1. The assessee is a company carrying on business of distribution of electrical energy under a licence issued under the Electricity (Supply) Act, 1948 (hereinafter referred to as 'the Act'). Section 57 of the Act provides that the provisions of the Sixth Schedule and the Seventh Schedule shall be deemed to be incorporated in the licence of every licensee, not being a local authority. The Sixth Schedule to the Act contains certain financial principles and their application. Paragraph III of the Schedule provides that there shall be created from existing reserves or from the revenues of the undertaking a reserve to be called 'contingencies reserve'. Paragraph IV(1), which deals with the annual appropriation to such a reserve, states that the licensee shall appropriate to contingencies reserve from the revenues of each year of account a sum not less than one-quarter of one per centum and not more than one-half of one per centum of the original cost of fixed assets, provided that if the said reserve exceeds, or would by such appropriation be caused to exceed, five per centum of the original cost of fixed assets, no appropriation shall be made which would have the effect of increasing the reserve beyond the said maximum. Under Paragraph 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. Paragraph V provides how the amounts standing to the credit of the contingencies reserve should be utilised and states :
'V. (1) The contingencies reserve shall not be drawn upon during the currency of the licence except to meet such charges as the State Government may approve as being--
(a) expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented;
(b) expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal;
(c) compensation payable under any law for the time being in force and for which no other provision is made.
(2) On the purchase of the undertaking, the contingencies reserve,after deduction of the amounts drawn under sub-paragraph (1) shall behanded over to the purchaser and maintained as such contingenciesreserve:
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.'
2. Paragraph VA deals with the creation of a development reserve and the said paragraph provides :
'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 development rebate to which the licensee is entitled for the accounting year under Clause (vi)(b) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922:
Provided that if 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 may be deducted from the price payable to the licensee.'
3. Pursuant to the obligation imposed on the assessee as a licensee by these provisions, the 'assessee transferred to the contingencies reserve account a sum of Rs. 41,328 and the development reserve account a sum of Rs. 42,718. In the assessment to income-tax of its profits and gains for 'the assessment year 1966-67, the assessee claimed that these two amounts should be deducted. The Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal negatived this claim 61 the assessee.
4. It is, thereafter, at the instance of the assessee the Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the Income-tax Act, 1961, has referred the following question for the opinion of this court.
'Whether, on the facts and circumstances of the case, the Appellate Tribunal is right in holding that the sum of Rs. 41,328 transferred to the contingencies reserve account and Rs. 42,718 transferred to the development reserve account are not to be deducted in arriving at the taxable profits of the assessee ?'
5. The learned counsel for the assessee contended that the amounts transferred to these two funds constituted the setting apart of the amounts by overriding statutory title and, therefore, necessarily have to be deducted from the gross receipts of the assessee for the purpose of assessment to income-tax. We are unable to accept this argument. The learned counsel invited our attention to a decision of the Supreme Court and to a decision of the Kerala High Court. The decision of the Supreme Court is in Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax : 57ITR521(SC) . In that case the subject-matter of the decision was the amount appropriated to 'consumers' benefit reserve account' which was also a reserve statutorily required to be created by Paragraph II of the Sixth Schedule to the Act. With reference to the claim for deduction of that amount the Supreme Court observed (page 525):
'The object of the Act and that of the Sixth Schedule thereto, as aforesaid, is to statutorily rationalize and regulate the rates chargeable for the energy supplied in the interest of the public and for electrical development. The rules embodied in the Sixth Schedule to the Act are intended only to achieve that object. Under the said rules certain appropriations and certain deductions have to be made to arrive at the clear profit; otherwise the items may be manipulated to sustain a demand for abnormal rates. The rules have no concern with income-tax, though for the purpose of arriving at the clear profit the taxes paid are also deductible. If this distinction is borne in mind, the problem presented is easily and readily solved.
Under Section 10(1) of the Income-tax Act, tax shall be payable by an assessee under the head 'profits and gains of business' in respect of profits and gains of any business carried on by him. The said profits and gains are not profits regulated by any statute, but profits in a business computed on business principles. They are business profits and not statutory profits. They are real profits and not notional profits. The real profit of a businessman under Section 10(1) of the Income-tax Act cannot obviously include the amounts returned by him by way of rebate to the consumers under statutory compulsion. It is as if he received only from the consumers the original amount minus the amount he returned to them. In substance there cannot be any difference between a businessman collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs. Y to them and another businessman collecting Rs. X alone. The amount returned is not a part of the profits at all.'
6. The Supreme Court further observed in the same judgment (page 531):
'The appellant-company is a commercial undertaking. It does business of the supply of electricity subject to the provisions of the Act. As a business concern its real profit has to be ascertained on the principles of commercial accountancy. As a licensee governed by the statute its clear profit is ascertained in terms of the statute and the Schedule annexed thereto. The two profits are for different purposes--one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the ' consumers' benefit reserve account'. They were a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of assessee's real profits. So, to arrive at the taxable income of the assessee from the business under Section 10(1) of the Act the said amounts have to be deducted from its total income.'
7. We are of the opinion that the above decision of the Supreme Court is not of any assistance to the assessee's case here. In the first place, the Supreme Court itself has clearly pointed out that the amount credited to the 'consumers' benefit reserve account' is the amount which has been taken out of the receipts of the assessee for the purpose of being paid over to the consumers. The statute compulsorily requires a licensee to create such a reserve and pay over the said amount by way of rebate to the consumers. In those circumstances, the reserve fund once it is created ceases to belong to the licensee and the licensee will be in the position of a trustee of the said fund for the benefit of the consumers. Consequently, the said amount will clearly fall to be deducted from the total receipts for arriving at the commercial profits of the licensee. But such a reserve is totally different from the two reserves with which we are concerned. The amounts standing to the credit of neither the contingencies reserve nor the development reserve can be said to be the amounts which have gone out of the hands or the control of the licensee, the assessee in the present case, and have become the subject-matter of ownership of somebody else. It may be the statute has imposed certain restrictions over the disposal of that amount by the assessee, but that does not mean that the amounts have ceased to be the money belonging to the assessee. What is meant by diversion of profit by overriding title is that a part of the profits earned by an assessee is notreally his profits, but it belongs to somebody else and with reference to that amount the assessee had no title at all. But that is not so in the present case. As far as the contingencies reserve is concerned, the statute has clearly indicated the purposes for which the amounts can be spent and those purposes clearly show that they are connected with the business of the assessee and it is the assessee which will have to utilise the amount. If. it is claimed to be an amount which is taken away from the assessee by overriding title, the assessee will have no control over the same even to the limited extent as provided for in Paragraph V of the Sixth Schedule. Equally, the fact that the assessee is required to invest the amounts standing to the credit of contingencies reserve in securities authorised under the Indian Trusts Act, 1882, does not in any way affect this position. The assessee continues to be the owner of the investments and however limited be the benefit that the assessee may derive from such an investment it cannot be held that the investment is not the assessee's investment, but somebody else's investment. The position is a fortiori with regard to development reserve. With regard to that reserve there is not even the restriction that it should be invested in securities authorised under the Indian Trusts Act, 1882. The only restriction is that the amount standing to the credit of development reserve shall be available only for investment in the business of electricity supply of the undertaking. That does not in any way make the amount in question the money or the property of somebody else other than the assessee. Equally, the provision that on the purchase of the undertaking, the development reserve shall be handed over to the purchaser and maintained as such development reserve does not in any way affect this basic position with regard to title to the amounts standing to the credit of such a reserve.
8. Apart from this in the very decision cited by the learned counsel there are indications to show that the fact that these appropriations have to be statutorily made under the provisions of the Act can have no relevancy to the arriving at of the commercial profits for the purpose of assessment to income-tax. It may be that in certain circumstances for the purpose of arriving at the commercial profits an appropriation required to be made by the statute may have to be deducted, but that is far different from saying that every statutory compulsory appropriation will have to be deducted for the purpose of arriving at the commercial profits in relation to the income-tax assessment. In the extract from the judgment of the Supreme Court we have already given, it is clearly stated that the rules contained in the Sixth Schedule to the Act have no concern with the income-tax and the Supreme Court has also pointed out that the two profits are for different purposes, one is for commercial and tax purposed and the other isfor statutory purposes in order to maintain a reasonable level of rates. Consequently, simply because the statute requires a licensee like the assessee to make an appropriation out of its revenue for a particular purpose and that is a compulsory appropriation which the assessee has to make, it does not follow that for the purpose of income-tax such appropriation must be necessarily deducted for arriving at the profits and gains of the business. As we pointed out already, the concept of commercial profits may coincide with the statutory profits in respect of certain appropriations, but that is far different from saying that every appropriation required to be made under the statutory provision constitutes a diversion of profit by overriding title.
9. The learned counsel also drew our attention to the decision of the Kerala High Court in Cochin State Power and Light Corporation Ltd. v. Commissioner of Income-tax : 93ITR582(Ker) . The Kerala High Court held that an amount appropriated to the contingencies reserve will have to be deducted for the purpose of arriving at the taxable profits, while the amounts appropriated to the development reserve will not be eligible for such a deduction. For the purpose of coming to this conclusion the learned judges referred to the relevant paragraphs in the Sixth Schedule to the Act, which we have already mentioned and contrasted the nature of the reserves. The learned judges, while dealing with the development reserve, stated (pages 591, 592):
'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 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. We do not think that this is in the nature of the consumers' benefit reserve with, which the Supreme Court was dealing in the Poona Electric Supply Co.'s case : 57ITR521(SC) . As indicated earlier, the consumers' benefit reserve was intended for the benefit of the consumer alone and there is no direct or indirect return of the benefit to the licensee under any circumstances. That is not the case here and we do not think there is a diversion of the revenue which has to be deducted for the purpose of determining the real profits of the assessee or that there is an 'expenditure'liable to be deducted under the Income-tax Act. In fact it is not a diversion in the real sense of the term since a diversion should be one which goes out and is no longer that of the person who so diverts it. We, therefore, hold that the assessee's claim for deduction of the amount under the development reserve ought not to be allowed. The question has to be answered in favour of the revenue and against the assessee.'
10. However, when dealing with the contingencies reserve, after referring to the relevant paragraph in the Sixth Schedule, the Kerala High Court observed (pages 593, 594):
'The amount of the reserve can be used for such purposes as are specified in Paragraph V(1) of the Sixth Schedule as the State Government may approve. These purposes indicate that the object is to see that the undertaking is smoothly and properly run. One of the purposes is the meeting of charges by way of expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented. Another is the meeting of expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal and the third is the compensation payable under any law for the time being in force and for which no other provision is made. The default of the licensee in regard to any of these obligations would have immediate impact upon the manner in which the undertaking is run and the result would affect the consuming public. Therefore, the creation of this reserve is apparently with the prime object of making available sufficient resources for meeting commitments necessary for the efficient running of the business, commitments which, if the licensee fails to meet, would really affect the consumers. An uninterrupted supply of electric energy and proper maintenance of the supply from time to time by the licensee are amenities which must be assured to the public and the object of the paragraph concerning this reserve appears to us to be to assure them these.
Bearing in mind the fact that the amount under the contingences reserve is not available to the assessee for any purpose of his own or even for any purpose other than those indicated in Paragraph V of the Sixth Schedule and also noticing the object of the creation of this reserve and further noting the provision that it is a diversion from the revenue, we think that the diversion is one which is deductible in determining the real profit. There is the further fact that the assessee does not get even compensation on account of this reserve as and when the undertaking is purchased and even the purchaser has to maintain the reserve as such. Therefore, in spite of the distinction that we have pointed out in regard to certain features between this reserve and the consumers' benefit reserve with which the Supreme Court was concerned in Poona Electric Supply Company's case : 57ITR521(SC) , we feel that the amount covered by the contingencies reserve is a diversion by reason of an overriding obligation created by the statute and, therefore, for determining the commercial profits of the assessee, the amount of this reserve has to be deducted.'
11. With great respect to the learned judges, we are unable to share their view with regard to the contingencies reserve. The fact that the contingencies reserve can be utilised only for the purposes indicated in Paragraph V(1) and there is also an obligation to invest the amount standing to the credit of that reserve in the securities mentioned in the Indian Trusts Act, 1882, do not in any way alter the character that the amount appropriated to the said reserve still belongs to the assessee. 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. In the extract we have already given, the learned judges, with reference to the development reserve, pointed out that the amount was not expended by the assessee and cannot be said to be lost to the assessee by an overriding obligation and the reserve was still available to the assessee and a diversion by overriding title should be one which goes out and is no longer that of the person who so diverts it. On these tests themselves it will be clear that the amount credited to the contingencies reserve cannot be said to be an expenditure, cannot be said to be lost to the assessee and is still available to the assessee and it cannot also be said to be a diversion by overriding title because it does not go out and it cannot be said that it is no longer that of the assessee who diverts it. Simply because the statute has imposed certain restrictions on the manner of utilisation of the amount credited to the reserve it cannot be held that the appropriation of the amount to such a reserve constitutes an expenditure or diversion of profit by overriding title or that the amount was lost to the assessee. Therefore, in our opinion, just as the amount appropriated to the development reserve, the amount appropriated to the contingencies reserve also cannot be deducted for arriving at the assessable profits. In these circumstances, we answer the question referred to this court in the affirmative and against the assessee. The Commissioner is entitled to his costs. Counsel's fee Rs. 500.