Assessee is supplier of electricity at notified tariff rate. The sale price included Advance Against Depreciation (AAD) which is shown by assessee as sales in its profit and loss account. While computing the book profit, assessee deducted the AAD component from total sale price and took only balance sheet amount into the profit and loss account. According to the Authority for Advance Rulings, reduction of AAD from the sales was reserve which had to be added back on the basis of Clause (b) of Explanation-1 to Section 115JB of the income Tax Act, 1961. On reading, it is clear that to make an addition under clause (B), the two conditions which must be jointly satisfied are that there must be a debit of the amount to the profit and loss account and the amount so debited must be carried to the reserve. Since the amount of AAD is reduced from sales, there is no debit in the profit and loss account. The amount did not enter the stream of income for the purposes of determination of net profit at all, hence clause (b) of Explanation-I was not applicable. There are broadly two types of reserves, those that are routed through profit and loss account, for example, a Capital Reserve such as Share Premium Account. AAD is not a reserve. It is not appropriation of profits. It is an amount that is under obligation, right from the inception, to get adjusted in the future, hence, cannot be designated as a reserve. It is not but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant (which is normally 30 years) the same would be reduced to nil. At the end of the life of the plant, AAD will be reduced to nil. Keeping in view the facts the total profit and loss account will be different from the above. In fact, Schedule-XII-A to the balance sheet for the financial years 2004-05 onwards indicated recouping. AAD “income received in advance”. It is a timing difference and represents adjustment in future which is in-built in the mechanism notified by the Income- tax Department. The respondent, who was employed as a teacher under the Government of Haryana, claimed advance increments in terms of Punjab Government Memo dated 1st September, 1960. The Director of Secondary Education, Haryana rejected the claim on the premise that in terms of Rule, 10 of the Punjab Education Service Class-lll (School Cadre) Rules, 195, and the pay scales of the teachers were subject to variation from time to time, and since the State of Haryana revised the pay scales of various categories of teachers w.e.f. 1st December, 1967, Memo dated 1st September, 1960 stood superseded. He also observed that higher start of pay with advance increments for post graduate qualification was provided only to Masters and Mistresses and not to other categories of teachers. The High Court allowed the writ petitions and directed that the respondent be given advance increments in terms of the Punjab Government Memo and the letter of the Government of Haryana. Aggrieved, the State of Haryana filed the appeal. The teachers employed under the Government of Haryana could claim benefit of the higher pay scales, advance increments etc. in terms of the policy decision taken by the Government of undivided Punjab and instructions issued by it only till the revision of their pay scales, which were made effective from 1st December, 1967 and not thereafter. The question of revision of pay scales of the teachers employed under the Government of Haryana was considered by the Education Commission which is also known as Kothari Commission. The recommendations made by that Commission were accepted by the President of India and were implemented by the State Government with effect from 1st December, 1967. After revision of the pay scales of various categories of teachers, the benefits in the term of personal pay to those Government servants who improved their qualifications by undertaking further studies within the country and abroad. Further, by letter, all the existing instructions were superseded and fresh instructions were issued on the subject. However, the decisions contained in letter and other related communications were withdrawn by the State Government by their letter. The High Court erred in accepting the plea of the respondents that revision of the pay scales of teachers with the retrospective date did not result in automatic supersession of the existing policy decisions. (785 words)
