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TMI Blog1997 (7) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 entitled to deduction of Rs. 55,703 and Rs. 30,104 contributed by it for the ' contingencies reserve ' for the assessment years 1969-70 and 1970-71, respectively ? (2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction of Rs. 98,676 and Rs. 18,735 transferred by it to the ' development reserve ' account and to the ' tariffs and dividend control reserve ' account, respectively, for the assessment year 1969-70 and Rs. 68,288 trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 securities under the provisions of the Electricity (Supply) Act. The said claim of the assessee was dismissed by the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal, on further appeal, allowed the claim of the assessee in respect of appropriation of sums to the contingencies reserve, but rejected the claim for deduction of the amounts appropriated to the development reserve and tariffs and dividend control reserve. The Tribunal also allowed the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 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 Supply Corporation Ltd. v. CIT [1979] 117 ITR 516), had taken a contrary view and had held that deduction could be claimed in respect of the amounts appropriated to the contingencies reserve. For the purpose of wealth-tax, the Bombay High Court in CWT v. Bombay Suburban Electric Supply Ltd. [1976] 103 ITR 384, had held that the amount standing to the credit of the contingencies reserve is a part of the assets belonging to the assessee and is includible in the net wealth of the assessee and is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 amount of the shortfall. (2) Any sum to be appropriated towards the Development Reserve in respect of any accounting year under sub-paragraph (1), may be appropriated in annual instalments spread over a period not exceeding five years from the commencement of that accounting year. (3) The Development Reserve shall be available only for investment in the business of electricity supply of the undertaking. (4) On the purchase of the undertaking, the Development Reserve shall be handed over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment 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 reserve was held to be different from the contingencies reserve for the reason that while in the contingencies reserve there is diversion of revenue, there is no such diversion in the development reserve. The Madras High Court in Vellore Electric Corporation Ltd. [1977] 109 ITR 454, has disagreed with the view of the Kerala High Court in Cochin State Power and Light Corporation Ltd. [1974] 93 ITR 582, as regards the deductibility of the amounts appropriated to the contingencies reserve but has agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 appropriated to development reserve were not part of the real profit of the electricity company. Like the contingencies reserve, the development reserve also belonged to the electricity company and it had the use of it. The contingencies reserve is meant to be utilised by the electricity company to meet the expenses or recoup loss of profits arising out of accidents, strikes or other circumstances which the electricity company could not have prevented or to meet the expenses on replacement or renewal of plant or wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are equally applicable to the Tariffs and Dividends Control Reserve and it must, therefore, be held that the amounts appropriated to the Tariffs and Dividends Control Reserve could not be deducted. It must, therefore, be held that the question referred in Civil Appeals Nos. 3333-3334 of 1981 and question No. 2 referred in Civil Appeals Nos. 2613-14 of 1984, have been rightly answered against the assessee and in favour of the Revenue by the High Court in the impugned judgments. We may now come to question No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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, this court said : " As regards the aspect emerging from the expression ' attributable to ' occurring in the phrase ' profits and gains attributable to the business of ' the specified industry (here generation and distribution of electricity) on which learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression ' attributable to ' and not the expression ' derived from '. It cannot be disputed that the expression ' attributable to ' is certainly wider in im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Refineries Ltd. [1985] 154 ITR 345 (Ker) ; CIT v. Universal Radiators P. Ltd. [1981] 128 ITR 531 (Mad) ; CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762 (Bom) and English Electric Co. of India Ltd. v. CIT [1987] 168 ITR 513 (Mad). In Indian Aluminium Co. Ltd. v. CIT [1980] 122 ITR 660 (Cal), the assessee was carrying on business as manufacturer of aluminium. Income by way of interest had accrued from the surplus funds of the assessee that had been invested for short periods. It was held by the Calcutta High Court that no par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 priority industry " means only the business income and not any other income. CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762 (Bom), related to profits earned by the assessee from sale of dry fruits imported under the import licences granted under the Export Promotion Scheme. The assessee was engaged in the business of manufacture and export of oil engines. It was held that the said profits did not qualify for relief under section 80-I of the Act because the same could not be said to be profits attributable to the priority indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 priority industry. In this context, reference may be made to the recent decision in Indian Leather Corporation P. Ltd. v. CIT [1997] 227 ITR 552 (C.A. No. 292 of 1982 decided on April 30, 1997), and this court, while construing the words " income attributable to any of the aforesaid activities " in section 104(4) of the Act, has said : " In order that income can be said to be attributable to manufacture or processing of goods for the purpose of Explanation to section 104(4) of the Act the earning of the income must be directly connected ..... X X X X Extracts X X X X X X X X Extracts X X X X
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