ADDITIONAL COMMISSIONER OF Income Tax, MADRAS-I vs VELLORE ELECTRIC CORPORATION LTD.

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, respectivel ?

(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 1970-7 ?

(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 u/s 80-I not only in respect of the business income but also in respect of income derived by it from investments in securitie ?

The first two question are covered by the decision of this court in Vellore Electric Corporation Ltd. Vs. Commissioner of Income Tax, . Though

the decision of the Kerala High Court in Cochin State Power and Light Corporation Ltd. Vs. Commissioner of Income Tax, and that of the

Bombay High Court in Amalgamated Electricity Co. Ltd. Vs. Commissioner of Income Tax, Bombay City I, 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. Vs.

Commissioner of Income Tax, . Accordingly, we answer the first two questions in favour of the revenue and against the assessee.

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.

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

investment 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 which is referred to in section 108 and has a gross total

income of fifty thousand rupees or less.

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 in 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 provision 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 not 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. Counsels fee Rs. 500.