TMI Blog1978 (7) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... controversy between the parties relates to the deductibility or otherwise of contingencies reserve in computing the taxable income of the assessee, the question needs to be reframed in the following manner : " Whether, on the facts and in the circumstances of the case, the contingencies reserve is deductible in computing the taxable income of the assessee ? " This question has been the subject-matter of answer by three of the High Courts, namely, the Kerala High Court, the Bombay High Court and the Madras High Court. The view expressed by the Kerala High Court in the case of Cochin State Power Light Corporation Ltd. v. CIT [1974] 93 ITR 582, has been accepted by the Bombay High Court in Amalgamated Electricity Co. Ltd. v. CIT [1974] 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting electrical energy in the towns of Darbhanga and Laheriasarai within the municipal limits of the towns. The company was established under a licence granted by the Government of Bihar under the provisions of the Indian Electricity Act, 1910. The working of the company is governed by the Electricity (Supply) Act, 1948 (hereinafter referred to as the Supply Act), as amended by the Electricity (Supply) Amendment Act, 1966, and the rules framed thereunder. According to the provision contained in Paragraph III of the Sixth Schedule of the Supply Act the assessee-company was under an obligation to create a reserve to be called " contingencies reserve ", the reserve to be created out of the existing reserves or from the revenues of the undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and the nature of the reserve have been at variance between the Madras High Court on the one side and the Kerala High Court and the Bombay High Court on the other. Having gone through the said decision, I am of the opinion that the view expressed by the Kerala High Court and the Bombay High Court expound the correct nature of the Contingencies Reserve ". As stated earlier, the working of the company is governed by the Electricity (Supply) Act, 1948. It will, therefore, be necessary to advert to some of the provisions relevant in respect of the creation of the reserve called " contingency reserve ". The Sixth Schedule of the said Act lays down the necessary provisions in that regard. Paragraph III of the Sixth Schedule requires an elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) compensation payable under any law for the time being in force and for which no other provision is made. Besides this hurdle, there is yet another hurdle, namely, that it would only be for the State Government to decide whether at all a contingency, as may require drawing upon the contingencies reserve had arisen. The paragraph states that the " contingencies reserve " shall not be drawn upon during the currency of the licence excepting to meet such charges as the State Government may approve (as being a contingency of the nature as stated). Therefore, the assessee's right to draw upon the contingencies reserve not only depends upon the happening of any of the contingencies mentioned in the said paragraph but further depends on the appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 67 of the Indian Electricity Act, 1910, makes the observance of the terms and conditions of the licence imperative. Failure to do so may entail penalty. Such being the terms and conditions of the contingencies reserve the Kerala High Court observed in the case of Cochin State Power Light Corporation Ltd. [1974] 93 ITR 582, 592 : " In fact, as I have indicated, this reserve is to be created from out of the ' revenue ' and not out of the profits and it is irrespective of the question whether the assessee makes a profit or not. It is related to the original cost of the fixed assets. Though the amount of the reserve could be utilised for certain purposes, the nature of the purposes indicated in para. IV of the Sixth Schedule is su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of the total receipts of the day and put the same through the slit in a box whose key was not held by the constituent and then further laying down the condition that the constituent will not use the money so set apart for any purpose other than his illness or marriage in the family adding a rider that it will be for the authority to decide as to whether the contingencies relating to illness or marriage in the family had actually arisen over and above those if the further condition put upon the constituent be that after his retirement the money, if unspent, will remain as it was to be passed on to his successor who will be doing likewise in the matter, what sort of control the said constituent will be deemed to be having over the money wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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