TMI Blog1996 (4) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... in providing passenger transport. The Income-tax Officer while completing the assessments for the assessment years 1973-74 and 1974-75 disallowed the claim for depreciation to the extent of Rs. 4,44,360 for the assessment year 1973-74 and Rs. 6,65,599 for the assessment year 1974-75. According to the assessee, it became the owner of those properties as per G. O. No. 86, Transport Department, dated November 8, 1971, and notification dated December 22, 1971. The latter notification vested those properties with the assessee and suitable entries were made in the assessee's books in respect of the consideration from capital contribution and loan advanced by the Government. A formal sale deed was not executed in view of the provisions under the Government Grants Act, 1895. The Income-tax Officer was of the view that the assessee had not become a legal owner and that the provisions of the Transfer of Property Act and the Indian Registration Act disqualify the assessee's claim for ownership over these properties. The Appellate Assistant Commissioner deleted the disallowance and directed the allowance of depreciation following the decision of the Tribunal in Tamil Nadu Small Scale Industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hicles Act, 1939, mandatorily requires either insurance to meet liabilities of the employees and third parties or maintenance of a fund for this purpose. The assessee had already constituted such a fund in the name of Pallavan Transport Corporation Insurance Fund Regulations, 1972. The fund meets the requirements of the Motor Vehicles Act. The amount set apart during the year has also been funded by putting it in the bank in the immediately succeeding year as seen from the accounts for the year ending March 31, 1974. On these facts, the Appellate Assistant Commissioner found that it was not a mere contingent liability but a provision towards the fund already in existence. On further appeal by the Department, the Tribunal agreed with the conclusion arrived at by the Appellate Assistant Commissioner. Accordingly, the Tribunal confirmed the finding of the first appellate authority on this aspect. Before us, learned standing counsel for the Department submitted that the fund created by the assessee is only a reserve created for meeting the contingent liability. The assessee is the owner of the fund. The interest arising out of the fund is payable to the assessee. Learned standing cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of certain events but the liability for the appellant is created by the statute and not by the events themselves. Therefore, the payments towards the insurance fund are an admissible deduction. The assessee is not resting its claim on the principle of diversion by overriding title. Learned counsel further submitted that if the insurance premium is paid that would be allowable as revenue expenditure. In similar manner, the fund was created and the amount was contributed and that should also be allowed as a deduction since it is a revenue expenditure. We have heard learned standing counsel for the Department and learned counsel for the assessee. In M. S. P. Senthilkumara Nadar and Sons v. CIT [1957] 32 ITR 138, this court held that : " it should be taken as well settled now that without statutory warrant---and there is none in section 10(2)(xv)--- deductions are not permissible for anticipated losses, even if they are inevitable---nor for contingent liabilities ". In Indian Molasses Co. (Pvt.) Ltd. v. CIT [1959] 37 ITR 66, the Supreme Court while considering the provisions of section 10(2)(xv) and section 66 of the Indian Income-tax Act, 1922, held that : " 'spending' in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the credit of the two reserves cannot be said to be amounts which have gone out of the hands or the control of the assessee and become the subject-matter of ownership of somebody else. It may be the statute has imposed certain restrictions over the disposal of the amounts by the assessee but that does not mean that the amounts have ceased to be money belonging to the assessee. Simply because the statute requires a licensee like the assessee to make an appropriation out of its revenue for a particular purpose and that is a compulsory appropriation which the assessee has to make, it does not follow that for income-tax purposes, such appropriation must necessarily be deducted in arriving at the profits and gains of the business. Every appropriation to be made under a statutory provision does not constitute a diversion of profit by overriding title. " In CIT v. Sijua (Jharriah) Electric Supply Co. Ltd. [1984] 145 ITR 740, the Calcutta High Court while considering the amount appropriated towards " reserve for contingencies " under the Electricity Supply Act held that : " if an assessee sets apart a sum of money every year for meeting its unknown liabilities in business, it cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts in the profit and loss account, a 'reserve' is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business ". The above said decisions are relied upon by learned standing counsel for the Department to support the contention that the assessee has created only a reserve to meet the contingent liabilities and, therefore, the contribution made to the Pallavan Transport Corporation. The insurance fund cannot be allowed as deduction as revenue expenditure since it does not also relate to earning of profits. On the other hand, learned counsel appearing for the assessee submitted that in order to meet the statutory liability the assessee created the insurance fund for the purpose of meeting the payment of compensation that may arise in future, and, therefore, it is an outgoing since the contribution went out of its hands and it should be allowed as deduction. Reliance was placed upon the decision of this court rendered in Chandmama Publications v. CIT [1989] 176 ITR 321, wherein this court held that : " the object of effecting insurance is generally to cover an insurable interest subject to a risk, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce fund for the purpose of covering third party risk 'from and out of the revenues of the Corporation' and, that being the position under the relevant rule, it is difficult to appreciate how the Appellate Assistant Commissioner took the view that these amounts were in the nature of debits to the insurance fund by way of appropriation of profits after they had been earned. The Tribunal, in our view, was, therefore, right in allowing the deduction claimed by the assessee-Corporation in respect of these contributions ". In Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334, the Bombay High Court while considering the provisions of section 10(1) of the Indian Income-tax Act, 1922, and rule 8 of the Indian Income-tax Rules, 1922, held that : " the contingency reserve and the tariffs and dividends control reserve are required to be compulsorily made under the Electricity (Supply) Act, 1948. Appropriations to both these funds are not made voluntarily by the licensee. The reserves are not available to the licensee for any purpose of its own. The tariffs and dividends control reserve is apparently intended to be used for the benefit of the licensee or its shareholders but, in the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t exceeds a reasonable return. Monies standing to the credit of the contingencies reserve which are set apart to be utilised by the electricity company for the purposes set out in clause V of the Sixth Schedule are to meet expenses or recoup loss of profits arising out of accidents, strikes or other circumstances which the electricity company could not have prevented; to meet expenses on replacement or renewal of plant or works; and for payment of compensation required by law for which no other provision has been made. These are all expenses which the electricity company has to incur. The reservation is made so that money is always available for meeting these expenses and the supply of electricity is not interrupted. For the same reason, payments out of the contingencies reserve can be made only with the State Government's approval. It is particularly noteworthy that the electricity company can make good from out of the contingencies reserve even a loss of profit arising out of strikes, accidents and other circumstances over which it has no control. There can be no doubt, in the circumstances, that the monies in the contingencies reserve belong to the electricity company, and are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o been put in the bank with reference to the aforesaid rules for the year ending March 31, 1974. The officers of the assessee-Corporation can operate this account and they can do so only in terms of the legal obligation arising under section 94(3) of the Motor Vehicles Act and the Regulations of the Insurance Fund. According to the assessee, the actual payment might arise on contingency depending upon an accident, which may or may not happen and it is a payment in the nature of an insurance premium to safeguard against any possible large outlay at any single point of time to the inconvenience of the normal operations of the assessee's business. It was pointed out that the interest on the amount deposited in the fund is payable to the assessee-Corporation as per clause (ii). The amount deposited should also be held on behalf of the assessee-Corporation. The fund is not maintaining a separate account of its own. The accounts of the fund are maintained in the books of account belonging to the assessee. Therefore, learned standing counsel submitted that the assessee is having ownership over the fund. According to learned standing counsel, the liability is only contingent in nature and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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