Full Judgment Text
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PETITIONER:
THE GODHRA ELECTRICITY CO. LTD. AHMEDABAD
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME TAX, GUJARAT-II, AHMEDABAD
DATE OF JUDGMENT: 03/04/1997
BENCH:
S.C. AGRAWAL, G.B. PATTANAIK
ACT:
HEADNOTE:
JUDGMENT:
J U D G M E N T
S.C. AGRAWAL, J. :
These appeals by certificate granted under section 261
of the Income Tax Act 1961 (hereinafter referred to as the
Act) have been filed by the Godhra Electricity co. Limited,
(hereinafter referred to as the assessee company ) against
the judgment of the Gujarat High Court dated February 24-25
1982 in Income Tax References Nos. 288 of 1975 ,73 of 1978.
Income Tax Reference no. 288 of 1975 related to the
assessment year 1969 -70 while Income Tax Reference No. 73
of 1978 related to the assessment years 1970-71 and 1971-72
and Income Tax Reference No. 171 of 1978 related to
assessment year 1972-73.
On November 19, 1922 the then Government of Bombay
granted a licence under the Indian Electricity Act, 1910 to
Lady Sulochana Chinubhai & Company authorising it to
generate and supply electricity to the consumers in Godhra
area. The assessee company is the successor of the said
licensee. On the recommendations of rating committee
constituted under section 57(2) of the Electricity (supply)
act, 1948 the State Government had fixed the charges for
supply of electricity and motive power by the assessee
company with effect from February 1, 1952. After the
amendment of the Electricity (supply) act, 1948 in 1956 the
assessee company increased the charges for motive power from
January 1, 1963 to 35 np. per unit with a maximum of Rs. 7
per month for every installation and a few months thereafter
on June 22, 1963 the assessee-company increased the rated
for electricity supplied for light and fans to 70 np. per
unit with a minimum of Rs. 5 of every installation with
effect from July 1, 1963 this unilateral increase in the
rates foe supply of motive power as well as electricity for
lights and fans led to the institution of two representative
suits by the consumers (civil suits Nos. 152 of 1963 and 50
of 1964 in the court of Civil Judge (senior Division) at
Godhra wherein in the right of the assessee company to
unilaterally increase the charges in respect of motive power
and lights and fans was challenged the said suits were
decided by trial court in favour of the consumers and the
decree of the trial court was affirmed in appeal by the
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Assistant judge Panchmahals at Godhra. The second appeals
filed by the assessee company were dismissed bu the learned
single judge of the Gujarat High Court on April 11, 1966 but
the letters patent Appeals (L.P.As. Nos. 42 and 43 of 1966
filed by the assessee company against the said judgment of
the learned single judge were allowed by the Division Bench
of the High Court by judgment dated December 3, 1968 and
both the representative suits filed by the consumers were
dismissed. It was held that under the Electricity supply
act, 1948 as amended in 1956 the assessee company was
entitles to enhance the charges unilaterally subject to the
conditions prescribed in the sixth schedule to the said Act.
the said judgment of the Division Bench of the Gujarat High
court was affirmed by this court by judgment dated February
26, 1969 in Jindas oil mill ors. v. Godhra Electricity co.
1969 (3) SCR 836. During the pendency of this litigation in
the various courts the assessee-company was not able to
realise the enhanced charges from the consumers. after the
decision of this court on February 26, 1969 some of the
citizens of Godhra mer the minister of Industries mines and
power government of Gujarat with a view to persuading him to
intervene and restrict the assessee-company from recovering
the enhanced rated from the consumers thereafter the under
secretary to the Government of Gujarat in the Industries
Mines and power department addressed a letter dated march
19, 1969 to the assessee-company suggesting that the company
may be advised to maintain the status quo for the rates to
the consumers are concerned and also to continue the
existing street light agreement for at least six months. The
chief Electrical Inspector was requested to go through the
accounts of the assessee-company for year to year and report
to the Government the actual position about the reasonable
return earned by the assessee-company on may 16, 1969 some
of the consumers filed another representative suit (suit No.
118 of 1969 against the assessee-company in the Court of
civil judge (junior Division ) at Godhra challenging the
right of the assessee-company to recover the consumption
charges at the enhanced rates. In the said suit it was
claimed that the decision of this court was only of academic
interest as in April, 1965 the assessee-company began to
purchase in bulk electrical energy and that the assessee-
company began to purchase in bulk electrical energy at 10
paise per unit from the Gujarat Electricity board and it had
to work merely as distributing agency and had to collect the
charges and not generate electrical energy and that the
assessee-company would earn more profits even if it supplied
electricity at 31 paise per unit to the consumers of motive
power and that it would earn a reasonable return even on the
basis of the existing rates an interim injunction was
granted by the trial Court in that suit a written statement
was filed by the assessee-company contesting the said suit
but when the suit came up for bearing no evidence was led to
controvert the evidence produced on behalf of the consumers
since at that point of time the undertaking of the assessee-
company was under the management of the collector of Godhra
and he did not give any instructions to the favour appearing
on behalf of the assessee-company with the result that the
said lawyer reported no instructions. The said suit was
decreed in favour of the consumers by the civil judge by his
judgement dated June 20, 1974 and a declaration was granted
to the effect that the assessee-company shall not recover
the charges exceeding 31 np. per unit for lights and fans
and 20 np. per unit for motive power. The interim injection
which had been granted against disconnection or dis-
connection or discontinuance of the supply was made absolute
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on the same terms on which it was initially granted. during
the course of hearing before the High Court it was stated by
the learned Advocate General appearing for the assessee-
company that an appeal was in fact filed against the said
judgement but the plaintiffs by their application dated July
27, 1979 sought permission of the court to withdraw the suit
with liberty to file a fresh suit on the same cause of
action and when necessary and the trial judge by order of
even date permitted the plaintiffs to withdraw the suit with
liberty to file a fresh suit on the same cause of action if
and when necessary and the trial judge by order of even date
permitted the plaintiffs to withdraw the suit and granted
them the liberty sought while the said suit was pending
before the trial court the Gujarat state electricity board
in exercise of power conferred on it by section 6(1) of the
Indian electricity Act 1910 read with clause (2) of the
terms of the licence sought to exercise its option to
purchase the electrical undertaking of the assessee-company
by issuing a notice dated November 81971. the assessee-
company filed a writ petition (special civil Application
no. 1752 of 1972 in the Gujarat High court challenging the
validity of the said notice. During the pendency of the said
writ petition the government of Gujarat issued an order
under Rule 115(2) of the defence of India rules 1971 taking
over the management of the undertaking of the assessee -
company with effect from November 19 1972 and the collector
of Godhra was authorised by the said order to take over the
management of the undertaking of the assessee company the
said writ petition was ultimately dismissed by the High
court by is judgment dated October 16-17 of 1973 in the
appeal filed by the assessee -company against the said
judgment in this court an interim order was passed directing
the collector of Godhra to hand over the undertaking to the
Gujarat state electricity board and in accordance with the
said direction the Government of Gujarat on December 20 1973
instructed the collector of Godhra to hand over the
management of the undertaking to the Gujarat state
Electricity board which was done on the next day and
thereafter the notification issued under Rule 115(2) of the
defence of Indian Rules 1971 was cancelled on may 4 1974.
Upto assessment year 1963 -64 the assessee-company was
assessed on the basis of the accounts maintained according
to the mercantile system for the subsequent assessment years
i.e from 1964-65 to 1967-68 the assessee-company deducted a
total amount of Rs. 10,87,828\- from the total earnings in
respect of sale of electrical energy on the ground that the
said amount was not actually recovers by it from the
consumers since the consumers had filed a suit against the
assessee-company and had obtained interim relief in that
behalf. The particulars of the deductions made for the
aforesaid four assessment years were as under:-
------------------------------------------------------------
Assessment Year Amount Deducted
------------------------------------------------------------
1964-65 Rs. 2,59,777/-
1965-66 Rs. 3,16,953/-
1966-67 Rs. 3,89,761/-
1967-68 Rs. 1,21,337/-
-----------------------------------------------------------
The aforesaid disputed amounts were shown by the
assessee-company on the liability side in the balance sheet
under the head "Disputed increase in rates charged to
customers(consumer) carried forward pending settlement of
disputes in the District court" IN the assessment year 1968
-69 there was an adjustment of the claim amounting to Rs.
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3,54,152/- while making the assessment for the assessment
year 1969-70 the income Tax officer included the said amount
of Rs. 7,33,676/- on the ground that the suit filed against
the assessee-company be the consumers was decide in favour
of the assessee-company by this court during the accounting
year 1968-69 and the assessee-company has the legal right to
recover the said amount and on the basis of the accountancy
followed by the assessee-company the amount of Rs.
7,33,676/- will have to be taxed as the income that has
accrued to the asseeeee-company on account of the decision
of this court in the assessment year 1969-70. The said
addition made by the income tax officer was however deleted
by the appellate assistant commissioner on appeal on appeal
on the view that no legally enforceable claim had accrued to
the assessee-company during the previous year by which it
could recover the arrears of motive power and electricity
for lights and fans from the consumers the income tax
appellate tribunal (hereinafter referred to as the tribunal
on further appeal held that the question of fixing a
reasonable return was still an open issue since it was a
subject matter of further litigation wherein as a result of
the decision of civil judge junior division Godhra the
assessee-company was restrained from recovering the charges
more than the 31 paise per unit for lights and fans and 20
paise per unit for motive power from the customers and that
the right to receive the increased rated had not
crystallized accounting to the Tribunal the claim at the
increased rates as made by the assessee-company and on the
basis of which necessary entries were made in the books,
represented only hypothetical income and the impugned amount
as brought to tax by the income Tax officer did not
represent the income which had accrued to the assessee-
company during the relevant previous year. On an application
by the Revenue the Tribunal referred following question of
law for the opinion of the Gujarat High court :-
"whether the Tribunal was right in
law in holding that the amount of
Rs. 7,33,676/- which had accrued to
the assessee during the previous
year and which was brought to tax
by the Income tax officer did not
represent the income and therefore
could not be included in
computation of the total income of
the assessee."
ON the basis of the said reference Income Tax Reference
No. 288 of 1975 was registered in the High court.
Similarly in respect of assessment years 1970-71 and
1971-72 the Income tax officer included the sums of Rs.
2,63,465/- and Rs. 2,98,077/- respectively as income that
had accrued to the assessee-company in those years and was
taxable the said addition was deleted by the Appellate
Assistant commissioner on appeal by the Tribunal on
application moved by the Revenue the following question of
law was referred to the High court for its opinion :-
"Whether the tribunal was right in
law in holding that the amount of
Rs. 2,63,465/- for assessment year
1970-71 and Rs. 2,98,077/- for
assessment year 1970-72 which had
accrued to the assessee during the
previous year and which was brought
to tax by the income tax officer
did not represent the income of the
assessee and therefore not liable
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to be included in computation of
the total income of the assessee ?"
On the basis the said reference Income Tax Reference
No. 73 of 1978 was registered in the High court .
For the assessment year 1972-73 the income tax officer
included a sum of Rs. 3,17,741/- as income that had accrued
and was taxable in the hands of the assessee company which
addition was deleted by the Appellate Assistant commissioner
and the said order of the Appellate Assistant commissioner
was upheld by the tribunal the following questions were
referred by the tribunal to the high court for opinion.
"1. whether the income tax
appellate tribunal was right in
holding that the amount of Rs.
3,17,741/- which had accrued to the
assessee during the previous year
and which was brought to tax by the
income tax officer did not
represent the income and therefore
it could not be included in the
computation of the total income of
the assessee ?
2. Whether on the facts and in
the circumstances of the cast the
receipt of Rs. 3,17,741/- could be
subjected to tax in the assessment
year in question as the income of
the assessee ?
On the basis the said reference, Income tax reference
No. of
1978 was registered in the High court.
All the three references were disposed of by the High
court by a common judgment dated February 24-25 1982 the
High court has held that the assessee-company was following
the mercantile system of accounting and that even under this
system in order to visit the assessee-company with the
obligation to pay tax the profit must become actually due no
matter when it is received and that income cannot be said to
have accrued to an assessee-company if it is based on a mere
claim not backed by any legal or contractual right to
receive the amount at a subsequent date. the High court has
held that in the mercantile system of accounting it is the
real income as distinguishes from a hypothetical income
which can be brought to tax. In view of the decision of the
Division Bench of the High court allowing the letters patent
Appeals of the assessee-company which judgment was affirmed
by this court on February 26 1969 the High court has held
that the assessee-company had a legal right to recover the
consumption charge at the enhanced rate from the consumers
as regards the letter from the under secretary to the
Government of Gujarat Industries Mines and power Department
dated March 19, 1969 the High court has observed :-
"We do not know if this letter was
a directive to the assessee under
any provision of law but in any
case it was it was in the from of a
suggestion which, if accepted
enured for a period of six months
only therefore the contention of
the learned advocate general that
income could not be said to have
accrued to the assessee within a
few days after the supreme court
dismissed the appeals filed by the
consumers does not appeal to us in
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any case the request made by the
state Government was to maintain
the status quo for a period of six
months only that letter did not
take away the right of the assessee
to recover consumption charges at
the enhanced rates from its
consumers."
As regards the representative suit (suit No. 118 of
1969) which was filed by the consumers in the court of civil
judge (junior division at Godhra the high court has observed
that "the said suit concerned the recovery of enhanced
charges for the period subsequent to 31st march 1969 and not
prior thereto " The High court rejected the contention urged
on behalf of the assessee-company that no real income had
accrued to the assessee-company in the facts and
circumstances of this case since the assessee-company was
legally entitled to recover the consumption charges from the
consumers at the enhanced rates and at no point of time had
the assessee-company forgone or given up its right to
recover the enhanced rates from its consumers on that view
of the matter the High court answered the questions
mentioned above against the assessee-company and in favour
of the Revenue by order dated January 15, 1983 the Hight
Court granted certificate of fitness to appeal to this court
against the said judgment. Hence these appeals.
Shri S. Ganesh the learned counsel appearing for the
assessee-company has submitted that in the facts and
circumstances of this case it must be held that no real
income had accrued to the assessee-company on account of
enhanced charges for electricity since the assesseee-company
was not able to recover the said enhanced charges from the
consumers in view of the protracted litigation during the
period from 1963 to 1969 and thereafter on account of the
letter from the under secretary to the Government of Gujarat
dated March 19 1969 asking the assessee-company not to
charge the enhanced rates for at least six months and the
subsequent suit (suit no. 118 of 1969) filed by the
consumers in 1969 and the taking over of the management of
the assessee-company by the collector Godhra in pursuance of
the order passed under Rule 115(2) of the Defence of India
Rules 1971. It has been urged that though the assessee-
company was following the mercantile system of accounting
but in the mercantile system also tax can be imposed only if
there is real income and income tax cannot be imposed on
hypothetical income. The learned counsel has placed reliance
on the decisions of this court in commissions of Income Tax
Bombay city-I V. Messrs. Shoorji Vallabhdas and Co., (1962)
46 ITR 144; Commissioner of Income tax West Bengal-II V.
Birla Gwalior (P) Ltd. (1973) 89 ITR 266; Poona Electric
Supply Co. Ltd. V. Commissioner of Income tax Bombay City-I
(1965)57 ITR 521 R.B Jodha Mal Kuthiala V. Commissioner of
income tax Punjab (1971) 82 ITR 570 and state bank of
Travancore v. commissioner of Income tax Kerala (1986) 158
ITR 102.
Under the Act income charged to tax is the income that
is received or is deemed to be received in India in the
previous year relevant to the year for which assessment is
made or on the income that accrues or arises or is deemed to
accrue or arise in India during such year. The computation
of such income is to be made in accordance with the method
or accounting with the method or accounting regularly
employed by the assessee. It may be either the cash system
where entries are made on the basis of actual receipts and
actual outgoings or disbursements or it may be the
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mercantile system where entries are made on accrual basis
i.e. accrual of the right to receive payment and the accrual
of the liability to disburse or pay. In commissioner of
Income tax Bombay city-I v. Messrs. Shoorji Vallabhdas and
co.(supra) it has been laid down :-
"Income tax is a levy on income no
doubt the Income Tax act takes into
account two points of time all
which the liability to tax is
attracted viz the accrual of the
income or its receipt; but the
substance of the matter is the
income. if income does not result
at all there cannot be a tax even
though in book keeping an entry is
made about a hypothetical income
which does not materialise."[P.
148]
This principle is applicable whether the accounts are
maintained on case system or under the mercantile system. If
the accounts are maintained under the mercantile system what
has to be seen is whether income can be said to have really
accrued to the assessee-company. in H.M. Kashiparekh & co.
ltd. v. commissioner of Income Tax (1960) 39 ITR 706 the
Bombay High court had said :-
"Even so, (the failure to produce
account losses we shall proceed on
the footing that the assessee-
company having followed the
mercantile system of account there
must have been entries made in its
books in the accounting year in
respect of the amount of commission
in our judgment we would not be
justified in attaching any
particular importance in this case
to the fact that the company
followed mercantile system of
accounting. They would not have any
particular bearing in applying the
principle of real income in the
facts of this case".
The said view was approved by this court in
commissioner of Income Tax v. Birla Gwalior (p) Ltd.
(supra) where the assessee maintained its accounts on the
mercantile system. In that case this court after referring
to the decision in Morvi Industries Ltd. V. commissioner of
Income Tax, (1971)82 ITR 835 which was also a case where the
accounts were maintained on mercantile system has said :-
"Hence it is clear that this court
in Morvi Industries case did
emphasise the fact that the real
question for decision was whether
the income had really accrued of
not it is not a hypothetical
accrual of income that has got to
be taken into consideration but the
real accrual of the income "[p.
273]
In Poona Electric supply co. Ltd. V. commissioner of
Income Tax Bombay city-I (supra ) this court has said :-
"Income tax is a tax on the real
income i.e. the profits arrived at
on commercial principles subject to
the provisions of the income tax
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act."
In that case the court has approved the following
principle laid down by the Bombay High court in H.M.
Kashiparekh & co. Ltd. v. commissioner of Income tax
(supra):-
"The principle of real income is
not to be so subordinated as to
amount virtually to a negation of
it when a surrender or concession
or rebate in respect or managing
agency commission is made agreed to
or given on grounds of commercial
expediency simply because it takes
place some time after the close of
an accounting year In examining any
transaction and situation of this
nature the court would have more
regard to the reality and
speciality of the situation rather
than the purely theoretical or
doctrinaire aspect of it will lay
greater emphasis on the business
aspect of the matter viewed as
whole when that can be done without
disregarding statutory language."
In state bank of Travancore v. commissioner of income
tax Kerala (supra ) after considering the various decisions
of this court sabyasachi Mukharji J. (as the learned chief
justice then was ) has said :-
"An acceptable formula of co-
relating the notion of real income
in conjunction with the method of
accounting for the purpose of
taxation is difficult to evolve
besides any strait jacket formula
is bound to create problems in its
application to every situation it
must depend upon the facts and
circumstances of each case when and
how does an income accrue and what
are the consequences that follow
from actual of income as well
settled the accrual must be real
taking in go account the actuality
of the situation whether an accrual
has taken place or not must in
appropriate cases be judged on the
principles of real income theory
After accrual non charging of tax
on the same because of certain
conduct based on the ipse dixit of
a particular assessee cannot be
accepted in determining the
question whether it is hypothetical
income or whether real income has
materialised or not various factors
will have to be taken into account
it would be difficult and improper
to extend the concept of real
income to all cases depending upon
the ipse dixit of the assessee
which would then become a value
judgment only what has really
accrued to the assessee has to be
find out and what has accrued must
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be considered from the point of
view of real income taking the
probability or improbability of
realisation in a realistic manner
and dovetailing of these factors
together but once the accrual takes
place on the conduct of the parties
subsequent to the year of closing
an income which has accrued cannot
be made "no income ." [P. 154]
If the matter is examined in the light of the
aforementioned principles laid down by this court it must be
held that even thought the assessee-company was following
the mercantile system of accounting and had made entries in
the books regarding enhanced charges for the supply made to
the consumers no real income had accrued to the assessee-
company in respect of those enhanced charges in view of the
fact that soon after the assessee-company decided to enhance
the rates in 1963 representative suits (civil suits Nos. 152
of 1963 and 50 of 1964) were filed by the consumers which
were decreed by the trial court and which decree was
affirmed by the appellate court and learned single judge of
the High court and it is only on December 3 1968 that the
letters patents Appeals filed by the assessee-company were
allowed by the division bench of the high court and the said
judgment by the consumers in this court and the same were
dismissed by the judgment of this court and the same were
dismissed by the judgment of this court dated February 26
1969. shortly thereafter on march 19 1969 the under
secretary to the Government of Gujarat wrote a letter
advising the assessee-company to maintain the status quo for
the rates to the consumers for at least six moths and the
chief Electrical inspector was directed to go through the
accounts of the assessee-company from year to year and to
report to the Government about the actual position about the
reasonable returns earned by the assessee-company on may 16
1969 another representative suit (suit no 118 of 1969) was
filed by the consumers wherein interim injunction was
granted bu the court and which was finally decreed in favour
of the consumers on June 23 1974 it would thus appear that
after the decision was taken by the assessee-company to
enhance the charges it was not able to realise the enhanced
charges on account of pendency of the earlier representative
suits of the consumers followed bu the letter of the under
secretary to the government of Gujarat and the subsequent
suit of the consumers and during the pendency of the
subsequent suit the management of the undertaking of the
assessee-company was taken over by the Government of Gujarat
under the Defence of India rules 1971 and the undertaking
was subsequently transferred to the Gujarat state
Electricity Board.
It is no doubt true that the latter addressed bu the
under secretary to the Government of Gujarat to the
assessee-company had no legally binding effect but one has
to look at things from practical point of view [see : R.B.
Jodha Mal Kuthiala v. commissioner of Income tax Punjab
(supra)]. The assessee-company being a licensee could not
ignore the direction of he state government which was
couched in the form of an advice whereby the assessee-
company was asked to maintain the status quo for at least
six months and not to take steps to recover the dues towards
enhanced charges from the consumers during this period
Before the expiry of the period of six months the subsequent
suit had been filed by the consumers and during the
pendency of the said suit the undertaking of the assessee-
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company was taken over bu the government of Gujarat under
the defence of India Rules 1971 and subsequently it was
transferred to the Gujarat state Electricity Board and as a
result the assessee-company was not it a position to take
steps to recover the enhanced charges.
The High court has observed that the subsequent suit
that was filed on May 16 1969 related to recovery of
enhanced charges for the period subsequent to March 31, 1969
and not prior thereto. We have however perused the judgment
of the joint Judge (junior Division) Godhra dated June 20
1974 in the said suit which was annexed as Annexure "d" to
the statement of the case. The said judgment does not show
that the suit was confined to the period subsequent to march
31, 1969. On the other hands it shows that the plaintiffs in
that suit were challenging the enhancement in charges made
in 1963 and had sought a declaration that the assessee-
company was not entitled to recover more than 31 paise per
unit for light and fans and 20 paise per unit for motive
power and the trial court while decreeing the said suit had
given a declaration in these terms. The said declaration is
not confined to the period subsequent to March 31,1969.
The question whether there was real accrual of income
to the assessee-company in respect of the enhanced charges
for supply of electricity has to be considers by taking the
probability or improbability of realisation in a realistic
manner. If the matter is considered in this light it is not
possible to hold that there was real accrual of income to
the assessee-company in respect of the enhanced charges for
supply of electricity which were added by the income tax
officer while passing the assessment orders in respect of
the assessment years under consideration. The Appellate
Assistant commissioner was right in deleting the said
addition made by the income tax officer and the tribunal had
rightly held that the claim at the increased rates as made
by the assessee-company on the basis of which necessary
entries were made represented only hypothetical income and
the impugned amounts as brought to tax by the income tax
officer did represent the income which had really accrued to
the assessee-company during the relevant previous years. The
High court in our option was in error in upsetting the said
view of the Tribunal .
In the result the appeals are allowed the impugned
judgment of the high court is set aside and the questions
referred bu the tribunal for options are answered in favour
of the assessee-company and against the Revenue. But in the
circumstances there will be no order as to costs.