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Income‑tax Referred Case No. 29 of 1963, decided on 6th August 1964.
‑---Development rebate‑Electric supply company . Construction of service lines‑Contribution from customers‑Effect on depreciation and development rebate‑"Actual cost"‑Meaning Indian Income‑tax Act, 1922, S.10 (2) (vi), (5).
The words "actual cost" mean cost accurately ascertained. It does not mean that the cost should be defrayed out of the assessee's own resources.
An electric supply company is entitled to the allowance of depreciation in respect of that portion of the service line towards the construction of which the consumer has contributed amounts.
Birmingham v. Barnes (1935) 19 T C 195; Commissioner of Income‑tax v. Poona Electric Supply Co. (1946) 14 1 T R 622 and Commissioner of Income‑tax v. Ranchi Electric Supply Co. (1954) 26 1 T R 89 fol.
Hoshiarpur Electric Supply Co. v. Commissioner of Income‑tax (1961) 41 I T R 608 (S C) ref.
By these applications under section 66 (1), the Commissioner of Income‑tax requires the Appellate Tribunal to refer certain questions of law which are said to arise out of the Tribunal's consolidated order in I. T. As. Nos. 7754 and 7755 of 1961‑62, dated 14th August 1962/23rd Sravana, 1884, to the High Court of Kerala at Ernakulam. Inasmuch as, in our opinion, a question of law does arise out of the Tribunal's order, we accordingly state an agreed case and refer it to the High Court.
2. The assessee is a private limited company, carrying on the business of supply of electricity. It has been granted a licence by the Government. Under the terms of the licence the assessee was to lay free of charge 100 ft. of service lines from its nearest distribution main outside the limits of the property in respect of which the requisition for connection of electricity is made. Any length in excess of 100 ft. and the whole of the service lines within the limits of the property in respect of which the electricity is to be supplied has to be paid for by the consumer. The service line, notwithstanding that a portion of the cost has been paid for by the consumer, was to remain the property of the licensee by whom it was to be maintained.
3. The assessee company claimed depreciation and develop ment rebate on the whole cost of the service line, including the portion of the service line towards the cost of which the consumer had contributed.
4. The Income‑tax Officer rejected this contention. He observed:
"For purposes of distribution the service line which has been installed at the cost of a consumer is the property of the company and its upkeep is left to the company by the very hazardous nature of the installation conveying electrical energy. Otherwise the consumer, who has paid the cost thereof, may at his will and pleasure try to remove or tamper with the service line and cause damage and interruption to the licensee's business. It is to avoid such a contingency that it has been laid down as a condition of service supply that the service line,. Not with standing that a portion of the cost has been paid by the consumer, shall remain the property of the licensee by whom it is to be maintained . . . . ."
He held that as the assessee‑company had not incurred any capital expenditure in respect of that portion of the service line, it was not entitled to the claim. Copies of the orders of the Income‑tax Officer are Annexures "A" and "A‑1" and form part of the case.
5. On appeal, the Appellate Assistant Commissioner upheld the claim of the assessee. He relied on the decision of the Appellate Tribunal in the case of another assessee. He held that the assessee was entitled to depreciation on the entire service connection installed by the company for consumption of electricity by the consumer and that in calculating the cost of such installation the amount recouped from the consumers in respect of such service installation should not be taken into account and that the assessee was entitled to depreciation on the actual cost incurred by it, irrespective of whether a portion had been recouped from the consumer or not Copies of the orders of the Appellate Assistant Commissioner are Annexures "B" and "B‑1" and form part of the case.
6. The Department appealed to the Tribunal.
7. The Tribunal upheld the Appellate Assistant Commissioner's decision. Relying on the decision of the Supreme Court in Hoshiarpur Electric Supply Co. v. Commissioner of Income tax (1961) 411 T R 608 and on the conditions of supply, it held that the consumer had no property in the said service line and it was the distributor (i.e., the assessee‑company), who had the property therein and that the actual cost to the assessee was not liable to be adjusted for the contribution received from the consumers.
8. The reasons for the above conclusion are set out in the case of another assessee, which is also the subject‑matter of reference to the High Court. A copy of that order in I. T. As. Nos. 7741 to 7751 of 1961‑62, dated 31st May 1962 Income‑tax Officer v. Cochin State Power and Light Corporation Ltd. as also that of the Appellate Tribunal's order in the assessee's case are made Annexures "C" and "D" and form part of the case.
9. The question of law is:
Whether the assessee‑company is entitled to the allowance of depreciation and development rebate in respect of that portion of the service line towards the construction of which the consumer has contributed amounts in cash "
C. T. Peter for the Commissioner.
V. K. K. Menon, C. S. Padmanabha lyer, M. Ramachandran and C. J. Balakrishnan for the Assessee.
This is a reference by the Income‑tax Appellate Tribunal, Madras Bench, under section 66 (1) of the Indian Income‑tax Act, 1922. The question referred is:
"Whether the assessee‑company is entitled to the allowance of depreciation and development rebate in respect of that portion of the service line towards the construction of which the consumer has contributed amounts in cash "
The assessee is the Cochin Electric Company (Private) Limited; Cochin. It is common ground that the cost of the service lines has been met in accordance with the provisions of rule 6 of Annexure VI to the Indian Electricity Rules, 1956. The rule says:
"The licensee shall lay free of charge 3048 meters (100 feet) of service line from his nearest distribution main outside the limits of the property in respect of which the requisition is made. Any length in excess of 3048 meters (100 feet) as defined above and the whole of the service line within the limits of the property in respect of which the application is made shall be paid for by the applicant. The cost mentioned above, however, shall be exclusive of the proportionate cost of the first pole and fittings beyond 3048 meters (100 feet) aforesaid. The proportionate cost of such poles and fittings shall be in the same ratio as 30'48 meters (100 feet) is to the length of the line beyond 3048 meters (100 feet) from the point of tap‑off of the service and the second support of the service line.
The main cut‑outs or fuses shall be inserted and sealed by the licensee free of cost to the consumer."
The Tribunal has found that the service lines in their entirety belong to the assessee and that the consumers have no proprietary right in any portion thereof. The contention of the Department is that in spite of that finding the Tribunal should not have allowed any allowance under section 10 (2) (vi)‑read with section 10 (5)‑of the Indian Income‑tax Act, 1922, in respect of that portion of the service lines which has been paid for by the consumers concerned.
The allowance is calculated on the "actual cost to the assessee" and the contention of the Department is that there is no "actual cost to the assessee" in cases where the expenditure was met from the contributions collected from the consumers. The decision of the High Court of Bombay in Commissioner of Income‑tax v. Poona Electric Supply Co. Ltd. ((1946) 14 I T R 622) and the decision of the High Court of Patna in Commissioner of Income‑tax v. Ranchi Electric Supply Co. Ltd. ((1954) 26 I T R 89) are both against this contention. Both the decisions follow the decision in Corporation of Birmingham v. Barnes ((1935) 19 T C 195). In that case Lord Atkin said:
"The word actual itself gives me no assistance. It serves, as Mr. Latter suggested, to give emphasis to the word following. It is to be cost, the whole cost, and nothing but the cost. It removes any question of estimate, and in cases where the plant has been purchased for a lump sum together with factory premises it may give rise to a difficult question of fact. The word actual' is used in the same emphatic sense in rules 2 and 3 of the rules applicable to Cases I and II of Schedule D in respect of actual wages, actual expenditure and actual loss. I do not read actual cost to mean anything more than cost accurately ascertained;" and
"But it is said that the words to the person in the phrase actual cost to the person plainly indicate that the section is intending to confine the relief to an aggregate equal to the sum of money which the person has defrayed out of his own resources, the cost of the burden which has ultimately fallen upon him. My Lords, I confess I do not think that this is the natural meaning of the words. What a man pays for construction or for the purchase of the work seems to me to be the cost to him; and that whether someone has given him the money to construct or purchase for himself; or before the event has promised to give him the money after he has paid for the work; or after the event has promised or given the money which recoups him what he has spent."
See also the decision of the Supreme Court in Hoshiarpur Electric Supply Co. v. Commissioner of Income‑tax ((1961) 41 I T R 608 (S C)).
We are in entire agreement with the decisions of the Bombay and Patna High Courts cited above, and must answer the question referred in the affirmative, that is, in favour of the assessee and against the Department. We do so, but without any order as to costs.
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as required by subsection (5) of section 66 of the Indian Income‑tax Act, 1922.
Question answered in the affirmative.
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