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High Court Of Calcutta
SABYASACHI MUKHERJI, SUHAS CHANDRA SEN
COMMISSIONER OF INCOME-TAX - Appellant
Versus
SIJUA (JHARRIAH) ELECTRIC SUPPLY CO.LTD. - Respondent
Income-Tax Reference 44 Of 1979
Decided On : 06/30/1983
INCOME TAX - Deductions - Contingencies reserve - Whether appropriation towards 'reserve for contingencies' is an allowable deduction in computing assessee's business income from electric supply undertaking - Held, no.
Fact of the Case:
The assessee, an electric supply undertaking engaged in the business of generation and distribution of electricity, appropriated an amount towards 'reserve for contingencies' and deducted that amount in the computation of its taxable income. The Income-tax Officer disallowed deduction of this amount and added back the same. The Tribunal held that the amount covered by contingency reserve was a diversion by reason of overriding obligation created by the statute and, therefore, for determining the commercial profits of the assessee, the amount of this reserve had to be deducted.
Finding of the Court:
The court held that the appropriation to the contingencies reserve is compulsory under the law and the assessee has really no option in this matter. This reserve has to be shown in the balance-sheet of the assessee-company, but the amount credited to this reserve cannot be utilised by the assessee except for the purposes laid down in the statute. Money has to be kept invested in securities authorised under the Indian Trusts Act, 1882. It is necessary to obtain prior approval of the Government before making any expenditure out of that fund. Ultimately, when the undertaking of the company is purchased, the contingencies reserve will have to be handed over to the purchaser. The court further held that the amount appropriated to the contingencies reserve was not lost to the assessee by an overriding obligation and the reserve was still available to the assessee.
Issues: Whether the appropriation towards 'reserve for contingencies' is an allowable deduction in computing assessee's business income from electric supply undertaking.
Ratio Decidendi: The amount appropriated to the contingencies reserve is a part of the revenue collected by the assessee in its business of generation and sale of electricity. The assessee is required to invest the sums appropriated to the contingencies reserve in securities authorised under the Indian Trusts Act, 1882. The assessee also cannot spend any amount out of this fund except with the approval of the State Government; but it is the assessee alone who can spend this amount so long as the assessee's business of generation and supply of electricity continues. It is true that the assessee is not at liberty to use this fund in whichever way it likes but the purposes for which the amount can be spent as prescribed in para. V are all usual business purposes of the company. The amount can be spent for meeting expenses or loss of profit arising out of accidents, strikes or other unavoidable circumstances. The amount can be utilised for payment of any statutory compensation for which no other provision has been made. The amount can also be spent for replacement or renewal of plant or works other than normal maintenance or renewal. It is also important to note in this connection that the written down cost of fixed assets of the company which cannot be used any more in the business of the assessee including the dismantling charges of such fixed assets will have to be charged against the contingencies reserve. The amount realised on sale of such fixed assets will have to be credited to the contingencies reserve.
Final Decision: The question referred by the Tribunal is answered in the negative and in favour of the Revenue.
( 1 ) THE following question of law has been referred at the instance of the Commissioner of Income-tax under Section 256 (1) of the I. T. Act, 1961:"whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 66,964 appropriated towards 'reserve for contingencies' is an allowable deduction in computing the assessee's business income from electric supply undertaking. "
( 2 ) THE facts relevant for this question stated by the Tribunal are as under:"the assessee is an electric supply undertaking engaged in the business of generation and distribution of electricity and is governed by the Electricity (Supply) Act, 1948. As per paragraphs III to V of the Sixth Schedule to the aforementioned Act, it had to create a reserve called "contingencies Reserve", to be utilised for the purposes set out in paragraph V of the said Sixth Schedule. In compliance with the provisions of the said Act, the assessee-company appropriated an amount of Rs. 66,964 towards "reserve for contingencies" and deducted that amount in the computation of its taxable income of the previous year relevant to the assessment year 1973-74, For the reasons mentioned by him in the assessment order, the Income-tax Officer disallowed deduction of this amount in the computation of the assessee's business income and added back the same. The aforesaid disallowance, among others, was disputed by the assessee in the appeal preferred before the Appellate Assistant Commissioner against the assessment for the assessment year 1973-74. For the reasons mentioned by him in his order, the Appellate Assistant Commissioner confirmed the disallowance of the deduction in respect of this Contingency Reserve of Rs. 66,964. "
( 3 ) THE assessee preferred a further appeal to the Tribunal. The Tribunal held that the amount covered by contingency reserve was a diversion by reason of overriding obligation created by the statute and, therefore, for determining the commercial profits of the assessee, the amount of this reserve had to be deducted. The Tribunal further held that the amount of Rs. 66,964 was deductible while computing the assessee's total income under Section 28 (1) of the I. T. Act, 1961.
( 4 ) THE argument in this case on behalf of the Revenue and also on behalf of the assessee has centered round the provisions contained in the Electricity (Supply) Act, 1948, and in particular on the Sixth Schedule. The relevant provisions of the Sixth Schedule are set out as under:"iii. There shall be created from existing reserves or from the revenues of the undertaking a reserve to be called 'contingencies Reserve '. IV. (1) The licensee shall appropriate to Contingencies Reserve from the revenues of each year of account a sum not less than one quarter of one per centum and not more than one-half of one per centum of the original cost or 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. (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. 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 maintenance or renewal; (c) compensation payable under any law for the time being in force and for which no other provision is made. (2) On the purchase of the under
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