LexGODHRA ELECTRICITY CO. LTD., AHMEDABAD versus COMMISSIONER OF INCOME TAX, GUJARAT-II, AHMEDABAD
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-~ \ GODHRA ELECTRICITY CO. LTD., AHMEDABAD v. COMMISSIONER OF INCOME TAX, GUJARAT-II, AHMED ABAD APRIL 3, 1997 (S.C. AGRAWAL AND G.B. PATTANAIK, JJ.] Income tax Act, 1961: A B Income Ta~Ays 1969-70 to 1972-73-Accmal of income-Mercantile C System of Accounting-Assessee, a licensee under the Electricity Act, generated and supplied electricity-Cliarges for supply were enhanced but due to pendency of litigation in various courts against increase in charges, assessee unable to recover the same-Litigation ultimately ended inf avour of assessee but immediately thereafter State Govemment suggested to the assessee to D maintain status quo for the rates for six months-Be/ ore the expiry of the said six months, consumers again challenged the right of the assessee to recover the enhanced charges-Recovery was stayed and the consumers suit decreed-During the pendency of the said consumers' suit the assessee-com- pany was taken over by State Govemment under Defence of India Rules and subsequently tran:.je"ed to State Electricity Board-Held:Accmal must be real E income and not hypothetical income-Jn such circumstances, even though assessee followed the mercantile :.ystem of accounting and had made ent1ies in the books regarding enhanced charges, no real income had accmed to it and the enllies represented only hypothetical income-Hence, not includible in the total income of the assessee-Electlicity Act, 1910-Electricity (Supply) Act, 1948-Defence of India Rules, 1971. Income Tax-Mercantile System of Accounting-Accrual of income-Real or hypothetical-Test to dete1~ mine-Held: Probability or improbability of realisation had to be considered in a realistic manne~In the circumstances of the case, there was no accmal of real income. The appellant-assessee was a licensee under the Electricity Act, 1910 generating and supplying electricity. The assessee enhanced the charges F G for supply of electricity but due to pendency of litigation in various courts against the increase in charges, it was unable to recover the same. The litigation ultimately ended in favour of the assessee but immediately H 539 540 SUPREME COURT REPORTS [1997] 3 S.C.R. A thereafter the Under Secretary to the State Government made a suggestion the assessee to maintain status quo for the rates for six months. Before the expiry of the said period of six months, the consumers again challenged the right of the assessee to recover the enhanced changes. The recovery was stayed and ultimately the consumer's suit decreed. During the penden- B cy of the said suit, the assessee-company was taken over by the State Government under the Defence of India Rules, 1971 and subsequently transferred to the State Electricity Board. The assessee was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers. C For the assessment years 1969-70 to 1972-73 the Income Tax Oflicer (ITO) included the enhanced charges, though not recovered from the consumers, in the taxable income of the assessee. The said addition made by the ITO was, however, deleted by the Appellate Assistant Commissioner. The Income Tax Appellate Tribunal held that the enhanced charges rep- resented only hypothetical income and did not represent the income, which D had really accrued to the assessee during the relevant previous years, and hence the enhanced ~h'lrges were not liable to be included in the taxable income of the assessee. The High Court allowed the appeal filed by the Revenue. Hence this appeal. E Allowing the appeal, this Court HELD : 1.1. Under the Income Tax Act, 1961 income charged to tax is the income that is received or is deemed to be received in India in the previous year relevant to the year fur which assessment is made or on the income that accrue or arises or is deemed to accrue or arise in India during F such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual outgo- ing or disbursements or it may be the mercantile system where entries are made on accrual basis, i.e., accrual of the right to receive payment and the G accrual of the liability to disburse or pay. This principle is applicable irrespective of the fact whether the accounts are maintained on cash system or under the merc.antile
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