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Petitioner: VELLORE ELECTRIC CORPORATION LTD. VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Supreme Court of India Judge(s): D. P. Wadhwa, S. C. Agarwal Title: VELLORE ELECTRIC CORPORATION LTD. vs COMMISSIONER OF INCOME-TAX Case No.: Civil Appeals Nos.3333, 3334 of 1981 with 2613 and 2614 of 1984 Date of Judgment:1997-07-08 Reported As: 1998 PTD 671 Result: Order accordingly.
JUDGMENT
JUDGMENT ' S.C. AGRAWAL, J.---These appeals filed by the assessee raise common questions for consideration. Civil Appeals Nos. 3333-3334 of 1981 relating to the 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 a 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 by the Income-tax Appellate Tribunal (hereinafter referred to as "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 for the assessm ent 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 (see Addl. CIT v. Vellore Electric Corporation Ltd. (1979) 119 ITR 523), on the basis of a certificate of fitness granted by the High Court under section 261 of the Income Tax Act. In these appeals, which relate to the assessment years 1969-70 and 1970-71, the High Court has answered against the assessee and in favour of the Revenue, the following questions referred by the Tribunal (page 524): "(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 assessm ent years 1969-70 and 1970-71, respectively?
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(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled on 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 the assessment year 1969-70 and Rs,68,288 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 provisions of the Electricity (Supply) Act, 1948, the assessee is entitled to relief under section 80-I not only in respect of the 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 "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 the 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 Schedule to the Electricity (Supply) Act the assesse was required to invest the sums appropriated in the "contingencies reserve" in securities authorized under the Indian Trusts Act, 1882. In respect of the assessm ent 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 assessee to the contingencies reserve and development reserve. The Income-tax Officer while making the assessm ent 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, 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 the assessment years 1967-68 and 1968-69 regarding deductibility of the sums transferred to the development reserve. On the basis of its earlier judgment in the Vellore Electric Corporation Ltd. v. CIT (1977) 109 ITR 454 (Mad.), concerning the assessm ent 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 asses see ' In the assessm ent year 1969-70, there was appropriation of Rs,55,703 to the contingencies reserve, Rs,98,676 to the development reserve and Rs,18,735 to the tariffs and dividend control reserve. In the assessm ent year 1970-71, there was appropriation of Rs,30,104 to the contingencies reserve and Rs,62,288 to the development reserve. The assessee also claimed deduction at the rate of 8 per cent. Under section 80-I of the Act on Rs,17,791 an Rs,14,741 being the interest received by the assessee on Government securities during the assessment year 1969-70 and 1970-71 in respect of amounts in the contingencies reserve which are required to be invested in such securities under the provisions of the Electricity (Supply) Act. The said claim of the assessee was dismissed by the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal, on further Appeal, allowed the claim of the assessee in respect of appropriation of sums to the contingencies reserve, but rejected the claim for deduction of the amounts appropriated to the development reserve and tariffs and dividend control reserve. The Tribunal also allowed the claim of the assessee under section 80-I of the Act. In respect of the assessment years 1969-70 and 1970-71, the three questions mentioned above were referred by the Tribunal to the High Court for its opinion. By its judgment dated February 6, 1978, the High Court answered questions Nos.1 and 2 in favour of the Revenue and against the assessee on the basis of its earlier judgment in Vellore Electric Corporation Ltd.'s case (1977) 109 ITR 454 (Mad.) in respect of the assessment year 1966-67. As regards question No,3 the High Court has held that the interest received on investments of the sums in the contingencies reserve could not be considered as profit of the company attributable to the business of the
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assessee which alone could be taken into account for the purpose of section 80-I of the Act and, therefore, the assessee was not entitled to claim any deduction under section 80-I. Therefore, the third question was also answered against the assessee. ' These appeals broadly involve the following two questions: (i) Is the assessee entitled to claim deduction in respect of sums transferred to the contingencies reserve, development reserve and tariffs and dividend control reserve? (ii) Is the assessee entitled to deduction under section 80-I on the interest received on the amounts transferred to the contingencies reserve which were invested in Government securities? ' As indicated earlier, the assessee is a licensee under the Electricity (Supply) Act for the purpose of distribution of power. Under section 57 of the Electricity (Supply) Act the provisions of the Sixth Schedule are deemed to be incorporated in the licence of a licensee, not being a local authority and the licensee is required to comply with the provisions of the said Schedule. The Sixth Schedule contains the financial principles and their application. It makes provisions for creation of the following reserves by the licensee: (a) Tariffs and Dividend Control Reserve (Paragraph II(1)). (b) Consumers' Rebate Reserve (Paragraph II(4)). (c) Contingencies Reserve (Paragraphs III, IV & V) (d) Development Reserve (Paragraph VA) ' In Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521, this Court has laid down that the amounts credited to the consumers' rebate reserve account did not form part of the real profits of the appellant-company and in order to arrive at the taxable income of the appellant-company from business under section 10(1) of the Indian Income-tax Act, 1922, the said amounts had to be deducted. ' As regards contingencies reserve there was difference of opinion among the various High Courts. The High Courts of Madras (Vellore Electric Corporation Ltd. (1977) 109 ITR 454), and Calcutta (CIT v. Sijua (Jharriah) Electric Supply Co. Ltd. (1984) 145 ITR 740), had taken the view that deduction could not be claimed in respect of the amounts appropriated to the contingencies reserve. The High Courts of Kerala (Cochin State Power and Light Corporation Ltd. v. CIT (1974) 93 ITR 582), Bombay (Amalgamated Electricity Co. Ltd. v. CIT (1974) 97 ITR 334), and Patna (Darbhanga Laheriasari Elecrtric Supply Corporation Ltd. v. CIT (1979) 117 ITR 516), had taken a contrary view and had held that deduction could be claimed in respect of the amounts appropriated to the contingencies reserve. For the purpose of wealth tax, the Bombay High Court in CWT v. Bombay Suburban Electric Supply Ltd. (1976) 103 ITR 384, had held that the amount standing to the credit of the contingencies reserve is a part of the assets belonging to the assessee and is includible in the net wealth of the assessee and is chargeable to wealth tax. This conflict in the views of the High Courts with regard to taxability of the amounts appropriated to contingencies reserve was resolved by this Court in Associated Power Co. Ltd. v. CIT (1996) 218 ITR 195, wherein the decisions of the High Courts of Madras and Calcutta referred to above have been approved and the decisions of the High Courts of Kerala and Bombay mentioned above have been overruled. It has been held that contingencies reserve is to be created from existing reserves or "from the revenues of the undertaking" which indicates that the monies which have to be put into the contingencies reserve reach the electricity company and it is the electricity company which has to invest the sums appropriated to the contingencies reserve. It has been pointed out that contingencies reserve differs from the Consumers' Benefit Reserve since the amount appropriated in the Consumers' Benefit Reserve has to be returned to the consumers and it is as if the electricity company had not received that amount which it is obliged to return and that the position is altogether different in 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 Paragraph V of the Sixth Schedule to the Electricity
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(Supply) Act, which are the expenses which the electricity company has to incur and that the reservation is made, so that money is always available for meeting these expenses and the supply of electricity is not interrupted. It was held that the monies in the contingencies reserve belong to the electricity company. In view of the decision of this Court in Associated Power Co. Ltd. (1996) 218 ITR 195, it must be held that question No,1 in Civil Appeals Nos.2613-14 of 1984 relating to contingencies reserve has been rightly answered against the assessee and in favour of the Revenue by the High Court. ' We may now come to development reserve and tariffs and dividend control reserve. In respect of development reserve, the following provisions are contained in paragraph VA of the Sixth Schedule to the Electricity (Supply) Act: "VA.(1) There shall be created a reserve to be called the Development Reserve to which shall be appropriated in respect of each accounting year a sum equal to the amount of income-tax and super-tax calculated at rates applicable during the assessment year for which the accounting year of the licensee is the previous year, on the amount of investment allowance to which the licensee is entitled for the accounting year under section 32A of the Income Tax Act, 1961 (43 of 1961): ' Provided that 4 in any accounting year, the clear profit (excluding the special appropriation to be made under item (va) of clause (c) of sub-paragraph' (2) of Paragraph XVII) together with the accumulations, if any, in the Tariffs and Dividends Control Reserve less the sum calculated as aforesaid falls short of the reasonable return, the sum to be appropriated to the Development Reserve in respect of such accounting year shall be reduced by the amount of the shortfall. (2) Any sum to be appropriated towards the Development Reserve in respect of any accounting year under sub-paragraph (1), may be appropriated in annual instalments spread over a period not exceeding five years from the commencement of that accounting year. (3) The Development Reserve shall be available only for investment in the business of electricity supply of the undertaking. (4) On the purchase of the undertaking, the Development Reserve shall be handed over to the purchaser and maintained as such Development Reserve: ' Provided that where the undertaking is purchased by the Board or the State Government, the amount of the Reserve (whether such amount is in the form of cash or other assets) may be deducted from the price payable to the licensee." ' Paragraph VA was inserted by Act 101 of 1956 with effect from April 1, 1957. Prior to that by the Finance Act, 1955, provision for allowances by way of development rebate was incorporated in section 10(2) (vi)(b) of the Indian Income Tax Act, 1922, but such rebate was allowable only if an amount equal to 75 per cent. Of it was debited to the profit and loss account for the relevant previous year and credited to a reserve account to be utilised by the assessee during a period of ten years next following for the purposes of the undertaking except for distribution by way of profits or by way of remittances outside India as profits or the creation of any asset outside India. This obligation did not extend to a case where the assessee was a company, being a licensee within the meaning of the Electricity (Supply) Act. Therefore, a separate provision was made by amending the Sixth Schedule to the Electricity (Supply) Act, for the creation of a development reserve. The development reserve required to be created under Paragraph VA of the Sixth Schedule to the Electricity (Supply) Act is directly related to the development rebate being equal to the income-tax and the super-tax payable on such rebate. The Kerala High Court in Cochin State Power and Light Corporation Ltd. (1974) 93 ITR 582, has made a distinction between development reserve and contingencies reserve and, while holding that the amounts appropriated to contingencies reserve must be deducted; it held that the amounts appropriated to development rebate could not be deducted. The High Court has said (page 591):
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"We will now take up the case of development reserve provided under Paragraph VA of the Sixth Schedule. This, as we have already pointed out, is of the same character as the 75 per cent. Of the development rebate which the assessee was bound to plough back into the business of the undertaking under the proviso to section 10(2)(vi)(b) of the Indian Income-tax Act, 1922. It cannot be said that the amount is expended by the assessee nor could it be said that it is lost to the assessee by an overriding obligation. The development reserve is still available to the assessee with the only limitation that it is so available only for investment in the business of the electricity supply undertaking. There is no restriction as to the scope of investment of the amount so reserved in any particular manner. Even the sum to be so appropriated towards the development reserve in respect of any accounting year could not be appropriated in annual instalments spread over for a period not exceeding five years. The benefit of the amount so set apart as reserve is available to the assessee directly. It could be applied by him as he pleases as investment in the business of the electricity supply undertaking." ' The development reserve was held to be different from the contingencies reserve for the reason that while in the contingencies reserve there is diversion of revenue, there is no such diversion in the development reserve. ' The Madras High Court in Vellore Electric Corporation Ltd. (1977) 109 ITR 454, has disagreed with the view of the Kerala High Court in Cochin State Power and Light Corporation' Ltd. (1974) 93 ITR 582, as regards the deductibility of the amounts appropriated to the contingencies reserve but has agreed with the view of the Kerala High Court with regard to development reserve. According to the Madras High Court, there is no difference between the two reserves and, referring to the decision of the Kerala High Court in this regard, it has been observed (page 462): "As a matter of fact, the very tests that the learned judges applied for holding that the development reserve cannot be deducted, will apply to the contingencies reserve also." ' The view that there is diversion of revenue in the contingencies reserve has not been accepted by this Court in Associated Power Co. Ltd. (1996) 218 ITR 195. ' Shri Harish Salve, learned senior counsel appearing for the assessee, has urged that under the Sixth Schedule there is a difference between the development reserve under Paragraph VA(1) and the contingencies reserve under Paragraphs III, IV and V. Learned counsel has laid stress on the difference in the language used in sub-para. (2) of Paragraph VA relating to contingencies reserve and sub-para. (4) of Paragraph VA relating to development reserve. Sub-para. (2) of Paragraph V and sub-para. (4) of Paragraph VA provide as follows: "V(2). On the purchase of the undertaking, the contingencies reserve, after the deduction of the amounts drawn under subparagraph (1), shall be handed over to the purchaser and maintained as such contingencies reserve: ' Provided that where the undertaking is purchased by the Board or the State Government, the amount of the reserve computed as above shall, after further deduction of the amount of compensation, if any, payable to the employees of the outgoing licensee under any law for the time being in force, be handed over to the Board or the State Government, as the case may be. ' VA(4). On the purchase of the undertaking, the Development Reserve shall be handed over to the purchaser and maintained as such development reserve: ' Provided that where the undertaking is purchased by the Board or the State Government, the amount of the reserve (whether such amount is in the form of cash or other assets) may be deducted from the price payable to the licensee." ' A perusal of the said provision would indicate that the main part of sub-para. (2) of Paragraph V and sub-paragraph (4) of Paragraph VA are practically the same. There is a difference in the proviso to the said provisions. Under the proviso to sub-para. (2) of Paragraph V, where the undertaking is purchased by the State Electricity Board or the State Government, the amount of the
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contingencies reserve after further deduction of the amount of compensation, if any, payable to the employees of the outgoing licensee under any law for the time being in force, has to be handed over to the Electricity Board or the State Government as the case may be. Under the proviso to sub- para. (4) of Paragraph VA where the undertaking is purchased by the State Electricity Board or the State Government, the amount of the development reserve has to be deducted from the price payable to the licensee. This difference in the two provisions does not, in our opinion, mean that the amounts appropriated to development reserve were not part of the real profit of the electricity company. Like the contingencies reserve, the development reserve also belonged to the electricity company and it had the use of it. The contingencies reserve is meant to be utilised by the electricity company to meet the expenses or recoup loss of profits arising out of accidents, strikes or other circumstances which the electricity company could not have prevented or to meet the expenses on replacement or renewal of plant or works or for payment of compensation required by law for which no other provision has been made. The development reserve is meant for investment in the business of electricity supply of the undertaking. On the purchase of the undertaking the contingencies reserve as well as the development reserve have to be handed over to the purchaser and have to be maintained as contingencies reserve and development reserve, as the case may be, in view of the main part of sub-para. (2) of Paragraph V and subpara. (4) of Paragraph VA. Under the proviso to sub-para. (2) of Paragraph V, where the undertaking is purchased by the Electricity Board or the State Government the amount of the contingencies reserve, after deduction of the amount of compensation, if any, payable to the employees of the outgoing licensee, is to be handed over to the Electricity Board or the State Government, as the case may be. Under sub-para. (4) of Paragraph VA, the amount of the development reserve, instead of being handed over to the Electricity Board or the State Government, can be deducted from the price payable to the licensee. Both the provisions achieve the same result, viz., the reserve being available to the State Electricity Board or the State Government. The difference in the language in the provisos in sub-para. (2) of Paragraph V and sub-para. (4) of Paragraph VA may be due to the fact that the liability for the payment of compensation payable to the employees of the outgoing licensee would be of the licensee and the said liability has to be met out of the contingencies reserve in view of Paragraph V(1)(c) of the Sixth Schedule and the amount of the contingencies reserve is to be handed over after deducting the amount of compensation so payable by the licensee. ' There is, therefore, no difference between development reserve and contingencies reserve and the High Court, in the impugned judgment, has rightly held that the amount appropriated towards development reserve could not be deducted. ' The provisions regarding tariffs and dividends control reserve are contained in sub-paras. (1), (2) and (3) of Paragraph II of the Sixth Schedule. The said provisions are practically in the same terms as those contained in Paragraph VA relating to development reserve. Sub-para. (2) of Paragraph II requires that the Tariffs and Dividends Control Reserve shall be 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 H on the purchase of the undertaking under the terms of the licence any balance remaining in the Tariffs and Dividends Control Reserve has to be handed over to the purchaser and has to be maintained as such Tariffs and Dividends Control Reserve and where the undertaking is purchased by the State Electricity Board or the State Government, the amount of the Tariffs and Dividends Control Reserve may be deducted from the price payable to the licensee. The reasons given for holding that the amounts appropriated to development reserve could not be deducted are equally applicable to the Tariffs and Dividends Control Reserve and it must, therefore, be held that the amounts appropriated to the Tariffs and Dividends Control Reserve could not be deducted.
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' It must, therefore, be held that the question referred in Civil Appeals Nos. 3333-3334 of 1981 and question No,2 referred in Civil Appeals Nos.2613-14 of 1984, have been rightly answered against the assessee and in favour of the Revenue by the High Court in the impugned judgments. ' We may now come to question No,3 in Civil Appeals Nos.2613-14 of 1984, which relates to relief claimed by the assessee under section 80-I of the Act in respect of income earned by way of interest on investment in securities of the amounts appropriated to the contingencies reserve. At the relevant time section SO-I read as under: "Section 80-I. Deduction in respect of profits and gains from priority industries in the case of certain companies.---(1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section a deduction from such profits and gains of an amount equal to eight per cent thereof, in computing the total income of the company. (2) This section applies to a domestic company, same in a case…
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