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TMI Blog1995 (11) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... city and distribution thereof to consumers. It is governed by the Electricity (Supply) Act, 1948. For the sake of convenience the facts in Tax Reference Case No. 13 of 1981 are set out. By reason of the provisions of the Electricity (Supply) Act and of the Sixth Schedule thereto, the assessee appropriated a sum of Rs. 46,460 out of its revenues to a contingency reserve account during the previous year relevant to the assessment year 1973-74. This amount was claimed by the assessee as a deduction in the computation of its total income for the purposes of the income-tax. The Income-tax Officer rejected the claim. The Appellate Assistant Commissioner allowed the assessee's appeal, relying upon the decision of the Kerala High Court in the case of Cochin State Power and Light Corporation Ltd. v. CIT [1974] 93 ITR 582, and of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334. The Revenue filed an appeal before the Tribunal and cited the judgment of the Madras High Court in the case of Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454. The Tribunal relied on the decision of the Madras High Court, which had disagreed with the view ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l rebate on the amounts collected from the sale of electricity and meter rentals or carried forward in the accounts of the licensee for distribution to the consumers in future, in such manner as the State Government may direct....... (4) On the purchase of the undertaking, after the expiry, or on the revocation, of its licence or otherwise, all amounts of rebate lying undistributed to the consumers on the date of such purchase shall be handed over to the purchaser who, in turn, shall enter the same in his books of account, under the heading Consumers' Rebate Reserve and any amount lying undistributed in that Reserve shall be carried forward for distribution to the consumer concerned : Provided that the share of money in the Consumers' Rebate Reserve payable to the consumers who are not traceable or who have ceased to be consumers in relation to that undertaking, may be utilised in the development works of the purchaser. " Clauses III, IV and V are most relevant to our purpose and they read thus : " III. There shall be created from existing reserves or from the revenues of the undertaking a reserve to be called ' contingencies reserve '. IV. (1) The licensee shall appropri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to statutorily rationalise and regulate the rates chargeable for energy supplied in the interest of the public and for electrical development. Under the rules embodied in the Sixth Schedule certain appropriations and deductions had to be made to arrive at the clear profit ; otherwise, the items might be manipulated to sustain a demand for abnormal rates. These rules had no concern with income-tax ; though, for the purpose of arriving at the clear profit, the taxes paid were deductible. The court then said (at page 525) : " Under section 10(1) of the Income-tax Act, tax shall be payable by an assessee under the head ' Profits and gains of business ' in respect of profits and gains of any business carried on by him. The said profits and gains are not profits regulated by any statute, but profits in a business computed on business principles. They are business profits and not statutory profits. They are real profits and not notional profits. The real profit of a businessman under section 10(1) of the Income-tax Act cannot obviously include the amounts returned by hint by way of rebate to the consumers under statutory compulsion. It is as if he received only from, the consumers the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment reserve and the special reserve were not to be deducted in arriving at the taxable income of the assessee, which was a company carrying on the business of distribution and supply of electricity and was governed by the provisions of the Electricity (Supply) Act, 1948. The High Court considered the nature of the contingencies reserve and observed (at page 586) : " Paragraph III of the Sixth Schedule indicates that the creation of the contingencies reserve is from out of the revenues of the undertaking. This is quite significant. The term ' revenue ' in the context in which it has been used in that Paragraph refers to the total receipts and not to what is left as profit after meeting the expenses. Therefore, the creation of a reserve is irrespective of the profit of the licensee. It is either out of the existing reserves or from the revenues of the undertaking. As Paragraph IV of the Sixth Schedule indicates, the amount that has to be appropriated to such reserve has no relation to the profit made in any year, but is a fixed percentage of the original cost of fixed assets. The paragraph further provides that on no account shall such appropriation be made to such reserve to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board or the State Government. In the provisions in the Indian Electricity Act, 1910, relating to price fixation, when such Board or the State Government took over, no allowance was made in the purchase price for the amount of the contingencies reserve. All these provisions indicated that though to a very limited extent the assessee might have a benefit from out of the contingencies reserve, in that in certain contingencies which the State Government approved it might get the benefit of the amount reserved ; generally, the amount was not one which was at the disposal of the assessee in the matter of its application. The creation of the reserve was apparently with the prime object of making available sufficient resources for meeting commitments necessary for the efficient running of the business, commitments which, if the licensee failed to meet them, would really affect the consumers. An uninterrupted supply of electric energy and proper maintenance of the supply from time to time by the licensee were amenities which had to be assured to the public and the object of the clause concerning this reserve appeared to be to assure them these. The High Court then said (at page 594) : " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion, so far as it relates to transfers or appropriations made by the assessees to the contingencies reserve in the instant case before us, will have to be answered in favour of the assessees. We accordingly, answer the question in favour of the assessees. " It is interesting to note that the same Bench of the Bombay High Court had thereafter occasion to consider the contingencies reserve in the context of the Wealth-tax Act, that is to say, whether the amount standing to the credit of that reserve was liable to be included in determining the net wealth of the assessee, which was also a company that generated and supplied electrical energy and was governed by the provisions of the Electricity (Supply) Act, 1948. This was the case of CWT v. Bombay Suburban Electric Supply Ltd. [1976] 103 ITR 384 (Bom). The judgments in Cochin State Power and Light Corporation case [1974] 93 ITR 582 (Ker) and Amalgamated Electricity Co. Ltd.'s case [1974] 97 ITR 334 (Bom) were cited on behalf of the assessee. It was submitted that in both these cases it had been held that the amount standing to the credit of the contingencies reserve was deductible under the Income-tax Act and, therefore, it coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of this court in Poona Electric Supply Co. Ltd.'s case [1965] 57 ITR 521 was cited on behalf of the assessee. The Madras High Court said that it was of no assistance to the assessee. The amount standing to the credit of the contingencies reserve could not be said to be an amount which had gone out of the hands or control of the assessee and become the subject-matter of ownership of somebody else. The statute had imposed certain restrictions over the disposal of that amount by the assessee, but that did not mean that the amount had ceased to be money belonging to the assessee. What was meant by diversion of profits by overriding title was that a part of the profits earned by an assessee was not really his profit but it belonged to somebody else and the assessee had no title. As far as the contingencies reserve was concerned, the statute had clearly indicated the purposes for which it could be spent and those purposes clearly showed that they were connected with the business of the assessee and it was the assessee which would have to utilise it. Equally, the fact that the assessee was required to invest the amount standing to the credit of the contingencies reserve in securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances, it could not be said that there had been any diversion of income at source by an overriding title from the assessee or that the amount that had been appropriated did not form part of the real income of the assessee. It was contended before the Calcutta High Court that the appropriation to the contingencies reserve was, in any event, expenditure wholly and exclusively laid out for the assessee's business and should be allowed as a deduction. This argument was not accepted for, the appropriation that had been made was not towards any known liability. The money had been set apart for meeting unknown future liabilities. It was not a provision but a reserve. There had been no expenditure in the real sense of the term. Mr. Sachar, learned counsel for the assessee before us, submitted that there was no distinction between the consumers' benefit reserve which had been considered by the Supreme Court in the case of Poona Electric Supply Co. Ltd. [1965] 57 ITR 521 and the contingencies reserve. The argument is fallacious. We have quoted the appropriate passage of this court's earlier judgment. The emphasis is on the fact that the amount paid into the consumers' benefit reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position. That on the purchase of the undertaking, the contingencies reserve has to be handed over to the purchaser and maintained as such is only to make explicit the obvious, for, the reserve is for the purposes of the undertaking that is being transferred. There is nothing in the statute to suggest, as argued, that the amount standing to its credit cannot be taken into consideration in arriving at the purchase price. For the purposes of sale to a State Board or Government, a different statute lays down how the price is to be fixed, and with it we are not here concerned. We must add that we asked Mr. Sachar to whom, in his submission, the amounts credited to the contingencies reserve were diverted. Mr. Sachar replied that they were diverted to and vested in the State Government. This, for the reasons set out above, is quite unacceptable. We hold that the amount credited to the contingencies reserve is not diverted by reason of an overriding obligation or title and, in determining the business profits of the assessee, it must be taken into account. Mr. Sachar con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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