1972 (12) TMI 23 - HC - Income Tax

Whether Tribunal was right in holding that the sum of Rs. 10, 225 transferred to the contingencies reserve account the sum of Rs. 30, 475 transferred to the development reserve account and the sum of Rs. 23, 417 transferred to the special reserve account are not to be deducted in arriving at the taxable income of the assessee-company ? - this amount is really laid out for the purpose of the business because it is to meet certain contingencies which a public utility concern has normally to anticipate to happen in the business and provide for. But I do not rest my final conclusion on this point applying section 37. I agree with the reasoning of my learned brother that this amount of contingency reserve must be deducted in arriving at the total income for assessment

Summary

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

Issue-Wise Detailed Analysis:

1. Deductibility of Amounts Transferred to the Contingencies Reserve Account:
The primary issue was whether the sum of Rs. 10,225 transferred to the contingencies reserve account should be deducted in arriving at the taxable income of the assessee-company. The court examined the statutory provisions under the Electricity (Supply) Act, 1948, particularly Paragraphs III, IV, and V of the Sixth Schedule. Paragraph IV(1) mandates the creation of a contingencies reserve from the revenues of each year, with specified limits. Paragraph V restricts the use of this reserve to certain approved charges, such as expenses from accidents or strikes, and requires the reserve to be handed over to the purchaser upon the sale of the undertaking.

The court concluded that the contingencies reserve is not available to the assessee for general purposes and is created from the revenue, not profits. The reserve is meant to ensure the efficient running of the business and is a statutory obligation. Thus, it is a diversion by overriding obligation and should be deducted in determining the real profit. The court held that the sum of Rs. 10,225 transferred to the contingencies reserve account should be deducted in arriving at the taxable income of the assessee-company.

2. Deductibility of Amounts Transferred to the Development Reserve Account:
The court considered whether the sum of Rs. 30,475 transferred to the development reserve account should be deducted. Paragraph V-A of the Sixth Schedule deals with the development reserve, which is created based on the development rebate under the Income-tax Act. The court noted that the development reserve is available for investment in the business of electricity supply and is not a diversion from the revenue. The reserve is created from the development rebate, which is a tax benefit, and the amount remains available to the assessee for business investment.

The court distinguished this reserve from the consumers' benefit reserve discussed in the Poona Electric Supply Co. Ltd. case, where the reserve was not at the disposal of the licensee. The development reserve, however, benefits the assessee directly and does not constitute an expenditure or a diversion of revenue. Therefore, the court held that the sum of Rs. 30,475 transferred to the development reserve account should not be deducted in arriving at the taxable income of the assessee-company.

3. Deductibility of Amounts Transferred to the Special Reserve Account:
The court addressed whether the sum of Rs. 23,417 transferred to the special reserve account should be deducted. The assessee claimed this reserve was created based on directions from the electricity board under section 55 of the Electricity (Supply) Act. However, it was not shown that the amount reserved was not available to the assessee for any purpose. The court found that the special reserve did not have the statutory restrictions applicable to the contingencies or development reserves.

Since the special reserve was available for appropriation by the assessee without any statutory restriction, it could not be considered a deductible expense. The court held that the sum of Rs. 23,417 transferred to the special reserve account should not be deducted in arriving at the taxable income of the assessee-company.

Conclusion:
The court answered the question partly in favor of the revenue and partly in favor of the assessee. The sum of Rs. 10,225 transferred to the contingencies reserve account should be deducted, while the sums of Rs. 30,475 and Rs. 23,417 transferred to the development reserve and special reserve accounts, respectively, should not be deducted. The judgment directed that a copy be sent to the Appellate Tribunal, Cochin Bench, as required by section 260(1) of the Income-tax Act, 1961.

Additional Remarks by Viswanatha Iyer J.:
Viswanatha Iyer J. concurred with the judgment but added that the financial principles in the Sixth Schedule aim to balance the interests of investors and consumers by imposing a ceiling on profits. The contingencies reserve is created to meet specific exigencies and must be transferred to the purchaser if the undertaking is sold. The development reserve, linked to the development rebate under the Income-tax Act, is meant for business development and should not be deducted over and above the rebate. The contingencies reserve, being a statutory obligation, should be deducted in arriving at the total income for assessment.