TMI Blog1997 (7) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... er referred to as " the Income-tax Act "). In these appeals the High Court has answered against the assessee and in favour of the Revenue, the following question referred by the Income-tax Appellate Tribunal (hereinafter referred to as " the Tribunal ") : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sums of Rs. 47,055 and Rs. 89,324 transferred to the development reserve account for the assessment years 1967-68 and 1968-69, respectively, were not to be deducted in arriving at the taxable profits of the assessee-company ? " Civil Appeals Nos. 2613-14 of 1984 have been filed against the judgment of the Madras High Court dated February 6, 1978 (see Addl. CIT v. Vellore Electric Corporation Ltd. [1979] 119 ITR 523), on the basis of a certificate of fitness granted by the High Court under section 261 of the Income-tax Act. In these appeals, which relate to the assessment years 1969-70 and 1970-71, the High Court has answered against the assessee and in favour of the Revenue, the following questions referred by the Tribunal : " (1) Whether, on the facts and in the circumstances of the case, the assessee is entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal referred to the High Court abovementioned in respect of the assessment years 1967-68 and 1968-69 regarding deductibility of the sums transferred to the development reserve. On the basis of its earlier judgment in the Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454 (Mad), concerning the assessment year 1966-67 in respect of the same assessee, the High Court held that the assessee could not claim deduction in respect of development reserve and the question referred was answered against the assessee. In the assessment year 1969-70, there was appropriation of Rs. 55,703 to the contingencies reserve, Rs. 98,676 to the development reserve and Rs. 18,735 to the tariffs and dividend control reserve. In the assessment year 1970-71, there was appropriation of Rs. 30,104 to the contingencies reserve and Rs. 62,288 to the development reserve. The assessee also claimed deduction at the rate of 8 per cent. under section 80-I of the Act on Rs. 17,791 and Rs. 14,741 being the interest received by the assessee on Government securities during the assessment years 1969-70 and 1970-71 in respect of amounts in the contingencies reserve which are required to be invested in such securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Tariffs and Dividend Control Reserve (Paragraph II(1)). (b) Consumers' Rebate Reserve (Paragraph II(4)) (c) Contingencies Reserve (Paragraphs III, IV V) (d) Development Reserve (Paragraph VA) In Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521, this court has laid down that the amounts credited to the consumers' rebate reserve account did not form part of the real profits of the appellant-company and in order to arrive at the taxable income of the appellant-company from business under section 10(1) of the Indian Income-tax Act, 1922, the said amounts had to be deducted. As regards contingencies reserve there was difference of opinion among the various High Courts. The High Courts of Madras (Vellore Electric Corporation Ltd. [1977] 109 ITR 454), and Calcutta (CIT v. Sijua (Jharriah) Electric Supply Co. Ltd. [1984] 145 ITR 740), had taken the view that deduction could not be claimed in respect of the amounts appropriated to the contingencies reserve. The High Courts of Kerala (Cochin State Power and Light Corporation Ltd. v. CIT [1974] 93 ITR 582), Bombay (Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334), and Patna (Darbhanga Laheriasari Electric Suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue by the High Court. We may now come to development reserve and tariffs and dividend control reserve. In respect of development reserve, the following provisions are contained in paragraph VA of the Sixth Schedule to the Electricity (Supply) Act : " VA. (1) There shall be created a reserve to be called the Development Reserve to which shall be appropriated in respect of each accounting year a sum equal to the amount of income-tax and super-tax calculated at rates applicable during the assessment year for which the accounting year of the licensee is the previous year, on the amount of investment allowance to which the licensee is entitled for the accounting year under section 32A of the Income-tax Act, 1961 (43 of 1961) : Provided that if in any accounting year, the clear profit (excluding the special appropriation to be made under item (va) of clause (c) of sub-paragraph (2) of paragraph XVII) together with the accumulations, if any, in the Tariffs and Dividends Control Reserve less the sum calculated as aforesaid falls short of the reasonable return, the sum to be appropriated to the Development Reserve in respect of such accounting year shall be reduced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of development reserve provided under Paragraph VA 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 India 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 so reserved in any particular manner. Even the sum to be so appropriated towards the development reserve in respect of any accounting year could not be appropriated in annual instalments spread over for a period not exceeding five years. The benefit of the amount so set apart as reserve is available to the assessee directly. It could be applied by him as he pleases as investment in the business of the electricity supply undertaking. " The development r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the undertaking is purchased by the Board or the State Government, the amount of the reserve (whether such amount is in the form of cash or other assets) may be deducted from the price payable to the licensee. " A perusal of the said provision would indicate that the main part of sub-para (2) of Paragraph V and sub-paragraph (4) of paragraph VA are practically the same. There is a difference in the proviso to the said provisions. Under the proviso to sub-para (2) of paragraph V, where the undertaking is purchased by the State Electricity Board or the State Government, the amount of the contingencies reserve after further deduction of the amount of compensation, if any, payable to the employees of the outgoing licensee under any law for the time being in force, has to be handed over to the Electricity Board or the State Government, as the case may be. Under the proviso to sub-para (4) of paragraph VA where the undertaking is purchased by the State Electricity Board or the State Government, the amount of the development reserve has to be deducted from the price payable to the licensee. This difference in the two provisions does not, in our opinion, mean that the amounts appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, has rightly held that the amount appropriated towards development reserve could not be deducted. The provisions regarding tariffs and dividends control reserve are contained in sub-paras (1), (2) and (3) of paragraph II of the Sixth Schedule. The said provisions are practically in the same terms as those contained in paragraph VA relating to development reserve. Sub-para (2) of paragraph 11 requires that the Tariffs and Dividends Control Reserve shall be available for disposal by the licensee only to the extent by which the clear profit is less than the reasonable return in any year of account. Under sub-para (3) of paragraph II on the purchase of the undertaking under the terms of the licence any balance remaining in the Tariffs and Dividends Control Reserve has to be handed over to the purchaser and has to be maintained as such Tariffs and Dividends Control Reserve and where the undertaking is purchased by the State Electricity Board or the State Government, the amount of the Tariffs and Dividends Control Reserve may be deducted from the price payable to the licensee. The reasons given for holding that the amounts appropriated to development reserve could not be deducted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company. (2) This section applies to--- (a) an Indian company ; or (b) any other company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, but does not apply to any Indian company referred to in clause (a), or to any other company referred to in clause (b), if such Indian or other company is a company referred to in section 108 and its total income as computed before applying the provisions of sub-section (1) does not exceed twenty-five thousand rupees. The said provision came up for consideration before this court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. In that case, while construing the expression " profits and gains attributable to the business of " in section 80E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Supply) Act, which reads as follows : " IV(2). The sums appropriated to the contingencies reserve shall be invested in securities authorised under the Indian Trusts Act, 1882 (92 of 1882), and such investment shall be made within a period of six months of the close of the year of account in which such appropriation is made. " The submission is that since the assessee, as a licensee, was required to appropriate certain amounts in the contingencies reserve and to invest the same as securities authorised under the Indian Trusts Act, 1882, the income by way of such investments as securities has to be treated as profits and gains attributable to the business of the assessee to generate electricity as licensee under the Electricity (Supply) Act. Shri K. N. Shukla, learned senior counsel appearing for the Revenue, has, however, submitted that income derived by way of interest from investment in securities cannot be regarded as profits and gains attributable to the business of generating electricity carried on by the assessee. Shri Shukla has placed reliance on the decisions of the various High Courts. (Indian Aluminium Co. Ltd. v. CIT [1980] 122 ITR 660 (Cal) ; CIT v. Cochin Refin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause the character of the interest is different from the character of the income attributable to the priority industry." In CIT v. Cochin Refineries Ltd. [1985] 154 ITR 345 (Ker), the assessee had derived interest on bank deposits. The said deposits were of amounts meant for the purpose of repayment of loans which were so deposited as the loans were not due for repayment. Such deposits were for short duration and were subsequently utilised for repayment of loans. Deduction was claimed under section 80-I in respect of interest received from these deposits. The Kerala High Court held that the amounts of interest were receipts from other sources and not profits and gains attributable to the business of the assessee as a priority industry and the assessee was not entitled to deduction under section 80-I in respect of such amounts. The court has expressed its agreement with the impugned judgment and has observed that the decision of this court in Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84, did not support the contention of the assessee to the contrary. It was held that the words " profits and gains " in the expression " profits and gains attributable to any priorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learly attributable to the priority industry. This decision indicates that in a case where the security deposit is necessary for the purpose of business of the assessee, then the interest obtained therefrom can be said to be attributable to the priority industry. To the same effect is the decision of the Calcutta High Court in CIT v. Dunlop India Ltd. [1992] 197 ITR 34 (Cal). In this case deposits were made by the assessee with the excise department for obtaining manufacturing facilities under the Central excise laws and with the electricity boards in West Bengal and Tamil Nadu for the purpose of obtaining industrial power connections. It was held that these deposits made were incidental to and for the purpose of carrying on the business of priority industry and the interest receipts earned from these securities had to be treated as part of the profits and gains attributable to a priority industry under section 80-I of the Act. The position that emerges from these decisions is that profits and gains can be said to be attributable to the priority industry under section 80-I if there is a direct and proximate connection between the profits and gains and the business of the priori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve in securities authorised under the Indian Trusts Act, 1882, being a condition statutorily incorporated in the licence granted to the assessee under the Electricity (Supply) Act, is incidental to the carrying on of the business of generation and distribution of electricity by the assessee. There is thus a direct and proximate connection between the carrying on of the business of generation and distribution of electricity by the assessee as a licensee under the Electricity (Supply) Act and the income derived by way of interest from the investments in securities of the sums appropriated to the contingencies reserve as required under the provisions of the Sixth Schedule to the Electricity (Supply) Act, which is one of the conditions of the licence on the basis of which the assessee can carry on its business of generating and distributing electricity. We are, therefore, of the view that the income earned by way of interest on the sums appropriated to the contingencies reserve which have been invested in securities can be said to be profits and gains attributable to the business of the assessee for the purpose of section 80-I of the Act. Question No. 3 in Civil Appeals Nos. 2613-14 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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