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Commissioner of Income-tax Vs. Calcutta Electric Supply Corporation Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 311 of 1973
Judge
Reported in[1982]138ITR111(Cal)
ActsSuper Profits Tax Act, 1963 - Schedule - Rule 1; ;Electric Supply Act; ;Indian Trusts Act, 1882
AppellantCommissioner of Income-tax
RespondentCalcutta Electric Supply Corporation Ltd.
Appellant AdvocateB.K. Bagchi and ;S.C. Chakraborty, Advs.
Respondent AdvocateD. Pal and ;J.C. Saha, Advs.
Cases ReferredMetal Box Company of India Ltd. v. Their Workmen
Excerpt:
- sabyasachi mukharji, j.1. in this reference under section 256(1) of the i.t. act, 1961, read with section 19 of the super profits tax act, 1963, the following question has been referred to us :'whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the debenture sinking fund of rs. 2,32,8,123, replacement and contingencies fund of rs. 6,97,90,155 and contingency reserve fund of rs. 69,92,624 constituted reserves for the purpose of computing the capital of the assessee-company under the second schedule to the super profits tax act, 1963 ?'2. the assessee is the calcutta electric supply corporation ltd., and the relevant assessment year is 1963-64. the assessee-company claimed as part of its capital debenture sinking fund rs. 2,32,08,123, reserve.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, read with Section 19 of the Super Profits Tax Act, 1963, the following question has been referred to us :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Debenture Sinking Fund of Rs. 2,32,8,123, Replacement and Contingencies Fund of Rs. 6,97,90,155 and Contingency Reserve Fund of Rs. 69,92,624 constituted reserves for the purpose of computing the capital of the assessee-company under the Second Schedule to the Super Profits Tax Act, 1963 ?'

2. The assessee is the Calcutta Electric Supply Corporation Ltd., and the relevant assessment year is 1963-64. The assessee-company claimed as part of its Capital Debenture Sinking Fund Rs. 2,32,08,123, Reserve for Plant Expansion Rs. 6,97,90,155 and Contingency Reserve Fund of Rs. 69,92,624 to be part of its capital. The ITO rejected the assessee's claim on the ground that the funds were not allowable for the capital computation to arrive at the standard deduction for a determination of the tax liability under the S.P.T. Act, 1963. Being aggrieved by this order, the assessee went up in appeal to the AAC. After referring to the several relevant decisions and authorities on accountancy, the AAC held that these three funds were reserves. Consequently, the AAC held that all the three funds constituted reserves and should be included in the computation of the capital base of the assessee-company for the purpose of the S.P.T. assessment.

3. Being dissatisfied with the aforesaid finding of the AAC, the Revenue went up in appeal before the; Appellate Tribunal. Attention of the Tribunal was drawn to the balance-sheet as per Schedule VI of the Companies Act, 1956, and the interpretation clauses contained in Pt. III thereof. The Revenue urged the Tribunal to interpret the expression 'reserves' on the same lines as in Schedule II to the C. (P.) S.T. Act, 1964, as according to it, the S.P.T. Act, 1963, was not to continue but its place was taken by the C. (P.) S.T. Act from the immediately succeeding year, that is to say, the assessment year 1964-65. It was further contended on behalf of the Revenue that the point in issue should be decided in the light of the provisions of the C. (P.) S.T. Act. The Revenue contended further that the Debenture Sinking Fund was created by setting apart amounts of profits to meet the known liability in the sense that the debentures which were redeemable on a future date did not form part of the capital of the company and as such the liability was known and was to be met out of the sinking fund. As regards the reserves for plant expansion, etc., the Revenue's contention was with reference to the Indian Electricity (Supply) Act, 1948, that the assessee-company being only a licensee for carrying on the business of selling electric current either by purchase or by generating and transmitting it, was not concerned with the expansion of the plants. Therefore, it was urged that the fund was created by an appropriation out of the profits, which, according to the Revenue, could not be treated as reserves and moreover, the disputed fund was a breach of the Contingency Reserve Fund. Coming to the Contingency Reserve Fund, it was urged on behalf of the Revenue that the fund was created by way of appropriation out of the profits to meet certain contingencies according to Sections 57 and 57A of the Electricity (Supply) Act, 1948. According to the Revenue there was no difference between the assessee's Contingency Reserve Fund and the 'provisions' in the pro forma balance-sheet as per Schedule VI of the Companies Act, 1956. On behalf of the assessee it was submitted with reference to the provisions of the Act and the decisions that the order of the AAC was proper. The Tribunal found that the Debenture Sinking Fund was set up in order to provide money for redeeming the debentures-which were issued in 1950. We are concerned as mentioned hereinbefore with the assessment for the assessment year 1963-64. From the balance-sheet it further appeared that the London issue of the 5% Debenture Stock, 1970 (secured) was for 30,00,000 and the Indian issue for 19,95,000. The balance-sheet figure of both on the first day of the previous year was 32,52,753 and the closing balance was 31,11,646, whereas the Debenture Sinking Funds accounted for 17,40,609 and 19,28,519 on the corresponding dates. According to the Tribunal from the pattern it was evident that the assessee-company had been gradually redeeming the debenture stock and simultaneously increasing the sinking fund with the idea that at the appropriate time, the redeeming of the debentures would not upset the working of the business. The Tribunal, therefore, was of the view that the debentures did not constitute the capital base for the purpose of the S.P.T. Act. Sinking funds did appear in the form of the balance-sheet. The funds set aside out of the company's profits were being used for business purposes because the company wanted to replace the capital by way of debenture by the sinking funds. The Tribunal was of the view that the liability was no doubt known but it was not a revenue liability. In the premises, the Tribunal held that this fund did form part of the company's capital.

4. Dealing with special appropriation for plant expansion, replacement and contingencies, according to the Tribunal, the nomenclature was not of much importance, but what was of importance was the purpose for which the appropriation had been made. The Tribunal was of the view that this had not been resorted to by way of debiting the profit and loss account as in the case of depreciation. The balance under this head had been on the increase and the purpose was quite evident from the description of the head. The Tribunal was of the view that the funds were being used for the purpose of business. Transfer from the Contingency Reserve Fund was not of much significance. According to the Tribunal contingencies used in designating the fund were meant for such contingencies in connection with the plant expansion and replacement. From the review of the chairman of the board of directors as appearing in the statement of account it appears that the company had been extending its capacity of generation of power. The Tribunal noted the argument that the assessee was merely a licensee under the law but the fact that the State Govt. or the State Electricity Board might take over the business of the company did not mean that the company should not carry on the business as a prudent businessman by anticipating expansion and providing funds therefor. The Tribunal was, therefore, unable to accept the contention of the Revenue on this point. Regarding the last item with which the Tribunal had to deal with, namely, the Contingencies Reserve Fund, the Tribunal noted that this had been on the increase and was being utilised for the purpose of business. There had been from time to time transfers from this fund to the head 'Special Appropriation for Plant Expansion, etc.'. The transfer was permitted by the provisions of the Electricity Act. The Tribunal in this contention referred to the balance-sheet. The Tribunal further noted that, apart from appropriation of profits, there had been debits and credits on account of sales and investments and depreciable assets as also on account of such assets being written off. Contingencies under the head 'Current Liabilities and Provisions' in the Form of the Balance-sheet represented matters relating to the revenue expenses and the current activities of the company whereas the reserve fund under discussion was evidently meant, according to the Tribunal, for capital liabilities. The Tribunal further noted that the fund had been set up under a statute and transfer therefrom was being made under the advice of the Government and/or as permitted under the statute. The Tribunal referred to the relevant provision of Schedule VI of the Electricity (Supply) Act, 1948, corresponding to Sections 57 and 57A and was of the view that the nature of the fund could not be deployed by the directors otherwise than for the specified heads. In the circumstances, the Tribunal held that this fund had been correctly treated as reserve for computation of the capital of the assessee. In the circumstances, the question as indicated above has been referred to this court.

5. It is necessary, in this connection, to bear in mind the provisions of Sections 57 and 57A of the Electricity (Supply) Act, 1948. The relevant provisions of the said sections read as follows :

'57. 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-

(a) in the case of a licence granted before the commencement of this Act, from the date of the commencement of the licensee's next succeeding year of account ; and

(b) in the case of a licence granted after the commencement of this Act, from the date of the commencement of supply,

and, as from the said date, the licensee shall comply with the provisions of the said Schedules accordingly, and any provision of the Indian Electricity Act, 1910, and the licence granted to him thereunder and of any other law, agreement or instrument applicable to the licensee shall, in relation to the licensee, be void and of no effect in so far as they are inconsistent with the provisions of Section 57A and the said Schedule.'

'57A. (1) Where the provisions of the Sixth Schedule and the Seventh Schedule are under Section 57 deemed to be incorporated in the licence of any licensee the following provisions shall have effect in relation to the said licensee, namely :--

(a) the Board or where no Board is constituted under this Act, the State Government-

(i) may, if satisfied that the licensee has failed to comply with any of the provisions of the Sixth Schedule ; and

(ii) shall, when so requested by the licensee in writing, constitute a rating committee to examine the licensee's charges for the supply of electricity and to make recommendations in that behalf to the State Government :

Provided that where it is proposed to constitute a rating committee under this section on account of the failure of the licensee to comply with any provisions of the Sixth Schedule, such committee shall not be constituted unless the licensee has been given a notice in writing of thirty clear days (which period, if the circumstances so warrant may be extended from time to time), to show cause against the action proposed to be taken :

Provided further that no such rating committee shall be constituted if the alleged failure of the licensee to comply with any provisions of the Sixth Schedule raises any dispute or difference as to the interpretation of the said provisions or any matter arising therefrom and such difference or dispute has' been referred by the licensee to the arbitration of the Authority under paragraph XVI of that Schedule before the notice referred to in the preceding proviso was given or is so referred within the period of the said notice :

Provided further that no rating committee shall be constituted in respect of a licensee within three years from the date on which such a committee has reported in respect of that licensee, unless the State Government declares that in its opinion circumstances have arisen rendering the orders passed on the recommendations of the previous rating committee unfair to the licensee or any of his consumers :

(b) a rating committee under Clause (a) shall-

(i) where such committee is to be constituted under Sub-clause (i) of that clause, be constituted not later than three months after the expiry of the notice referred to in the first proviso to that clause ;

(ii) where such committee is to be constituted at the request of the licensee, be constituted within three months of the date of such request ;

(c) a rating committee shall, after giving the licensee a reasonable opportunity of being heard and after taking into consideration the efficiency of operation and management and the potentialities of his undertaking, report to the State Government within three months from the date of its constitution, making recommendations with reasons therefor, regarding the charges for electricity which the licensee may make to any class or classes of consumers so, however, that the recommendations are not likely to prevent the licensee from earning clear profit sufficient when taken with the sums available in the Tariffs and Dividends Control Reserve to afford him a reasonable return as defined in the Sixth Schedule during his next succeeding three years of account:

Provided that the State Government may, if it so deems necessary, extend the said period of three months by a further period not exceeding three months within which the report of the rating committee may be submitted to it ; (d) within one month after the receipt of the report under Clause (c), the State Government shall cause the report to be published in the Official Gazette, and may at the same time make an order in accordance therewith fixing the licensee's charges for the supply of electricity with effect from such date, not earlier than two months or later than three months, after the date of publication of the report as may be specified in the order and the licensee shall forthwith give effect to such order;

(e) the charges for the supply of electricity fixed under Clause (d) shall be in operation for such period not exceeding three years as the State Government may specify in the order: Provided that nothing in this clause shall be deemed to prevent a licensee from reducing at any time any charges so fixed.'

6. It is also necessary to refer to Schedule VI of the said Act which deals with the financial principles and their application. Clause III of Schedule VI enjoins to create from the existing reserves or from the revenue of the undertaking a reserve to be called 'Contingencies Reserve'. Clauses IV and V are as follows :

'IV. (1) 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.

(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.'

'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 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.'

7. About the nature of the sinking fund for repayment of loans our attention was drawn to the book, Spicer & Pegler's Book-Keeping and Accounts, 17th edn., where, under Section 10 (p. 66) the learned editors have observed as follows :

'S. 10. The. Operation of Sinking Funds for the Repayment of Loans.--A sinking fund for the repayment of a loan is created in a manner similar to the depreciation fund for the replacement of an asset, destribed in Section 8(d)(p. 57) except that the annual provision is an appropriation of and not a charge against,, profit. Equal amounts are debited to the Appropriation Account each year and credited to Sinking Fund Account, an equivalent sum is invested outside the business in securities (cash being credited and investments debited) and allowed to accumulate at compound interest, so as to produce the amount required to repay the loan on its due date.

Ultimately, the investments of the fund will be realized and the loan repaid, after which the credit balance remaining on the Sinking Fund Account should be transferred to Reserve Account, since the purpose for which the profits were appropriated had ceased to exist, and whereas the profits were formerly represented by specific investments, they are now represented by general assets of the business which have been acquired out of profits. This emphasizes the fact that the amount set aside to a sinking fund for the repayment of a liability is an appropriation of profit, whereas the amount set aside to a depreciation fund for replacing an asset is a charge against profits (except to the extent that it may exceed the original capital outlay on the asset being depreciated). In the case of a sinking fund for the repayment of a loan, the net assets are increased by the amount of the fund ; a depreciation fund merely maintains the net assets at their original book value.

The amounts allocated to a sinking fund are debited to profit and loss Account so that moneys may be accumulated and set aside out of profits to repay the liability, without having to provide additional capital moneys from external sources. It would be possible to accumulate funds outside the business for the repayment of a liability by making annual investments of cash without debiting the profit and loss account at all, but if this were done the balance of the profit and loss account alone would exceed the amount of profits which are available for distribution, because the cash resources of the business would have been reduced by the amounts invested. The balances on the profit and loss account and the Sinking Fund Account are both reserves which form part of the proprietors' interest in the net assets of the undertaking.

The calculation of the annual amount to be invested is made in the same way as for a depreciation fund, already explained in Section 8(d) (p. 57) above.'

8. Our attention was also drawn to Batliboi's Advanced Accountancy, 27th edn., p. 678, where the learned editors have noted as follows :

'Sinking Fund.--A Sinking Fund is a fund created with the object of providing means for the redemption of liabilities like debentures or any other loan. It is formed by setting aside, half yearly or yearly, a fixed sum of money for a definite period, such sum to be invested at compound interest, so that at the end of the period, the annual amounts, with accumulations of interest, will be sufficient to discharge a prescribed loan. In such a case, the amount set aside should not be debited to Revenue Account but to a Net Revenue Account or Profit and Loss Appropriation Account, as being rather in the nature of an allocation of profits than a charge against them.

Tha term Sinking Fund is often applied to what is really a provision for the replacement of a wasting asset, invested in liquid assets apart from the business, so that cash may be available at a time when the original asset has to be replaced without severely dislocating the concern. The amount thus set aside each year is a charge against revenue and not an allocation of profits. It would be clearer if the term Sinking Fund were used only in connection with the provision for the repayment of a future liability, and not in connection with the renewal of an asset. The expression Replacement and Renewal Fund would be more appropriate in the latter case. If, however, it is desired to use the term Sinking Fund in either case, it may be suggested that the item be made a little bit more explicit in the Balance Sheet thus--'Sinking Fund for Redemption of Debentures 'or' Sinking Fund for Replacement of Machinery', etc.

It would be clearly seen from the above that the essence of distinction between a Reserve Fund and a Sinking Fund lies in this, that whereas a Reserve Fund is maintained as a measure of prudence, and the amount representing it may or may not be invested in outside securities as may be found financially desirable, a Sinking Fund, being created to meet a known liability at a definite future date, should always be invested outside the business.

The advantages of maintaining a Sinking Fund quite distinct from a Reserve Fund are:

(1) That it draws attention to the fact that investments representing this Fund are acquired with a definite object in view ; and

(2) That this Fund is not to be utilised for the purpose of equalising dividends or for any object other than the one for which it was created.'

9. Several decisions were cited at the Bar in support of the contentions of the respective parties on the three items with which we are concerned in this reference. Though the principles are quite well settled, out of deference to the arguments advanced before us, we shall presently note the said decisions. Our attention was drawn to the decision of the Bombay High Court in the case of Shree Ram Mills Ltd. v. CIT : [1977]108ITR27(Bom) . There the assessee-company, which was a public limited company, had claimed in the assessment proceeding under the S. P. T. Act, 1963, for the assessment year 1963-64, for which the corresponding accounting year was the calendar year 1962, two items as being includible in the computation of its capital under Schedule II to the Act, viz., (i) provision for taxation of Rs. 22,75,000, and (ii) proposed dividends of Rs. 11,83,050. The Appellate Tribunal upheld the decision of the lower authorities that the provision for taxes for the sum of Rs. 22 lakhs odd could not be said to be a 'reserve' within the meaning of Rule 1 of Schedule II to the Act, but the Tribunal reversed the decision of the lower authorities as regards the dividend reserve of Rs. 11 lakhs odd and held that this amount had to be treated as a 'reserve' and included in the computation of the capital. The High Court had held that it would be clear from the provision in Rule 1 of the Schedule II to the Act that before any amount or sum qualified for inclusion in the capital computation of a company, the amount or sum must be a 'reserve'. On a consideration of the definitions of the expressions 'provision' and 'reserve' in Clause 7(1)(a) of Part III of Schedule VI to the Companies Act and the decision of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC , it was clear that where an amount was set aside out of profits and other surpluses to provide for any known liability of which the amount could not be determined with substantial accuracy, the same was a provision ; but if the amount so set apart was not designed to meet a liability, a contingency, commitment or diminution in the value of assets known to exist at the date of the balance-sheet, it would be a reserve. If this test was applied to the item of Rs. 22 lakhs odd, being the provision for taxation, it would be clear that this setting aside of the amount from out of the gross profits of the company have to be regarded as a provision and not as a reserve. The relevant previous year in that case was the calendar year which ended on 31st of December, 1962. Under Rule 1 of the Second Schedule to the Act the first day of the previous year would be 1st of January, 1962, and, therefore, the balance-sheet of the assessee-company as on 31st of December, 1961, and the profit and loss account for the year which ended on 31st of December, 1961, would be relevant. It could not be disputed that on the expiry of 31st December, 1961, the assessee-company had incurred the taxation liability in respect of the profits which it had earned during that year, though the exact amount of such liability could not be ascertained with substantial accuracy at that time. The liability for taxation having thus arisen on the expiry of the last date of the year, the setting apart of the sum of Rs. 22 lakhs odd by the board of directors would have to be regarded as provision made for a known and existing liability and the quantification whereof had to be done later. The taxing authorities and the Tribunal were, therefore, clearly right in taking the view that the provision for taxation in the sum of Rs. 22 lakhs odd made by the board of directors in that case was not a reserve but provision and as such was not entitled to be included in the capital computation of the assessee-company under the Act. As regards the amount of Rs. 11 lakhs odd being the amount of proposed dividends, in the first place a mass of undistributed profits could not automatically become reserve and somebody possessing the requisite authority must clearly indicate that the amount had been separated from the general mass of profit with a view to constitute it as a reserve ; secondly, it should be apparent from the surrounding circumstances that the amount so set apart was in fact a reserve to be utilised in future for a specific purpose on a specific occasion ; thirdly, clear conduct on the part of the directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend would be destructive of making that amount a reserve ; and, lastly, having regard to the purpose of the Rules framed for computing the capital of the company for the purpose of super profits tax in Schedule II to the Act, the amount so set apart should be available to the assessee for being used in its business in future. The manner in which the directors in their report had indicated the appropriation of the balance of the gross profits, after making provision for commission agency, depreciation and tax, namely, that Rs. 11 lakhs odd should be appropriated towards a payment of the proposed final dividend at the rates indicated in the report and having regard to the manner in which this particular item had been shown in the balance-sheet as on 31st of December, 1961, and in the profit and loss account for the year ending 31st December, 1961, the amount of Rs. 11 lakhs odd would have to be regarded as not a reserve and, therefore, the same was not liable to be included in the capital computation under Rule 1 of Schedule II to the S.P.T. Act, 1963. Our attention was drawn to the observations of Mr. Justice Tulzapurkar at p. 32 of the report.

10. Reliance was also placed on the decision of this court in the case of CIT v. Indian Standard Wagon Co. Ltd. : [1979]118ITR623(Cal) , and also on the decision of this court in the case of CIT v. Eyre Smelting Pvt. Ltd. [1978] 118 ITR 857, where the characteristics of provisions and reserves were mentioned. There the assessee-company had made provision in its accounts for bad and doubtful debts aggregating to Rs. 1,02,239, respectively, under two separate heads, namely, 'Debts outstanding for a period exceeding six months and considered doubtful' and 'Advances recoverable in cash or in kind or value to be received unsecured and considered doubtful'. In its assessment to super profits tax the assessee had claimed that the sum of Rs. 1,02,239 should be considered as reserve and included in the computation of its capital under Schedule II of the S.P.T. Act, 1963, but the claim was not accepted by the ITO. On appeal, the AAC held that a technical meaning should be given to the word 'reserve' and the fund created by the assessee was a reserve. On further appeal by the Revenue, the Tribunal had held that a provision made for bad and doubtful debts was a provision for some future loss that might or might not arise and the liability, therefore, was neither known nor could be determined with any substantial accuracy on the relevant date and the fund came within the category of a reserve and not that of a provision. On a reference, the High Court held that the provision in the instant case was made for an anticipated contingency, for the item appeared in the profit and loss account and was intended to meet the anticipated diminution of the value of the assets of the assessee resulting from unrealised debts. The contingency was known and anticipated on the date of the balance-sheet and the amount set apart for the item, though not determined with accuracy, was estimated. Further, the amount set apart did not have any characteristics of reserve, but had all the characteristics of a 'provision' because the amount appropriated in the profit and loss account could not be said to form part of the capital employed in the business. The court further held that the Tribunal was wrong in holding that a provision was only made for a known liability. According to the court, the sum of Rs. 1,02,239 could not be treated as a reserve for the computation of the capital under the Second Schedule to the Super Profits Tax Act, 1963. Our attention was drawn to the observations of the court at p. 862 of the report. Reliance was also placed on the decision of the Bombay High Court in the case of CIT v. Century Spg. & Mfg Co. Ltd. : [1977]108ITR431(Bom) . There the Division Bench of the Bombay High Court was concerned with the question of setting apart of a sum of Rs. 40 lakhs in the balance-sheet. It was held by the Bombay High Court that the setting apart of Rs. 40 lakhs in the balance-sheet as on 31st December, 1961, which according to the assessee-company's own statement before the Tribunal was for the purpose of meeting the liability which might arise as a result of an award that would be made in an industrial adjudication, which was pending under a statute, would have to be regarded as a provision made for a known contingent liability, the quantification whereof was to depend upon either the actual award that would be made by the adjudicating machinery or as a result of settlement that might be arrived at by the parties. Therefore, the setting apart of the sum of Rs. 40 lakhs being in the nature of a provision would not be includible in the capital computation of the assessee-company for the purpose of the S.P.T. Act, 1963. Reliance was placed on the observations of the court at p. 436 of the report.

11. In the decision of the Calcutta High Court in the case of A.P.V. Engineering Co. Ltd. v. CIT : [1979]119ITR937(Cal) , the meanings of the expressions 'provision' and 'reserve' were again discussed in the light of the provisions of the Companies Act, 1956. There the court had relied on the interpretation Clause in Pt. III of Schedule VI of the Companies Act, 1956, and noted that a clear distinction between a reserve and a provision had to be made in Regulation 87 of the Companies Act, 1956. The court had also observed in that case that the object of the Act was to impose tax on a certain part of the commercial profits of joint stock companies and it would be more appropriate to construe the words and expressions in such a statute according to the commercial sense and not in their dictionary meaning, a view about which, for the purpose of disposing of the present reference, it is not necessary for us to express any opinion.

12. Reliance was also placed on a Full Bench decision of the Madras High Court in the case of Madras Motor & General Ins. Co. Ltd. v. CIT : [1979]117ITR534(Mad) . There the court was concerned in determining the capital of an insurance company for arriving at the chargeable profit under the C. (P.) S.T. Act, 1964. Our attention was drawn to the observations of the court appearing at p. 539 of the report, where the Division Bench reiterated that the reserves, in order that they might be so called in the real sense of the term, should normally come out of the profits of the company. But the court further observed that if reserves were constituted out of assets, which were sold or by any other means, it might be difficult to term that the amount shown as reserve was really reserve. But the court observed that the court did not wish to state anything by way of opinion of the court on this aspect because that question did not arise before the court. But the court reiterated that the amount set apart specifically for the purpose of meeting a specific liability would not be a reserve but would be only a provision made for a specific liability.

13. Reliance was also placed on the decision of this court in the case of CIT v. Burn and Co. Ltd. : [1978]114ITR565(Cal) , where I, delivering the judgment of the court, had referred to the principles enunciated by Mr. Justice Tulzapurkar in the decision of the Division Bench of the Bombay High Court in the case of Shree Ram Mills Ltd. v. CIT : [1977]108ITR27(Bom) . While expressing our respectful concurrence with the four tests laid down by the learned judge, we observed that a reserve need not exclusively be set apart from profits but might be available from other surplus and for this purpose we referred to the decision of the Supreme Court in the case of CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) . We further observed that we were inclined to take the view that the expression 'reserve' in Rule 1 of Schedule II might be a reserve in the ordinary sense and need not be considered in contradistinction to 'provision', Our attention was also drawn to the decision in the case of Addl. CIT v. A.L.N. Rao Charitable Trust : [1976]103ITR44(KAR) , and reliance was placed on the observations of the court at p. 55.

14. On the question of contingency reserve, reliance was placed on the decision of the Kerala High Court in the case of Cochin State Power & Light Corporation Ltd. v. CIT : [1974]93ITR582(Ker) . There the court was concerned with the special reserve appropriated under a statutory provision and whether such reserves were permissible deduction. There the asses-see, the Cochin State Power & Light Corporation Ltd., had claimed in respect of the year ending 3rd of March, 1965, relevant for the assessment year 1965-66, that the sums of Rs. 10,225, Rs. 30,475 and Rs. 23,417 appropriated by it towards 'contingencies reserve', 'development reserve' and 'special reserve', respectively, should be allowed as deduction in the computation of its business income on the ground that these reserves had been created under the statutory obligations under the Electricity (Supply) Act and the amounts appropriated to these reserves did not form part of the income of the assessee. The ITO rejected the claim and included these amounts in the income of the assessee. On appeal, the AAC did not accept the plea of the assessee. A further appeal to the Appellate Tribunal was dismissed and it was held by the High Court that the amount covered by the contingencies reserve was a diversion by reason of the overriding obligation created by a statute and, therefore, for determining the commercial profits of the assessee, the amount of this reserve had to be deducted. This reserve was created from out of the revenue and not out of the profit, and was related to the original cost of the fixed assets of the assessee, and, could be utilised only for certain purposes, indicated in para. IV of Schedule VI to the Electricity (Supply) Act, 1948, and was not at the disposal of the assessee in the matter of its application. The amount appropriated to this reserve had to be invested in trust securities within a fixed period and the assessee could not be said to be getting any benefit from it ; even assuming that the assessee might be said, to get a benefit from it, if and when the contingency specified in Schedule VI of the Electricity (Supply) Act, 1948, arose that was no reason to say that it was not an expenditure wholly and exclusively laid out or expended for the purpose of the business or profession. The 'development reserve' was of the same character as 75% 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 I.T. Act, 1922. It could not be said that the amount was expended by the assessee nor could it be said that it had been lost to the assessee by an overriding obligation. The development reserve was still available to the assessee with the only limitation that it was so available only for investment in the business of the electricity supply undertaking. There was no diversion of the revenue which was to be deducted for the purpose of determining the real profits of the assessee nor was an expenditure liable to be deducted under the I.T. Act. The assessee could not, over and above the allowance by way of development rebate, claim the amount appropriated to the development reserve under the Electricity (Supply) Act to be deducted in computing the income for the purpose of assessment. As for the 'special reserve', the court held that it was not shown that it was under any statutory obligation but what was said was that the Electricity Board directed the assessee to keep such a reserve. It had not been shown that the amount so reserved was not available to the assessee for diversion for any purpose of its own. Merely because some instruction was said to have been given by the Electricity Board for the creation of the reserve which, in the normal course, would be available for appropriation by the assessee without restriction, it could not be said that it should be deductible from the income. The amount appropriated to this reserve ought not, therefore, to be deducted in arriving at the taxable income of the assessee-company. The court noted at p. 592 of the report that the 'development reserve' was not similar in nature to the consumer benefit reserve with which the Supreme Court had to deal in the case of Poona Electric Supply case : [1965]57ITR521(SC) .

15. Our attention was also drawn to a decision of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd. v. CIT : [1974]97ITR334(Bom) .

16. There the Bombay High Court observed that the contingency reserve and the tariffs and dividends control reserve were required to be compulsorily made under the Electricity (Supply) Act, 1948. Appropriations to both these funds were not made voluntarily by the licensee. The reserves were not available to the licensee for any purpose of its own. The tariffs and dividends control reserve were apparently intended to be used for the benefit of the licensee or its shareholders, but in the ultimate analysis, the real purpose behind the creation of the reserve was to see that the tariffs leviable on the consumers in the relevant years were not increased or enhanced. On the purchase of the undertakings the reserves were required to be handed over to the transferee and the transferee was required to maintain them as such and when the undertaking was purchased by the Board or the State Govt. no allowance was made in respect of the reserves while determining the price payable by the Board or the State Govt. Having regard to these aspects of the reserves, it was clear that the amounts credited to these reserves in the accounting years had to be deducted under Section 10(1) of the Indian I.T. Act, 1922, in computing the profits of the electricity undertakings. Similar view was expressed by the Madras High Court in the case of Vellore Electric Corporation Ltd. v. CIT : [1977]109ITR454(Mad) . There the Madras High Court held that pursuant to the obligations imposed on the assessee, an electric supply undertaking, by the Electricity (Supply) Act, 1948, the amounts of Rs. 41,328 and Rs. 42,718 were transferred to the contingencies reserve account and the development reserve account. The assessee's claim for deduction of these two sums in computing its profits and gains for income-tax assessment was negatived by the ITO, AAC and the Tribunal. The High Court held that the amount standing to the credit of the two reserves could not be said to be amounts which had gone out of the hands or the control of the assessee and became the subject-matter of ownership of somebody else. It might be that the statute had imposed certain restrictions over the disposal of the amounts by the assessee but that did not mean that the amounts ceased to be money belonging to the assessee. Simply because the statute required a licensee like the assessee to make an appropriation out of its revenue for a particular purpose and that was a compulsory appropriation which the assessee had to make, it did not follow that for income-tax purposes such appropriation must necessarily be deducted in arriving at the profits and gains of the business. Every appropriation to be made under a statutory provision did not constitute a diversion of profit by overriding title. Here, of course the question of provision and reserve in the context of our present statute was not an issue before the Madras High Court. Reliance was also placed on a Division Bench decision of the Patna High Court in the case of Darbhanga Laheriasari Electric Supply Corporation Ltd. v. CIT : [1979]117ITR516(Patna) , where at pp. 520 and 521 of a report, after discussing the Madras and Kerala decisions, the Patna High Court was unable to agree on this aspect with the views of the Madras High Court and held that under the provisions of Schedule VI of the Electricity(Supply) Act, formulated above, the amount credited to the contingency reserve was not one which was under the disposal of the assessee and should be excluded in determining the taxable income of the assessee. We have already referred to the decision of this court in the case of CIT v. Burn & Co. : [1978]114ITR565(Cal) . Learned advocate for the assessee, however, placed strong reliance on the observations of this court at pp. 575 and 581 of the report. Naturally, our attention was drawn to the observations of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . This decision has been exhaustively discussed in the several decisions we have referred to hereinbefore ; it is not necessary for our present purpose to refer to the said decision in detail except to the state that the decision reiterated the difference between a provision and a reserve, at p. 67 of the report. The Supreme Court in the case of CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) , was concerned with the business profits tax and reiterated that in its ordinary meaning the expression 'reserve' meant something specifically kept apart for future use or for a specific occasion.

17. We are concerned in this reference with three items as we have indicated from the question, namely, (1) Debenture Sinking Fund, (2) Replacement and Contingencies and (3) Contingency Reserve Fund. We have also noted the facts as found by the Tribunal and several decisions to which our attention was drawn. Some of these decisions and some of the principles involved were reviewed by us in a recent decision (unreported) in-the case of CIT v. Karam Chand Thapar and Brothers, [ITR No. 431 of 1976--judgment'ftelivered on 15th of May, 1980 (since reported in : [1981]131ITR175(Cal) ].

18. In the light of these decisions, in our opinion, the following principles should be applied in determining the question whether a particular sum can be treated as a 'reserve' within the meaning of Schedule II to the S.P.T. Act, 1963-

(a) to determine whether a particular amount is reserve or not one has to find out the substance of the matter. Mere nomenclature of a particular amount as a reserve or not is neither determinative nor decisive of the question as to whether it should be treated as a reserve or not under the said Act ;

(b) for the purpose of finding out whether an amount is a reserve within the meaning of Rule 1 of Schedule II to the S.P.T. Act, 1963, one has to find out whether the amount in question represented any profit earned by the assessee-company and other amounts available to the assessee-company and not distributed as a dividend, but kept away or apart for any purpose to which the same might be put in future;

(c) There must be a decision by the authorities competent to take such decision to keep the amount in question back for any purpose to which the same might be put in future ;

(d) The reserve might be built up not only from the profits but may be from other sources available to the assessee-company ;

(e) The expression 'reserve' appearing in Rule 1 of Schedule II meant reserve in the ordinary sense and need not be considered in contradistinction to a provision.

19. These principles can be deduced from the decision of the Supreme Court in the case of CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) , and reference may be made to the observations of the court at pp. 693 and 694 of the report. We had also, after referring to the several decisions on this aspect in the case of CIT v. Bum & Co. Ltd. : [1978]114ITR565(Cal) , reiterated these principles and reference in this connection may be made to our observations appearing at p. 575 of the report. Judged by the above principles it appears from the facts found by the Tribunal that out of the debenture stock which was originally issued for 49,95,000 in 1950, the balance as on the first day of the relevant previous year was 32,52,753 and the closing balance was 31,11,646 whereas the debenture sinking fund accounted for 17,40,609 and 19,28,519 on the corresponding dates. From the pattern indicated above the Tribunal found as a fact that the assessee-company had been gradually redeeming the debenture stock and simultaneously increasing the sinking funds with the idea that at the appropriate time the redeeming of the debentures would not upset the working of the business. The Tribunal further found that the funds set aside out of the company's profits were being used for the purposes of business because the assessee-company wanted to replace the capital by way of debenture by the sinking fund. In the premises, according to the Tribunal, in the redeeming of the debentures, the liability was not known and was not a revenue liability. In our opinion, in the light of the facts found by the Tribunal and in the background of the principles we have mentioned hereinbefore, the Tribunal was correct in holding that the debenture sinking fund constituted a reserve for the purpose of computing the capital of the assessee-company under the Second Schedule to the S.P.T. Act, 1963. The next question, however, is about replacement and contingency. The Tribunal was unable to accept the Revenue's view-point because of the transfer of the amount from the contingencies reserve fund. The Tribunal found that the fund was meant for such contingencies in connection with the plant expansion and replacement. It is incorrect to say that the assessee-company should not be concerned with the expansion and it was not expected to be so concerned. On the other hand, it was found from the report of the chairman of the board of directors of the assessee-company as appearing in the printed statement of account that the assessee-company had been extending its capacity for generation of power. As a prudent businessman the assessee-company was expected to anticipate an expansion and provide funds therefor which could properly be treated as part of the capital of the assessee-company. In that background and in the light of the other facts found by the Tribunal as well as by the AAC and on the ratio of the principles we have indicated before, we are of the opinion that the Tribunal was also right in treating replacement and contingencies as reserve for the purpose of computing the capital of the assessee-company under the relevant provisions.

20. The last fund with which we are concerned in this reference is the Contingencies Reserve Fund. Our attention was drawn and we have set out certain relevant provisions of some of the provisions of the Electricity (Supply) Act, 1948, Schedule VI whereof deals with the financial principles and their application. Paragraphs III, IV, V and IX of Schedule VI deal with 'Contingencies Reserve'. It was contended on behalf of the Revenue that the nature of the reserve, the sources from which the same was created, the purposes of the fund and the manner in which the same could be drawn up or utilised should be borne in mind and in this connection reliance was placed on the decision mainly of the Kerala High Court in the case of Cochin State Power and Light Corporation Ltd. v. CIT : [1974]93ITR582(Ker) , as well as several other decisions. It was urged that in order to find out whether certain amount set apart was a 'reserve' or 'provision' for computing the capital of a company under Schedule II to the S.P.T. Act, 1963, the true nature of the amount should be taken into account and not the mere description given to it by the assessee. Reliance in this connection was placed on the observations of the Division Bench of this court in the case of CIT v. Indian Standard Wagon Co. Ltd. : [1979]118ITR623(Cal) . We also agree with this proposition. The amount of contingency reserve, according to the Revenue, is not available to the assessee for any purpose of his own or even for any other purpose than those indicated in para. V of Schedule VI to the Electricity (Supply) Act, 1948. It was urged on behalf of the Revenue that the assessee-company had stated that no portion of the said fund could be used without the prior approval of the State Govt. The amount of the reserve had to be invested in securities authorised under the Indian Trusts Act, 1882. According to the Revenue, para. V of Schedule VI to the Electricity (Supply) Act, 1948, provided that the contingencies reserve should not be drawn upon save in exceptional circumstances and that too with the prior approval of the government during the currency of the licence. It was, therefore, urged that the amount was not one which was at the disposal of the assessee in the matter of its application. Since the amount was not available to the assessee for the purpose of its business it was not a reserve under Schedule II to the S.P.T. Act, 1963. It was also apparent from the surrounding circumstances, according to the Revenue, that the amount so set apart is not a reserve to be utilised in future for any specific purpose on any specific occasion. Reference was made to the decision which we have referred to as also on the decision of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd. v. CIT : [1974]97ITR334(Bom) , which followed the ratio of the principle of the Kerala High Court referred to hereinbefore. It was also urged on behalf of the Revenue that the contingencies reserve was created not on the assessee's own volition but because of statutory compulsion. On the purchase of the undertaking the reserve had to be handed over to the purchaser who had to maintain it as such. The assessee would not get any compensation on account of this reserve. In the provisions of the Electricity Act, 1910, relating to the price fixation when the Board or the State Govt. took over the undertaking of the licensee, no allowance was to be made on the purchase price for the amount of the contingencies reserve. It was further urged on behalf of the Revenue that the contingencies reserve was, therefore, created to meet a known liability and could not, therefore, constitute a reserve. Reliance was placed on some of the decisions including in the case of CIT v. Indian Standard Wagon Co. Ltd. : [1979]118ITR623(Cal) , the decision in the case of CIT v. Eyre Smelting Pvt. Ltd. : [1979]118ITR857(Cal) and the decision in the case of A. P. V. Engineering Co. v. CIT : [1979]119ITR937(Cal) . According to the learned advocate for the Revenue, the Tribunal had found that the contingency reserve fund was meant for capital liability and, therefore, this showed that the amount in question was not a reserve under the S.P.T. Act, 1963. In this connection, reliance was placed on the decision of the Bombay High Court in the case of CIT v. Century Spg. & Mfg. Co. Ltd. : [1977]108ITR431(Bom) . It was also urged on behalf of the Revenue that the contingency reserve was a diversion of income by an overriding obligation created by the statute. The amount in question did not really belong to the assessee, the amount was not under the control of the assessee. According to the Revenue, it was impressed with an obligation which was in the nature of a trust. Moreover, neither the statutory reserve nor the securities in which the amount had been invested could be considered to be the trading asset of the assessee. It had no direct relationship or nexus with the business of generating and supplying energy. The amount did not, therefore, come within the concept of a reserve under Schedule II to the S.P.T. Act, 1963. Reference was made to several decisions including the decision of the Kerala High Court to which we have referred hereinbefore. It was further submitted on behalf of the Revenue that para. III of Schedule VI to the Electricity (Supply) Act, 1948, indicated that the creating of the contingencies reserve was either out of the existing reserve or from the revenue of the undertaking. The term 'revenue' referred to the total receipt and not to what was left as profit after meeting the expenses. Therefore, the creation of the reserve was irrespective of the profit of the licensee, according to the Revenue. Paragraph IV of Schedule VI indicated that the amount that had to be appropriated to such reserve had no relation to the profit made in any year but was a fixed percentage of the original cost of the fixed assets. One of the basic characteristics of a reserve under Schedule II to the Act was that it should be the appropriation of a profit which was retained to form a part of the capital employed in the business. The amount in question, therefore, according to the Revenue, did not come within the meaning of reserve under the Act. Reliance was placed on several decisions. It was, therefore, urged that the Tribunal had found that there had been debits and credits on account of sale of investments and depreciable assets as also on such assets being written off. This also showed, according to the Revenue, that the amount in question would not come within the description of a reserve. It was further urged that the amount in question on this aspect has been allowed in computing profits for the purpose of the Indian I.T. Act, 1922, or the I.T. Act, 1961. On this ground also the amount could not be considered, according to the learned advocate for the Revenue as a reserve under Schedule II to the S.P.T. Act, 1963.

21. We have noted that the contingencies reserve had to be maintained by an electric supply company in accordance with Schedule VI to the Electricity (Supply) Act, 1948. Clause III of Schedule VI provided that there should be created from the existing reserve or from the revenues of the electricity undertaking a reserve to be called 'Contingencies Reserve'. Clause IV(1) provided that the licensee should appropriate to the '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 the fixed assets provided that if the said reserve exceeded 5% of the original cost of the fixed asset no appropriation should be made which would have the effect of increasing the reserve beyond the said maximum. Clause V of Schedule VI provided for the purposes for which the contingencies reserve might be drawn upon as appearing from the provisions of the Act as follows :

(a) to meet the expenses or loss of profit arising out of accidents, strikes or circumstances which the management could not have prevented ;

(b) to meet the expenses on replacement or removal of plants or works other than expenses required for normal maintenance or renewal ; and

(c) to meet the expenses by way of compensation payable under any law for the time being in force and for which no other provision has been made.

22. During the currency of the licence, the contingencies reserve might be drawn to meet such charges as aforesaid as the State Govt. might approve. Clause IV(2) provided that the sum appropriated by the contingencies reserve should be invested in securities authorised under the Indian Trusts Act and such investment should be made within a period of six months of the close of the year of account in which such appropriation was made. From the aforesaid, it appears to us that unlike the consumers' benefit reserve which is also provided under the said Act and which is required to be returned or returnable by the licensee to the consumers in certain events and, therefore, did not form a part of the assessee's real profits, the contingencies reserve cannot be said to be an amount which had gone out of hand or the control of the licensee. The said amount had not ceased to be the money belonging to the licensee. What was meant by a diversion of profit by overriding title was that part of the profit earned by the assessee was not really its profit but belonged to somebody else and with reference to that amount the assessee could have no title at all. In the case of the contingencies reserve, the statute had clearly indicated the purposes for which the amount can be spent and the aforesaid purposes clearly show that these are connected with the business of the assessee and it was the assessee who can utilise the amount. If the said amount can be said to have been taken away by a diversion of overriding title then the assessee would have no control over the same even to the limited extent provided for in Clause V of Schedule VI. The fact that the assessee was required to invest the amount standing to the contingencies reserve in securities authorised by the Indian Trusts Act did not in any way affect the position of the assessee, namely, that the assessee continued to be the owner of the investments and it is the assessee who alone is entitled to utilise the said amount for the specified purposes of the business, however limited it might be, it cannot be said that the reserve invested in securities was not the assessee's investment but somebody else's. The Division Bench of the Madras High Court in the case of Vellove Electric Corporation Ltd. v. CIT : [1977]109ITR454(Mad) , discussed the relevant provision at pp. 458 and 459 of the report. We are in respectful agreement with the said analysis of the Division Bench of the Madras High Court. The Division Bench of the Madras High Court also considered the decision of the Kerala High Court in the case of Cochin State Power & Light Corporation Ltd. v. CIT : [1974]93ITR582(Ker) , on which reliance was placed heavily by the Revenue but the Madras High Court was unable to accept the said decision. On this aspect of the matter we are in respectful agreement with the view expressed by the Division Bench of the Madras High Court in the case of Vellore Electric Corporation Ltd. v. CIT : [1977]109ITR454(Mad) . It is not correct, in our opinion, to hold that the amount represented by the contingencies was not at the disposal of the assessee and it was not available to the assessee for the purposes of his business. The contingencies reserve were to be utilised for the purposes specified in Clause V of Schedule VI of the said Act which clearly indicated the purposes for which the amount could be spent and such purposes were clearly connected with the business of the assessee and it is the assessee who had to utilise the said amount which was available to the assessee. It was only for the purpose of spending the amount that the prior approval of the State Govt. was necessary. Such a requirement had been provided for in the statute because it appears that an electricity supply company was a public utility undertaking and, therefore, the State Govt. had been given the power to see that the said contingency reserve was not frittered away or uneconomically spent except for the approved purposes of the business of the company. It was not correct to state that such reserve was created to meet any known liability. There is no diversion of the money because the money still belonged to the assessee or that the amount was at the disposal of the assessee for utilisation in the business of the assessee. On this aspect we would prefer to follow the views of the Madras High Court as we have indicated before in preference to the decision of the Kerala High Court. For the same reasons we are also unable to accept the conclusions of the Bombay High Court on this aspect in the case of Amalgamated Electricity Co. Ltd. v. CIT : [1974]97ITR334(Bom) , which followed the ratio of the decision of the Kerala High Court. But the Bombay High Court, however, in the case of CWT v. Bombay Suburban Electricity Supply Ltd. [1977] 103 ITR 384, observed that the contingencies reserve was an asset belonging to the assessee-company and could be utilised for the purposes of the business of the assessee. This observation, however, was made in the context of Section 2(m) of the W.T. Act, 1957. The argument of the Revenue that the contingencies reserve had not been created out of the profits of the company, in our opinion, in view of the ratio of the decision of this Bench which we have referred to hereinbefore, cannot also be accepted. We have also reiterated that the reserves might be built up from the profits and from sources other than profits. As a matter of fact, reserve can be created out of the profits and other surpluses available to the company. In the case of Poona Electricity Supply Co. Ltd. v. CIT : [1965]57ITR521(SC) , the amount considered by the Supreme Court was 'consumers' benefit reserve', which was required to be created under Clause II of Schedule VI. The Supreme Court, on an analysis of the characteristics of the said reserve, pointed out that for the purpose of rationalisation of rates and keeping them under control the licensee was directed to adjust its rates in such a way that its clear profit in any year should not, as far as possible, exceed the amount of reasonable profit, but if an excess was collected the licensee should distribute one-half of that excess in the form of a proportional rebate to the consumer or carry forward the same in his accounts for future distribution to the consumers. Thus, according to the Supreme Court, this scheme of the provision was that part of the excess collected was returned to the consumers by way of rebate. It was on this analysis of the nature of the consumers' benefit reserve that the Supreme Court pointed out that these were part of the excess amount paid to it and reserved to be returned to the consumers. These did not form part of the assessee's real profit and hence to arrive at the taxable income of the assessee the said amount had to be reduced from the total income. As was already pointed out the consumers ' benefit reserve was materially different in character and incidence from the contingencies reserve. In the case of consumers' benefit reserve, a part of the excess amount was paid to the company and reserved to be returned to the consumers. But in the case of contingencies reserve the said amount belonged to the assessee and could be utilised by the assessee for its business purposes specified in Clause V of Schedule V. This fundamental distinction between the two reserves must be borne in mind and should not be equated to make the two reserves similar in nature, character and incidence. On this aspect, in our opinion, the view of the Kerala Division Bench referred to hereinbefore cannot be accepted and it has been rightly pointed out by the Madras High Court in the decision which we have noted that these two reserves were different in character, incidence and, therefore, the ratio of the case of Poona Electric Supply : [1965]57ITR521(SC) , in respect of the consumers' benefit reserve could not be applied to the contingencies reserve. It, therefore, appears to us that contingencies reserve must have been created either out of the reserves or other sums or amounts available to the assessee. The said reserve had to be earmarked and set apart to meet the contingencies which are not known to exist at the time when the reserve was created and the reserve having been created by the authorities who were competent to take the decision and set apart for future purposes to which it may be put. By the principles which we have discussed in the previous decisions, the Tribunal was also right in treating the said contingencies reserve to be a reserve for the computation of the capital under the relevant provisions.

23. In the premises, the question referred to this court must be answered in the affirmative and in favour of the assessee. In the facts and circumstances of this case, the parties will pay and bear their own costs.

Sudhindra Mohan Guha, J.

24. I agree.


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