Case Law Details

Case Name : CESC Ltd. Vs CIT (Calcutta High Court)
Appeal Number : ITA No. 82 of 2004
Date of Judgement/Order : 14/05/2015
Related Assessment Year :
Courts : All High Courts (4314) Calcutta High Court (173)

Brief of the Case

Calcutta High Court held In the case of CESC Ltd. vs. CIT that Section 43B of the Income Tax Act is attracted to a case where payment is to be made to the State Government in the capacity of the State as a sovereign and not to a case where payment is to be made to the State Government in its capacity as a principal by an agent. In the instant case, the relationship between the State and the licensee is of a principal and agent/fiduciary and not that of a sovereign and a subject. So, provision of Section 43B of the Income Tax Act does not apply to the electricity duty collected by the licensee/assessee as per provisions of the Bengal Electricity Duty Act, 1935.

Facts of the Case

The assessee company did not include the unpaid electricity duty while computing disallowance to be made under Section 43 of the Income Tax Act. The electricity duty was realized by the assessee company from the consumers which is finally paid to the State Government. The assessing officer was of the view that the amount of electricity duty collected by the assessee company from its customers is to be treated as a part of sales proceeds and the amount actually paid during the year was only to be allowed as expenditure. The assessing officer disallowed the amount of Rs. 36,01,942/-, Rs. 2,71,83,582/- and Rs. 2,85,57,061/- being amounts not paid to the Government during the three years under consideration.

On appeal, CIT (A) held that the electricity duty collected by the appellant licensee from the consumers falls within the purview of Section 43B of the Income Tax Act, 1961 and as such he dismissed the appeals of assessee and upheld the order of the assessing officer. The assessee company preferred appeal before ITAT. ITAT also dismissed the appeal with conclusion that it was a liability of the assessee to pay the electricity duty to the Government and consequently the deduction of electricity duty is allowable on actual payment as per provisions of Section 43B.

Contention of the Assessee

The learned counsel for the assessee submitted that Section 43B of the Income Tax Act does not apply to electricity duty collected by the assessee-company as licensee, on behalf of the State Government inasmuch as the electricity duty which the assessee-company collects from the consumers is made over to the State Government and, as such, the same is not a tax, duty, cess or fee payable by the assessee and, as such, the provisions of Section 43B of the Income Tax Act are not applicable to the instant case. He contended that only the amounts which can be construed as payable by the assessee are covered by the provisions of Section 43B of the Income Tax Act. Section 43B does not cover all and every payment made by an assessee to the Government and covers only such payments which are chargeable to the assessee. Referring to Sections 2, 3 and 5 of the Bengal Electricity Duty Act, 1935, he contended that on a reading of the aforesaid provisions, it would be clear that the electricity duty is not a levy of tax/duty on the assessee but the role of the assessee as a licensee is to act as a mere collecting agent of the Government and the electricity duty is a charge on the consumers of electricity for the energy consumed by them. He further submitted that the levy of electricity duty is not on the licensee for generation or distribution of electricity and the payment of electricity duty is not a primary liability of the assessee. The assessee is merely supplying energy to the consumers and is obliged to collect the duty from the consumers and make over the same to the State Government. He further pointed out that the assessee neither includes the electricity duty collected from the consumers in the credit balance of its profit and loss account nor is the said sum payable debited to the profit and loss account. He contended that the electricity duty is not akin to sales tax and hence, the principles laid down in respect of collection and payment of sales tax are not applicable to the case of collection and payment of electricity duty under the Bengal Electricity Act. Ld. He also referred a a Division Bench decision of the Kerala High Court in the case of Kerala State Electricity Board vs. Deputy Commissioner of Income Tax reported in (2010) 329 ITR 91in which it was held that Section 43B of the Income Tax Act cannot be invoked in making the assessment of the liability of the assessee under the Income Act with regard to the amounts collected by the assessee pursuant to the obligation cast on it under Section 5 of the Kerala Electricity Duty Act, 1963.

He also relied on a Division Bench decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax vs. Devatha Chandraiah & Sons reported in (1985) 154 ITR 893 and a Division Bench decision of this Court in the case of A.W. Figgis & Co. Ltd. vs.Commissioner of Income Tax reported in (2002) 256 ITR 268 in which it was held that amount received towards the sales tax by the assessee from the purchasers was received on behalf of the actual owner of tea and, therefore, the same could not constitute a trading and/or business receipt and, therefore, cannot be treated as an income of the assessee.

Finally, he referred a decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax vs. D. Shankaraiah reported in (2001) 247 ITR 798 in which it was decided that the assessee was collecting sales tax only as a commission agent of the principal and the amount cannot be treated as its income.

Contention of the Revenue

Ld. Counsel of the revenue submitted that the amount of electricity duty collected by the assessee forms an integral part of the commercial transaction of supplying and distributing electricity and, as such, it is nothing but trading receipt. She contended that it is the nature and the quality of the receipts and not the head under which it is taken or entered in the accounts of the assessee that would be determinative and decisive. She further contended that merely because the electricity duty was not credited in the sale account by the assessee-company in its book of account, the same would not alter or change the nature, character and quality of the amount collected by the assessee by way of electricity duty in the course of its business activities.

It was further argued that perusal of the entire provisions of the Bengal Electricity Act, 1935 would show that it was the primary liability of the assessee-company to pay electricity duty to the Government under the provisions of the said Act. As such, she submitted that Section 43B of the Income Tax Act is very much attracted to the electricity duty collected by the assessee-company from the consumers but not paid to the Government. He relied on the Division Bench decision of the Gujarat High Court in the case of Commissioner of Income Tax Vs. Ahmedabad Electricity Co. Ltd. (2003) 262 ITR 97 which was relied upon by the ITAT as well. In this case it was decided that it could not scribe to the observations of the Tribunal that Section 43B would not be applicable to the assessee’s case on the ground that the electricity duty recovered by it did not belong to it, but it was retained for a short-time as an agent of the Government

Held by CIT (A)

CIT (A) held that the electricity duty collected by the appellant licensee from the consumers falls within the purview of Section 43B of the Income Tax Act, 1961. He confirmed the addition made by AO.

 Held by ITAT

ITAT held that a reading of the provisions of Section 5(1) of the Bengal Electricity Duty Act, 1935, it is clear that it is the obligation or duty of the licensee to pay electricity duty payable under Section 3 of the said Act in respect of the energy supplied by the licensee to the consumers unless the licensee is unable to recover his dues, i.e., the dues for the energy supplied by the licensee to the consumers. The provisions contained in Section 5(1) of the said Act also indicate that the duty so payable by the licensee in respect of energy supplied by it to the consumers shall be a first charge on the amount recoverable by the licensee for the energy supplied by it and shall be a debt due from it to the State Government. The electricity duty shall be a first charge on the amount recovered by the licensee for the energy supplied irrespective of whether or not the licensee recovers the amount of electricity duty from the consumers. Thus, there is a primary and clear liability of the licensee who has recovered charges for the electricity supplied by it to the consumers, to pay the electricity duty to the State Government under the said Act.

ITAT further observed that an amount even though realized as sales tax is, in the hands of a trader, a trading receipt and as such chargeable to tax. Further, the trader shall be entitled to claim deduction in respect of an amount realized as sales tax or any part thereof as and when the sum is paid to the Government. The same principle applies to electricity duty and the nature of electricity duty collected by a licensee is that of a trading receipt. The collection and payment of electricity duty by the licensee under the Bengal Electricity Duty Act, 1935 is related to the trading sphere and to the business activities of generation and supply of electricity carried on by the assessee. ITAT concluded that it was a liability of the assessee to pay the electricity duty to the Government and consequently the deduction of electricity duty is allowable on actual payment as per provisions of Section 43B of the Income Tax Act.

Held by High Court

Section 43B(a) provides that notwithstanding anything contained in any other provision of the Act, a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of the previous year in which such sum is actually paid by him.

The object of Section 43B was to curb the malpractice exercised by some taxpayers who did not discharge their statutory liabilities even though they claimed those liabilities as a deduction on the ground that they maintain accounts on mercantile or accrual basis. The Section was intended to apply to cases where the statutory liability remained un discharged though the assessee in such a case claimed deduction on the ground that he maintained those accounts on mercantile business.

The question that falls for determination by us is whether Section 43B applies to the electricity duty collected by the assessee company from the consumers of electricity in terms of the provisions of the Bengal Electricity Act, 1935. On a reading of the provisions of the Bengal Electricity Duty Act, it is quite clear that the primary liability to pay electricity duty to the State Government is that of the consumers of energy. The licensee/assessee merely acts as a collecting agent for the State Government. The licensee is obliged to collect the electricity duty from the consumers and pay the same to the State Government. The licensee merely acts as a conduit. The electricity duty is not chargeable to the licensee. If the intention of the legislature was to impose primary and absolute liability for electricity duty on the licensee, the proviso to Section 5 (1) of the Act would not have been there. The said proviso exempts the licensee from paying any duty in respect of any energy supplied by the licensee for which it has been unable to recover its dues. In our view, the first charge created by Section 5(1) of the Act on the amount recoverable by the licensee for the energy supplied by him in respect of duty payable to the Government, is to induce the licensee to make every effort to recover the electricity duty from the consumers for payment to the Government. If the licensee recovers only the price of energy supplied from the consumers but not the electricity duty, then a secondary liability arises on the part of the licensee to make payment of the duty to the Government. However, if the licensee is unable to recover the energy charges as well as the electricity duty, there is no liability on the part of the licensee to pay any duty to the Government.

The electricity duty, not being a sum payable by the assessee as a primary liability by way of tax, duty, cess or fee, Section 43B is not attracted to the licensee/assessee in respect of electricity duty collected by it for being passed on the State Government. We are in disagreement with the decision of the Gujarat High Court in the case of Commissioner of Income Tax vs. Ahmedabad Electricity Co. Ltd. (2003) 262 ITR 97 and we are in agreement with the decision of the Kerala High Court in the case of Kerala State Electricity Board- vs. Deputy Commissioner of Income Tax (2010) 329 ITR 91.

From another angle, the electricity duty collected by the licensee from the consumers is so done by the licensee as an agent of the State and, hence, the same cannot be considered to a trading receipt in the hands of the licensee. It does not constitute income of the licensee and cannot be included in the licensee’s income for the purpose of computation of income tax. It is not a business receipt of the licensee which the licensee collects on its own behalf in connection with its business of generating and supplying electricity. The licensee does not collect the electricity duty for its own consumption or utilization. If the licensee collects the duty but does not pay the same to the Government, the statute provides mechanism for the Government to recover the same from the licensee. Even in a case where the licensee is unable to recover the duty but recovers the energy charges, the statutes still provides a procedure for the Government to recover the duty either from the consumer or from the licensee. This view of ours finds support from the decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax vs. Devatha Chandraiah (1985) 154 ITR 893. Though this said case deals with sales tax, the principle laid down in that case supports our view. The mischief that Section 43B of the Income Tax Act intended to present, is taken care of by the provisions of the Bengal Electricity Duty Act itself.

Accordingly, appeal of the assessee allowed.

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