Supply Affording Charges and Electrification Charges recovered by an electricity distribution company are capital receipts, as they contribute to creating enduring infrastructure, and should reduce the cost of relevant assets.
Issue:
Whether “Supply Affording Charges” and “Electrification Charges” recovered by an electricity distribution company from consumers, intended to cover the cost of laying power lines and acquiring plant and machinery for electricity supply, constitute revenue receipts taxable as income or capital receipts that should reduce the cost of the relevant assets.
Facts:
- For Assessment Years 2007-08, 2011-12, 2012-13, and 2013-14, the assessee was an electricity distribution company.
- The assessee recovered one-time charges from consumers under the heads “Supply Affording Charges” and “Electrification Charges.”
- These charges were specifically intended to cover the cost of laying extensive power lines and acquiring plant and machinery necessary for electricity supply.
- It was explicitly noted that these charges were not related to electricity consumption or the sale of stock-in-trade.
- The Assessing Officer (AO) treated these receipts as revenue in nature and added them to the total income of the assessee.
- However, the lower authorities (presumably the CIT(A) or Tribunal) held that such receipts were capital in nature, as they were recovered to create enduring infrastructure, and should therefore be reduced from the cost of the relevant assets.
Decision:
The court held in favor of the assessee, affirming the decision of the lower authorities. It ruled that “Supply Affording Charges” and “Electrification Charges” received by the assessee were rightly held to be capital receipts instead of revenue receipts.
Key Takeaways:
- Capital vs. Revenue Receipts – Fundamental Distinction: The core distinction in income tax is whether a receipt is ‘capital’ (relates to the asset itself, often a one-time payment for an enduring benefit) or ‘revenue’ (arises from day-to-day business operations, recurs regularly, and is a substitute for income).
- Enduring Benefit/Infrastructure Creation: The charges were recovered to lay power lines and acquire plant and machinery. These are clearly expenditures on creating or acquiring “enduring infrastructure” or “profit-earning apparatus” for the business. Receipts that offset or contribute to the creation of such capital assets are themselves capital in nature.
- Not Linked to Consumption/Trading: The fact that these charges were “not related to electricity consumption or sale of stock-in-trade” is crucial. This distinguishes them from charges like electricity bills (which are revenue from sale of services/goods) or connection charges that are merely for access to existing infrastructure. These were for creating the infrastructure.
- Reduction from Cost of Assets: When a capital receipt is directly linked to the acquisition or creation of a specific capital asset, it is typically used to reduce the cost of that asset for accounting and depreciation purposes. This ensures that the assessee does not claim excessive depreciation or an inflated cost of acquisition.
- Consistency of Lower Authorities: The court’s affirmation of the lower authorities’ consistent finding reinforces the correct legal position on this matter.
- “In favour of assessee”: The receipts are treated as capital, meaning they are not immediately taxable as revenue income. Their impact is on the cost of the underlying assets for future depreciation or capital gains computation.
HIGH COURT OF MADHYA PRADESH
PR. Commissioner of Income-tax I
v.
M. P. Paschim Kshetra Vidyut Vitran Company Ltd.
VIVEK RUSIA and Gajendra Singh, JJ.
INCOME TAX APPEAL No. 225 of 2024
MARCH 7, 2025
Harsh Parashar, Adv. for the Appellant.
ORDER
Vivek Rusia, J. – The Principal Commissioner of Income Tax-I has filed this appeal under Section 260 of Income Tax Act, 1961 (hereinafter referred as “IT Act”) challenging the order dated 10.04.2024, whereby the ITA No.62/Ind/2023 for the Assessment Year 2012-13 has been dismissed by the common order. Other ITA Nos.86, 61, and 63/Ind/2023 in respect of the Assessment Year 2007-08, 2011-12 and 2013-14 respectively have also been dismissed.
02. The respondent assessee is an Electricity Distribution Company of State of Madhya Pradesh (DISCOM) engaged in the business of distribution and retail supply of electricity. In the Assessment Year 201213, the Assessee Company filed a return declaring total loss of Rs.2,39,34,28,780/-. The case was selected for scrutiny assessment through CASS. After issuance of show-cause notice, the assessee company participated in the proceedings before the Assessing Officer. The representative of the assessee company appeared alongwith books of account, cash book, ledger and requisite documents. According to the Assessing Officer, revenue receipts of Rs.35,57,00,000/- were wrongly shown as capital receipts. Vide order dated 27.02.2015, the AO held that amount of Rs.35,57,00,000/- received in the account of basic operation of the company i.e. “Supply Affording Charges” and “Electrification Charges” were required to be credited in P & L account and same is liable to be added as revenue receipts in the total income of the assessee, therefore, it is treated that the assessee had concealed its income to the extent of Rs.35,57,00,000/- by treating the same as a capital receipt rather than revenue hence, penalty was also imposed.
03. Being aggrieved by the aforesaid order, the respondent assessee preferred an appeal under Section 250 of the IT Act. Vide order dated 26.12.2022, Commissioner of Income Tax (Appeal) allowed the appeal and set aside the order of Assessing Officer. Being aggrieved by the aforesaid order, the DCIT(I) Indore approached the Income Tax Appellate Tribunal, Indore Bench by way of income tax appeal. Vide order dated 10.04.2024, the learned Tribunal by placing reliance on a judgment passed by the Hon’ble Apex Court in the case of Hoshiarpur Electric Supply Co. v. Commissioner of Income-tax, [1961] 41 ITR 608 (SC) hence, this appeal before this Court.
04. The appellant has suggested the following substantial question of law involved in this appeal:
“(1) Whether, the ITAT was justified in law in holding the ‘Supply affording charges” of Rs.32,25,00,000 and Electrification Charges of Rs.3,32,00,000 as ‘Capital receipts’ instead of ‘Revenue receipts’?
(2) Whether the ITAT was justified in law in holding the receipts as ‘Capital receipts’ even though the assessee itself stated that such receipts were collected by way of Charges” from customers for have been facilitated a particular service?”
05. The assessee charged the supply affordable charges and electrification charges from the customer for facilitating the particular service. The assessee company recovered the cost and expenses towards laying of extensive line, acquisition of fabrication of plant and machinery for affecting the supply of electricity to the consumer as one time charges hence, it is not for the consumption of electricity or supply of any stock in trade. The nature of service line receipts are entirely different from the nature of electricity charges hence, the service line receipts deserves to be reduced from the cost of the relevant plant and machinery. The energy charges are recovered from the consumer for the amount of electricity consumed by them at the prevailing tariff which is of a revenue nature. Hence, the CIT(A) and ITAT have rightly held that both these receipts namely energycharges and service line receipts have a different characteristic and could not be treated as revenue receipts. CIT(A) and ITAT have duly considered the relevant regulations framed and notified by M.P. Electricity Regulation Commission constituted under M.P. Electricity Act, 2003. Apart from that, the issue raised before the ITAT Act had already been answered by the Apex Court way back in the year 1968 in the matter of Hoshiarpur Electric Supply Co. (supra). The relevant para’s of the judgment are as under:
“The assessee only spends a part of the amount received by it from the consumers. It is not clear from the statement of the case whether amongst the 229 new connections given, there were any which were of a length less than 100 ft. Payments received by the assessee must of course be for service lines installed of length more than 100 ft., but it is not clear on the, record whether the expenditure of Rs. 5,929 incurred by the assessee is only in respect of service lines which exceeded 100 ft. in length or it is expenditure incurred in respect of all service lines. It is however not disputed that a part of the amount received from the consumers remains with the assessee after meeting the expenses incidental to the construction of the service lines. But an electric service line requires constant inspection and occasional repairs and replacement and expenses in this behalf have to be undertaken by the assessee. The amount contributed by the consumer for obtaining a new connection would of necessity cover all those services. The amount contributed by the consumer is in direct recoupment of the expenditure for bringing into existence an asset of a lasting character enabling the assessee to conduct its business of supplying electrical energy. By the installation of the service lines, a capital asset is brought into existence. The contribution made by the consumers is substantially as consideration for a joint adventure; the service line when installed becomes an appanage of the mains of the assessee, and by the provisions of the Electricity Act, the assessee is obliged to maintain it in proper repairs for ensuring efficient supply of energy. The assumption made by the Department that the excess remaining in the hands of the assessee, after defraying the immediate cost of installation of a service line must be regarded as a trading profit of the company is not correct. The assessee is undoubtedly carrying on the business of distributing electrical energy to the consumers. Installation of service lines is not an isolated or casual act; it is an incident of the business of the assessee. But if the amount contributed by the consumers for installation of what is essentially reimbursement of capital expenditure, the excess remaining after expending the cost of installation out of the amount contributed is not converted into a trading receipt. This excess-which is called by the Tribunal “profit element”-was not received in the form of profit of the business; it was part of a capital receipt in the hands of the assessee, and it was not converted into a trading profit because the assessee was engaged in the business of distribution of electrical energy, with which the receipt was connected.
In Commissioner of Income-tax v. Poona Electric Supply Co. Ltd. (1), it was held by a Division Bench of the Bombay High Court that the amount received from the Government of Bombay by the Poona Electric Company in reimbursement of expenses incurred for constructing new supply lines for supplying energy to new areas not previously served, was a capital receipt and not a trade receipt. The question of the taxability of the “profit element” in the contribution received from the Government was not expressly determined; but the court in that case held that the entire amount received by the Poona Electric Company from the Government as contribution was a capital receipt.
In Monghyr Electric Supply Co. Ltd. v. Commissioner of Income-tax, Bihar and Orissa (2), it was held that the amount paid by consumers of electricity for meeting the cost of service connections was a capital receipt in the hands of the electricity undertaking and not revenue receipt and the difference between the amount received on account of service connection charges and the amount immediately not expended was not taxable as revenue.
The receipts though related to the business of the assessee as distributors of electricity were not inciden t nor in the course of the carrying on of the assessee’s business; they were receipts for bringing into existence capital of lasting value. Contributions were not made merely for services rendered and to be rendered, but for installation of capital equipment under an agreement for a joint venture. The total receipts being capital receipts, the fact that in the installation of capital, only a certain amount was immediately expended, the balance remaining in hand, could not be regarded as profit in the nature of a trading receipt. On that view of the case, in our judgment, the High Court was in error in holding that the excess of the, receipts over the amount expended for installation of service lines by the assessee was a trading receipt.
The appeal is allowed and the question submitted to the High Court is answered in the negative. The assessee is entitled to its costs in this court as well as in the High Court.”
06. In view of the above, we do not find any ground to admit this appeal on the proposed question of law. Accordingly, this Income Tax Appeal stands dismissed.