The Vellore Electric Corporation Ltd. Etc v. The Commissioner Of Income Tax, Madras

A THE VELLORE ELECTRIC CORPORATION LTD. ETC. v. THE COMMISSIONER OF INCOME TAX, MADRAS JULY 8, 1997 [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 read with Paragraphs JI! and W (2) of Sixth Schedule to the Electricity Supply E 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 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 : (a) Tariffs and Dividend Control Reserve. (Paragraph 11(1) (b) Consumer's Rebate Reserve (Paragraph 11(4) (c) Contingencies Reserve (Paragraphs III, JV, V) (d) Development Reserve (Paragraph VA) 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. 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 586 587 588 586 589 590 Section: CONCLUSION 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 A that the supply of electricity is not interrupted. [594-G-H; 595-A] Associated Power Co. Ltd. v. CIT, [1996] 7 SCC 221, followed. Vellore Electricity Corporation Ltd. v. UOJ, 109, ITR 454 (Mad) and CIT v. Sijua (Jhaniah) Electric Supply Co. Ltd., (1984) 145 ITR 740 (Cal.), B referred to and impliedly approved. Cochin State Power and Light Corporation Ltd. v. CIT, Kera/a (1974) 93 ITR 582 (Ker.); Amalgamated Electricity Co. Ltd. v. CIT Bombay City I, (1974) ITR 334 (Born.) and Darbhanga Laheriasari Electric Supply C Corporation Ltd. v. CIT Bihar, (1979) 117 ITR 516 (Pat.) referred to and impliedly over-ruled. Poona Electric Supply Co. Ltd. v. CIT Bombay City I, (1965) 57 ITR 521 (SC) and Commissioner of Wealth Tax, Bombay v. Bombay Suburban Electric Supply Ltd., (1976) 103 ITR 384 (Born.), referred to. 2. Since there is no difference between the Development Reserve and Contingencies Reserve, the amount appropriated towards Development Reserve cannot be deducted. Development Reserve required to be created under Paragraph VA of the Sixth Schedule to the Electricity (Supply) Act E is directly related to the Development Rebate being equal to the income tax and super tax payable on such rebate. The difference in language used in Para V(2) relating to contingency Reserve and para VA(4) relating to Development Reserve does not mean that the amounts appropriated to Development Reserve were not part of the real profit of the Electricity Company. Like, Contingencies Reserve, Development Reserve also F belonged to the Electricity Company and it had the use of it. While the Contingencies Reserve is meant to be utilised by the Company to meet expenses or recoup loss of profits in the event of certain circumstances, Development Reserve is meant for investment in the business of electricity supply of the undertaking. Both the provisions achieve the same result viz. G Reserve being available· to the State Electricity Board or the State Government. [599-G; A-F; 598-H] Ve/lore Electricity Corporation Ltd. v. UOJ, 109 ITR 454 (Mad.); Cochin State Power & Light Corporation Ltd. v. CIT Kera/a, (1974) 93 ITR 582 (Ker.) and Associated Power Co. Ltd. v. CIT, [1996] 7 SCC 221, H referred to. 3. Provisions contained in Paragraph 11(1), (2) and (3) of the Sixth A Schedule regarding Tarilfs and Dividend Control Reserve are practically in the same terms as that contained in Paragraph VA relating to Development Reserve. The reasons given for holding that the amounts appropriated to Development Reserve could not be deducted are equally applicable to Tariffs and Dividend Control Reserve and therefore, the B amounts appropriated to this Reserve cannot be deducted. Paragraph ll(2) requires that this Reserve shall he available for disposal by the licensee only to the extent by which the clear profit is less than the reasonable return in any year of account. Under sub-para 3 of Paragraph II, on the purchase of undertaking under the terms of licence, any balance remaining in the Tariffs and Dividend Control Reserve has to be handed C over to the purchaser and has to be maintained as such Tariffs and Dividend Control Reserve and where the undertaking is purchased by the State Electricity Board or the State Government, the amount of the Tariffs and Dividend Control Reserve may be deducted from the price payable to the licensee. [599-H; 600-A-C] D 590 592 4.1. Profits and Gains can be said to be attributable to the priority industry under section 80-1 if there is a direct and proximate connection between the profits and gains and the business of the priority industry. It is not necessary that the income should have been earned from the actual conduct of the business of generation and distribution of electricity but E what is required is that the activity from which the income is earned must have a direct and proximate connection with the priority industry of generation and distribution of electricity. [606-C; 607-B] 4.2. In the present case, by virtue of Section 57 of the Electricity F (Supply) Act read with provisions of Sixth Schedule particularly, Para III and para IV(2), the requirement to create the Contingencies Reserve and investment of the sums appropriated to the said Contingencies Reserve in securities authorised under the Indian Trusts Act 1882, being a condition statutorily incorporated in the licence granted to the assessee under the Electricity (Supply) Act, is incidental to the carrying on of the business of G generation and distribution of electricity by the Assessee. Since there is a direct and proximate connection between the carrying on of business of generation and distribution of electricity by the Assessee as licencee and income derived by way of interest from the investment in securities, the income earned by way of interest on the sums appropriated to the H A Contingencies Reserve and which have been invested in securities can be said to be profits and gains attributable to the business of the Assessee for purposes of Section 80-1 of the Act. [607-C-E] Cambay Electric Supply Industrial Company Ltd. v. CIT Gujarat II, Ahmedabad, [1978) 2 SCC 644; Indian Aluminium Co. Ltd. v. CIT West B Bengal II, 122 ITR 660 (Cal.); CIT Kera/a I, Ernakulam v. Cochin Refineries Ltd., 154 ITR 344 (Ker.); CIT Tamilnadu-Vv. Universal Radiators Pvt. Ltd., 128 ITR 531 (Mad.); CITv. Kirloskar Oil Engines Ltd., 157 ITR 762 (Born.); English Electric Co. of India Ltd. v. CIT, 168 ITR 513 (Mad.); C/Tv.Dunlop India Limited, 197 ITR 34 (Cal.) and Indian Leather Corporation P. Ltd. v. C CIT, (CA No. 292 of 1982 decided by S.C. on April 30 1997), referred to. CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 3333-3334 of 1981 Etc. From the Judgment and Order dated 28.11.78 of the Madras High D Court in T.C. No. 116 of 1974. H.N. Salve, Shrinivasamoorty, K.N. Shukla, Jaideep Gupta, K.J. John, B.K. Prasad, N.D.B. Raja and C. Radha Krishnan for the appearing parties. E The Judgment of the Court was delivered by S.C. AGRAWAL, J. These appeals filed by the assessee raise common questions for consideration. Civil Appeals Nos. 3333-3334 of 1981 relating to assessment years 1967-68 and 1968-69 have been filed against the judgment of the Madras High Court dated November 28, 1978 in T.C. No. 116 of 1974 on the basis of certificate of fitness granted by the High Court under Section 261 of the Income Tax Act, 1961 (hereinafter referred to as 'the Income Tax Act'). In these appeals the High Court has answered against the assessee and in favour of the Revenue the following question referred to by the Income Tax Appellate Tribunal (hereinafter referred as G 'the Tribunal') : ''Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sums of Rs. 47,055 and Rs. 89,324 transferred to the Development Reserve Account fot the Assessment Years 1967-68 and 1968-69 respectively were not to be deducted in arriving at the taxable profits of the assessee-company?" Civil Appeals Nos. 2613-14 of 1984 have been filed against the judgment of the Madras High Court dated February 6, 1978 on the basis of certificate of fitness granted by the High Court under Section 261 of the Income Tax Act. In these appeals, which relate to assessment years 1969-70 and 1970-71, the High Court has answered against the assessee and in B favour of the Revenue the following questions referred by the Tribunal : 592 594 "(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 55,703 and Rs. 30,104 contributed by it for the 'Contingencies Reserve' for the assessment C years 1969-70 an 1970-71 respectively? (2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction of Rs. 98,676 and Rs. 18,735 transferred by it to the 'Development Reserve' account and to the 'Tariffs and Dividend Control Reserve' account respectively for D' the assessment year 1969-70 and Rs. 68,228 transferred by it to the 'Development Reserve' account for the assessment year 1970-71? (3) Whether, on the facts and in the circumstances of the case and in view of the prol'isions of the Electricity (Supply) Act, 1948, the E assessee is entitled to relief under Section 80-I not only in respect of business income but also in respect of income derived by it from investments in securities?" The assessee is a public limited company having a licence under the provisions of the Electricity (Supply) Act, 1948 (hereinafter referred to as F 'the Electricity Supply Act') to distribute power in the Vellore and Ranipet areas. In view of Section 57 of the Electricity Supply Act read with Sixth Schedule to the said Act, the assessee was required to set apart a part of its profits for reserves known as "Contingencies Reserve'', "Development Reserve", and "Tariffs and Dividend Control Reserve". Under the Sixth .G Schedule to the Electricity Supply Act the assessee was required to invest the sums appropriated in the 'Conting~cies Reserve' in securities authorised under the Indian Trusts Act, 1882. In respect of the assessment years 1967-68 and 1968-69 the assessee claimed deduction of the sums of Rs. 91, 715 and Rs. 1,39, 781 in respect of the amounts transferred by the assessce to the Contingencies Reserve and Development Reserve. The H A Income Tax Officer while making the assessment disallowed the said deductions and added the said amounts in the income of the assessee. On appeal, the Appellate Assistant Commissioner allowed certain deductions but did not consider the question of excluding the amounts transferred to the Contingencies Reserve and Development Reserve. On further appeal, B the Tribunal disallowed the claim of the assessee with regard to Development Reserve but held that the assessee was entitled to succeed in respect of the claim relating to Contingencies Reserve. The Tribunal referred to the High Court for its opinion the question above mentioned in respect of assessment years 1967-68 and 1968-69 regarding deductibility of the sums transferred to the Development Reserve. On the basis of its C earlier judgment in the Ve/lore Electricity Corporation Ltd. v. Union of India, 109 ITR 454, concerning the assessment year 1966-67 in respect of the same assessee the High Court held that the assessee could not claim deduction in respect of Development Reserve and the question referred was answered against the assessee.