LexASSOCIATED POWER CO. LTD. versus COMMISSIONER OF INCOME TAX
Open in Lexace · Ask the AI about this caseJudgment (excerpt)
ASSOCIATED POWER CO. LTD. A v. COMMISSIONER OF INCOME TAX NOVEMBER 28, 1995 [S.P. BHARUCHA, FAIZAN UDDIN AND S.B. MAJMUDAR, JJ.) B Income Tax Act, 1961 : Contingency Reserve Account-Amount set apart to meet contingen- cies-Assessee owner thereof-Not a business expenditure-Hence not allow- able as a deduction in aniving at the taxable business income. Electricity (Supply) Act, 1948 : c Sixth Schedule-Clauses III, IV and V-Contingencies Reserve-- Created from the revenue of each year of account-Invested i!l securities D authorised under the Indian Trusts Act, 1882-Within a period of six months-Not to be drawn upon during cwTency of licence-Except to meet specified charges with the approval of State Govemment-To be handed over to the purchaser on purchase of the undertaking. Doctrine of diversion of income-Applicability of. These are references by the Income Tax Appellate Tribunal to this Court under Section 257 of the Income Tax Act, 1961. The references have been made because of a divergence of opinion between several High Courts. E The appellant - assessee is a company engaged in the business of generation of electricity and distribution thereof to consumers. It is F governed by the Electricity (Supply) Act, 1948. By reason of the provisions of the Electricity (Supply) Act and of the Sixth Schedule thereto, the appellant - assessee appropriated the sum of Rs. 46,460 out of its revenue to a Contingency Reserve account during the G previous year relevant to the Assessment Year 1973 • 74. This amount was claimed by the appellant - assessee as a deduction in the computation of its total income for the purpose of income tax. The I.T.O. rejected the claim. The Appellate Assistant Commissioner allowed the assessee's ap- peal. The Revenue filed an appeal before the Tribunal which set aside the order of the Appellate Assistant Commissioner, but referred the following H 721 722 SUPREME COURT REPORTS (1995] SUPP. 5 S.C.R. A question. to, this Court B ''Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the sum of Rs. 46,460 transferred to the Contingencies Reserve Account is not allowable as a deduction in arriving at the taxable business income of the assessee- company?" On behalf of the appellant-assessee it was contended that there was no distinction between the Consumers' Benefit Reserve and the Contingen- cies Reserve; that the amount credited to the Contingencies Reserve is ·a C business deduction; and the doctrine of diversion of income is applicable. Disposing of the references, this Court HELD : 1. It is particularly noteworthy that the electricity company can make good from out of the Contingencies Reserve even a loss of profit D arising out of strikes, accidents and other circumstances over which it has not control. There can be no doubt, in the circumstances, that the monies in the Contingencies Reserve belong to the electricity company. These are all expenses which the electricity company has to incur. The amount paid into the Consumers' Benefit reserve has to be returned to the consumers. It is as if the electricity company had not received the amount which it was E obliged to return. The amount that it was obliged to return was not a part of its income. This is altogether different from the case of 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 to the Electricity (Supply) Act, 1948. [735-C-D; 734-H; 735-A] F Poona Electric Supply Co. Ltd. v. C./. T., Bombay City; 57 ITR 521, held inapplicable. Ve/lore Electric Corporation Ltd. v. C.l.T. Madras, 109 ITR 454 and Commissioner of Income Tax, West Bengal v. Sijua (Jharriah) Electric Supply G Co. Ltd., 145 ITR 740, approved. Cochin State Power & Light Corporation Ltd. v. C./. T., Kerala, 93 ITR 582 and Amalgamated Electricity Co. Ltd. v. C./. T. Bombay, 97 ITR 334, overruled. H 2. The amount credited to the Contingencies Reserve is set apart to , ._ t ASSOCIATED POWER CO. LTD. v. C.l.T. 723 meet possible exigencies. It is not a provision for known existing Jiabilities. A [736-E] Commissioner of Income Tax, West Bengal v. Sijua (Jharria) Electlic Supply Co. Ltd., 145 !TR 740, approved. 3. The doctrine of diversion of income by reason of an over-riding B title is quite inapposite. The doctrine
Excerpt shown. Read the full judgment & AI analysis in Lexace.