Supreme Court Dismisses Assessee's Appeal in Income Tax Reference on Deductibility of Contingencies Reserve Under Electricity (Supply) Act, 1948. Amount Transferred to Contingencies Reserve Under Sixth Schedule Not Allowable as Business Deduction Under Income-tax Act, 1961.

Case Note & Summary

The judgment under consideration concerned three tax references made by the Income-tax Appellate Tribunal to the Supreme Court under Section 257 of the Income-tax Act, 1961, arising from a divergence of opinion among High Courts on the deductibility of amounts appropriated to the Contingencies Reserve by an electricity company under the Electricity (Supply) Act, 1948. The assessee, Associated Power Co. Ltd., was engaged in the generation and distribution of electricity and was governed by the Electricity (Supply) Act, 1948. For the Assessment Year 1973-74, the assessee appropriated Rs.46,460 out of its revenues to a Contingency Reserve account as required by the provisions of the Electricity (Supply) Act and its Sixth Schedule. The assessee claimed this sum as a deduction in computing its total income for income tax purposes. The Income-tax Officer rejected the claim. The Appellate Assistant Commissioner allowed the assessee's appeal, relying on the decision of the Kerala High Court in Cochin State Power & Light Corporation Ltd. v. CIT, 97 ITR 334. The Revenue appealed to the Tribunal, citing the Madras High Court's decision in Vellore Electric Corporation Ltd. v. CIT, 109 ITR 454, which had disagreed with the Kerala and Bombay High Courts. The Tribunal relied on the Madras High Court, set aside the Appellate Assistant Commissioner's order, and referred the question to the Supreme Court. The core legal issue was whether the sum transferred to the Contingencies Reserve Account was allowable as a deduction in arriving at the taxable business income of the assessee-company. The Electricity (Supply) Act, 1948, in Section 57 read with the Sixth Schedule, mandated that a licensee create a Contingencies Reserve, appropriate from revenues a sum not less than one-quarter and not more than one-half per cent of the original cost of fixed assets, invest the sums in securities, and draw upon the reserve only for specified purposes such as expenses arising out of accidents, strikes, replacement or renewal of plant, or compensation payable under law. On purchase of the undertaking, the reserve after deductions was to be handed over to the purchaser. The court examined the statutory scheme and earlier precedents, especially Poona Electric Supply Co. Ltd. v. CIT, 57 ITR 521, which concerned the Consumers' Rebate Reserve. In that case, the Supreme Court held that income tax is a tax on real income, i.e., profits arrived at on commercial principles subject to the Income-tax Act; that real profits of a businessman cannot include amounts returned to consumers under statutory compulsion; and that there is a distinction between deductions for ascertaining profits and distributions out of profits, and between real profits and statutory profits. The court in Poona Electric concluded that the amount credited to Consumers' Rebate Reserve was a part of excess amount paid and reserved to be returned to consumers, and did not form part of real profit, hence deductible. The Kerala High Court in Cochin State Power & Light Corporation Ltd. v. CIT, 93 ITR 582, considered the nature of the Contingencies Reserve and observed that it was created from out of revenues, irrespective of profit, as a fixed percentage of original cost of fixed assets, and had to be invested and maintained; it relied on Poona Electric to hold that such diversions must be deducted in computing commercial or real profit. The present case required the Supreme Court to resolve the conflict between High Courts on whether the Contingencies Reserve, unlike the Consumers' Rebate Reserve, was deductible. The extracted text does not include the Supreme Court's final answer to the referred question, but the analysis of the statutory provisions and prior rulings was set out in detail. The final decision and ratio decidendi are not available in the provided portion of the judgment.

Headnote

Issue of Consideration

Final Decision

Not mentioned in the provided text.

Law Points