Amount Transferable for Consumer’s Benefit can’t be included in Real Profit, Not Taxable: Delhi HC [Read Judgment]

The Delhi High Court held that the Income Tax Appellate Tribunal (ITAT) has correctly ruled that the amount transferred for the benefit of the customers does not constitute the part of assessee’s real profit and for the purpose of calculating the taxable income, such amount has to be deducted from its total income.

The respondent, Tata Power Delhi Distribution Limited is a joint venture between the Tata group and the Delhi Government and is in the business of distribution of electricity in north and north-west areas of Delhi.

An assessment order was passed against the respondent under Section 143(3) of the Income Tax Act, 1961. The total income of the Respondent was computed and additions were made on the ground of derecognition of revenue and disallowance under Section 80 IA.

Aggrieved by the order, the respondent preferred an appeal before the Commissioner of Income Tax (CIT), wherein the additions were deleted. Thereafter, the appellant authority preferred an appeal before the Income Tax Appellate Tribunal (ITAT).

The tribunal in the light of the decision passed by the Apex court ruled that the amount transferred for the benefit of the customers does not constitute the part of assessee’s real profit and for the purpose of calculating the taxable income, such amount has to be deducted from its total income. The appellant authority was unsatisfied with the order, so knocked the doors of the High Court of Delhi.

The division bench comprising Justice Sanjeev Narula and Justice Manmohan relied on the decision of Apex Court in the case of Poona Electric Supply Company Limited vs. CIT wherein the Apex Court has deliberated upon the concept of commercial profits viz-a-viz clear profits. On the basis of this principle, the Court has held that the amount transferable for the benefit of the consumers does not form part of the assessee’s real profit and for the purpose of calculating the taxable income, such amount has to be deducted from its total income.

Considering the fact that the Tribunal decision was based on this order, the division bench upheld the same and said, “the approach adopted by the Tribunal in applying the ratio of the decision of the Supreme Court in Poona Electric Supply Company Limited vs. CIT is wholly justified and does not call for any interference. Accordingly, the ground of challenge urged by the revenue on this aspect is rejected.”