Commissioner of Income Tax vs Pallavan Transport Corporation Ltd.

Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following two questions for the asst. yrs. 1973-74 and

1974-75 for the opinion of this Court under s. 256(2) of the IT Act, 1961;

For Both the assessment years :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to depreciation on the

assets transferred by the Government to the assessee even though the assessee is not the legal owner of the property ?

For the asst. yr. 1974-75 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 7,76,205 being the contribution to

the insurance fund is admissible deduction ?

The assessee is a State Government undertaking engaged in providing passenger transport. The ITO while completing the assessments for asst.

yrs. 1973-74 and 1974-75 disallowed the claim of depreciation to the extent of Rs. 4,44,360 for asst. yr. 1973-74 and Rs. 6,65,599 for asst. yr.

1974-75. According to the assessee it became the owner of those properties as per GO No. 86 Transport Department dt. 8th Nov., 1971 and

notification dt. 22nd Dec., 1971. The latter notification vested those properties with the assessee and suitable entries were made in assessee''s

books in respect of the consideration from capital contribution and loan advanced by the Government. A formal sale deed was not executed in

view of the provisions under Government Grants Act, 1895. The ITO was of the view that the assessee had not become a legal owner and that the

provisions of Transfer of Property Act and Indian Registration Act disqualify the assessee''s claim for ownership over these properties. The

Appellate Assistant Commissioner (AAC) deleted the disallowance and directed the allowance of depreciation following the decision of the

Tribunal in Tamil Nadu Small Scale Industries Development Corpn. Ltd. in ITA No. 1692/Mad/1976-77 dt. 29th March, 1978. On appeal,

considering the provisions contained in s. 2 of the Government Grants Act and s. 53A of the Transfer of Property Act and the provisions of s. 32

of the IT Act, 1961, the Tribunal confirmed the order passed by the AAC in accepting the assessee as the owner of the properties in question and

in granting allowance of depreciation. A similar question came up for consideration before this Court in Commissioner of Income Tax Vs. Tamil

Nadu Small Industries Development Corporation Ltd., , wherein this Court held that s. 2 of the Government Grant Act, 1895 was applicable to

the transfer of the three raw material depots to the assessee by the Government of Tamil Nadu. A plain reading of s. 2 of the Government Grants

Act 1895, shows that the term ""other transfer"" used in the section will take in all forms of transfer of lands or interest therein made by the

Government for consideration. There is nothing in the language of s. 2 of the Act or restrict the meaning of the term ""other transfers"" only to grants

and other transfers akin to grants made by the Government and for holding that the expression ""other transfers"" will not cover other forms of

transfer by the Government for consideration. The order passed by the Tribunal on this aspect is in accordance with the judgment of this Court

cited supra. Accordingly, we answer question No. 1 referred to us in the affirmative and against the Department.

Question No. 2 relates to contribution to insurance fund. The assessee contributed in the asst. yr. 1974-75 a sum of Rs. 7,76,205 as

contribution to insurance fund. The assessee contended that the payment was in terms of the statutory provisions of the Motor Vehicles Act, 1939

and that it should be allowed as deduction. According to the ITO it represents only a contingent liability and allowed only a sum of Rs. 3,095 out

of the total provision of Rs. 7,79,300 on the ground that only this amount of Rs. 3,095 representing actual payment towards the insurance fund is

allowable as a deduction. He disallowed the balance of Rs. 7,76,205. On appeal, the AAC deleted this disallowance on the ground that insurance

fund in terms of s. 94(3) of the Motor Vehicles Act, 1939 mandatorily requires either insurance to meet liabilities of the employees and third parties

or maintenance of a fund for this purpose. The assessee had already constituted such a fund in the name of PTC Insurance Fund Regulations,

1972, The fund meets the requirements of the Motor Vehicles Act. The amount set apart during the year has also been funded by putting it in the

bank in the immediately succeeding year as seen from the accounts for the year ending 31st March, 1974. On these facts, the AAC found that it

was not a mere contingent liability but a provision towards the fund already in existence. On further appeal by the Department, the Tribunal agreed

with the conclusion arrived at by the AAC. Accordingly, the Tribunal confirmed the finding of the first appellate authority on this aspect.

Before us, learned standing counsel for the Department submitted that the fund created by the assessee is only a reserve created for meeting the

contingent liability. The assessee is the owner of the fund. The interest arising out of the fund is payable to the assessee. Learned standing counsel

submitted that the amount deposited to the fund should be held on behalf of the assessee-corporation. It was further pointed out that no separate

accounts were maintained by the fund. It is only in the books of accounts of the assessee.-corporation, the fund accounts are maintained.

Therefore, according to the learned standing counsel the fund created by the assessee is owned by it. The learned standing counsel further

submitted that though the ownership of the fund is with the assessee, but the user is restricted only for the purpose of payment of compensation in

case if any accident takes place. He pointed out that if the liability actually accrued that was deducted in the year in which the payment was made.

Therefore according to the learned standing counsel inasmuch as the ownership of the fund is with the assessee and the liability is only a contingent,

the amount contributed by the assessee to the fund cannot be deducted as revenue expenditure. It was further pointed out that amount contributed

to the fund was not incurred for the purpose of the property of the assessee-company. According to the learned standing counsel even though the

fund was created to fulfil the obligation placed upon the assessee under the Motor Vehicles (M. V.) Act inasmuch as the liability is only a

contingent liability, the amount contributed to the fund cannot be allowed as revenue expenditure. For these reasons, it was submitted that the

Tribunal was not correct in considering the contribution made to the fund as revenue expenditure and therefore allowable as a deduction.

On the other hand, learned counsel appearing for the assessee submitted that the assessee had set up the insurance fund in terms of the statutory

provisions of the M. V. Act. The terms of s. 94(3) (c) are alternate to s. 94(1) of he M. V. Act and without such provision for insurance under s.

94(1) or under s. 94(3) the Motor Vehicles Licensing authority would not accept payment of M. V. tax and the vehicles should not be used.

Therefore the assessee claimed that it is a proper deduction either under s. 36(1) or under s. 37(1) of the Act. The insurance fund set up by the

assessee and the payments made into it are governed by statutory regulations and, therefore, it is a statutory liability. The actual payment out of the

fund might be contingent on the happening of certain events but the liability for the appellant is created by statute and not by the events themselves.

Therefore, the payments towards the insurance fund is an admissible deduction. The assessee is not resting its claim on the principle of diversion by

overriding title. Learned counsel further submitted that if the insurance premium is paid that would be allowable as revenue expenditure. In the

similar manner, the fund was created and the amount was contributed and that should also be allowed as a deduction since it is a revenue

expenditure.

We have heard the learned standing counsel for the Department and the learned counsel for the assessee.

In M. S. P. Senthikumara Nadar and Sons Vs. Commissioner of Income Tax, Madras, this Court held that, ""it should be taken as well settled

now that without statutory warrant - and there is none in s. 10(2) (xv) - deductions are not permissible for anticipated losses, even if they are

inevitable nor for contingent liabilities.

In Indian Molasses Co. (Private) Ltd. Vs. Commissioner of Income Tax, West Bengal, , the Supreme Court while considering the provisions of

s. 10(2) (xv) and s. 66 of the IT Act, 1922 held that, ""''spending'' in the sense of ''Paying out or away'' of money is the primary meaning of

''expenditure''. ''Expenditure'' is what is paid out or away and is something which is gone irretrievably. Expenditure, which is deductible for Income

Tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the

happening of an event is not expenditure."" It was further held that, ""the Income Tax law makes a distinction between an actual liability in praesenti

and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter.

In Tarachand Ghanshyamdas vs. CIT (1966) 59 ITR 378 this Court while considering the provisions of s. 10(1) and s. 10(2) (xv) of the Indian

IT Act, 1922, held that, ""the assessee was not entitled to claim the sum of Rs. 75,000 paid to S as a deduction under s. 10(1) or s. 10(2) (xv) of

the Indian IT Act, 1922. The sum of Rs. 75,000 paid to S. by the assessee could not be called an expenditure, as the assessee did not pay the

amount of any accrued liability, but only paid it towards a contingent liability which might arise in the future or might not. The Income Tax law does

not allow as expenses all the deductions a prudent trader will make in computing his profits.

In Chandmama Publications Vs. Commissioner of Income Tax, , this Court while considering the provisions of s. 37 of the IT Act, 1961, held

that, ""as the payment of an insurance premium is a definite outgoing though the payment is to cover the contingency of an insurable interest the

analogy of the payment of insurance premium to the provisions of retrenchment compensation will also be inappropriate. As the liability to pay

retrenchment compensation is only in the nature of a contingent liability and there is no satisfactory method of evaluating or quantifying the value of

that liability in any particular year of account, the provision therefor, cannot properly form the subject-matter of a claim for deduction as business

expenditure under the IT Act, 1961"".

In Vellore Electric Corporation Ltd. Vs. Commissioner of Income Tax, , while considering the compulsory appropriation out of profits to

contingencies reserves and development reserve under the Electricity (Supply) Act, 1948, this Court held that, ""the amounts standing to the credit

of the two reserves cannot be said to be amounts which have gone out of the hands or the control of the assessee and become the subject-matter

of ownership of somebody else. It may be the statute has imposed certain restrictions over the disposal of the amounts by the assessee but that

does not mean that the amounts have ceased to be money belonging to the assessee. 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 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 does not constitute a diversion of profit by overriding title.

In Commissioner of Income Tax Vs. Sijua (Jharriah) Electric Supply Co. Ltd., the Calcutta High Court while considering the amount

appropriated towards ""reserve for contingencies"" under Electricity Supply Act held that, ""if an assessee sets apart a sum of money every year for

meeting its unknown liabilities in business, it cannot be said that the sum so set apart has been diverted at source by an overriding title. Similarly, if a

sum is set apart under a compulsion of law for meeting unknown business needs of the company a diversion of income at source by an overriding

title does not take place.

In Commissioner of Income Tax Vs. South Arcot District Co-operative Supply and Marketing Society Ltd., this Court while considering the

statutory contribution of portion of its profits to education fund held that, ""merely because the statute contemplates the creation of a particular fund

and its utilisation in a particular manner, it does not mean that there is any diversion by overriding title as such. Sec. 62 and r. 46 dealt with what

could or should be done after the profits are earned and have reached the assessee, and not with any profits before they accrued to it. The amount

set apart is not also any expenditure to earn the profits. Accordingly, the contribution to the education fund cannot be allowed as a deduction in

computing the assessable income.

In Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, , the Supreme

Court while considering the meaning attributable to ""reserves"" and ""provisions"" assigned in Companies Act, 1956 in relation to Surtax Act, 1964

held that, ""the expression ''reserve'' has not been defined in the Super Profits Tax Act, 1963 or the C. (P) S. T. Act, 1964. The dictionaries do not

make any distinction between the two concepts ''reserve'' and ""provision"" while giving their primary meanings, whereas in the context of those Acts

a clear distinction between the two is implied. Though the expression ''reserve'' is not defined, since it occurs in taxing statutes applicable to

companies only and to no other assessable entitles, the expression has to be understood in its popular sense, that is to say, the sense or meaning

that is attributed to it by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, the meanings

attached to the words ''reserves'' and ''provisions'' in the Companies Act, 1956 dealing with the preparation of the balance sheet an the P&L a/c

would govern their construction for the purposes of the two enactments. The broad distinction between the two is that whereas a ''provision'' is a

charge against the profit to be taken into account against gross receipts in the P&L a/c, a ''reserve'' is an appropriation of profits, the asset or

assets by which it is represented being retained to form part of the capital employed in the business.

The above said decisions are relied upon by the learned standing counsel for the Department to support the contention that the assessee has

created only a reserve to meet the contingent liabilities and therefore the contribution made to PTC. Insurance Fund cannot be allowed as

deduction as revenue expenditure since it does not also relate to earning of profits.

On the other hand, learned counsel appearing for the assessee submitted that in order to meet the statutory liability the assessee created the

insurance fund for the purpose of meeting the payment of compensation that may arise in future, and therefore, it is an outgoing since the

contribution went out of its hands it should be allowed as deduction. Reliance was placed upon the decision of this Court rendered in

Chandamama Publications vs. CIT (supra), wherein this Court held that, ""the object of effecting insurance is generally to cover an insurance

interest subject to a risk, which may or may not take place. To that extent, the risk may be contingent. Even so, the payment of insurance premium

to cover such a contingent risk or an insurable interest is a definite outgoing. In other words, to cover a possible risk, there is a present

expenditure, which is not present when a mere provision made for such a contingency which may or may not arise in future."" Therefore this

decision cited by the learned counsel for the assessee in order to support his contention that the contribution to the PTC. Fund should be equated

to the payment of premium for insurance amount cannot be accepted.

Reliance was placed upon a decision of the Bombay High Court in CIT vs. Bombay State Road Transport Corpn. 1975 106 ITR 303 ,

wherein it was held that, ""under this statutory rule, which has been framed by the State Government under s. 44 of the Road Transport

Corporations Act, a legal obligation has been cast upon the assessee-corporation to establish and maintain a fund called third party liability fund.

The rule also provides that the assessee-corporation shall pay into this fund every year from and out of the revenues of the corporation such sum as

may be directed by the State Government from time to time for meeting any liability arising out of any vehicle of the corporation. It was not

disputed before us that it was in pursuance of this statutory obligation that was cast upon the assessee-corporation that the four amounts in

question had been contributed by the assessee to the insurance fund which comprised one of the items, viz. third party risk. Even in the accounts

prepared by the assessee-corporation for the aforesaid relevant years these amounts were shown as having been contributed to the insurance fund

in relation to the third party risk. It is obvious that nay amount due from the corporation in respect of any claim arising out of accidents by or to the

vehicles of the corporation was required to be paid out of this fund and, in our view, since the contributions were made under a statutory obligation

cast upon the assessee-corporation under the statutory rule the same will have to be allowed as a deduction in computing its profits. There is also

an additional factor which may be mentioned in this behalf. Under r. 11 the assessee-corporation is called upon to make such contributions to the

insurance fund for the purpose of covering third party risk ""from and out of the revenues of the corporation"" and, that being the position under the

relevant rule, it is difficult to appreciate how the AAC took the view that these amounts were in the nature of debits to the insurance fund by way of

appropriation of profits after they had been earned. The Tribunal, in our opinion, was, therefore, right in allowing the deduction claimed by the

assessee-corporation in respect of these contributions.

In Amalgamated Electricity Co. Ltd. Vs. Commissioner of Income Tax, Bombay City I, the Bombay High Court while considering the

provisions of s. 10(1) of the IT Act, 1922 and r. 8 of Indian IT Rules, 1922, held that, ""the contingency reserve and the tariffs and dividends

control reserve are required to be compulsorily made under the Electricity Supply Act 1948. Appropriations to both these funds are not made

voluntarily by the licensee. The reserves are not available to the licensee for any purpose of its own. The tariffs and dividends control reserve is

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 is to see that the tariffs leviable on the consumers in the relevant years are not increased or enhanced. On the purchase of the

undertakings the reserves are required to be handed over to the transferee and the transferee is required to maintain them as such and when the

undertaking is purchased by the Board or the State Government no allowance is made in respect of the reserves while determining the price

payable by the Board or the State Government. Having regard to these aspects of the reserves, it is clear that amounts credited to these reserves in

the accounting years have to be deducted under s. 10(1) of the Indian IT Act, 1922 in computing the profits of electricity undertakings."" In the

above said decision, the Bombay High Court applied the principle enunciated in the decision reported in Poona Electric Supply Co. Ltd. Vs.

Commissioner of Income Tax, Bombay,

In CIT vs. New India Sugar Mills Ltd. (1994) 206 ITR 12 the Calcutta High Court had an occasion to consider whether contribution made to

Molasses storage reserve fund under compulsion of law is whether capital or revenue expenditure, held that, ""there was no finding by the Tribunal

that the assessee had gained any advantage of enduring nature or acquired any capital asset as a result of the contribution made under compulsion

of law. The contribution made by the assessee and the other sugar mill owners might be utilised for creating storage facilities. But the result of the

expenditure would not augment or improve the capital structure of the assessee-company. The contribution to the Molasses storage reserve fund

created under the Uttar Pradesh Sheera Niyantran (Sansodhan) Adesh, 1974 was revenue expenditure."" Following this decision, the Calcutta High

Court in Commissioner of Income Tax Vs. Upper Ganges Sugar Mills Ltd., held that the contribution to Molasses storage and maintenance

reserve created under the Uttar Pradesh Sheera Niyantran (Sansodhan) Adesh, 1974 is a revenue expenditure.

The Supreme Court in Associated Power Co. Ltd. Vs. Commissioner of Income Tax, while considering the provisions of electricity (Supply)

Act, 1948 and cl. II of the Sixth Schedule thereto held that, ""clause II of the Sixth Schedule to the electricity (Supply) Act, 1948 requires the

Electricity company to create certain reserves if its clear profit exceeds a reasonable return. Monies standing to the credit of the contingencies

reserve which are set apart to be utilised by the electricity company for the purpose set out in cl. V of the Sixth Schedule are to meet expenses or

recoup loss of profits arising out of accidents, strikes or other circumstances which the electricity company could not have prevented; to meet

expenses on replacement or renewal of plant or works; and for payment of compensation required by law for which no other provision has been

made. These are all expenses which the electricity company has to incur. The reservation is made so that money is always available for meeting

these expenses and the supply of electricity is not interrupted. For the same reason, payments out of contingencies reserve can be made only with

the State Government''s approval. It is particularly noteworthy that the electricity company can make good from out of the contingencies reserve

even a loss of profit arising out of strikes, accidents and other circumstances over which it has no control. These can be no doubt, in the

circumstances, that the monies in the contingencies reserve belong to the electricity company, and are to diverted away from it. It is the electricity

company which has to invest the sums appropriated to the contingencies reserve. The investment would be in its name and it would be the owner

thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position.

The fact that on the purchase of the undertaking the contingencies reserve has to be handed over to the purchaser and maintained as such is only to

make explicit the obvious for the reserve is for the purpose of the undertaking that is being transferred. There is nothing in the statute to suggest that

the amount standing to its credit cannot be taken into consideration in arriving at the purchase price. For the purpose of sale to a State Board or

Government a different statue lays down how the price is to be fixed. The amount credited to the contingencies reserve is not diverted by reason of

an overriding obligation title and, in determining the business profits of the assessee, it must be taken into account"". In the above said decision the

Supreme Court approved the decision of the Madras High Court reported in Vellore Electric Corporation Ltd. Vs. Commissioner of Income Tax,

. The Supreme Court overruled the decision reported in Cochin State Power and Light Corporation Ltd. Vs. Commissioner of Income Tax, and

Amalgamated Electricity Co. Ltd. Vs. Commissioner of Income Tax, Bombay City I, , The Supreme Court distinguished the decision reported in

Poona Electric Supply Co. Ltd. Vs. Commissioner of Income Tax, Bombay, .

According to the facts arising in this case in order to fulfil the statutory obligation cast upon the assessee under s. 94(3) of M. V. Act, it created

a fund called P. T. C. Insurance Fund Regulations, 1972. This fund was created in accordance with the G. O. MS. No. 86 Transport Department

dt. 8th Nov., 1971 and Notification dt. 22nd Feb., 1971. The fund should be used only for making payments to third parties either on death or

bodily injury arising out of the vehicle owned by the company, damage to properties caused by the use of the vehicle and any liability arising under

the Workmen''s Compensation Act. The amount reckoned at Rs. 100 per annum per vehicle in running condition with an initial contribution of not

less than Rs. 1 lakh was to be set apart and to be deposited in a bank. The amount so set apart has also been put in the bank with reference to the

aforesaid rules for the year ending 31st March, 1974. The officers of the assessee-corporation can operate this account and they can do only in

terms of the legal obligation arising under s. 94(3) of the M. V. Act and the regulations of the insurance fund. According to the assessee the actual

payment might arise on the contingency depending upon an accident, which may or may not happen and it is payment in the nature of an insurance

premium to safeguard against any possible large outlay at any single point of time to the inconvenience of the normal operation of the assessee''s

business. It was pointed out that the interest on the amount deposited in the fund is payable to the assessee-corporation as per cl. (ii). The amount

deposited should also be held on behalf of the assessee-corporation. The fund is not maintaining a separate account of its own. The accounts of the

fund are maintained in the books of accounts belonging to the assessee. Therefore, the learned standing counsel submitted that the assessee is

having ownership over the fund. According to the learned standing counsel the liability is only contingent in nature and it was also not in fact for

earning any profit. Hence it cannot be deductible as business expenditure. The fact that the assessee for fulfilling a statutory obligation imposed on it

by the M. V. Act created the fund and contributed the amount which is payable on the happening of an event, would not entitle the assessee to ask

for deduction of the amount contributed to the fund as admissible revenue expenditure. In view of the recent Supreme Court judgment reported in

Associated Power Co. Ltd. Vs. Commissioner of Income Tax, we are unable to accept the contention put forward by the assessee that the

amounts contributed towards the PTC Insurance Fund is in order to fulfil the obligation imposed upon it by the statute and, therefore, it should be

allowable as revenue expenditure. As already pointed out that the amount appropriated to the contingent reserve, which set apart to meet the

possible exigencies is not a provision for known existing liabilities and therefore it is not deductible as business expenditure. In that view of the

matter, we answer question No. 2 referred to us in the negative and in favour of the Department. No costs.