TMI Blog1976 (12) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... less than one-quarter of one per centum and not more than one-half of one per centum of the original cost of fixed assets, provided that if the said reserve exceeds, or would by such appropriation be caused to exceed, five per centum of the original cost of fixed assets, no appropriation shall be made which would have the effect of increasing the reserve beyond the said maximum. Under Paragraph IV(2) the sums appropriated to the contingencies 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. Paragraph V provide how the amounts standing to the credit of the contingencies reserve should be utilised and states : "V. (1) The contingencies reserve shall not be drawn upon during the currency of the licence except to meet such charges as the State Government may approve as being-- (a) expenses or loss of profits arising out of accidents, strikes 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 maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the State Government, the amount of the reserve may be deducted from the price payable to the licensee. Pursuant to the obligation imposed on the assessee as a licensee by these provisions, the assessee transferred to the contingencies reserve account a sum of Rs. 41,328 and the development reserve account a sum of Rs. 42,718. In the assessment to income-tax of its profits and gains for the assessment year 1966-67, the assessee claimed that these two amounts should be deducted. The Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal negatived this claim of the assessee. It is, thereafter, at the instance of the assessee the Income-tax Appellate Tribunal, Madras Bench, under section 256(1) of the Income-tax Act, 1961, has referred the following question for the opinion of this court. "Whether, on the facts and circumstances of the case, the Appellate Tribunal is right in holding that the sum of Rs. 41,328 transferred to the contingencies reserve account and Rs. 42,718 transferred to the development reserve account are not to be deducted in arriving at the taxable profits of the assessee ?" The learned counsel for the assessee contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs. Y to them and another businessman collecting Rs. X alone. The amount returned is not a part of the profits at all The Supreme Court further observed in the same judgment : "The appellant-company is a commercial undertaking. It does business of the supply of electricity subject to the provisions of the Act. As a business concern its real profit has to be ascertained on the principles of commercial accountancy. As a licensee governed by the statute its clear profit is ascertained in terms of the statute and the Schedule annexed thereto. The two profits are for different purposes--one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the 'consumers' benefit reserve account'. They were a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of assessee's real profits. So, to arrive at the taxable income of the assessee from the business under section 10(1) of the Act, the said amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties authorised under the Indian Trusts Act, 1882, does not in any way affect this position. The assessee continues to be the owner of the investments and however limited be the benefit that the assessee may derive from such an investment it cannot be held that the investment is not the assessee's investment, but somebody else's investment. The position is a fortiori with regard to development reserve. With regard to that reserve there is not even the restriction that it should be invested in securities authorised under the Indian Trusts Act,1882. The only restriction is that the amount standing to the credit of development reserve shall be available only for investment in the business of electricity supply of the undertaking. That does not in any way make the amount in question the money or the property of somebody else other than the assessee. Equally, the provision that on the purchase of the undertaking, the development reserve shall be handed over to the purchaser and maintained as such development reserve does not in any way affect this basic position with regard to title to the amounts standing to the credit of, such a reserve. Apart from this in the very decision cited by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned judges, while dealing with the development reserve, stated : "It cannot be said that the amount is expended by the assessee nor could it be said that it is lost to the assessee by an overriding obligation. The development 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 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. We do not think that this is in the nature of the consumers' benefit reserve with which the Supreme Court was dealing in the Poona Electric Supply Co.'s case [1965] 57 ITR 521 (SC). As indicated earlier, the consumers' benefit reserve was intended for the benefit of the consumer alone and there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee for any purpose of his own or even for any purpose other than those indicated in Paragraph V of the Sixth Schedule and also noticing the object of the creation of this reserve and further noting the provision that it is a diversion from the revenue, we think that the diversion is one which is deductible in determining the real profit. There is the further fact that the assessee does not get even compensation on account of this reserve as and when the undertaking is purchased and even the purchaser has to maintain the reserve as such. Therefore, in spite of the distinction that we have pointed out in regard to certain features between this reserve and the consumers' benefit reserve with which the Supreme Court was concerned in Poona Electric Supply Company's case [1965] 57 ITR 521 (SC), we feel that the amount by the contingencies reserve is a diversion by reason of an overriding obligation created by the statute and, therefore, for determining the commercial profits of the assessee, the amount of this reserve has to be deducted." With great respect to the learned judges, we are unable to share their view with regard to the contingencies reserve. The fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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