Statutory reserve appropriations are not deductible when income remains under the assessee's ownership despite use restrictions.

Amounts transferred to the contingencies reserve and development reserve under the Sixth Schedule to the Electricity (Supply) Act, 1948 were not deductible in computing taxable profits because the statutory appropriation did not divest the assessee of ownership. The contingencies reserve remained subject only to restrictions on use and investment, and the development reserve likewise continued to belong to the assessee, being earmarked for investment in the electricity supply business. The statutory limits did not amount to diversion of income by overriding title, nor did they convert the transfers into expenditure or loss. The consumer's benefit reserve principle was inapplicable because these reserves did not cease to form part of the assessee's real profits.

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Issues: Whether the amounts transferred to the contingencies reserve and the development reserve under the Sixth Schedule to the Electricity (Supply) Act, 1948 were deductible in computing the assessee's taxable profits.

Analysis: The reserves were created under statutory compulsion, but the amounts appropriated to them did not cease to belong to the assessee. The contingencies reserve remained subject only to restrictions on use and investment, and the development reserve was likewise retained by the assessee, being available only for investment in the electricity supply business. The statutory restrictions did not amount to a diversion of income by overriding title, nor did they convert the appropriations into expenditure or loss to the assessee. The rule applicable to consumers' benefit reserve did not govern these reserves, because those amounts were earmarked for the benefit of consumers and ceased to form part of the licensee's real profits, whereas the present reserves remained under the assessee's ownership and control.

Conclusion: The amounts transferred to both the contingencies reserve and the development reserve were not deductible in arriving at the assessee's taxable profits and the answer was against the assessee.

Ratio Decidendi: A statutory appropriation is deductible only when it amounts to a real diversion of income away from the assessee by overriding title; a reserve that remains the assessee's money, though subject to statutory limitations on use, is not deductible in computing taxable profits.

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