) of paragraph II and further that if the purchase of the undertaking was by the Board or the State Government the amount of the reserve is not to be compensated while determining the price payable by the Board or the State Government in respect of the undertaking. Relying upon these aspects which emerge from the provisions contained in paragraph II of the Sixth Schedule Mr. Mehta contended that the amounts that were transferred to this reserve could not be said to be available to the assessee for the year of account for any purpose whatsoever and as such the transfers would fall within the ratio of the Supreme Court decision in Poona Electric Supply Co.'s case and, therefore, such transfers or appropriations to this reserve should be allowed to be deducted while determining the real profits of the assessee. On the other hand, Mr. Hajarnavis for the revenue strongly relied upon a couple of other aspects which emerge from the provisions contained in paragraph II of the Sixth Schedule. In the first place, he pointed out that essentially the source from which these amounts were transferred or appropriated to this reserve was no other than “clear profit” which has arisen, to the assessee in the year of account; in other words, the character of the amounts which were transferred to this reserve was “profit” earned by the assessee in the year of account and he went on to contend that in taxation matters the court was not concerned with the manner in which these amounts were subsequently dealt with, disbursed or disposed of by the assessee. Secondly, he pointed out that the purpose for which the amounts so transferred to this reserve could be used or utilised as clearly indicated in sub-paragraph (2) of paragraph II was to maintain the dividend or return to the shareholders of the licensee by replenishing the “clear profit” of any year in which the same falls short of “reasonable return”. He, therefore, urged that having regard to these aspects, it would be difficult;to hold that the amounts transferred or appropriated to this reserve could be claimed as a deduction for arriving at the real profits of the assessee and as such the Tribunal's view disallowing deduction should be accepted by this court. After having given our anxious consideration to all the aspects that are involved in the matter we have come to the conclusion that the transfers or appropriations of amounts of this reserve should be allowed as a deduction while computing the real profits of the assessee concerned and we shall indicate our reasons for the same presently.

23. It is no doubt true that the source from which this particular reserve comes into existence is the “clear profit” earned by the assessee in the year of account. But that aspect cannot be regarded as decisive of the question, for, even in the case of transfers or appropriations made to the consumers' benefit reserve, the source of that reserve was “clear profit” and even then the Supreme Court in Poona Electric Supply Co.'s case came to the conclusion that the amounts transferred to the consumers' benefit reserve will have to be regarded as amounts in respect of which deduction could be claimed by the assessee for arriving at the real profits of the assessee, mainly relying on the aspect of the purpose for which such reserve could be drawn upon, namely, that the same was not available to the licensee (assessee) for any of its purposes at all but had to be disbursed for the benefit of the consumers only; in other words, emphasis was laid on the restricted manner in which the reserve could be dealt with or disbursed rather than on the source from which it was created. The other aspect on which reliance has been placed by Mr. Hajarnavis also requires serious consideration. Under sub-paragraph (2) of paragraph II of the Sixth Schedule, this reserve would be drawn upon by the licensee only to the extent by which the “clear profit” is less than the “reasonable return” in any year of account, obviously for the purpose of maintaining the permissible dividend or return to the licensee or its shareholders. It is true that this reserve is apparently intended to be used for the benefit of the licensee or its shareholders in any year in which there is a shortfall or deficiency but it will appear very clear that in the ultimate analysis the real purpose of making good the shortfall or deficiency is to see that the tariffs leviable on the consumers in the relevant years are not enhanced or increased. The very name of this reserve, viz., the tariffs and dividends control reserve, clearly suggests that this reserve is created with the intention of controlling not merely the dividends but also the tariffs. This reserve ensures payment of permissible return or dividends to the licensee or its shareholders in any particular year of account where there is deficiency in the clear profit, but at the same time it secures to the consumers electrical energy at reasonable rates. Under paragraph I of the Sixth Schedule the cardinal principle has been laid down that the licensee shall so adjust his charges for the sale of electricity, whether by enhancing or reducing them, that his clear profit in any year of account shall not, as far as possible, exceed the amount of reasonable return; and it is only because this reserve is made available for making good the deficiency arising in the clear profit in any year that the licensee is enabled to maintain the particular rates at which electrical energy is supplied to the consumers which otherwise would be required to be enhanced. Looking at from this angle, in our view, though the immediate purpose of this reserve is to maintain payment of permissible dividends to the shareholders of the licensee, the real object of this reserve is to see that the tariffs which are charged to the consumers are not increased or enhanced and in that sense the purpose of this reserve could be said to be in the interest of the public generally, that is to say, in the interest of all the consumers of electrical energy. Having regard to this aspect which emerges from sub-paragraph (2) of paragraph II of the Sixth Schedule, the question will have to be considered as to whether the transfers or appropriations to this reserve fall within the ratio of the Supreme Court decision in Poona Electric Supply Co.'s case. There is no doubt that transfers or appropriations to the tariffs and dividends control reserve are required to be compulsorily made under the statute and these appropriations are not voluntarily made by the licensees. Secondly, though the amounts credited to this reserve are out of “clear profit” of the assessee, transfers to this reserve are intended to serve the public generally, meaning the consumers who are to be charged tariffs by the assessee. Thirdly, on the purchase of the undertaking this reserve is required to be handed over to the transferee and the transferee is required to maintain it as such and under the proviso to sub-paragraph (3) of paragraph II it is clear that when the undertaking is purchased by the Board or the State Government no allowance is made in respect of the said reserve while determining the price payable by the Board or the State Government in respect of the undertaking so purchased. In other words, subject to a limited use which the licensee can make of this reserve as indicated in sub-paragraph (2) of paragraph II which use ultimately enures for the benefit of the consumers, if the undertaking is taken over by the State Government or the board, this reserve is completely lost to the licensee or its shareholders without getting anything in return therefor. One more aspect in this context may be mentioned. Ordinarily under paragraph I of the Sixth Schedule the licensee is required to so adjust his charges for the sale of electricity whether by enhancing or reducing them that his “clear profit” in any year of account shall not, as far as possible, exceed the amount of “reasonable return” and it is only if there is any excess in the clear profit over and above the amount of reasonable return that the transfers or appropriations to this particular reserve have to be made. But normally the tariffs are so required to be fixed by the licensee that “clear profit” in any year of account does not exceed the amount of “reasonable return”. Therefore, the contingency of making transfers to this reserve under subparagraph (2) of paragraph II would be a marginal, if not remote, possibility and even when such contingency arises and transfers are made to this reserve, as stated earlier, the real purpose served by such reserve is to see that the tariffs charged to consumers are not high and are maintained at reasonable level. Having regard to these aspects of the reserve to which transfers or appropriations have been made by the assessees concerned in the relevant years, we feel that the amounts so credited to this reserve also will have to be deducted while computing or determining the real profits of the assessees. Therefore, the question so far as it relates to the amounts that have been credited to the tariffs and dividends control reserve is accordingly answered in favour of the assessee. Having regard to the above discussion, we answer question No. 4 in the negative and in favour of the assessee.

24. In view of our aforesaid answer to question No. 4, there is really no necessity to answer question No. 5. However, even if it be held that the amounts transferred to these three types of reserves are to be regarded as part of receipts amounting to income of the assessees, the amounts so transferred to these reserves will have to be deducted under section 10(1) of the Act and question No. 5 will have to be answered accordingly. There is no question of deducting these amounts so transferred to these reserves under section 10(2)(xv) of the Act.

25. Questions Nos. 6 and 7 will have to be considered together and these concern only the Amalgamated. These questions run as follows:

“(6) Whether, having regard to the provisions of the Electricity (Supply) Act, 1948, and the provisions of the 6th Schedule thereto, the sum of Rs. 36,000 being the amount refunded to the consumers from the consumer's benefit reserve (temporary deposit) was the income of the assessee?”

“(7) Whether the payment of Rs. 36,000 from out of the amounts reserved in the earlier years to the consumers in the previous year is a proper deduction in the assessment of 1952-53 under any of the provisions of the Act?”

26. In view of the facts which are disclosed by the profit and loss account of the Amalgamated for the accounting year ended March 31, 1951, in which year the question arises, it happens to us that question No. 6 will have to be reframed. Question No. 3 as framed by the Tribunal seems to be based on the assumption that the sum of Rs. 36,000 in respect of which relief was claimed by the assessee was the amount which had to be refunded to the consumers from the consumers' benefit reserve, but actually the profit and loss account of the assessee for the year ended March 31, 1951, does not bear out that assumption. In the relevant profit and loss account the amount of Rs. 36,000 is shown on the credit side as being the amount less received in respect of sale of energy made by the assessee to its consumers. The very first item on the credit side of the profit and loss account for the year ended March 31, 1951, runs as follows:

Dr. Cr. Rs. As. Ps. Rs. As. Ps. 11,01,066—10—9 By sale of Energy: Less: Rebate allowed to consumers 18,244—1—0 Amount refundable to consumers 36,000—0—0 54,244 —1 —0 10,46,822—9—9

27. In other words, the amount of Rs. 36,000 in respect of which relief was claimed by the assessee in the accounting year ended March 31, 1951 (relevant assessment year 1951-52), represented the amount of rebate refundable to the consumers in respect of charges that were collected from them for energy supplied to them. Having regard to this factual position, we reframe question No. 6 as under:

“(6) Whether the amount of Rs. 36,000 being the sum to be refunded to the consumers from out of receipts by sale of energy was the income of the assessee?”

28. The question as reframed will now admit of no difficulty in so far as its answer is concerned. As stated earlier, what has actually happened in the accounting year ended March 31, 1951, is that by sale of energy the assessee has shown its income at Rs. 11,01,066-10-9. In that very year a sum of Rs. 18,244-1-0 was actually paid to the consumers as and by way of rebate and the sum of Rs. 36,000, which was really due to the consumers as and by way of rebate but which could not be refunded in that year, was shown as having been less received under the caption “Amount refundable to consumers”. That the said sum of Rs. 36,000 was actually meant for being utilised as rebate to the consumers is amply borne out by the fact that in the succeeding year the said sum has been actually paid out to the consumers. Here is a case, therefore, of the assessee having really recovered a higher sum from its customers in the year of account to the tune of Rs. 54,244-1-0 to which it was not entitled and, therefore, the said amount was treated as rebate partly paid and partly payable back to the consumers. A sum of Rs. 36,000 could not be paid back to the consumers during the accounting year and that it was actually repaid to the consumers in the next year and, therefore, in the year of account rebate of Rs. 36,000 was also claimed under the caption “Amount refundable to consumers”. In our view, this item of Rs. 36,000 will have to be regarded as provision for refund out of considerations of business expediency and, in this view of the matter, we feel that the said amount could not be regarded as income of the assessee for the assessment year 1951-52. Question No. 6 as reframed, therefore, is answered in the negative and in favour of the assessee. In view of the above answer to question No. 6, it is unnecessary to deal with or answer question No. 7.

29. Question No. 8 pertains to the claim made by the assessees (Amalgamated and Malegaon) in respect of multiple shift allowance in regard to electric meters that had been installed in the premises of their consumer-constituents and the question runs as follows:

“(8) Whether electrical meters fall under item 111(3) C (ii) or III(3) C (iii) of rule 8 of the Indian Income-tax Rules and whether they are entitled to multiple shift allowance as prescribed in rule 8?”

30. The assessees, viz., Amalgamated and Malegaon, had installed electric meters in the premises of all their constituents and the Amalgamated claimed multiple shift allowance in respect of such meters for all the years from 1951-52 to 1959-60 while the Malegaon claimed such multiple shift allowance for the years 1950-51 and 1951-52 on the ground that the meters fell under item III(3) C (ii) of rule 8. The Income-tax Officer rejected the claim. But the Appellate Assistant Commissioner held that the meters fell under item III(3) C (iii) of rule 8 and as such were not eligible for extra shift allowance, When the matter was taken to the Tribunal in appeals for 1954-55 to 1957-58 which were heard by one Bench of the Tribunal that Bench allowed the claim of the assessees holding that the meters fell under item III(3) C (ii) but in so far as appeals by the Amalgamated for the other years were concerned, these were dealt with by another Bench of the Tribunal which took a contrary view and rejected the claim for these years. So far as the Malegaon was concerned the claim was rejected all throughout for the relevant years.

31. The question as framed by the Tribunal suggests that the claim for extra shift allowance could be claimed by the assessees only if the meters fall under item III(3) C (ii) and not if the meters fall under III(3) C (in) of rule 8 and these are the only two alternatives mentioned in question No. 8. The two items in rule 8 III(3) C are as follows:

“C.—Electrical machinery—

(i) Batteries

(ii) Other electrical machinery including electrical generators and motors (other than tramway motors).

(iii) Switchgear and instruments, transformers and other stationary plant and wiring and fittings of electric light and fan installations (N.E.S.A).”

and the question which was considered by the taxing authorities was whether the meters of the assessees could fall either under item (ii) or item (iii) of the sub-classification styled “Electrical machinery” under “C” of main classification III of rule 8, for, if it fell under (ii) multiple shift allowance could be claimed but if it fell under item (iii) it could not be claimed. However, it is clear that rule 8 pertaining to allowance in respect of depreciation of various assets first of all divides various assets into different classes—which might be regarded as the main classification— such as I buildings, II furniture and III machinery and plant. For the assets styled as “Machinery and plant” under rule 8 III depreciation allowance is granted at general rate under (i) and at special rates under (ii) applicable to the whole of the machinery and plant used in certain specified concerns and also at special rates under (iii) applicable to other machinery and plant; under this clause (iii) the assets falling under “Machinery and plant” are further classified or sub-divided, that is to say, machinery and plant—ropeway structures, salt works, electrical machinery generally, machinery used in the production and exhibition of cinematograph films, electric supply undertakings and so on and so forth and this sub-classification is indicated by (3)A, (3)B, (3)C, (3)D, (3)E and so on. In our view, in order to decide the question as to whether the assessees are entitled to multiple shift allowance in respect of their meters or not, it will have to be first seen as to under what classification and sub-classification these particular assets of the assessees, namely, meters installed in their constituents' premises fall and, looked at from this angle, it seems to us clear that the meters could be classified as assets of “electric supply undertakings” and the question of granting relief will have to be considered under entry III(3)E of rule 8 which entry runs as follows:

“E.—Electric supply undertakings—

(i) Electric plant, machinery, boilers.

(ii) Hydro-electric concerns—hydraulic works, pipe lines and sluices (N.E.S.A)”

32. Having regard to the classification and sub-classification made under rule 8 under which depreciation allowance is granted, the meters in respect of which multiple shift allowance is claimed by the assessees, in our view, can never fall in the sub-classification C.— “Electrical machinery”, for that sub-classification is general while sub-classification “E” pertains to assets belonging to specific undertakings like “Electric supply undertaking” and if the meters properly fall under “E”, these would be excluded from sub-classification “C”. Neither of the two competing items under sub-classification “C” under which the matter was considered by the taxing authorities and the Tribunal really covers the meters in question. The question, therefore, as to whether multiple shift allowance could be claimed in respect of meters in question under rule 8 III(3)C would not arise and the granting of relief will have to be considered under rule 8III(3)E.

33. The manner in which we have tried to approach the classifications and sub-classifications which appear under rule 8 seems to have been approved by the Madras High Court in the case of Commissioner of Income-tax v. South Madras Electric Supply Corporation Ltd. In that case the question was whether overhead cables and wires used for service connections given by electric supply undertakings would fall under the item “Electric machinery—overhead cables and wires” mentioned in rule 8III(3)C(v) or under the heading “electric supply undertakings” mentioned in rule 8 III(3)E and the Madras High Court took the view that notwithstanding the fact that overhead cables and wires had been specifically referred in item (v) in clause C and that no such specific reference to overhead cables and wires had been made under the heading “Electric supply undertakings” under rule 8 III(3)E, the overhead cables and wires would be more appropriately classified and fall under “E”. At page 492 of the report this is what the court observed:

“It is clear from clause C that electric machinery in general would include overhead cables and wires. It is true that in clause E no specific mention of overhead cables or wires is made. But, in our opinion, on that account it cannot be said that electric machinery in clause E should be read as excluding from its scope overhead cables and wires.. The use of the expression ‘electric plant, machinery, boilers’ in clause E appears to have been made in a comprehensive sense so as to include parts of the plant as well as electric machinery. Clause E seems to be in the nature of an exception to clause C and where it concerns electric supply undertakings, a consolidated rate is fixed for electric plant, machinery, boilers, without reference to the various parts which go to make up the plant, machinery or boilers.”

34. In our view, therefore, relief of multiple shift allowance would be available to the assessees since, in our view, the meters in question would fall under rule 8 III(3) E (i).

35. Mr. Hajarnavis, however, contended that before the taxing authorities and the Tribunal competition was between the two provisions, one under rule 8 III(3)C(ii) and rule 8 III(3)C(iii) and no point was canvassed before the authorities that relief (multiple shift allowance) could be claimed on the ground that the meters would fall under rule 8 III(3)E. That undoubtedly is true. But we do not think that this aspect presents any difficulty in the matter of granting relief to which the assessees would be entitled in respect of their meters. What one has to consider is what is the real controversy between the parties in the case. The contention of the assessees is that they are entitled to multiple shift allowance under rule 8, whereas according to the revenue the assessees are not entitled to any multiple shift allowance in respect of their meters and what we have to consider is, looking to the provisions of the Income-tax Act and the relevant rules, whether the claim could be granted to the assessees or not and it is not necessary for the assessees to suggest under what particular provision of rule the relief could be claimed by them. This position has been sufficiently clarified by this court in the case of Commissioner of Income-tax v. Breach Candy Swimming Bath Trust. In view of the observations which are to be found at page 293 of the report in that case it seems to us clear that the matter is of a legal argument which can always be advanced in court and, therefore, the proper question which the Tribunal should have framed and submitted to us was whether this particular relief sought by the assessees could be claimed under rule 8 of the Indian Income-tax Act, 1922. Having regard to the above discussion, we will answer question No. 8 thus:

Electrical meters of the assessees fall under rule 8 III (3)E(i), the entry being “electric supply undertaking”—(i) electric plant, machinery, boilers and not under either rule 8 III(3)C(ii) or rule 8 III(3)C(iii) and they are entitled to multiple shift allowance as prescribed under that provision.

36. Question No. 9 which has been referred to us for our opinion runs as follows:

“Whether, in view of the provisions contained in the second proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1959, the company is entitled to deduction of the full rebate on super-tax admissible under the first proviso, ignoring the provisions of the second proviso?”

37. So far as this question is concerned, counsel for the assessee and counsel for the revenue have made an agreed statement before us to the following effect:

“The assessee company is entitled to rebate of super-tax in terms of the first proviso to Paragraph D of Part II of the First Schedule to the Finance Act, 1959, only after taking into consideration the provisions of the second proviso.”

38. In view of this we answer the question in favour of the revenue.

39. Turning to the last question, the same runs as follows:

“Whether the wealth-tax assessable under the Wealth-tax Act, for the assessment years 1958-59 and 1959-60, is a proper deduction in the income-tax assessments of the respective years under any of the provisions of the Act?”

40. The assessee, namely, the Amalgamated, is the only assessee interested in this question and Mr. Mehta appearing for the assessee has fairly stated before us that the question will have to be answered against the assessee as the matter could be taken to have been concluded by the provisions of the Act 41 of 1972. By section 2 of the Income-tax (Amendment) Act, 1972 (41 of 1972), section 40 of the Income-tax Act, 1961 (being the principal Act), has been amended and a new sub-clause has been inserted with retrospective effect, the new sub-clause being (ii-a)—inserted after subclause (ii) of clause (a) of section 40, and it runs as follows:

“(ii-a) any sum paid on account of wealth-tax”.

41. In other words, by reason of this addition of sub-clause (ii-a) to the list of amounts which are declared as not deductible, the deduction claimed cannot be allowed and section 4 of the Income-tax (Amendment) Act, 1972 (Act No. 41 of 1972), makes the insertion of the amended provision operative with retrospective effect from the assessment year commencing from 1st day of April, 1957, and onwards. Section 4 runs as follows:

“4. Nothing contained in the Indian Income-tax Act, 1922 (11 of 1922), shall be deemed to authorise, or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head ‘profits and gains of business, profession or vocation or’ income from other sources for the assessment year commencing on the 1st day of April, 1957, or any subsequent assessment year, of any sum paid on account of wealth-tax.”

42. In view of this provision, it is clear that question No. 10 will have to be answered in the negative, against the assessee and we answer it accordingly.

43. We direct that each party should bear their own costs of this reference.