1978 (7) TMI 76 - HC - Income Tax

Summary

Issues:
1. Whether the creation of contingencies reserve is deductible under section 37(1) of the Income-tax Act, 1961?

Comprehensive Analysis:
The judgment revolves around the deductibility of contingencies reserve in computing the taxable income of the assessee. The High Court reframed the question to focus on whether the reserve is deductible. Varied opinions from different High Courts were discussed, with the Kerala and Bombay High Courts supporting deductibility, while the Madras High Court opposed it. The Kerala and Bombay High Courts emphasized that the reserve was not at the disposal of the assessee, making it deductible. In contrast, the Madras High Court held that the reserve remained under the assessee's control, hence not deductible.

The facts revealed that the assessee, an electric company, was mandated to create a contingencies reserve under the Electricity (Supply) Act, 1948. The Sixth Schedule of the Act outlined the provisions for creating and utilizing the reserve. The reserve could only be utilized for specific contingencies, and drawing upon it required approval from the State Government. Furthermore, the reserve could not be considered an asset during the sale of the company, limiting the benefit to the assessee.

The judgment highlighted the contrasting interpretations of the nature of the contingencies reserve. The Kerala High Court stressed that the reserve was not under the assessee's control, making it non-taxable. Conversely, the Madras High Court believed that the reserve still belonged to the assessee, thus not constituting an expense or diversion of profit. The judgment criticized the Madras High Court's view, emphasizing the lack of control the assessee had over the reserve and suggesting a more appropriate name for the reserve.

Ultimately, the High Court agreed with the Kerala and Bombay High Courts, ruling in favor of deductibility of the contingencies reserve. The judgment concluded that the reserve was not under the assessee's control, leading to its deductibility in computing taxable income. No costs were awarded in the judgment.

Judge S. Sarwar Ali concurred with the decision, and the judgment was delivered by Judge Shiveshwar Prasad Sinha.