TaxTMI 
TaxTMI 
1972 (12) TMI 23
X X X X Extracts X X X X
X X X X Extracts X X X X
....aimed that the sums appropriated by it towards of " contingencies reserve ", "development reserve " and " special reserve " should be allowed as deduction in the computation of its business income. This was for the reasons that these reserves were created under statutory obligations and the amounts appropriated to these reserves did not form part of the income of the assessee. The amounts so appropriated during the year of account were as follows : Rs. Contingencies reserve 10,225 Development reserve 30,475 Special reserve 23,417 The Income-tax Officer rejected this claim and included these amounts also in the income of the assessee. In the appeal before the Appellate Assistant Commissioner, reliance was placed on the decision of the Supreme Court in Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax. That was a case where the reserve made under a statutory provision by way of consumers' benefit reserve account was allowed to be deducted in determining the income of the company. That was sought to be applied in the case of the reserves which are the subject-matter of controversy in the case before us. But the Appellate Assistant Commissioner did not accept this plea ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly relevant for our purpose, may be read here : " 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 exceeds, or would by such appropriation, be caused to exceed, five per centum of the original cost of fixed assets, no appropriation shall be made which would have the effect of increasing the reserve beyond the said maximum." Sub-clause (2) of this Paragraph provides that the sums appropriated to the contingencies reserve shall be invested in securities authorised under the Indian Trusts Act, 1882. Utilisation of the contingencies reserve is contained in Paragraph V. That paragraph again may be read here : " V. (1) The contingencies reserve shall not be drawn upon during the currency of the licence except to meet such charges as the State Government may approve as being- (a) expenses or loss of profits arising out of accident, strikes or circumstances which the management could not have prevented ; (b) expenses on replacement or removal of plant or works oth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at where the undertaking is purchased by the Board or the State Government, the amount of the reserve may be deducted from the price payable to the licensee. " The provision with regard to the contingencies reserve is not identical with the provision with regard to the development reserve and, therefore, these require to be considered independently. Now we will first consider the nature of the contingencies reserve. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an amount equal to 75 per cent. of it was debited to the profit and loss amount of the relevant previous year and credited to a reserve account to be utilised by the during the period of 10 years next following for the purposes of the undertaking except for distribution by way of dividends of profits or by way of remittances outside India as profits or the creation of any asset outside India. This obligation which every assessee who sought development rebate had, did not extend to a case where the assesseee was a company, being a licensee within the meaning of the Electricity (Supply) Act, 1948. That meant that while in the case of every assessee other than a company which is a licensee under the Electricity (Supply) Act, 1948, it had an obligation to plough back 75 per cent. of the development rebate within a period of ten years next succeeding, there was no such corresponding obligation in the case of the assessee who was a company and was a licensee under the Electricity (Supply) Act. Apparently that was because, simultaneously, provision was made by amendment of the Schedule to the Electricity (Supply) Act, 1948, for the creation of a development reserve. Paragraph V-A of the S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uction of the amount credited to the consumers' benefit reserve was held to be admissible and it is contended before us that the same rule must apply in regard to the development reserve and contingencies reserve. Regarding the third reserve, namely, the " special reserve " it is not shown that it is under any statutory provision, but what is said is that the electricity board directed the assessee to keep such a reserve and since it is done in accordance with such direction which the assessee was bound to comply with by reason of section 55 of the Act, that too must be considered as admissible. We can dispose of the case of the assessee with regard to the last of these items, namely, the deduction of the amount under the " special reserve ". It has not been shown that the amount so reserved was not available to the a ssessee for diversion for any purpose of his own. It has not been attempted to be proved that the terms of the instruction to the assessee in any way affects the right of the assessee to deal with such a reserve as in the case of any ordinary reserve which the assessee is not bound to apply to any particular purpose only. Therefore, merely because some instruction is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tutory profits. The latter are statutorily fixed for a specified purpose. If we bear in mind these two principles there will be no difficulty in ansewering the question raised. The appellant-company is a commercial undertaking. It does business of the supply of electricity subject to the provisions of the Act. As a business concern its real profit has to be ascertained on the principles of commercial accountancy. As a licensee governed by statute its clear profit is ascertained in terms of the statute and the Schedule annexed thereto. The two profits are for different purposes---one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the 'consumers' benefit reserve account'. They were a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of the assessee's real profits. So, to arrive at the taxable income of the assessee from the business under section 10(1) of the Act, the said amounts have to be deducted from its total income. In this view it is not necessa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n future. Therefore, the amount credited to the consumers' benefit reserve is an amount returnable to the consumers and is not to be at the disposal of the licensee. We have to see whether the position is the same in the case of the contingencies reserve and the development reserve. We will now take up the case of development reserve provided under Paragraph V-A of the Sixth Schedule. This, as we have already pointed out, is of the same character as the 75 per cent. of the development rebate which the assessee was bound to plough back into the business of the undertaking under the proviso to section 10(2)(vi)(b) of the Income-tax Act, 1922. It cannot be said that the amount is expended by the assessee nor could it be said that it is lost to the assessee by an overriding obligation. The development reserve is still available to the assessee with the only limitation that it is so available only for investment in the business of the electricity supply undertaking. There is no restriction as to the scope of investment of the amount no reserved in any particular manner. Even the sum to be so appropriated towards the develpoment reserve in respect of any accounting year could be appropr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the licence. This rule is subject to exceptions. The exception clause provides that it shall be drawn upon for meeting such charges as the State Government may approve as being,--- (a) expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented ; (b) expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal ; (c) compensation payable under any law for the time being in force and for which no other provision is made. On the purchase of the undertaking, the reserve has to be handed over to the purchaser who has to maintain it as such. If the undertaking is purchased by the board or the State Government after deduction of the compensation payable to the employees of the out-going licensees the reserve has to be handed over to the 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 takes over, no allowance is made in the purchase price for the amount of the contingencies reserve. All these provisions indicate that though to a very limited extent the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gard to any of these obligations would have immediate impact upon the manner in which the undertaking is run and the result would affect the consuming public. Therefore, the creation of this reserve is 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 fails to meet, would really affect the consumers. An uninterrupted supply of electric energy and proper maintenance of the supply from time to time by the licensee are amenities which must be assured to the public and the object of the paragraph concerning this reserve appears to us to be assure them these. 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 also noticing the object of the creation of this reserve and further noting the provision that it is a diversion from the revenue, we think that the diversion is one which is deductible in determining the real profit. There is the further fact that the assessee does not get ev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ling is imposed on the profits made by the electricity undertakings. The Sixth Schedule prescribes this ceiling by laying down that the clear profit of an undertaking in any year of account shall not exceed the amount of reasonable return. To effectuate this ceiling the undertaking is required by the subsequent provisions of the Schedule, to dispose of the excess over the clear profits in the manner prescribed in Paragraph 2 and to create three reserves, viz., tariff and dividend control reserve, contingencies reserve and development reserve. We are concerned in this case with only the latter two reserves, viz., contingencies reserve and development reserve. Contingencies reserve has been created to meet exigencies like loss resulting from strike or accidents, expenditure incurred on replacement of plant other than normal maintenance, and compensation payable under any law in respect of which no provision exists. A small percentage of the revenue is directed to be credited towards this reserve annually. If the undertaking is sold, this reserve also must be passed on to the purchaser who is also bound to maintain it as a contingency reserve. The amount appropriated to this reserve s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the rebate will be withdrawn and the amount made taxable. The said provision exempts companies carrying on the business of electricity supply under the Electricity (Supply) Act, 1948. This was because by Act 101 of 1956, the Electricity (Supply) Act was amended and in the VIth Schedule, Para. V-A was added which required the amount representing the tax payable on the rebate allowed for the year to be kept as a reserve and permitted to be utilised only for the development of the industry. Of course the provision for withdrawal of the rebate, if the reserve is not utilised for the business within a time, is not there, otherwise this Para. V-A of the VIth Schedule is really complementary to the development rebate provisions of the Indian Income-tax Act. That was why in Para. V-A, it is said that appropriation to development reserve need be had only if the assessee is entitled to development rebate under the Income-tax Act. This will show that it is really a portion of the development rebate, that is allowed under the Income-tax Act, that is directed to be kept as a reserve for utilisation of the development of the industry. That this is the intention of the legislature is further cle....