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Additional Commissioner Of Income-Tax, Madras-I v. Vellore Electric Corporation Ltd.
Structured Summary of the Opinion — Ramaswami, J.
Factual and Procedural Background
The Tribunal referred three questions to the court under section 256(1) of the Income-tax Act, 1961 concerning: (1) entitlement of the assessee to deductions for amounts contributed to a "contingencies reserve" for the assessment years 1969–70 and 1970–71; (2) entitlement to deductions for transfers to a "development reserve" and a "tariff and dividend control reserve" for the same years; and (3) whether relief under section 80-I of the Act applies not only to business income but also to income derived from investments in securities, in view of the provisions of the Electricity (Supply) Act, 1948.
The assessee is a public limited company engaged in the distribution of electricity at Vellore and Ranipet and is governed by the Electricity (Supply) Act, 1948. The Sixth Schedule to that Act requires creation of a "contingency reserve" and provides in paragraph IV(2) that sums appropriated to that reserve shall be invested in securities authorised under the Indian Trusts Act, 1882, within six months of the close of the year of account.
For the assessment years in question the undertaking received interest on securities amounting to Rs. 17,791 (1969–70) and Rs. 14,741 (1970–71). The assessee claimed the 8% deduction available under s.80-I of the Income-tax Act on those interest receipts.
Legal Issues Presented
- Whether the assessee is entitled to deduction of Rs. 55,703 and Rs. 30,104 contributed to the "contingencies reserve" for assessment years 1969–70 and 1970–71 respectively.
- Whether the assessee is entitled to deduction of Rs. 98,676 and Rs. 18,735 transferred to the "development reserve" and "tariff and dividend control reserve" respectively for 1969–70 and Rs. 68,288 transferred to the "development reserve" for 1970–71.
- Whether, having regard to the Electricity (Supply) Act, 1948, the assessee is entitled to relief under section 80-I of the Income-tax Act not only in respect of business income but also in respect of income derived from investments in securities (i.e., whether interest on such investments is attributable to the profits and gains of the priority industry).
Arguments of the Parties
Assessee's Arguments
- The assessee argued that it was under a statutory obligation (under the Sixth Schedule to the Electricity (Supply) Act, 1948) to invest amounts appropriated to the "contingencies reserve" in approved securities.
- Because compliance with that statutory obligation was necessary to carry on the business of distributing electricity, interest arising from such investments should be regarded as attributable to the profits and gains of the priority industry and thus qualify for the 8% deduction under section 80-I of the Income-tax Act.
Revenue's Arguments
- The revenue contended that only the immediate source of income should be considered; here the immediate source of the interest receipts was investment in securities.
- The revenue further argued there was no direct relationship between the interest income and the carrying on of the business of generation or distribution of electricity, and therefore such income could not be treated as attributable to a priority industry under s.80-I.
Tribunal's View (as recorded)
- The Tribunal had taken the view that because the investment in Government securities was made pursuant to a statutory obligation, there was a direct relationship between the income derived from those investments and the carrying on of the business of distribution of electricity.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Vellore Electric Corporation Ltd. v. Commissioner Of Income-Tax, Madras-I, [1977] 109 ITR 454 (Mad) | Decision of this court addressing deductions in respect of contingency/development reserves (used to resolve questions 1 and 2). | The court followed this decision and held that the first two questions were covered by it; accordingly those questions were answered in favour of the revenue and against the assessee. |
| Cochin State Power & Light Corporation Ltd. v. CIT, [1974] 93 ITR 582 (Ker) | High Court decision taking a different view regarding "contingency reserve" and "development reserve". | Not followed by the court; the bench noted the different view but expressly preferred the decision in Vellore Electric Corporation. |
| Amalgamated Electricity Co. Ltd. v. CIT, [1974] 97 ITR 334 (Bom) | High Court decision taking a different view regarding "contingency reserve" and "development reserve". | Not followed by the court; the bench noted the different view but expressly preferred the decision in Vellore Electric Corporation. |
Court's Reasoning and Analysis
The court treated the first two questions as covered by its earlier decision in Vellore Electric Corporation (see table above) and therefore answered those questions against the assessee and in favour of the revenue.
For the third question the court undertook a statutory and factual analysis focused on the scope of section 80-I of the Income-tax Act. The court extracted the text of s.80-I (permitting an 8% deduction "in the case of a company ... where the gross total income includes any profits and gains attributable to any priority industry") and observed that "priority industry" is defined in s.80B(7) to mean the business of generation or distribution of electricity or of any other form of power.
The court emphasized that the 8% deduction is allowable only in respect of "profits and gains attributable to any priority industry." It reasoned that the immediate source of the interest income in the present case was the investment in Government securities required by paragraph IV(2) of the Sixth Schedule to the Electricity (Supply) Act. That provision required investment of contingency reserve monies in securities authorised under the Indian Trusts Act, 1882, within six months.
The Tribunal had treated the statutory obligation to invest as creating a direct relationship between the interest income and the business of distribution of electricity. The court rejected that view. It held that neither the statutory reserve nor the securities in which the amounts were invested could be treated as trading assets of the electricity undertaking. Because the investments were not trading assets, the court concluded they did not have the requisite direct nexus with the business of generating or supplying energy. Consequently, the interest received on such investments could not be considered profits or gains "attributable to" the priority industry for purposes of s.80-I.
On that basis the court held that the assessee was not entitled to the 8% deduction under s.80-I in respect of interest on the securities, and thus answered the third question against the assessee.
Holding and Implications
Holding:
- With respect to questions 1 and 2 (deductibility of amounts contributed to contingency/development/tariff & dividend control reserves for the assessment years 1969–70 and 1970–71), the court followed the decision in Vellore Electric Corporation Ltd. v. Commissioner of Income-Tax and answered those questions in favour of the revenue and against the assessee.
- With respect to question 3 (whether interest on investments in securities attributable to contingency reserve qualifies for deduction under s.80-I), the court held that the assessee is not entitled to relief under section 80-I in respect of interest on such securities and answered that question against the assessee.
Direct consequences and costs:
- The revenue was held entitled to costs; counsel's fee was fixed at Rs. 500.
Broader implication noted by the court:
- The court expressly preferred and applied its earlier decision in Vellore Electric Corporation over contrary views taken by the Kerala and Bombay High Courts in the cited cases.
This summary is prepared exclusively from the information contained in the provided opinion and does not include any material that is not present in that opinion.
Ramaswami, J.:— The following three questions have been referred by the Tribunal under s. 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 80-I 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. Commissioner Of Income-Tax, Madras-I., [1977] 109 ITR 454 (Mad).
3. 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 Eleciricity 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. Commissioner Of Income-Tax, Madras-I., [1977] 109 ITR 454 (Mad). Accordingly, we answer the first two questions in favour of the revenue and against the assessee.
4. 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.”
5. 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 s. 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 s. 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 s. 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.”
6. 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 s. 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 s. 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 s. 80-I of the Act. Accordingly, we hold that the assessee is not entitled to relief under s. 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.
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