THE VELLORE ELECTRIC CORPORATION LTD. ETC. versus THE COMMISSIONER OF INCOME TAX, MADRAS

Citation: [1997] SUPP. 1 S.C.R. 586 · Decided: 08-07-1997 · Supreme Court of India · Bench: S.C. AGRAWAL · Disposal: Dismissed

Judgment (excerpt)

A 
THE VELLORE ELECTRIC CORPORATION LTD. ETC. 
v. 
THE COMMISSIONER OF INCOME TAX, MADRAS 
JULY 8, 1997 
B 
[S.C. AGRAWAL AND D.P. WADHWA, JJ.] 
Income Tax Act 1961/Electiicity Supply Act 1948--Section 80 !/Section 
57 read with paragraphs V(2), VA and (1), (2) and (3) of paragraph 11 of 
Sixth Schedule to the Act-lncome--Deductions-Assessee, a licensee for dis-
C tribution of powe1'--Contributions made by assessee towards Contingency 
Reserve; Development Rese1ve and Taiiffs and Control Rese1ve-Amounts 
transf e1Ted by the assessee to these reserves, held, not deductible. 
Profits and Gains-Pliority lndustry-Assessee, a licensee for dist1ibu-
D tion of powe1~Statuto1y condition under licence to create a contingency 
Reserve and invest the amounts appropriated thereto in secwities autholised 
under the Indian T1usts Act-Interest income de1ived from such investment 
held, has proximate and direct nexus to the company's business of generation 
and distribution of elecflicity-1herefore, allowable as deduction-Section 57 
E 
read with Paragraphs JI! and W (2) of Sixth Schedule to the Electricity Supply 
Act, 1948, Indian Tmsts Act, 1882 and Section 80-1, lncome Tax Act, 1961. 
The appellant assessee, a public limited company and a licensee 
under the provisions of the Electricity Supply Act 1948 to distribute power 
in Vellore and Ranipet areas, was required to set apart a part of its profits 
F 
for reserves being the 'Contingency Reserve'; 'Development Reserve' and 
'Tariffs and Dividend Control Reserve'. Section 57 of the Electricity (Supp· 
ly) Act, 1948 read together with the Sixth Schedule to the Act contemplated 
the creation of the following reserves by the licensee : 
G 
(a) Tariffs and Dividend Control Reserve. (Paragraph 11(1) 
(b) Consumer's Rebate Reserve (Paragraph 11(4) 
(c) Contingencies Reserve (Paragraphs III, JV, V) 
H 
(d) Development Reserve (Paragraph VA) 
586 
VELLORE ELECTRIC CORPN. LTD. v. C.I.T. MADRAS 
587 
Also, under the Sixth Schedule to the Act, the assessee was required A 
to invest the sums appropriated in the 'Contingencies Reserve' in 
securities authorised under the Indian Trusts Act 1882. 
With respect to the assessment years 1967 -68 al)d 1968-69, the claim 
of the assessee for deduction of sums of Rs. 91,715 and 1,39,781 transferred B 
by it to the Contingencies Reserve and Development Reserve, was rejected 
by the Assessing Officer. On appeal, the Appellate Assistant 
Commissioner allowed certain deductions but did not consider the 
question of excluding the amounts transferred to the Reserves. The 
Tribunal allowed the claim of the assessee partly with respect to the 
Contingency Reserve. On reference, the High Court held thl)t the assessee C 
could not claim deductions in respect of Development Reserve. 
With respect to the assessment years 1969-70 and 1970-71, 
deductions were claimed by the assessee with respect to appropriations 
made to the Contingency Reserve, Development Reserve and Tariffs and 
Dividend Control Reserve. Also deduction was claimed by the assessee 
under Section 80-1 on the interest received by the assessee on the 
investment made in Government Securities for these years. 
D 
The claim of deductions by the assessee were negatived by the Income 
Tax Officer and the Appellate Assistant Commissioner. On appeal, the E 
Tribunal allowed the claim in respect of Contingencies Reserve but 
rejected the claim of deductions as regards the other reserves. The 
Tribunal in addition allowed the claim of the assessee under section 80-1 
of the Act. The High Court however, disposed of all the issues in favour of 
the Revenue and against the assessee. Aggrieved, the assessee filed the 
present appeals. 
F 
Disposing of these appeals, this Court 
HELD : 1. The appellant-assessee is not entitled to claim deductions 
in respect of contributions made to Contingencies Reserve. Contingencies G 
Reserve is different from Consumers' Benefit Reserve. While in the 
Consumers' Benefit Reserve, the amount appropriated in the reserve is to 
be returned to the Consumers, the amounts standing to the credit of the 
Contingencies Reserve is set apart to be utilised by the Electricity Company 
for the purposes set out in Paragraph V of the·Sixth Schedule to the Act so 
as to ensure that money is always available for meeting out its expenses and H 
588 
SUPREME COURT REPORTS [1997] SUPP.1 S.C.R. 
A that the supply of electricity is not interrupted. [594-G-H; 595-A] 
Associated Power Co. Ltd. 

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