1. These three references under s. 256(1) of the I.T. Act, 1961, raise a common question for determination in the backdrop of the following facts.
2. The Government of Bombay granted a licence under the Indian Electricity Act, 1910, to a concern known a Lady Sulochna Chinubhai & Company on November 19, 1922, authorizing it to generate and supply electricity to the consumers in Godhra. The assessee is the successor of the said licensee. After the Electricity (Supply) Act, 1948, came into force, a rating committee was constituted under s. 57(2) thereof at the request of the assessee on January 19, 1950. On the recommendation of the said committee certain charges were fixed with effect from February 1, 1952. Thereafter the Electricity (Supply) Act was amended sometime in 1956. The assessee unilaterally increased the charges for motive power with effect from January 1, 1963, to 35np. per unit with a minimum of Rs. 7 per month for every installation. A few months thereafter, that is, on June 22, 1963, the assessee increased in the rates of motive power as well as for light and fans led to the institution of two Suits Nos. 152/63 and 50/64, in the Court of Civil judge (Senior Division) at Godhra. By the said two suits the consumers challenged the right of the assessee to unilaterally increase the charges for motive power and the rates for lights and fans as stated earlier. Those two representative suits were decided by the trial court in favour of the respective consumers. Against the said decision the assessee filed two separate appeals which were ultimately dismissed by the learned assistant judge, Panchamahals at Godhra. The assessees, therefore, filed two separate second appeals in this court which too were dismissed by a learned assistant single judge of this court on April 11, 1966, vide: Godhra Elec. Co. Ltd. v. Somlal  8 GLR 686. The assessee feeling aggrieved by the decision in the aforesaid two second appeals rendered by the learned single judge, preferred Letters Patent Appeal Nos. 42 and 43 of 1966 which were disposed of by a Division Bench of this court on December 3, 1968. The Division Bench of this court in the aforesaid two Letters Patent Appeals reversed the decrees passed in favour of the respective consumers and dismissed both the suits holding that under the Electricity (Supply) Act, as amended in 1956, the assessee was entitled to enhance the charge unilaterally subject to the conditions prescribed in the Sixth Schedule to the said Act. The respective consumers feeling aggrieved by the decision of the Division Bench of this court in the aforesaid two Letters Patent Appeals carried the matter to the Supreme Court. The Supreme Court its judgment dated February 26, 1969, affirmed the view expressed by the Division Bench of this court and consequently, dismissed both the appeals preferred by the respective consumers, vide: Jindas Oil Mills v. Godhra Electricity Co., : 3SCR836 . The question which the Supreme Court was required to answer in the said two appeals was whether under the provisions of the Electricity (Supply) Act, as amended in 1956, the assessee was competent to unilaterally enhance the charges. The Supreme Court, after considering ss. 57 and 57A along with the Sixth Schedule to the said Act, came to the conclusion that the assessee was entitled in law to unilaterally enhance the charges as it had admittedly followed the procedure prescribed by law. After this decision of the Supreme Court upholding the right of the assessee to unilaterally enhance the charges or rates for motive power as well as for lights and fans, it is obvious that there was no impediment in the assessee recovering consumption charges from its consumers at the enhanced rate since the interim injunction no more held the field.
3. It, however, appears that soon after the Supreme Court rendered the aforesaid decision on February 26, 1969, some of the citizens of Godhra met the Minister of Industries, Mines and Power, Govt. of Gujarat, with a view to persuading him to intervene and restrain the assessee from recovering the consumption charges at the enhanced rates. In pursuance of this meeting it appears that the Under Secretary to the Govt. of Gujarat in the Industries, Mines and Power Dept. addressed a letter dated March 19, 1969, to the assessee suggesting that it may maintain the status quo for at least six months and in the meantime continue to supply electricity for the street lights as per the agreement. On receipt of this letter of request from the Government, it is the case of the assessee that it did not bring the increase to the profit and loss account for that year.
4. Certain developments which took place subsequently and which are not brought out in the order of the income-tax Appellate Tribunal were mentioned to us in the course of hearing of these references. We may briefly set out those facts in respect of which there is no controversy.
5. It appear that the Gujarat Electricity Board, in exercise of the power conferred upon it by s. 6(1) of the Indian Electricity Act, 1910, read with clause (2) of the terms of the licence, sought to exercise its option to purchase the electrical undertaking of the assessee by a notice dated November 8, 1971. Thereupon the assessee filed Special Civil Application No. 1752 of 1972 challenging the validity of the said notice. During the pendency of that writ petition the Govt. of Gujarat issued an order under r. 115(2) of the Defence of India Rules, 1971, taking over the management of the undertaking with effect from November 19, 1972. The Collector of Godhra was authorized by the said notification to take over the management of the undertaking and accordingly the management was taken over. The writ petition was ultimately dismissed by this court by its judgment dated October 16 or 17, 1973, but as substantial questions of law arose, a certificate was granted under are. 133(1) of the Constitution. In the appeal that was preferred, a stay was granted and the Collector was directed to hand over the undertaking to the Gujarat Electricity Board. Thereupon on December 20, 1973, the Govt. of Gujarat instructed the Collector of Godhra to handover the management of the undertaking to the Board which was done on the next day in pursuance of the order of the Supreme Court. Thereafter, the notification issued under r. 115(2) of the Defence of India Rules was cancelled on May 4, 1974. In the meantime some of the consumers filed a representative Suit No. 118 of 1969 in the Court of the Civil Judge (Junior Division), Godhra, against the assessee challenging the right of the assessee to recover consumption charges at the enhanced rates. It appears that in the said suit a written statement contesting the suit was filed on behalf of the assessee but when it came up for hearing no oral evidence was led to controvert the evidence adduced on behalf of the consumers. We were told that this was done because at the relevant point of time the Collector of Godhra was in the management of the undertaking and he did not give any instructions to the lawyer appearing on behalf of the assessee with the result that the said lawyer reported no instruction. Be that as it may, the fact remains that the learned civil judge by his order dated June 23, 1974, allowed the suit of the consumers with costs and granted a declaration to the effect that the assessee shall not recover the charges exceeding 31 ps. per unit for lights and fans and 20 ps. per unit for motive power. The interim injunction which was granted against disconnection or discontinuance of the supply was made absolute on the same terms on which it was initially granted. Although it is not stated in the statement of case prepared by the Appellate Tribunal at the instance of the Revenue whether an appeal was filed against the said decision of the trial court, we were informed by the learned Advocate-General appearing on behalf of the assessee that an appeal was, in fact, filed but he was not able to produce the order, if any, passed in appeal. He, however, placed before us a subsequent order passed in the suit which goes to show that the plaintiffs by their application dated July 27, 1979, sought permission of the court to withdraw the suit with liberty to file a fresh suit on the same cause of action, if and when necessary. The learned trial judge by his order of even date permitted the plaintiffs to withdraw the suit and reserved upto them the liberty sought. That is how the subsequent Suit No. 118 of 1969 terminated.
6. It is clear from the statement of facts prepared by the Appellate Tribunal, and it was not disputed before us, that up to the assessment year 1963-64, the assessee was assessed on the basis of the accounts maintained according to the mercantile system. In other words, the assessee maintained accounts according to the mercantile system prior to the enhancement of the rates in 1963. For the subsequent assessment years, that is, from 1964-65 to 1067-68, the assessee deducted the amount in respect of the enhanced charges on the ground that the said amounts were not actually recovered by it from the consumers as the consumers had filed a suit and obtained an interim relief in that behalf against the assessee. The particulars of the dedications made in the aforesaid four assessment years may be set out as under:
-----------------------------------------------------------------Assessment Year Amount-----------------------------------------------------------------Rs.1964-65 2,59,7771965-66 3,16,9531966-67 3,89,7611967-68 1,21,337
7. Thus, the total figure of the disputed amounts works out to Rs. 10,87,828. The assessee-company had shown the aforesaid disputed amount on the liabilities side in its balance-sheet under the head 'Disputed increase in rates charged to customers (consumers), carried forward pending settlement of disputes in the District Court'. In the assessment year 1968-69, there was an adjustment of the claim amounting to Rs. 3,54,152 due to a settlement of a dispute with the Railway authorities. The disputed balance thus stood reduced to Rs. 7,33,676 and the Revenue claims tax on this amount in the assessment year 1969-70, corresponding to the accounting year 1968-69, in view of the undertaking given by the assessee to the effect that the amount would be offered for taxation if the judgment was in favour of the assessee. After the Letters Patent Appeals were disposed of by a Division Bench of this court, the right of the assessee to unilaterally increase the charges/rates came to be judicially affirmed. The litigation in that behalf finally terminated with the decision of the Supreme Court rendered on February 26, 1969. It is, therefore, the case of the Revenue that it is entitled to tax the assessee on the basis that the income of Rs. 7,33,676 accrued in the assessment year 1979-70, that is, immediately after the Department learnt about the decision of the Supreme Court in the aforesaid litigation. Reference No. 288 of 1975 pertains to this assessment year 1969-70. On the same basis the Department sought to recover tax on the amount of Rs. 2,63,456 having accrued to the assessee in the assessment year 1970-71, and a further amount of Rs. 2,98,077 in the assessment year 1971-72. Reference No. 73 of 1978 pertains to the said two assessment years. Similarly, the Department sought to recover tax from the assessee on the basis that a sum of Rs. 3,17,741 accrued to the assessee in the assessment year 1972-73, corresponding to the accounting year 1971-72. Reference No. 171 of 1978 pertains to the claim made by the Department in respect of the said assessment year.
8. As stated earlier, it is an admitted fact that up to the assessment year 1963-64, the assessments of the assessee were finalised on the basis of income declared by it on mercantile system of accounting. Under s. 5 of the I.T. Act, 1961, all assessees are chargeable in respect of income accruing, arising or received or deemed to accrue, arise or to be received in India. Section 145(1) next provides that income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee. On a conjoint reading of these two provisions it is clear that the two main systems of accounting, namely, the cash system and the mercantile system appear to be based on, (i) actual receipts and actual payment and the accrual of the liability to disburse of pay. The choice of the method of accounting is left to the assessee and ordinarily the Revenue is bound by the assessee's choice provided that the accounts are regularly maintained in accordance with that system. If the assessee follows the mercantile system, as in the present case, the income becomes liable to be taxed on the date of accrual regardless of the date of actual receipt of the amount in question. If, on the other hand, the assessee follows the cash system, the income becomes liable to tax in the accounting year in which it is actually received. This difference in the two methods of accounting is to well known to need an elaborate discussion.
9. In the instant case it is common ground that the assessee followed the mercantile system of accounting till the assessment year 1963-64. The Revenue had assessed the assessee on that basis throughout in the past. Even under this system in order to visit the assessee with the obligation to pay tax, the profit must become actually due no matter when it is received. The income cannot be said to have accrued to an assessee if it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date. In other words, in the mercantile system of accounting it is the real income as distinguished from a hypothetical income which can be brought to tax. The sum entered in the account books of the assessee which is not backed by any legal or contractual right to receive cannot be made subject to assessment of tax. That is why the Bombay High Court in the case of CIT v. Shoorji Vallabhdas & Co. : 36ITR25(Bom) pointed out that the question whether the income accrued or not is not a mere matter of cogency of the entries made in the account books of the assessee but is essentially one of substance and of the real nature of what happened; a mere book entry is not conclusive of the question whether the assessee had become entitled to the sums or not. This view of the Bombay High Court was affirmed by the Supreme Court in CIT v. Shoorji Vallabhdas & Co. : 46ITR144(SC) . It is, therefore, obvious that regardless of the manner in which the assessee posted entries in its account books in respect of the disputed income alleged to have accrued to it in the respective assessment years, the assessee would be liable to pay income-tax on the said amount if they actually accrued to it during the relevant periods.
10. We have noticed from the facts narrated earlier that the assessee enhanced the rates some time in the year 1963. Soon thereafter some of the consumers filed a suit against the assessee challenging the unilateral increase in the charges of the rates made by the assessee. The said litigation culminated in the judgment of the Supreme Court pronounced on February 26, 1969. By the said judgment the Supreme Court upheld the assessee's right to unilaterally enhance the charges/rates in view of the amended provisions of the Electricity (Supply) Act. Now, s. 57 of the Supply Act, after its amendment in 1956, provides that the provisions of the Sixth Schedule shall be deemed to be incorporated in the licence of every licensee not being a local authority. It makes it obligatory on the licensee to comply with the provisions of the said Schedule and other provisions of the Electricity Act, 1910, besides the terms and conditions of the licence which are not inconsistent with the provisions of the said Act as well as the Schedule thereto. Section 57A(1) next provides that where the provisions of the Sixth Schedule are, under s. 57, deemed to be incorporated in the licence of any licensee, namely, (a) Board, or (b) where no Board is constituted under the Act, the State Govt:
(i) may, if satisfied that the licensee has failed to comply with any of the provisions of the Sixth Schedule; and
(ii) shall, when so requested by the licensee in writing constitute a rating committee to examine the licensee's charges for the supply of electricity and to make recommendations in that behalf to the State Government.
11. It becomes immediately clear on a plain reading of this provision that if the State Govt. is satisfied that the licensee has failed to comply with the provisions of the Sixth Schedule, it may constitute a rating committee to examine the license's charges for the supply of electricity and to make recommendations in that behalf to the State Govt. In the instant case sub-clause (ii) is not attracted because it is common ground that the licensee had not requested the State Govt. to constitute a rating committee. Clause (b) of the said section provides that where a rating committee constitute under sub-clause (i) of clause (a) it shall be constituted not later than three months after the expiry of the notice referred to in the first proviso to that clause which proviso stipulate that the licensee has been given a notice, in writing, of thirty clear days to show cause against the action proposed to be taken, Sub-clause (c) of the said provision next provides that the rating committee shall, after giving the licensee a reasonable opportunity of being heard and after taking into consideration the efficiency of operation and management and the potentialities of his undertaking, report to the State Govt. within three months from the date of its constitution on receipt of the report of the rating committee. Sub-clause (d) requires that the State Govt. shall cause the report to be published in the Official Gazette, and may at the same time make an order in accordance therewith fixing the licensee's charge for the supply of electricity with effect from such date, not earlier than two months or later than three months after the date of publication of the report as may be specified in the order. On the completion of the said formality it is enjoined upon the licensee to give effect to the said order. Sub-clause (c) next provides that the charges for the supply of electricity fixed under clause (d) shall be in operation for such period not exceeding three years as the State Govt. may specify in the order. Paragraph I of the Sixth Schedule which begins with the non obstacle clause lays 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. The first proviso lays down that such charges shall not be enhanced more than once in any year of account and the second proviso stipulates that the licensee shall not be deemed to have failed so to adjust his charges, if the clear profit, in any year of account, has not exceeded the amount of reasonable return by twenty per cent. of the amount of reasonable return. The subsequent proviso says that if the charges subsequently fixed by the rating committee are lower than those notified by the licensee, the licensee shall refund to the consumers the excess amount recovered by him from them. Paragraph II(1) next provides 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 be distributed in the form of a proportional rebate on the amounts collected form the sale of electricity and meter rental or carried forward in the accounts of the licensee for distribution to the consumers in future, in such manner as the State Govt. may direct.
12. On an examination of these provisions it is obvious that if the State Govt. is of the opinion that the licensee has failed to comply with any of the provisions of the Sixth Schedule, it can appoint a rating committee, but not otherwise. Of course, if the licensee requests, it is imperative on the State Govt. to constitute such a committee. In the instant case it is an admitted fact that at no point of time did the licensee make such a request to the State Govt. The State Govt. on its part did not choose to appoint a rating committee in exercise of the power conferred upon it by sub-clause (i) of clause (a) of sub-s. (1) of s. 57A of the Supply Act. That being so, since the licensee was in law entitled to unilaterally increase the rates as held by the Division Bench of this court in the Letter Patent Appeals and later affirmed by the Supreme Court, it is obvious that the enhanced rates had come into operation and the licensee had a legal right to recover charges accordingly. Since the State Govt. had not chosen to appoint a rating committee, presumably because there was no material with it to be satisfied that the licensee had failed to comply with the provisions of the Sixth Schedule, it was not necessary for the licensee to await the report of the rating committee. Even under the scheme of s. 57A of the Supply Act read with the Sixth Schedule, it is clear that if the licensee enhances the rates unilaterally it is entitled to recover on the basis of the enhanced rates but if the rates fixed by the rating committee at a later date are lower than those notified by the licensee, the licensee is under an obligation to refund the excess amount to the consumers in the manner set out in para. II(1) of the Sixth Schedule, namely, to retain one-third of such excess not exceeding five per cent of the amount of reasonable return and distribute one-half of the balance only to the consumers in the form of a proportionate rebate on the amounts collected from the sale of electricity and meter rentals or carry forward the same in the account of the licensee for distribution to the consumers at a future date in such manner a may be directed by the State Govt. Therefore, from the scheme of s. 57A(1) of the Supply Act read with the Sixth Schedule appended thereto, it becomes crystal clear that as interpreted by the supreme Court the licensee has a unilateral right to enhance the rates and recover charged at the enhanced rates from the consumer even the appointment of a rating committee after the licensee has notified its decision to enhance the rates does not prevent the licensee from recovering consumption charges at the enhanced rates form the consumers but it is obliged to refund the excess amount in the manner set out in para II(1) of the Sixth Schedule. When the question of refund arises for consideration, it must be shown that the charges recovered by the licensee exceeded 20 per cent. of the reasonable return and it is only then that para II(1) of the Sixth Schedule comes into operation. In that case also one-third of the excess, albeit not exceeding five per cent. of the amount of reasonable return, shall remain at the disposal of the undertaking and of the balance one-half will be refunded as provided in para II(1) of the Sixth Schedule. We are, therefore, not impressed by the submission made by the learned Advocate-General on behalf of the assessee that the assessee was in law not entitled to recover at the enhanced rates from the consumers in view of the various restrictions placed by s. 57A(1) read with the Sixth Schedule of the supply Act. In fact, in law the licensee had an unfettered right to unilaterally increase the charges/rates and recover consumption charges from the consumers at the enhanced rates. Even appointment of a rating committee by the State Govt. did not prevent the licensee from recovering consumption charges at the enhanced rates but if the consumption charges recovered exceeded twenty per cent. of the reasonable returns, the licensee was in law obliged to refund the excess amount in the manner set out in para. II(1) of the Sixth Schedule. Therefore, the right of the licensee to recover at the enhanced rates was not in any manner qualified by the provisions of s. 57A(1) and the Sixth Schedule to the Supply Act. That being so, we must conclude that the licensee had a legal right to recover consumption charges at the enhanced rates from the consumers and since in the instant case the Government had not appointed any rating committee there was no apprehension that it would have to refund excess charges if the rates fixed by the rating committee were lower than those notified by the licensee. That is why the Supreme Court in para. 10 of its judgment, reported in AIR 1969 SC 1225, 1233 (Jindas Oil Mills' case), observed as under:
'If the terms of the licence, including the deemed terms permit him to unilaterally alter the charges then he has that right. If we merely look at those terms, as we think we ought to, then there is no dispute that the respondent was within its rights in enhancing the charges as admittedly it had followed the procedure prescribed by law.
13. It is, therefore, obvious that the licensee had a right to unilaterally enhance the consumption charges/rates and recover the same from the consumers at the enhanced rate.
14. Our attention was also invited to certain other decisions bearing on the question of interpretation of s. 57, s. 57A and the Sixth Schedule of the Supply Act. We do not consider it necessary to refer to them as they do not take a view contrary to the view indicated by us but it would suffice to mention those cases. They are Amalgamated Electricity Co. Ltd. v. N. S.Bathena, : AIR1959SC711 Amalgamated Electricity Co. Ltd. v. N. S. Bathena, : 7SCR503 Jhalawar Electric Power Supply Co. Ltd. v. Wadhwan City Municipality, AIR 1969 Guj 40 and Subhash Oil Industries v. State of U.P., : AIR1975All19 .
15. The learned Advocate-General next submitted that merely because the assessee had issued bills according to the enhanced rates, it cannot be said that income had accrued to the assessee since in fact even after the decision of the Supreme Court on February 26, 1969, the State Govt. had given a direction to the company to maintain the status quo and some of the consumers had filed a representative suit challenging the assessee's right to recover the consumption charges at the enhanced rate in the court of the learned Civil Judge (Junior Division), Godhra. It is indeed true that after the Supreme Court pronounced in favour of the assessee on February 26, 1969, the state Govt. wrote a letter to the assessee dated March 19, 1969, which has been referred to in the order of the Appellate Tribunal. A copy of the letter written to the assessee by the Government has not been produced on the record of the case and it could not be made available to this court in the course of the hearing of these references. However, in the order of the Appellate Tribunal there is a reference to this letter of March 19, 1969, whereby it was suggested to the assessee that it should maintain the status quo for at least six months. We do not know if this letter was a directive to the assessee under any provision of law but in any case it was in the form of a suggestion which, if accepted, enured for a period of six months only. Therefore, the contention of the learned Advocate-General that the income could not be said to have accrued to the assessee in view of this letter received by the assessee within a few days after the Supreme Court dismissed the appeals filed by the consumers, does not appeal to us. In any case the request made by the State Govt. was to maintain the status quo for a period of six months only. That letter did not take away the right of the assessee to recover the consumption charges at the enhanced rates from its consumers. It is, however, true that some of the consumers filed a representative suit in 1969, being Suit No. 118 of 1969, in the court of the learned Civil Judge (Junior Division), at Godhra. In that and interim order was obtained whereby the assessee was precluded from recovering the enhanced charges from the customers. In the said suit the assessee filed a contesting written statement but when the suit came up for hearing, the assessee's advocate reported no instructions and the suit was decreed ex parte. An appeal was preferred and it appears from the subsequent order in the suit that the suit was ultimately withdrawn (see cyclostyled copy of order dated July 27, 1979). It may be mentioned that the said suit concerned the recovery of enhanced charges for the period subsequent to March 31, 1969, and not prior thereto. In the background of these facts, the learned Advocate-General submitted that since the assessee had given an undertaking in respect of the claim pertaining to the assessment year 1964-65, that amount would be brought to tax if the assessee succeeds in the litigation, the Revenue must be taken to have accepted the shift to the hybrid method which was followed in the subsequent years also. It is true that an aggregate amount of Rs. 10,87,928 was deducted towards enhanced charges not realised during the assessment years 1964-65 to 1967-68, as per the split up given in para. 6 above. A sum of Rs. 3,54,152 was realised for the railway administration in the assessment year 1968-69, thus leaving a balance of Rs. 7,33,676 only. After the decision of the Supreme Court on February 26, 1969, the Revenue sought to bring the aforesaid amount to tax in assessment year 1969-70, on the basis of the undertaking given by the assessee. The assessee had agreed to the amount being brought to tax if its action of unilateral increase was upheld by the Supreme Court. There is nothing on record to show that the Revenue had agreed to a shift to the cash or hybrid system in so far as the said claim is concerned. On the contrary, the undertaking suggests that the assessee undertook to offer the amount for tax as soon as the Supreme Court upheld its legal right to unilaterally increase the rates without waiting for the actual realisation of the dues. That would at best mean a postponement of the date of accrual to the date the Supreme Court upheld the assessee's right to enhance the rates but it is too much to read in the undertaking even an implied agreement on the part of the Revenue to a shift to the hybrid system. The subsequent suggestion of the State Govt. in 1969 cannot alter the situation. The system of accounting, therefore, remind the same. This becomes manifest from the fact that a sum of Rs. 19,404 was transferred to the profit account, as it clear from the annual report of 1968-69, without actual receipt. We are, therefore, not impressed by the submission made by the learned Advocate-General on behalf of the assessee that in view of the peculiar facts and circumstances of this case, we should infer that a hybrid system, partly mercantile and party cash, was adopted by the assessee in concurrence with the Revenue. We think that the system of accounting continued to be the same, namely, the mercantile system.
16. That brings us to the last submission made by the learned Advocate-General on behalf of the assessee, namely, had a legal right to enhance the consumption charges/rates unilaterally and had the right to recover such enhanced charges/rates from the consumers, in view of the facts and circumstances of this case, we should hold that no real income had accrued to the assessee and, therefore, the Revenue could not tax the assessee as it proposed to do in respect of income alleged to have accrued during the assessment years 1969-70 to 1972-73. He pointed out that even under the mercantile system of accounting, the income must become legally recoverable no matter when it is actually received. In other words, what can be brought to tax is the real income as distinguished from a hypothetical income. That is why it is often repeated that a mere entry in an account book is no evidence of income having accrued to the assessee. In the case of H. M. Kashiparekh & Co. Ltd. v. CIT : 39ITR706(Bom) the Division Bench of the Bombay High Court held that it is the real income of the assessee that is liable to tax because income-tax is a tax on income.
17. The Supreme Court in CIT v.Shoorji Vallabhdas & Co. : 46ITR144(SC) observed that though the I.T. Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income; if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. In both these cases it is pertinent to note that income had accrued to the assessee but the assessee had given it up. It was in that context of the assessee and a mere entry in the assessee's books of account could not be treated as income liable to tax (sic).
18. Reference may now be made to another decision of the Supreme Court in Poona Electric Supply Co. Ltd. v. CIT : 57ITR521(SC) . In that case the assessee-company had set apart a sum of Rs. 42,148 and Rs. 77,138 in the assessment years 1953-54 and 1954-55, respectively, under the head 'Consumers' benefit reserve account' and claimed deduction of these sums in computing it s profits liable to income-tax. The amounts thus credited by the assessee during the aforesaid assessment years was a part of the excess amount paid to it by the consumers which the assessee was in law liable to return to the consumer. It was in that set of circumstances that the Supreme Court came to the conclusion that since the amount represented the excess which the assessee was statutorily bound to refund to the consumers it could not be made the subject-matter of tax.
19. In CIT v. Nadiad Electric Supply Co. Ltd. : 80ITR650(Bom) the assessee supplied electricity to the Municipality for street lighting and other purposes at the rate fixed in the agreement at 19 paise per unit. That agreement was for a period of ten years and it expired on August 31, 1960. The normal rate charged by the assessee to its other consumers was 30 paise per unit. After the expiry of the agreement, the assessee started billing the Municipality at the rate of 30 paise per unit. The Municipality, however, disputed the assessee's right to charge at that rate and paid amount of the bills calculated at the rate of only 19 paise per unit. The Municipality then filed a suit which was carried to the High Court. It was finally held by the High Court that the assessee was bound to continue to supply electricity to the Municipality on the same terms and conditions as those contained in the agreements, that is, at the fixed rate of 19 paise per unit. The assessee-company maintained its account books according to the mercantile system. It had debited the amount to the Municipality after the expiry of the agreement so far as the difference of 11 paise per unit is concerned in its account books which at the end of the accounting year, that is, on March 31, 1961, amounted to Rs. 35,251.02. This amount was shown by the assessee in its balance-sheet as an asset under the head 'Sundry creditors considered doubtful'. The Revenue sought to bring this amount to tax. In view of the fact that the High Court had in the civil suit instituted by the Municipality came to the conclusion that the assessee was liable to supply electricity to the Municipality at the agreed rate of 19 paise per unit even after the expiration of the 10 year period, it could not be aid that any income had accrued to the assessee and, therefore, the court rightly held that the Revenue was not entitled to bring the amount of the difference calculated at 11 paise per unit to tax. The court held that (p. 652):
'An amount can accrue or arise to an assessee when the assessee acquires a legal right to recover that amount, that is, conversely, that amount becomes legally due to the assessee by the assessee's debtor.'
20. It was observed that :
'There would be a legal enforceable claim or obligation only if there was an agreement, express or implied, in that behalf or there was some statutory or similar right or obligation.'
21. Nothing was found in the statement of the case in any of the documents annexed thereto forming part of it to show that the assessee had a legal right to claim from the Municipality payment at the rate of 30 paise per unit. In the present case we have already pointed out earlier that the assessee had a legal right to claim consumption charges at the enhanced rates, whereas in the case cited, it was held by the High Court on an interpretation of the agreement that the assessee was bound to continue to supply electrical energy to the Municipality at the same rates as were specified in the aid agreement. Therefore, this decision can be distinguished on facts.
22. Reference was made by the learned Advocate-General to a decision of this court in CIT v. Western India Engineering Co. : 81ITR712(Guj) . That was a case in which the assessee, a building contractor, submitted bills for extra work at rates pitched a little high in view of the past experience to allow for deduction at the time of settlement of the bills. The assessee credited the mounts of the bills in his works account and subsequently transferred to his profit and loss account only such amounts a he expected to receive and retained the difference in the works account a kasar. If the assessee subsequently got any amount from its customers in excess of the amounts estimated by it, such excess was treated by it as profit in the year of its receipt. Similarly, whenever the actual amount of the bill which was settled with the customer fell short of the assessee's estimate, then the difference was deducted as a loss in the year in which this loss was actually suffered. This system was adopted by the assessee from 1956-57 and was accepted by the Department. But, for the assessment years 1961-62 and 1962-63, the Department took the stand that the amount of kasar found in the works account of the assessee could not be deducted as the assessee was maintaining his accounts according to the mercantile system and the whole amount of the bills prepared by the assessee and credited to the works account represented its accrued right to receive the same from its customer. In the backdrop of these facts the court held that the mercantile system of account brings into credit what is due immediately it becomes legally due, and before it is actually received, and are brings into debit expenditure the amount for which legal liability has been incurred before it is actually disbursed. But mere posting of an entry in the account books of the assessee would not always supply conclusive evidence on the question whether the disputed amount accrued to the assessee or not. It was found on the facts of that case that the assessee pitched his bills a little high with a view to allowing deductions at the time of settlement of the bills. This practice followed by the assessee was accepted by the Department in the past. the assessee only credited the amount which it reasonable expected to receive from its consumers at the time of settlement of the bills in its regular account books. The system of accounting adopted by the assessee and which was accepted by the Department clearly showed that the assessee did not treat the amounts credited to the works account as representing its real income. Once the fact that the assessee pitched his bills a little high with a view to making deductions at the time of settlement of bills is accepted, it can never be contended that the amount mentioned in the said bills represented the real income of the assessee. In our opinion, therefore, this decision cannot be pressed into service by the assessee.
23. The learned Advocate-General places strong reliance on the decision of the Punjab and Haryana High Court In CIT v. Ferozepur Finance (P.) Ltd. . That was a case in which the assessee carried on business of finance and hire purchase. For the assessment year 1969-70 the assessee declared a loss of Rs. 2,60,322. The ITO noticed that there was an account in the name of Shri B. K. Bedi showing a sum of Rs. 10,81,931 due from him as on April 1, 1968, which was reduced to Rs. 10,17,981 as on March 31, 1969, but no interest was charged on this account. On being asked to explain, the assessee informed the ITO that the financial condition of Shri Bedi was such that there was no hope of recovery even of the principal amount and, therefore, it had not considered it necessary to charge any interest. No interest was actually charged or added to the amount due from Shri Bedi during the previous year notwithstanding the fact that it had received a sum of Rs. 1,05,000 from the said party during the said year on different dates as also an advance of Rs. 29,000 on June 17, 1968. The ITO, therefore, was not prepared to accept the assessee's contention that the financial condition of Shri Bedi was really bad. Since the method of accounting adopted by the assessee was of mercantile basis, the ITO added the interest to the income in computing the total income of the assessee. The AAC upheld the order of the ITO. The Income-tax Appellate Tribunal, however, allowed the appeal of the assessee since the additional evidence supplied made it difficult for the Department to seriously dispute the fact that Shri Bedi was financially weak. It is, therefore, clear from the facts of this case that the assessee had not claimed the interest from Shri Bedi and had actually forgone it. The interest amount could not, therefore, be treated forming part of the real income of the assessee since the assessee had forgone it having regard to the monetary condition of Shri Bedi. In the instant case the assessee has never forgone or given up his right to claim the excess amount from the consumers who have been billed according to the enhanced rates.
24. Our attention was lastly drawn to a decision of the Madras High Court in CIT v. Motor Credit Co. P. Ltd. : 127ITR572(Mad) . That was a case of an assessee carrying on business as financiers for purchase of motor vehicles on hire purchase, who advanced under higher purchase agreements, moneys to two firms which were plying buses. The routes of these two firms having been taken over by a State Transport Corporation, the firm defaulted in making payments of the hire purchase instalment, and consequently the buses are seized. As the assessee was advised that there was no prospect of recovering even the principal amount, it did not credit the interest on the outstandings from the two companies even though it was adapting the mercantile system of accounting. The facts of this case are almost identical to the facts of the case before the Punjab and Haryana High Court. Here also the assessee had forgone the interest amount because it realised that having regard to the fact that the routes were taken over by the State Transport Corporation, the firms which had defaulted were not in a position today the principal amount, much less interest. It was in these circumstances that the Madras High Court held that the commercial and business realities of the situation in which the assessee was placed could not be overlooked and merely because the assessee was maintaining accounts according to the mercantile system, it could not be taxed on the bias of mere entries in its account books.
25. The review of the aforesaid authorities goes to show that if an assessee because of business expediency forgoes a certain amount so forgone cannot be treated a the real income of the assessee notwithstanding the fact that follows the mercantile system of accounting. It also becomes clear from these decisions that if an assessee has posted an entry in his account books in the belief that it is entitled to the said amount from another party but it is found as a matter of fact that the said amount is not legally due and payable by the said party to the assessee, the assessee cannot be taxed on the basis of a mere entry in the account books. Similarly, if any amount is credited by the assessee in its account books, the assessee will not liable to be taxed on that amount if it is found that it is statutorily liable to refund the same to the party from which the said amount was recovered or received. In such set of circumstances, the doctrine of real income intervenes and an assessee who has credited the amount in its account books is absolved from the liability to be taxed for the same. So far a the assessee before u is concerned, we have found as a matter of fact that it was legally entitled to recover consumption charges from the consumers at the enhanced rates. At no point of time has the assessee forgone or given up its right to recover the enhanced charges from its consumers. We are, therefore, of the opinion that income had accrued to the assessee in the assessment years in question having regard to the undertaking given by the assessee that the amount would be offered for taxation if the judgment was in favour of the assessee. The judgment was pronounced by the Supreme Court on February 26, 1969, and immediately after the Department learnt about the same, it proceeded to tax the respective sums in the assessment years in question. We are, therefore, of the opinion that the Appellate Tribunal was not right in coming to the conclusion that the sums sought to be brought to tax in the assessment years in question did not represent the real income of the assessee and was, therefore, not liable to tax.
26. The question formulated by the Tribunal in Income-tax Reference No. 288 of 1975 is as under :
'Whether the Tribunal was right in law in holding that the amount of Rs. 7,33,676 which had accrued to the assessee during the previous year, and which was brought total by the Income-Tax Officer, did not represent the income and, therefore, it could not be included in the computation of the total income of the assessee ?'
27. Except for the difference in the amount, identical question has been framed in Income-tax Reference No. 73 of 1978. We answer the said question in the negative in both the references.
28. In so far as Income-tax Reference No. 171 of 1978 is concerned, two questions have been formulated for our opinion and they read as under:
'1. Whether the Income-tax Appellate Tribunal was right in law in holding that the amount of Rs. 3,17,741 which had accrued to the assessee during the previous year, and which was brought to tax by the Income-tax Officer did not represent the income and, therefore, it could not be included in the computation of the total income of the assessee : 2. Whether, on the facts and in the circumstances of the case, the receipt of Rs. 3,17,741 could be subjected to tax in the assessment year in question as the income of the assessee ?'
29. We answer question No. 1 in the negative and question No. 2 in the affirmative.
30. Before we part with these references, we are tempted to reproduce the observations of S. T. Desai J. in H. M.Kashiparekh & Co. Ltd. v. CIT : 39ITR706(Bom) which read as under (p. 713):
'It is trite saying that income-tax is not and cannot be cast on logical lines. No considerations of equity or hardship can be permitted to control the application of the Act. Nor is it permissible to the court to disregard any axiomatic principle of tax law.'
31. We are conscious that the view that we take may cause hardship to the assessee but that cannot be helped. We, therefore, think that this is not a case in which any order should be made as regards costs.
32. The three references are answered accordingly. There will be no order as to costs.