TMI Blog2006 (3) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was eligible for deduction at the rate of 100 per cent. 3. Before us ld. DR submitted that service lines and lighting and signal system cannot be considered as an independent plant or machinery. Therefore, 100 per cent depreciation is not allowable. On the other hand ld. AR submitted that in earlier years, the claim of assessee had been allowed and the department had not preferred any appeal against such deduction allowed by ld. CIT(A). 4. We have considered the submissions made by both the parties. First proviso to section 32 was omitted by the Finance Act, 1995, with effect from 1-4-1996. It provided that where the actual cost of any machinery or plant does not exceed Rs. 5,000, the actual cost thereof shall be allowed as deduction in respect of previous A years in which such machinery or plant is first put to use by the assessee for the purpose of his business or profession. In order to find out whether a particular machinery or plant can function independently, functional test has to be applied. A piecemeal approach is not permissible and the entire matter must be considered as a single unit unless of course, the component part can be treated as separate units having d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the parties. It is a fact that transmission loss occurs due to theft and other reasons. The transmission loss in the case of assessee is lower than the transmission loss in the case of Tamilnadu Electricity Board. The contention of the revenue is that the assessee being a society, the line loss should be less as compared to Tamilnadu Electricity Board, a Public Sector Company. This argument of Revenue holds no water. For making an addition sufficient material has to be brought on record. Additions cannot be made on the basis of presumptions and surmises. It is not the case of Revenue that the assessee has sold the electricity outside the books of account and since the Assessing Officer has not been able to bring any material on record contrary to the facts of the case, we are of the considered view that no addition under such a situation can be made. Accordingly, we uphold the findings of Ld. CIT(A) in this regard. 8. Next common issue for consideration in Revenue's appeals for assessment years 1994-95 and 1995-96 relate to amount credited to Contingency Reserve. The assessee created Contingency Reserve because of statutory provisions contained in Clause IV of Electricity (Supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngencies Reserve shall be invested in securities authorised under the Indian Trusts Act, 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." Clause V reads as under : "V. The Contingency Reserve shall not be drawn upon during the currency of the license except to meet such charges as the State Government may approve as being:- (a) Expenses or loss of profit arising out of accidents, strike 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 time being in force and for which no other provision is made. (2) On the purchase of the undertaking, the Contingency Reserve, after deduction of amounts drawn under sub-paragraph , shall be handed over to the purchaser and maintained as such contingencies reserve: Provided that where the undertaking is purchased by the Board or the State Government, the amount of the reserve computed as above shall, after further deduction of the amount of compensation, if any, payab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligation, income A is diverted and never reaches the person in whose hands it is sought to be assessed. In the present case the statute requires the electricity company to create certain reserves if its clear profit exceeds a reasonable return (Clause II, Sixth Schedule). Again, the contingencies reserve is to be created from the existing reserve or from "the revenue of the undertaking". This clearly indicates that the monies which have to be put into the contingencies reserve reach the electricity company and are not diverted away from it. It is the electricity company which has to invest the sums appropriated to the contingencies reserve. The investment would be in its name and it would be the owner thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trust Act makes no difference to this C position." Their Lordships finally held that the amount credited to the contingencies reserve was not diverted by reason of an overriding obligation or title and, in determining the business profits of assessee it must be taken into account. 14. In Associated Power Co. Ltd.'s case, Hon'ble Supreme Court has overruled the decision of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, there is no expenditure involved when an amount is appropriated to the contingencies reserve under the Electricity (Supply) Act, 1948; as such appropriation is setting apart to meet possible contingencies. It is not known provision or known existing liabilities. Therefore, amount paid to the reserve is an appropriation of profits and cannot be allowed as deduction. Ld. CIT(A) has held that monies credited to Contingency Reserve account is a charge on Profits and Loss Account and not an appropriation of profits. We are unable to subscribe his views. The facts of the case in South Madras Electricity Supply Corpn. Ltd. are distinguishable from the facts of the case before us. In that case, Hon'ble Madras High Court held that there was diversion of profits on contribution of monies credited into consumers' rebate reserve whereas in the case before us, the reserve has been created to meet certain contingencies. There is no diversion of profits in the instant case. The money remains with the assessee and forms part of the capital. The creation of the reserve is thus, an appropriation of the profits. Respectfully following the decision of Hon'ble Supreme Court in the case of Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed to tax is real income and not hypothetical income. The Hon'ble Supreme Court in the case of CIT v. Shoorji Vallahhdas Co. [1962] 46 ITR 144 examined the concept of real income. In this case it was held as under: "Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a "hypothetical income", which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." 18. The Hon'ble Supreme Court in the case of CIT v. Hindustan Housing Land Development Trust Ltd. [1986] 161 ITR 524 held that the assessee was engaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no right to receive. The claim of the assessee for subsidy was not decided by the Government. The assessee had no right enforceable in the law. Therefore, there was no accrual of real income to the assessee. The quantification of the amount was thus a "hypothetical income". Merely because amount was quantified in books of account, its character would not change from "hypothetical income" to "real income". Therefore, the assessee's case is squarely covered by the decision of Hon'ble Supreme Court in the cases of Shoorji Bhallahhdas Co. and Godhra Electricity Co. Ltd. We, therefore, uphold the order of the ld. CIT(A) on this issue and reject the ground raised by the Revenue for both the assessment years. 21. The another issue in Revenue's appeal for assessment year 1997-98 relates to deletion of bad debts. The assessee claimed deduction of Rs. 53,99,005 as bad debts written off. Ld. CIT(A) on verification found that for assessment year 1990-91 and assessment year 1991-92, the assessee credited income of Rs. 33,33,604 and Rs. 20,65,401 respectively on account of free electricity supplied under terms of licence granted to it. This amount was written off as bad debts as the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Factory Ltd [1997] 224 ITR 604 held that for the purpose of making deduction under section 80P of the Act, gross total income must be determined in accordance with the other provisions of the Act. Therefore, for the purpose of computation of income from co-operative banks the expenses relatable to earning of the said income will be deductible. This is what the Assessing Officer as well as Ld. CIT(A) has done. Accordingly, we do not find any infirmity in the stand taken by the authorities below. 25. The first issue raised in assessee's appeal in ITA No. 1259/Mds./2000 for assessment year 1997-98 relates to confirming the addition on account of provision for contingency reserve. Since we have decided the issue in favour of the Revenue in their appeals for assessment years 1994-95 and 1995-96, this ground raised by the assessee in the assessment year 1997-98 for the same reasons stands dismissed. 26. The next issue arising in the assessee's appeal for assessment year 1997-98 relates to subsidy received by the assessee. The assessee received subsidy of Rs. 22,09,950 under various heads. The Assessing Officer treated the receipt of subsidy as income of A the assessee. The ld. CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as revenue receipt. Accordingly, we do not find any infirmity in the findings of Ld. CIT(A). 28. The last issue for consideration in this appeal relates to interest accrued on R.E.C. bonds. The assessee obtained R.E.C bonds for a sum of Rs. 1,10,40,000 and earned interest thereon The interest earned was not admitted as income on the ground that R.E.C. Bonds were purchased out of special funds which were created out of remittances of interest payable by the assessee. The contention of the assessee has not been accepted by the authorities below. The ld. CIT(A) held that bonds were allotted in the name of assessee by R.E.C. and hence, interest on R.E.C. bonds has accrued in the hands of assessee. 29. We have considered the matter carefully. The assessee has invested Rs. 1,10,40,000 in R.E.C. Bonds out of "Special Fund". Therefore, the ownership on the bonds vests with the assessee. The interest earned thereon therefore, will be the income of the assessee. Merely because the interest is credited in the special funds it would not amount to diversion of income at source. As per the scheme of the fund, the interest on project loans provided by REC shall be credited in a special Saving ..... X X X X Extracts X X X X X X X X Extracts X X X X
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