What was the key issue in Poona Electric Supply v. CIT?

Whether sums kept in the Consumers’ Benefit Reserve under the Electricity (Supply) Act, 1948 could be taxed as company income.

What did the Supreme Court decide?

The Court held that money kept for a statutory consumer benefit is not taxable income. It must be excluded from taxable profits.

Why are statutory reserves treated differently from profits?

Because the company cannot treat that money as its own profit; law requires it to pass the surplus to consumers. It is not a real gain.

Does the mercantile method change the result?

No. Accounting method cannot convert a mandated consumer refund into taxable profit.

What is the simple takeaway for exams?

Surplus earmarked by statute for consumer rebate is not taxable income. Distinguish real business profits from statutory profits.

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Quick Summary

The company supplied electricity under a licence. Law capped its “clear profit” and required any extra to be returned to consumers as rebates. The company set aside that extra money in a Consumers’ Benefit Reserve. The tax department tried to tax it.

The Supreme Court said: this reserve is not the company’s real profit. It is money held for consumers by force of statute. Therefore, it is not taxable income.

Issues

Are sums credited to the Consumers’ Benefit Reserve taxable as income?
How do we separate real business profits from statutory surplus under the Electricity (Supply) Act, 1948?
Does the mercantile method of accounting change the tax result?

Rules

Money kept aside because a statute requires consumer rebate is not taxable income.
Tax looks at real profits computed on commercial principles, not just statutory figures created for regulation.
Accounting method cannot convert a compulsory consumer obligation into profit.

Electricity (Supply) Act, 1948 — clear profit & fair return framework

Facts (Timeline)

Timeline illustration of key facts in the case

Licensed utility: The company supplied electricity in Poona under a government licence.

Regulatory cap: By law, “clear profit” could not exceed a fair return. Extra had to go back to consumers as rebates.

Reserve created: For A.Y. 1953–54 and 1954–55, the company credited ₹42,148 and ₹77,138 to a Consumers’ Benefit Reserve.

Tax dispute: The Income-tax Officer disallowed deductions. The Appellate Assistant Commissioner agreed.

Tribunal stage: The ITAT allowed the deductions. Revenue sought a reference to the High Court.

High Court: Ruled against the assessee, prompting an appeal.

Supreme Court: Held in favour of the assessee: the reserve is not taxable income.

Arguments

Appellant (Company)

Surplus belongs to consumers by statute; company is only a holder.
No real profit arises to the company on commercial principles.
Reserve is a statutory obligation, not a discretionary appropriation.

Respondent (Revenue)

Amounts were credited out of profits; hence taxable.
Under mercantile accounting, income accrues when earned.
Reserve is an internal appropriation after profits are computed.

Judgment

The Supreme Court allowed the appeal. Money parked in the Consumers’ Benefit Reserve is not taxable income because the statute ties it to consumer refunds. The High Court view was set aside. Costs were awarded to the company.

Ratio (Core Principle)

Distinguish real commercial profits from statutory surplus. If law forces a company to pass surplus to consumers, that surplus is not the company’s income and cannot be taxed as profit.

Why It Matters

Protects regulated utilities from tax on money they cannot keep.
Clarifies interplay between sector regulation and income-tax computation.
Guides exam answers on statutory reserves and real income doctrine.

Key Takeaways

Consumers’ Benefit Reserve ≠ taxable profit.
Real income test beats formal accounting labels.
Mercantile method does not create income where law denies beneficial ownership.

Mnemonic + 3-Step Hook

Mnemonic: “RESERVE?—RESERVED!”

Regulated cap: profit beyond fair return is locked.
Earmarked for consumers: company is a custodian.
Statutory tie means: no real income to tax.

IRAC Outline

Issue: Is Consumers’ Benefit Reserve taxable income?

Rule: Statutorily earmarked surplus for consumer rebate is not real profit; exclude from taxable income.

Application: Law capped profit; surplus had to be credited to the Reserve for consumers. Company lacked beneficial ownership over that money.

Conclusion: Not taxable; appeal allowed; High Court reversed.

Glossary

Clear Profit: Profit computed under the Electricity law after specific deductions and fair return rules.
Consumers’ Benefit Reserve: Account where surplus is parked for later consumer rebates.
Real Income: Income that truly accrues to a taxpayer on commercial principles.

Student FAQs

Whether the surplus kept for consumer rebate could be taxed as company income.

Regulation capped profit and forced refunds, so the surplus was never the company’s own income.

No. Accounting method cannot create taxable income where law denies beneficial ownership.

The reserve is not taxable income. The assessee won and received costs.

Quick Jump

Quick Summary Issues Rules Facts Arguments Judgment Ratio Why It Matters Key Takeaways Mnemonic IRAC Glossary FAQs Related Cases

Case Meta

CASE_TITLE: Poona Electric Supply Co. Ltd. v. CIT, Bombay City I & Amalgamated Electricity Co. Ltd.
PRIMARY_KEYWORDS: Consumers’ Benefit Reserve, statutory surplus, real income
SECONDARY_KEYWORDS: Electricity (Supply) Act 1948, fair return, mercantile method
PUBLISH_DATE: 01 Nov 2025
AUTHOR_NAME: Gulzar Hashmi
LOCATION: India
Slug: poona-electric-supply-v-cit-1965-57-itr-521