1976 (12) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of amounts transferred to contingencies reserve account.
2. Deductibility of amounts transferred to development reserve account.

Summary:

1. Deductibility of Amounts Transferred to Contingencies Reserve Account:

The assessee, a company distributing electrical energy, transferred Rs. 41,328 to the contingencies reserve account as mandated by Paragraph IV of the Sixth Schedule to the Electricity (Supply) Act, 1948. The assessee claimed this amount as a deductible expense for income-tax purposes, arguing it constituted a setting apart of amounts by overriding statutory title. The court, however, held that the amounts in the contingencies reserve did not go out of the hands or control of the assessee and remained its property, albeit with statutory restrictions on their use. The court emphasized that such appropriations do not equate to a diversion of profit by overriding title, as the amounts are still available to the assessee for specific business-related purposes. Consequently, the court ruled that the amount appropriated to the contingencies reserve cannot be deducted for arriving at the assessable profits.

2. Deductibility of Amounts Transferred to Development Reserve Account:

The assessee also transferred Rs. 42,718 to the development reserve account as required by Paragraph VA of the Sixth Schedule to the Act. Similar to the contingencies reserve, the assessee claimed this amount as a deductible expense. The court noted that the development reserve is intended for investment in the business of electricity supply and does not involve the transfer of ownership to another entity. The court held that the amount appropriated to the development reserve remains the property of the assessee and does not constitute an expenditure or a diversion of profit by overriding title. Therefore, the court ruled that the amount appropriated to the development reserve also cannot be deducted for arriving at the assessable profits.

Conclusion:

The court concluded that both the amounts transferred to the contingencies reserve account and the development reserve account are not deductible in arriving at the taxable profits of the assessee. The question referred to the court was answered in the affirmative and against the assessee. The Commissioner was entitled to costs, with counsel's fee set at Rs. 500.