1997 P T D 1739
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Judicial Member and Inam Elahi Shaikh, Accountant Member
I.T.As. Nos. 1110/LB, 1112/LB, 1113/LB, 2641/LB, 3641/LB of 1986-87, 243/1_13 of 1987-88 and 1320/LB of 1988-89, decided on 17/01/1991.
Income-tax---
----Capital or revenue receipt ---Assessee, a Gas Supply Company received consumers' contribution towards sharing the cost of service lines meant for reducing the capital cost incurred on the laying of service lines---Held, assns so created were in the nature of capital assets and the contribution or received from the customers was in the nature n> direct re-coupment or reimbursement of the capital expenditure---Consumers' contribution received by the assessee constituted capital receipt in the hands of the company and did not form the trading receipt or revenue income liable to be subjected to the levy of income-tax---Department thus was misdirected in adding the consumers contribution to the total income of assessee for the purpose of levying the income-tax by treating the same as business receipts of revenue nature.
C.I.T. v. Poona Electric Supply Co. Ltd. (1946) 14 ITR 622; Monghyr Electric Supply Co. v. C.1.T. (1954) 26 ITR 15 and Hoshiarpur Electric Supply Co. Ltd. v. C.I.T. (1961) 41 ITR 608 fol.
Khalifa Salahuddin and Sohail Hasan, F.C.A. for Appellant.
Muhammad Ilyas Khan, L.A., Qadirul Jalil and Amjad Ali, D.Rs. for Respondent.
Date of hearing: 20th November, 1990.
ORDER
In all the above appeals at the instance of assessee (hereinafter referred to as the appellant) the only objection pressed before us is as follows:
"The learned C.I.T.(A) has erred in upholding treatment as of revenue nature for consumers' contribution which were received towards the cost of service lines and mains."
2. Except the figures of amount received by the appellant the facts and circumstances are common. The I.T.O., has dealt with the issue in details in the assessment year 1982-83 and, therefore, for the sake of convenience the facts as discussed by the I.T.O., and findings given in the assessment order for the assessment year 1982-83 are reproduced below for the sake of convenience:
"Scrutiny of the balance sheet shows a sum of Rs.1,20,989 (ths.) under the head deferred credits. This is against the amount of Rs.65,114 (ths.) shown as liability under the head as on 30-6-1981. As per note 1.6 the amount received from consumers as contributions towards the cost of supplying the laying service lines and mains are reflected as deferred credits and are amortized over the estimated useful lives of the related assets.
The nature of this receipt is that the assessee increased connection charges for supply of gas in 1980 in view of the increased cost of raw material and other expenses. Minimum expenses in respect of domestic consumers were fixed at Rs.1,000 and in respect of commercial consumers Rs.1,500. As regards industrial consumers fixed charges were to be computed in respect of each connection separately keeping in view the expenses involved for providing the connection. There is no correlation between the receipts and expenses incurred for providing the connection of each of the consumers nor any separate account in respect of expenses incurred for supply of gas to any consumers is maintained. The receipts are a part of the contract for supply of gas to the consumers. So, the receipts are part of the charges recovered from the consumers for supply of gas.
The assessee has shown 5% of the amounts received during the period as a part of the revenue receipts whereas the balance amount has been shown as liability under the head deferred credits. Out of this balance amount of Rs.39.77 millions has been capitalised, and debited to the cost of assets raised during the period. The treatment of these receipts as adopted in the accounts is not in accordance with the principal of accountancy and the legal provisions. The assessee was called upon to show cause why the receipts of Rs.60.468 millions received during the period should not be treated as income as the same is of revenue nature.
Reply was furnished vide A.R's. letter dated 18-4-1983. The explanation offered is as under:
"You have required to show cause why the amounts described as deferred credit as liability on the company balance-sheet not be treated as income and added to the income already returned. As you are already aware that the company receives contributions to reimburse itself wholly or partly for the capital expenditure to be incurred in providing the laying service line and mains. The amount paid by the consumers for meeting the cost of service line, mains etc. are capital receipts and money received towards the recoupment of the expenditure on capital assets must be treated as capital receipts. In the accounts of the company, the contributions received are neither appropriated to income nor do they constitute part of the share-holders equity. The assets created out of these contributions are capitalised as part of the company's accounts the depreciation charge on these fixed assets, an amount equivalent thereto is transferred out of deferred credit to profit and loss account. There appears to be some misunderstanding on the nature of this transfer. It appears that this transfer has been misinterpreted to constitute income or profit. In fact, it is merely to offset the element of depreciation included in the gross accounting depreciation shown in the year's profit and loss account relating to the fixed assets financed by consumers' contributions.
Effectively what is achieved through this accounting treatment is that the depreciation of fixed assets financed out of the contributions is charged as nil as the company has not borne the cost to the extent of such contributions. In other words, accounting profit for the year has no element of charge for accounting depreciation on the assets created out of the consumers' contribution. The accounting treatment or quantum of depreciation charged in the accounts is not relevant to the determination of the total income for the purposes of income-tax as the allowance for depreciation for tax purposes is to be computed under the provisions of the Income Tax Ordinance, 1979.
Be as it may, the accounting treatment has and should have on beating in determining the character of the receipts from the consumers for the purpose of income-tax. As explained above, the Co. does not treat these receipts as revenue receipts but, even if it had done so, these receipts would still constitute capital receipts for the purpose of income-tax law. Our this contention is further supported by the judicial decisions in the following cases;
Hoshiarpur Electric Supply Co., v. CIT (1961) 41 ITR 608. Brief facts of this case were that the assessee received a sum of Rs.12,530 for new service connection granted to its consumers. Out of the said amount Rs.5,929 were spent for laying the service lines and Rs.1,338 for laying certain mains. The I.T.O. treated the entire sum as trading receipt. On appeal the A.A.C. excluded the -cost` incurred for laying service lines and mains and the balance was held to be taxable income. The Tribunal upheld the order of the A.A.C, On a reference under section 66(1) the High Court--substantially agreed with the view of the Tribunal.
Not only the facts in our client's case are identical but you also proposed to met the same treatment to the contributions received from consumers for supplying and laying service lines and mains as the I.T.O., did in the above-quoted case. On the aforementioned facts, the Supreme Court of India held that:---
'The amount contributed by the customers was in direct recoupment of the expenditure for bringing into existence as assets of a lasting character enabling the assessee to conduct its business of supplying electric energy. The amount was, therefore, essentially reimbursement of capital expenditure and the excess that remained after expending the cost of installation of service lines was part of capital receipts in the hands of the assessee was engaged in the business of distribution of electrical energy, with which the receipt was connected. The excess over the cost of installation was not a trading profit and was not taxable income in the hands of the assessee.
Similarly, in the case of Monghyr Electric Supply Co. Ltd. v. CIT (1954) 26 ITR (15) the Patna High Court held:
The sum representing the cost of service connection received by an electric supply company from different consumers is a capital receipt and not a revenue receipt in the hands of the company.
From the above judicial pronouncements, it is quite evident that not only the contributions received from consumers representing recoupment of part or whole of the capital expenditure for bringing into existence an asset of lasting character and enabling assessee to conduct his business, but even the amounts received in excess of the actual cost are capital receipts and thus not taxable.
In view of the factual and legal position explained above, we hope that you will agree with us that the contributions received from consumers for laying service lines and mains constitute capital receipts and hence not taxable. The cost of assets capitalised during the year out of consumers contribution shown in the schedule of Income-tax depreciation amounts to Rs.3,97,75,361.
The contention of the assessee is that the amounts spent for providing and laying lines and mains is a capital expenditure and money received towards the recoupment of expenditure of capital expenditure must be treated as capital receipts. In other words the assessee's contention is that since the receipts have been spent for buying of pipelines which is capital assets the receipts are also of capital nature.
This gives birth to a theory that the nature of expenditure is determined by the nature of receipt from which the expenditure is made and that one cannot buy a capital assets from his revenue income and no revenue expenditure can be made from capital receipts. If argument of the assessee is accepted then the sale proceeds of gas would also become capital receipt if the same are utilized for raising capital asset of the company. Thus, the contention is illogical and without any basis.
The other contention is the amount received constitute customer contribution towards cost of installation. Hence it does not constitute business income. This again is a fallacious argument. In the first instance the receipt is not in the nature of contribution towards cost of installation but is in the nature of connection charges received as a part of the contract for supply of gas. Secondly the assessee's argument could have been acceptable if the assets created by the customers contribution had become the property of the customers to the extent of their contribution. But there it is not so. The entire assets created by the amount received by the assessee have been appropriated by the assessee and treated them as their asset.
If the argument of the assessee is accepted, then it will change the whole complexion of the provisions relating the business transactions. Under the same principles a factory owner may receive part of the sale proceeds of his goods in the form of capital goods to be utilized for a new factory and in the end had a new factory without paying a penny on the income that created it. Similarly, a doctor instead of charging fees from his customers starts receiving equipment from his clinic or partly charges fees and partly requires the patients to meet the cost of his laboratory equipment. He can thus furnish his clinic without paying any tax on the income that creates it. In the instant case also, the assessee had two options. He could either raise his charges of supply of gas to meet the cost of installation or receive a lump sum amount for the same purpose. In the former case, the receipts would have been undoubtedly treated as revenue receipt. It is not understandable how in the latter case they become capital receipt.
And last though not the least, the assessee himself has declared a part of the receipt as revenue receipts and shows every intention of declaring the rest of it in due course. What really escapes comprehension is that what logic or law makes 5 % of a receipt as revenue and the rest as capital, what chemical action would take place that would go on converting 5% of the balance, to say, capital receipt into revenue receipt every year.
As regards the case cited as Hoshiarpur Electric Supply Co. v. CIT (1961) 41 ITR 608. The case is not at all fours with this case. The issue in that case was taxation of a petty amount of Rs.5,929 representing surplus of a sum of Rs.12,530 paid by the consumers for installation of electricity connection. It was held that it was a capital receipt. All other observations contained in the judgment constitute obiter dicta. There is no surplus arising out of the expenditure in this case. Secondly, the sum paid by customers was undisputedly reimbursement of the expenses incurred by the company on laying line. That is not the case here. Here the assessee charges every customer a certain sum and alongwith its own funds instals the pipeline. Thirdly, it was not known in that case whether the capital asset created become the property of the consumer or the company. In this case, the pipeline is undoubtedly that of the assessee. Last though not the least in that case, as it has been pointedly remarked by their Lordship, the entire charges related to service line "that is not the distributing mains. In the instant case, as per note 14, the amount was contributed by the customers was utilized for mains as well as for service lines.
In short, the facts in this case are entirely different from the case cited. The judgment is, therefore, not applicable.
It was argued by the A.R. that the amount received from the customers are refundable if connection is not provided and a sum of Rs.129 was in fact refunded during the period on this account. The company becomes absolute owner of the amounts received from the consumers when the connection is provided. Thus, the amount received from the consumers to the extent it is not utilized during the period amounts to advance for supplying the connection. The company becomes absolutely owner of the amount to the extent it pertains to the consumers who are provided connection during the period. According to him, a sum of Rs.39.775 millions was utilized for this purpose. In view of this argument of the assessee out of the total sum of Rs.60.468 millions received from the consumers a sum of Rs.39.775 millions is treated as business receipt of revenue nature. As such, an addition of Rs.39.775 millions is trade to the disclosed profit."
3. The above issue was raised by the assessing officer in the earlier assessment years also by reopening of the assessments pertaining to the assessment years 1971-72 to 1980-81. The appeals pertaining to the assessment years 1971-72 to 1980-81 have been disposed of separately by us in favour of the appellant on the short ground that the, reopening of assessments was not justified being result of the change of opinion. However, the issue under consideration in the present appeals was discussed by the learned CIT(A) in his order dated 31-5-1986 while deciding appeals for the assessment years 1971-72 to 1980-81 and in subsequent years he has placed reliance on his order dated 31-5-1986. The relevant findings of the learned CIT(A) in the issue under consideration are, therefore, reproduced below from the order of learned CIT(A) dated 31-5-1986 relating to the assessment years 1971-72 to 1980-81 which reads as follows:
"Another grievance relating to the assessment year 1980-81 is directed against the I.T.O.'s action in treating as of revenue nature the consumers contribution amounting to Rs.1,38.81,680 which were received towards the cost of service lines and m4ins. The facts of the case are that the assessee received a sum of Rs.1,38,81,680 from consumers at the time of giving gas connections. The amount was not shown in receipts and instead was reduce from the cost of pipelines at the time of claim of depreciation'. This treatment was not considered in accordance with law and the assessing officer dealt that point in detail in the assessment order for the next year 1981-82. The assessee toop up the following position before the Income Tax Officer:--
'The nature of deferred credit has been explained in note 1.4 to the accounts for the year' ended June 30, 1980. Under clause 8(b) of Rule 8 of the Third Schedule to the Income Tax Ordinance, 1979 in computing the actual cost of an asset for purposes of, inter alia, claiming tax depreciation, the amount of any grant, subsidy, rebate or commission, and the value or any assistance received ? by an assessee from Government or any other authority or person ....shall be exercised. Consequently for claiming tax depreciation the contribution received by the company from the consumers towards the cost of supplying and laying service lines and mains has been adjusted in the cost incurred by the company. From the tax depreciation schedule filed with the return of income you will observe that a sum of Rs.13,881,680 presenting consumers contribution towards the cost of supplying and laying service lines and mains has been adjusted against the costs incurred by the company. This receipt cannot be treated as revenue receipt in view of the provisions of the Third Schedule mentioned above,
The assessing officer refuted the company's claim as under:---
"The argument of the assessee is misconceived. Firstly, the assessee has received these amounts from its consumers and these do not constitute loans which are returnable or adjustable in future. These receipts spring from the assessee's business with his customers and constitute income. Unless it is shown that these are exempt, these shall have to be included in the total income. Secondly, Third Schedule to the Income Tax Ordinance consists of rules for the computation of depreciation allowance. The provisions of this Schedule cannot grant exemption to any item of income by implication.
Rule 8(8)(b) relied upon by the assessee cannot be so interpreted as to grant exemption to this income. The object of this sub-rule is to determine the cost of an asset for the purpose of computation of depreciation allowance. It cannot be so interpreted to take an item of receipt from the ambit of section 11. Thirdly, rule 8(b) deals with a stage when an amount is expended on acquisition of a capital asset. But before one reaches that stage one has to determine how the amount is to be treated when it is received. Is it a loan or receipt? If it is a receipt, is a capital or a revenue receipt. If it is a revenue receipt, is it include-able in the total income or is exempt. One cannot jump over this stage and confine oneself to determining whether the assets acquired with this amount are eligible for depreciation or not. It may also be pointed out that it is an undisputed principle of law that the nature of income is determined subsequent disposal or utilization does not effect its nature. And last though not the least the assessee itself treats these receipts as revenue income though only partly so. The treatment adopted is that only 5 % of the amounts received are credited to the revenue account annually on the reasoning that the expected service life of the assets creates with these amounts in 20 years. The balance is treated as deferred credit. Now if the receipts are of capital nature, there is no justification for treating 5 % of these amounts as revenue income and if these are revenue receipts, there is no justification for treating 95 % of it a deferred credit. The assessee itself is aware that these amounts constitute revenue income. The treatment has been adopted to postponing the payment of tax.
Apart?? from the above discussion, the said Rule 8(8)(b) is not applicable to the case of the assessee. The said clause relates to any subsidy, rebate or commission and the value of any assistance. What the assessee has received from his customers does not constitute either grant, subsidy rebate commission or assistance. This receipt is essentially a fee charged by it from the customers for allowing them gas connection. The second condition is that the said grant. subsidy, rebate, commission or assistance must be received from the Government or any other authority or person. It is an accepted principle of the interpretation of statute (known as jusdem rule) that a general expression following specific expressions must fall in the same category. The term person occurs after the terms 'Government or other authority' and, therefore, must fall in the same category. The customers in any case buying gas from the assessee-company do not fall in this category. Thus, the provisions of Rule 8(8)(b) are not applicable to the case of assessee-?company. In view of the foregoing the entire amount received from customers as installation charges shall be included in the total income and W.D.V., will accordingly go up, as this amount was earlier excluded from the W.D.V.
The correct role of this clause is to preclude an assessee from claiming depreciation allowance on the:
(a) the expenditure the assessee does not actually incur (commission, rebate).
(b) the expenditure he does not incur himself (grant, subsidy, assistance).
There is no confusion in respect of commission or rebate. In such cases the actual cost to the assessee is which actually pays after deduction of commission or rebate from the invoice price.
As regards amount of any grant subsidy or assistance there could be two situation. Where receipt of such grant subsidy or assistance is taxable these receipts constitutes total income of assessee and legally the assets acquired with such subsidy grant or assistance constitutes assets acquired out of assessee?s own income and he is therefore entitled tp depreciation. But where such grant subsidy or assistance is not taxable in the hands of assessee, then allowing depreciation on capital assets acquired with such funds would not allow the assessee double benefit. On one hand, such receipts are not taxable and secondly depreciation is allowance on assets acquired with such receipts reduces the assesses other taxable income. It is to prevent this double benefit that this provision has been made'.
It is contended by the appellant's counsel that the payments made by the consumers constitute their contributions to the cost of service lines and mains etc. which are the fixed assets of the company and for purposes of income tax law constituted capital receipts in the hands of the company. It is added that the said contributions were neither appropriated to income nor did they constitute part of the share-holders enquiry in the company's accounts. It is further argued that the manner in which the assessee-company has treated the consumers' contributions in the accounts is not relevant in deciding whether the receipts were taxable as a revenue. It is pointed out that the contributions were received from the customers under the directions of the Ministry of Production and Natural Resources, Government of Pakistan vide their letter dated 13-2-1980 addressed to the Managing Director of the assessee-company as reproduced below:---
Sub. Sinking of cost of service lines by gas consumers-
Dear Sir,
I am directed to state that in view of the rising capital costs involved in providing gas connection to new consumers S.N.G.P.L., may charge perspectively Rs.600 (six hundred only) for each new domestic connection and Rs.1,000 (one thousand only) for each new commercial connection towards sharing the cost of service lines and to recover the actual cost of service line from industrial consumers.'
It is observed that instead of increasing the sale price of gas the assessee-company received contributions from the consumers and to that extent reduced the capital cost of the asset. At the same time the company treated 5 % of the contributions as revenue income and the balance 95 % as deferred credit. The assessee-company could achieve the same purpose by increasing the sale price of gas but that was perhaps not allowed by the Government and the method of obtaining contributions from the consumers was adopted. The point has been dealt with in detail by the assessing officer as noted above. In the circumstances of the case he was justified to hold that contributions received from the customers constituted revenue receipts in the hands of the assessee-company. As observed by the assessing officer, depreciation will be admissible on the total cost of the assets including the consumers' contributions. The objection raised is accordingly rejected."
4. Being dissatisfied with the findings of learned CIT(A) the appellant has preferred these second appeals before us.
5. We have heard Khalifa Salahuddin, Advocate and Sohail Hasan, F.C.A. for the appellant, and Mr. Muhammad Ilyas Khan, Advocate learned Legal Advisor for the Department and M/s. Qadirul Jalil and Amjad Ali, D.Rs. for the Department. The learned representatives for the parties have mainly reiterated their respective contentions raised before the two authorities below. The learned representatives for the Department have mainly dilated on the question of applicability of Rule 8(8)(b) of the Third Schedule to the Income Tax Ordinance, 1979. They have further focussed their arguments towards the accounting treatment by the appellant whereby 5 % of the amounts received during each year has been declared as revenue receipts whereas the balance amount has been shown as liability antler the head deferred credits. On the other hand, the main contention of Mr. Khalifa Salahuddin is that the accounting treatment should have no bearing in determining character of the receipts from the consumers for the purpose of income-tax. He has contended that if an assessee has given a wrong accounting treatment to a particular receipt, it cannot be' a yardstick for deciding the nature of receipt for the purpose of Income-tax law. According to Mr. Khalifa Salahuddin the real nature of the transaction and not the treatment given by an assessee of accounting treatment or method adopted is the guiding principle for the assessing officer. Mr. Khalifa Salahudlin has maintained that notwithstanding the method adopted by the appellant, the real nature of the transaction is that contribution received from the consumers is towards the recoupment of capital expenditure. It being in the nature of reimbursement of the expenses incurred which are capital in nature, the consumers contribution should be treated as capital receipts and not subject to the levy of income-tax. Both the learned representatives for the parties have agreed that the nature of receipt is to be determined at the time of receiving it and not on the basis of its subsequent consumption or expenditure.
5-A. We have carefully considered the contentions raised by the learned representatives for the parties before us and before the learned two officers below. We have given our anxious consideration to the reasons assigned by the learned two officers below, for treating the consumers' contribution as revenue income. We are of the considered opinion that the plea taken on behalf of the appellant in the context of Rule 8(8)(b) of the Third Schedule to the Income Tax Ordinance, 1979 was misplaced and all the discussion in this behalf by the learned two officers below is out of context and misdirected. Rule 8(8)(b) and for that matter entire Third Schedule contains rules for the computation of depreciation allowance and has no bearing for determining the nature of receipt. Rule 8(8)(b) and all other rules contained in Third Schedule become relevant after the determination of nature of receipt on account of consumers' contribution towards laying of service lines and mains and in the context of depreciation claimed by the assessee on such service lines and mains. A perusal of the rulings cited on behalf of the appellant from the Indian jurisdiction shows that in the similar circumstances the issues have been considered in their right perspective and the controversy hat been laid to rest. The first judgment in this behalf is in the case of CIT, v. Poona Electric Supply Co. Ltd. reported as (1946) 14 ITR 622. In these cases two references were made to the High Court of Bombay concerning the same item, i.e., contribution made by the Government to the assessee-company. The relevant facts in the cited case were that Poona Electric Supply CO. Ltd. undertook the work of supplying the electricity on the request of Government and for that purpose constructed new supply lines and the Government paid the cost of materials and labour charges plus 15 % for supervision of the complete work. The contention of the department was that the amount paid by the Government towards the construction of supply lines was the part of company's remuneration and, therefore, chargeable as the profit and income of the company. Justice Chagla of the Bombay High Court held as follows:
"It is clear that the company would not have constructed these new lines and given the supply of electricity to the Government unless they received Government contribution towards capital expenditure to be incurred by the company in laying down these new lines. This contribution is rot in the nature of recurring income or receipt. It is not as if the company is charging Government anything more for supplying electricity to them but what the company tells Government is: we are not in a position, and we do not propose, to incur capital expenditure to supply electricity to you unless you contribute towards the same. When Government agreed to make this contribution the company agreed to incur capital expenditure to supply electricity to Government. In our opinion, therefore, the first question raised must be answered in the negative. They are not trading receipts: they are capital receipts."
6. The first question referred to the High Court which was replied in negative was as follows:
"Whether on the facts found by the Tribunal the contribution amounting to Rs.36,310 received by the assessee company from Government during the accounting period are trading receipts and are as such assessable to tax in the hands of the company.
7. If this very judgment the second question on another reference application was answered in affirmative to the following questions.
"If the contributions are in the nature of capital receipts, do they form part of the actual cost to the assessee within the meaning of section 10(5) of the Income Tax Act."
8. As the second question is not under consideration before us in the present appeals, therefore, we do not propose to dilate on this aspect. It will be considered in some proper case as and when it comes for our consideration.
9. The second case from the Indian jurisdiction on the point under consideration is Monghyr Electric Supply Co. v. CIT reported as (1954) 26 ITR 15. Briefly stated the relevant facts in the case were that the assessee was a public limited company carrying on the business of supply of electricity in the town of Monghyr and Jamalpur. The mode of supply of electricity in the service area was that the company understood a network of distribution mains throughout service area. These distribution mains carry the electric current from the power house where the current was generated. As and when a prospective consumer asked the company for supply of electricity the company gave him an estimate of the expenditure which the consumer would have to pay to carry the current from the distribution main to the consumer's property. In the year under consideration the assessee company received .a total sum of Rs.8,674 as service connection charges from its consumers. During the said period the company spent a sum of Rs.7,504 leaving surplus of Rs.1,170 only. In its accounts the company treated service connection of receipts as revenue receipts and included the amount in its total revenue receipts. The sum of Rs.7,504 spent on service connections was however treated as capital expenditure and included under the head service connection in the balance sheet. Though the sum of Rs.8,674 was treated as a revenue receipt in the accounts of the company, the company had deducted this amount from the profit in arriving at the income. The company however, claimed depreciation on the service connection charges incurred in the year amounting to Rs.7,504 on the ground that these expenses were capital ill nature. The Tribunal found that the expenditure of Rs.7,504 was of a revenue nature as it did not bring into existence in asset or advantage of an enduring nature. Earlier the 1.T.0., did not accept the company's claim to the exclusion of sum of Rs.8,674 in computing the income from business of the assessee company. He, therefore, included this amount in the company's income from business for the relevant assessment year. He, however, treated the sum of Rs.7,504 as capital expenditure and allowed depreciation thereon. The assessee appealed to the Assistant Commissioner contending that the sum of Rs.8,674 was capital receipt and the A.A.C., accepted the plea by placing reliance on the decision of Bombay High Court in the case of CIT v. Poona Electric Supply Co. Limited (supra). The I.T.O. appealed to the Tribunal and the appeal was accepted wherein it was held that the amount of Rs.8,67.4 was a trading receipt. The Tribunal further directed that no depreciation should he allowed on the sum of Rs.7,504 and this entire amount was allowed as a revenue deduction. In the above circumstances the following two questions were referred to the Patna High Court:
"(1) Whether the sum of Rs.8,674 representing the total of the amounts received on account of service connection charges was liable to inclusion in the company's business income for the assessment year 1947-48.
If the answer to question (1) is in the affirmative,
(2) Whether sum of Rs.7,504 representing the expenditure incurred by the company in giving service connection in the year was deductable in arriving at the company's income from business for the year 1947-48."
9-A. The Honourable judges of Patna High Court after considering the facts and referring to some cases from the authorities from English jurisdiction observed that the question before them was not whether the amount of Rs.7,504 is a capital expenditure but whether the amount of Rs.8,674 contributed by the consumer should be treated as revenue receipt. It was held that the argument of the counsel for assessee that the amount paid by the consumer for meeting the cost of service connection was a capital receipt in the hands of the company was correct because the money paid towards the recoupment of the expenditure of capital asset must be treated as a capital receipt. It was further held that although the company in the books of accounts has treated the receipt from the consumers for installing service connection as revenue receipt but the company was bound to do so under the electricity rules but the mode of accounting is neither binding on the High Court nor upon the Income-tax Authorities. It was further observed, that in determining the question whether receipt is of a capital nature or of income nature we have got to look to the substance of the matter and we have to examine what is the true fact and character and the payment made by the consumers." It was ultimately held that the consumers contribution was made under the provision of statute for the purpose of installation of the service line and, therefore, the contribution made by the consumers had the character of a capital receipt for the amount has been paid in advance for installation of a capital asset. The learned Judges of the Patna High Court supported their view with the decision of Bombay High Court in Poona Electricity Supply Company's case (supra) and an English case, Seaham Harbour Dock Co. v. Crook. (1930-31) 16 Tax Cas. 333 and Boyce v. Withvick Colliery Co. Ltd. (1934) Tax Cas. 655. The learned Judges ultimately held that the amount of Rs.8,674 received by the assessee on account of service connection charges was a capital receipt and was not liable to inclusion in the assessees business income for the year 1947-48.
10. The third decision on which Mr. Khalifa Salahuddin has placed reliance is by the Supreme Court of India in the case of Hoshiarpur Electric Supply Co. Ltd., v. CIT (961) 41 ITR 608. The facts in this case were that the assessee, a licence of an electricity undertaking, 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 I.T.O., treated the entire amount of Rs.12,530 as trading receipt. In appeal to the A.A.C., the cost incurred for laying service lines and mains was excluded and the balance was treated as taxable income. On further appeal the Appellate Tribunal agreed with the A.A.C., 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. On reference the Punjab High Court held in the case reported as Hoshiarpur Electricity Co. v. CIT (1958) 33 ITR 686 that, " ....the company's receipts from the consumers for laying the 'service lines are trading receipts and the profit element therein being the difference between the service connection receipts and the service connection costs is taxable income in the hands of the company".
11. In the above case also the assessee-company had credited service connection receipts to the revenue account and debited the corresponding cost of laying service lines to the capital account. The Honourable Supreme Court held that the classification of the receipts in the form of accounts is not of any importance in considering whether the receipt is taxable as revenue. It was contended on behalf of assessee before the Honourable Supreme Court that the amount paid by the consumers for new connection is capital receipt and not liable to tax, because the amount is paid by the consumers towards expenditure to be incurred by the assessee in laying new service lines--an asset of a lasting character. It was further contended that the amount contributed by the consumers was direct recoupment of the expenditure for bringing into existence an asset of a lasting character enabling the assessee to conduct its business of supply electricity 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 appendage of the mains of the assessee, and by the provisions of the Electricity Act, the assessee is obliged to keep it in proper repairs for ensuring efficient supply of the energy. The contention on behalf of the assessee was accepted by the Honourable judges of the Supreme Court of India and it was held that the contribution made by the customers for installation of service lines was essentially reimbursement of capital expenditure. The ratio in the Division Bench of Bombay High Court in the case of CIT v. Poona Electric Supply Co. Ltd. and Punjab High Court in the case of Monghyr Electric Supply Co. Ltd., v. CIT was approved. Finally it was held by the Supreme Court of India as follows:
"The receipts though related to the business of the assessee as distributors of 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. Contributions were not made 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."
12. As already observed by us earlier, the point in issue in the similar circumstances has' been considered in its right perspective in various judgments by the superior Courts in the Indian jurisdiction and the ratio on above judgments cited elaborately by us clinches the issue in the appeals under consideration. The facts and circumstances leading to the receiving of consumers contribution by the appellant company have been discussed in detail by the learned two officers below and reproduced in the earlier part of this order and we need not to repeat the same. It is admitted fact that the appellant company received the consumers contribution towards sharing the cost of service lines and thus it was meant for reducing the capital cost incurred on the laying of service lines. There can be no cavil to the proposition that the assets so created were in the nature of capital assets and the contribution of receipts from the customers was in the nature of direct recoupment of reimbursement of the capital expenditure. In these circumstances we have no hesitation in holding that the consumers' contribution received by the appellant constituted capital receipts in the hands of the company and it did not form the trading receipt or revenue income liable to be subjected to the levy of income tax. We follow with respect of judgments of Bombay High Court, Patna High Court and the Supreme Court of. India cited above and hold that the learned two officers below were not justified in holding that the consumers' contribution in all the assessment years under appeal were trading receipts. The learned two officers below thus misdirected in adding the consumers' contribution to the total income of appellant for the purpose of levying the income-tax by treating the same as business receipts of revenue nature. The additions on this account in all the assessment years under appeal stand deleted. Necessary corrections may be made in the assessment in this respect.
13. All the appeals at the instance of assessee/appellant are allowed as above.
M.B.A. /350/(Trib.) ???? ??????????????????????????????????????????????????????????????????????? Appeals allowed.
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