1983 (6) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum appropriated towards 'Reserve for contingencies' is an allowable deduction in computing the assessee's business income.
2. Whether the appropriation to the contingencies reserve is a diversion of income by an overriding title.
3. Whether the appropriation to the contingencies reserve can be considered an expenditure under s. 37 of the I.T. Act.

Summary:

Issue 1: Allowable Deduction
The Tribunal held that the amount appropriated towards 'Reserve for contingencies' was an allowable deduction in computing the assessee's business income from the electric supply undertaking. This was based on the argument that the amount was a diversion by reason of overriding obligation created by the statute.

Issue 2: Diversion of Income by Overriding Title
The High Court examined the nature and purpose of the contingencies reserve under the Electricity (Supply) Act, 1948. It was argued that the appropriation to the contingencies reserve was compulsory under the law and the assessee had no option in this matter. However, the Court found that the amount appropriated was part of the revenue collected by the assessee and remained at the disposal of the assessee, albeit for specific purposes. The Court concluded that there was no diversion of income by an overriding title as the amount remained under the control of the assessee and was used for its business purposes.

Issue 3: Expenditure under s. 37 of the I.T. Act
The Court rejected the argument that the appropriation to the contingencies reserve was an expenditure wholly and exclusively laid out for the assessee's business. It was held that the appropriation was not towards any known liability or any liability that had accrued during the relevant accounting year. The money was set apart for meeting unknown future liabilities, which does not qualify as an expenditure under s. 37 of the I.T. Act.

Conclusion:
The High Court concluded that the amount appropriated to the contingencies reserve does not form part of the real income of the assessee and cannot be considered an allowable deduction. The question referred by the Tribunal was answered in the negative and in favor of the Revenue.