Madras High Court
Additional Commissioner Of Income-Tax vs Vellore Electric Corporation Ltd. on 6 February, 1978
Author: V. Ramaswami
Bench: V. Ramaswami
JUDGMENT Ramaswami, J.
1. The following three questions have been referred by the Tribunal under Section 256(1) of the I.T. Act, 1961 (hereinafter called "the Act") :
"(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 years 1969-70 and 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 'tariff 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 80I not only in respect of the business income but also in respect of income derived by it from investments in securities ?"
2. The first two questions are covered by the decision of this court in Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454 (Mad). Though the decision of the Kerala High Court in Cochin State Power & Light Corporation Ltd. v. CIT [1974] 93 ITR 582 and that of the Bombay High Court in Amalgamated Electricity Co. Ltd, v. CIT [1974] 97 ITR 334 have taken a different view in respect of "contingency reserve" and "development reserve", we prefer to follow the decision of this court in Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454 (Mad). Accordingly, we answer the first two questions in favour of the revenue and against the assessee.
3. Before we answer the third question, it is necessary to state certain facts relating to this issue. The assessee is a public limited company carrying on business of distribution of electricity at Vellore and Ranipet. As an electricity undertaking, it is governed by the provisions of the Electricity (Supply) Act, 1948. Under para. III of the Sixth Schedule to the said Act, the undertaking shall create a reserve called "contingency reserve". Paragraph IV(2) of the said Schedule, which is the relevant provision, reads as follows :
"IV. (2) The sums appropriated to the contingencies reserve shall be invested in securities authorised under the Indian Trusts Act, 1882, and such investment shall be made within a period of six months of the close of the year of account in which such appropriation is made."
4. The undertaking received a sum of Rs. 17,791 for the assessment year 1969-70 and Rs. 14,741 for the assessment year 1970-71, by way of interest on securities. The assessee claimed the benefit of 8% deduction under Section 80-I of the Act on these receipts as well. It was contended by the assessee that since it was under a statutory obligation to invest the amount appropriated by it to the "contingencies reserve" in approved securities and since it could not carry on the business of distribution of electricity without complying with that statutory obligation, interest arising from such investments in approved securities should be considered as attributable to the profits and gains of priority industry within the meaning of that section qualifying for relief under Section 80-I of the Act. The revenue, on the other hand, contended that the immediate source of the income alone should be considered and that even otherwise there was no direct relationship between the "interest income" and the "carrying on of the business" and that, therefore, the receipt of income cannot be considered as attributable to the priority industry. The question for consideration is which of these two views is acceptable. We may usefully now extract the provisions (1) and (2) of Section 80-I of the Act:
"(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, save in a case where such company is a company which is referred to in section 108 and has a gross total income of fifty thousand rupees or less."
5. The deduction under this provision is a special benefit given to a company which satisfies the conditions of that provision. It may be seen from the above provisions that the deduction of 8% is permissible only from "profits and gains attributable to any priority industry". "Priority industry" is defined in Section 80B(7) as meaning the business of generation or distribution of electricity or of any other form of power. Thus the deduction is possible only in respect of profits and gains arising from the specific activities or business of generation or distribution of electricity or any other form of power. The immediate source of income in this case is the investments in Government securities. This investment and the realisation of interest has no direct bearing on the business of generation or distribution of electricity of the assessee. The Tribunal was of the view that since the investment on Government securities was a statutory obligation there was a direct relationship between the income derived by the assessee by way of investment in securities and the carrying on of the business of distribution of electricity by it. We are unable to agree with this view of the Tribunal. In order to attract the provisions of Section 80-I the income should be in the nature of profits or gains arising out of business of a priority industry. Neither the statutory reserve nor the securities in which the amounts have been invested can be considered to be a trading asset of the assessee. Any investment of the contingency reserve, therefore, could not be taken as having a direct relationship or nexus with the business, of generating and supplying energy. The interest received on such investment, therefore, could not be considered to be profit or gain attributable to the business of the assessee which alone can be taken into account for the purpose of Section 80-I of the Act. Accordingly, we hold that the assessee is not entitled to relief under Section 80-I in respect of interest on securities. We answer this question also against the assessee. The revenue will be entitled to its costs. Counsel's fee Rs. 500.