TaxTMI 
TaxTMI 
1995 (11) TMI 5
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....d 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 taken by the Kerala High Court and the Bombay High Court. It set aside the order of the Appellate Assistant Commissioner, but referred the following question to this court : " Whether, on the facts and in the circumstances of the case, the Income-ta....
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....he 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 appropriate to contingencies reserve from the revenues of each year of account a sum not less than one-quarter of one per centum and not more than one-half of one per centum of the original cost of fixed assets, provided that if the said reserve ex....
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....d 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 original amount minus the amount he returned to them. In substance, there cannot be any difference between a businessman collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs. Y to them a....
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....ovisions 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 exceed five per cent., of the original cost of fixed assets. Sub-clause (2) of Paragraph IV is also significant. The sums appropriated to the contingencies reserve have to be invested in securities within a fixed period and it i....
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....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) : " Bearing in mind the fact that the amount under the contingencies reserve is not available to the assessee for any purpose of his own or even for any purpose other than those indicated in Paragraph V of the Sixth Schedule and a....
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....uestion 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 could not be regarded as an asset. The court said (at page 395 of 103 ITR) : " At the outset, it should be pointed out that in both these cases the court was really concerned with the question of determination of the income....
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....redit 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 securities authorised under the Indian Trusts Act, 1882, did not in any way affect this position. The assessee continued to be the owner of the investment and, however limited be the benefit that the assessee might derive from....
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....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 has to be returned to the consumers. Therefore, it is as if the electricity company had not received the amount which it was obliged to return. The amount that it was obliged to return was not a part of its income. Th....