1986 PLP 465 (PTD)

SUHAS CHANDRA SEN, J.‑‑The following question of law has been referred at the instance of the Commissioner of Income‑tax under section 256 (1) of the Income‑tax Act, 1961:‑ "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs.66,964 appropriated towards 'Reserve for Contingencies' is an allowable deduction in computing the assessee's business income from Electric Supply undertaking?"

2. The facts relevant for the question stated by the Tribunal are as under:‑ The assessee is an Electric Supply undertaking, engaged in the business of generation and distribution of electricity anti is governed by the Electricity (Supply) Act, 1948. As per paragraphs III to V of the Sixth Schedule to the aforementioned Act, it had to create a reserve called Contingencies Reserve', to be utilised for the purposes set out in paragraph V of the said Sixth Schedule. In compliance with the provisions of the said Act the asses see‑company appropriated an amount of Rs.66,964 towards 'Reserve for Contingencies and deducted that amount in the computation of its taxable income of the previous; year relevant to the assessment year 1973‑

74. For the reasons mentioned by him in the assessment order, the Income‑tax Officer disallowed deduction of this amount in the computation of the business income and added back the same.

3. The aforesaid disallowance, among others; was disputed by the assessee in the appeal preferred before the Appellate Assistant-Commissioner against the assessment for the assessment year. 1973‑74, For the reasons mentioned by him in his order the Appellate Assistant Commissioner confirmed the disallowance of the deduction in respect of this contingency Reserve of Rs.66, 964.

4. The assessee preferred a further appeal to the Tribunal. The Tribunal held that the amount covered by contingency reserve was a diversion by, reason of overriding obligation created by the statute arid, therefore, for determining the commercial profits of the assessee, the amount of this reserve had to be deducted. The Tribunal further held that the amount of Rs.66,964 was deductible while computing the assessee's total income under section 28(1) of the I.T. Act, 1961.

5. The argument in‑this case on behalf of the revenue and also on behalf of the assessee has centred round the provisions contained in the Electricity (Supply) Act, 1948 and in particular the Sixth Schedule. The relevant provisions of the Sixth Schedule are set out as under: "III. There shall, be created from existing reserves or from the revenues of the undertaking a reserve to be called 'Contingencies Reserve." 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 costs of fixed assets, provided that ;f 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 the 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 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." Paragraph VI deals with allowance in respect of depreciation of fixed assets employed in the business of electricity supply. it is provided that all sums credited to depreciation account shall be invested only in the business of electricity supply of .the undertaking or where it is not practicable to so invest them, in investment's approved by the State Government. It is further provided that any sums invested icy investments approved by the State Government shall, as soon as practicable, be utilised in the business of electricity supply of the undertaking.

6. Paragraph V1I is important for our purpose and is as under "VII. (1) Where any fixed asset ceases to be available for fuse through obsolescence, inadequacy, superfluity or for any other reason, it shall be described in the books of the licensee as no longer in use and no further depreciation in respect thereof shall be allowed as a charge against revenue. (2) The written‑ down cost of such fixed asset including expense incurred on the dismantling thereof shall be charged against the Contingencies Reserve: Provided that where the accumulations in the Contingencies Reserve are not sufficient to permit the charging of the entire written down cost of the asset and the‑ dismantling expenses, the excess amount may be included in the capital base for the purpose of cl. (a) of sub para. (1) of Para. XVII. (3) The amount for which any such fixed asset is sold or the amount of 'its scrap value when actually realised shall be credited to the Contingencies Reserve. VIII. When any asset has been written down in the books of the undertaking to 10 percent or less of its original cost no further depreciation shall be allowed in respect of that amount, IX. When any fixed asset is sold for art amount exceeding its written down cost the excess' after deducting all taxes payable thereon shall be credited to the Contingencies Reserve."

7. The provisions of, paragraph VII have been drastically altered in 1978, but in this reference we are concerned with the assessment year 1973‑74 and those changes have no bearing on the question raised in the instant case.

8. It has been contended before us on behalf of 'the assessee that the appropriation to the contingencies reserve is compulsory under the law and the assessee has really no option in this matter. This reserve has to be shown in the balance‑sheet of the assessee‑company, but the amount credited to this reserve cannot be utilised by the assessee except for the purposes laid down in the statute: Money has to be kept invested in securities authorised under the Indian Trusts Act, 1882. It is necessary to obtain prior approval of the Government before making any expenditure out of that fund. Ultimately, where the undertaking of the company is purchased, the contingencies reserve will have to be handed over to the purchaser. It has been argued that the amount; appropriated to contingencies reserve has been diverted at source .by an overriding title and cannot form part of the real income of the assessee. In the alternative, it has been argued that the money has been irrevocably set apart for a business purpose and will have to be allowed as a deduction under section 37 of the I.T, Act.

9. In this case the amount that has been appropriated to the contingencies reserve is part of the revenue collected by the assessee: in its usual business of generation and sale of electricity. The assessee is required to invest the sums appropriated to the contingencies reserve in securities authorised under the Indian Trusts Act, 1882. The assessee' also cannot spend any amount out of this fund except with the approval of the State Government; but it is the assessee alone who can spend this amount so long as the assessees business of generation and supply of electricity continues. It is true that the assessee is not at liberty to, use this fund in whichever way it likes but the purposes for which the amount can be spent as prescribed in paragraph V are all usual business purposes of the company. The amount can be spent for meeting expenses or loss of profit arising out of accidents, strikes or other unavoidable circumstances. The amount can also be utilised for payment of any statutory compensation for which no other provision has been inside. The amount can also be spent for replacement or renewal of plant or works other than normal maintenance or renewal. It is also important to note in this connection that the written down cost of fixed assets, of the company which cannot be used any more in the business of the assessee including the dismantling charges of such fixed assets will have to be charged against the contingencies reserve. The ' (excess) amount realised on sale of such fixed assets will have to be credited to the contingencies reserve. It will appear from the provisions that, have been made in respect of the contingencies reserve that the amount will be available to the assessee for utilisation in its business. The approval of the Government is necessary only to ensure that the money is not frittered away or disputed for purposes other than what has been set out in paragraph V. The company is also under an obligation to file, alongwith its Balance Sheet, a statement of contingencies reserve showing the' additions and withdrawals made every year. Therefore, the intention of the legislature was, not to prevent the assessee from using this fund or to divert this fund from the assessee to some other person, The fund will remain in the custody and control of the assessee and will be utilised for the specified business purposes of the assessee. But there are certain statutory safeguards to ensure that the, fund is used only for those limited purposes.

10. We are also not impressed by the argument that in the long run this fund may have to be handed over to the, purchaser of the electricity undertaking. The remote contingency of the undertaking of the company being taken over cannot affect the position in law in this case. This requirement of paragraph V (2) will not prevent the assessee‑company from drawing upon the contingencies reserve during the currency of the license. It is only the amount that will remain outstanding after deduction of all the payments that have been made, which will have to be handed over to the purchaser. The entire fund may 'be ‑utilised for replacement of plant and machinery or for making up loss arising out of accidents or strikes or for discharging the other liabilities. It is only the amount if any, that remains outstanding after all these payments, that will have to he handed over to the purchaser, Even then, the amount so handed over will remain charged for payment .of compensation; if any, payable to the employees of the Company. Retrenchment compensation and other dues of the employees will have to be paid out of this fund. In other words, even when the undertaking is purchased by the Board or the State Government the amount standing to the credit of this fund will be available to the Company for discharging the statuiory obligations to its employees.

11. The Supreme Court in the case of U. P. Electric Supply Co., Ltd. v‑. R. K Shukla A T R 1970 S C 237 had occasion to go into the nature sand purpose of the contingencies reserve in that case the licence of the U.P. Electric Supply Co. Ltd: expired in 1964 and the undertaking of the Company .Was taken over by the State Electricity Board from the mid‑night of 16th September, 1964; The workmen of the undertaking claimed that they were entitled to retrenchment compensation, ‑salary in lieu of notice and other benefits from 'the company. The Supreme Court field that the liability to pay retrenchment compensation was a debt and if it arose on the transfer of an undertaking, it would 'attach to the purchase money payable to the company. It was observed by the Supreme Court at page 245 of the report: ‑ "Clause V only provides for the appropriation of the contingencies Reserve: It required an undertaking to hand over the Contingencies Reserve to the purchaser. If any amount of compensation is payable to the employees of the outgoing Licensee under any law for the time being in force, it is chargeable to the Contingencies Reserve. If the retrenchment compensation becomes properly due to the employees of the Company, it would by virtue of‑ clause V sub‑clause (2) proviso, be charged upon the Contingencies Reserve and the balance sum would be handed over to the purchaser. It was urged that the contingencies reserve has been paid over to the purchaser. There is, however, no finding by the Labour Court in that behalf. If it be found in appropriate proceedings that retrenchment compensation is payable to the workmen and the contingencies reserve out of which it .is payable has been handed over to the Board, the charge for payment of that amount may attach to that amount. On that matter we need express no opinion' at this stage."

12. The nature of the contingencies reserve has been examined in a number of cases decided under the Income‑tax Act; the Wealth‑tax Act and also the Super Profits Tax Act. Under the I.‑T. Act, it has been held by the Kerala, Bombay and Patna High Courts that any appropriation to the contingencies reserve will amount to diversion of income at source by an overriding title. The Madras High Court has taken a contrary view. The Bombay High Court, however, has held in a wealth‑tax case that the contingencies reserve fund cannot be excluded from the net wealth of an assessee as the fund was an asset belonging to the assessee. A Division Bench of this Court has 'also taken the view that contingencies reserve fund is a reserve and has to be taken into account for the purpose of computation of capital under the Super Profits Tax Act. It will be necessary to refer to those decisions in order to resolve the controversy that has been raised in this case. .

13. The Kerala High Court in the case of Cochin State Power Light Corporation v. Commr. of Income‑tax Kerala, (1974) 93 I T R 582: (1973) Tax LR 1402 held that for determining the commercial profits of the assessee, the amount appropriated towards the contingencies reserve must be deducted. In that case Subramonian Poti J. observed (at p.1408 of Tax L.R.):‑ "Bearing in mind the fact that the amount under the contingencies reserve is not available to the assessee for any purpose of his own or even for any purpose other than those indicated in paragraph V of the Sixth Schedule and also‑noticing the object of the creation of this reserve end further noting the provision that it is a diversion from the revenue, we think that the diversion is one which is deductible in determining the real profit. There is the further fact that the assessee does not get even compensation on account of this reserve as and when the undertaking is purchased and even the purchaser has to maintain the reserve as such therefore, in spite of the distinction that we have pointed out in regard to certain features between this reserve and the consumers' benefit reserve with which the Supreme Court was concerned in the Poona Electric Supply Company case, we feel that the amount covered by the contingencies reserve is a diversion by reason of overriding obligation created by the statute and, therefore, for determining the commercial profits of the assessee, the amount of this reserve has to be deducted."

14. This point also came up for consideration before a Division Bench of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd, v. Commr. of Income‑tax, Bombay City‑I, (1974) 97 ITR

334. In that case Tulzapurkar, J. after referring to the passage from the judgment of the Kerala High Court that we have ‑extracted above observed:‑ "In other words, it is clear that the Kerala High. Court was considerably influenced,, and in our view rightly, by three or four aspects of this contingencies reserve, namely, the source from which this reserve is created; the purpose for which this reserve could be drawn upon as mentioned in paragraph V that this reserve was not available to the assessee for any purposes of its own, that the assessee would not get any compensation of account of this reserve as and when the undertaking would be purchased and that 'the purchaser, is required to' maintain the reserve as such. We, therefore, feel that substantial reasons have been given by the Kerala High Court for coming to the conclusion that .the transfers or appropriations made by the assessee to the contingencies reserve should be deducted while computing the real profit of the assessee. In this view of the matter, the question, so far as it relates, to transfers or appropriations made by the assessee to the contingencies reserve in the instant case before us, will have to be answered in favour of the assessee."

15. A, Division. Bench of the Patna High Court in the case of Darbhanga Laheriasri Electric Supply Corporation Ltd. v. Commr. of Income‑tax Bihar (1979) 1'17 1 T R 516, agreed with the views expressed by the Kerala High Court‑ and the Bombay High Court in the two cases referred above and held that the amount kept in the contingencies reserve under the Electricity Act was not at the disposal of the assessee and was, therefore, to be excluded in determining the profits of the assessee.

16. Elaborate argument has been advanced in this case on the point whether the amount standing in the contingencies reserve was available to the assessee‑company for its own use. In 'this connection reference was made to the Sixth Schedule to the Electricity Act which we have set out earlier. The Bombay High Court in the case, of Amalgamated electricity Company Ltd, agreed with the view expressed by the Kerala High Court in the Cochin State. Power & Light Corporation Ltd and held that this reserve was not available to the assessee for any purposes of its own". But a contrary view way taken about the nature and purpose of contingencies reserve by the same Bench of Bombay High Court in the case of Commr of Wealth‑tax v. Bombay Suburban Electric Supply Ltd. (1976) 103 I T R

331. In that case, a case under the Wealth-tax Act the nature and purpose of the contingencies reserve was examined once again by the Division Bench consisting of Kantawala: C.J and Tulzapurkar, J. it was held that the amount of Rs.7,53,433 standing credited as contingencies reserve was a part of .the assets belonging to the assessee‑company and had to be included in its net wealth within the meaning of section 2 (m) of the Wealth‑‑tax Act. The nature of the contingencies reserve was examined by Kantawala, C.J. in that judgment and it was emphasized at pages 392‑393 "Paragraph V undoubtedly imposes limitations or restrictions upon the power of the assessee to utilise the amounts standing to the credit of the contingencies reserve. In the first, place, such amount cannot be utilised except with the prior approval of the State Government, but the fact that prior approval is required will not detract from making it an asset of the company if in law it belongs to the assessee. Even the purposes for which it may be utilised will indicate that it is done either for discharging the liability of the assessee‑company or for replacement or renewal of the plant or works of the assessee‑company. The amount of contingencies reserve can lie drawn either for the expenses or loss of profits arising out of accidents strikes or circumstances which the management could not have prevented; or for the expenses on replacement or renewal of plant or works other than expenses' requisite for normal maintenance or renewal or for compensation payable under any law for the time being in force and for which no other provision is made. Incurring of expenses and pay‑rent of compensation are the normal liabilities of an assessee‑company and a sum, which can be utilised for such purposes cannot be treated as belonging to anybody other than the assessee itself. So also the fact that the amount of contingencies reserve can be utilised for meeting the expenses of replacement or renewal of plant or works indicates that it is used for replacing an asset, which ultimately formed part of the assessee's undertaking. It is undoubtedly true that under cl. (2) of paragraph ‑V of the Sixth Schedule, in the event of a compulsory purchase of the undertaking, the amount standing to 'the credit of the contingencies reserve has to be handed over to the purchaser namely, the Electricity Board; the State Government or a local authority because' they are' the only authorities who can exercise the power of compulsory purchase, but that by itself will not be a sufficient reason to come to the conclusion that it cannot be treated as a part of the asset of the assessee‑company. If power of compulsory purchase is not exercised, then under section 8 it continues to form part of the assets of the undertaking and can be dealt with like any other assets belonging to the assessee‑company. This being the nature of the amount of contingencies reserve, can it be said that this mount, which is an asset belongs to an entity other than the assessee-company? It was urged by Mr. Dastur that the provisions contained in the Sixth Schedule are meant for the benefit of the public and therefore the public should be treated as beneficiaries in respect of the amount of contingencies reserve. It is undoubtedly true that the maintenance of contingencies reserve is a provision made for the benefit of the public, but that is because an electricity supply undertaking being a public utility concern for supply of electrical energy to the consumers, it is undoubtedly the duty of the State to see that such supply of electrical energy is not interrupted. It is from that point of view that specific provisions are, made for the purposes of appropriation and maintenance of contingencies reserve and restrictions are imposed on the use of the amount of the contingencies reserve. The object underlying these provisions is only to see that the supply of electricity to the consumer is maintained uninterrupted. That by itself does not mean that the members of the public or consumers have a beneficial interest in the amount standing to the credit of the contingencies reserve. The amount undoubtedly as shown part of the assets because contingencies reserve are always shown the company. Thus, the amount standing contingencies reserve is undoubtedly a part of the assets belonging to the assessee‑company and will be includible in the net wealth within the meaning of section 2(m) and will be chargeable to Wealth‑tax under S.3

17. A Division Bench of the Madras High Court ‑ in the case of Vellore Electric Corporation Ltd. in Commr. of Income‑tax, Madras‑I (1977) 109 I T R 454: (1977 Tax LR J415), a case under the Income‑tax Act, held that the amount appropriated to the contingencies reserve was not lost to the assessee by an overriding obligation and the reserve was still available to 'the assessee. It was held by Ismail, J. at pages 458‑459. (of I T R): (at p. 1418 of Tax L.R.) of the report:‑ ' "The amounts standing to the credit of neither the contingencies reserve nor the development reserve ' can be said to be the amounts which have gone out of the hands or the control of the licensee, the assessee in the present case, and have become the subject‑matter of ownership of somebody else. It may be that statute has imposed certain restrictions over the disposal of that amount by the assessee, but. That does not mean that the amounts have ceased to be the money belonging to the assessee. What is meant by: diversion of profit by overriding title is that a part of the profits earned by an assessee is not really his profits, but it belongs to somebody else and with reference to that amount the assessee had no title at all. But that is not so in the present case. As far as the contingencies reserve is concerned, the statute 'has clearly indicated the purposes for which the amounts can be spent and those purposes clearly show that they are connected with the business of the assessee and it is the assessee which will have to utilise the amount. If it is claimed to be an amount, which is taken away from the assessee by overriding title, the assessee will have no control over the same even to the limited extent as provided for in Paragraph V of 'the Sixth Schedule. Equally, the fact that the assessee is required to invest the ‑amounts 'standing to the credit, of contingencies reserve in securities authorised under the Indian Trusts Act, 11382, does not in any way affect this position. The assessee continues to be the owner of the investments and however limited be the benefit that the assessee may derive from such an investment it cannot be held that the investment is not the assessee's investment, but somebody's investment. The position is a fortiori with, regard to development reserve."

18. After referring to the views expressed by the Kerala High Court in the case of 'Cochin State Power and Light Corporation (1973 Tax LR .1402) Ismail, J. observed (at p. 1420 of 1977 Tax LR):‑ "In the extract we have already given, the learned Judge, with reference to the development reserve, pointed out that the amount was not expended by the Assessee and cannot be said to be lost to the assessee by an overriding obligation and the reserve was still available to the assessee and a diversion by overriding title should be one which goes out and is no longer that of the person .who so diverts it. On these tests themselves it will be clear that the amount credited to the contingencies reserve cannot be said to be an expenditure, cannot be said to be lost to the assessee and is still available to the assessee arid it cannot also be said to be a diversion .by overriding title because it does not go out and it cannot be said that it is no longer that of the assessee who diverts it. Simply because the statute has imposed certain restrictions on the manner of utilisation of the amount credited to the reserve it cannot be held that the appropriation of the amount to such a reserve constitutes an expenditure or diversion of profit by overriding title or that the amount was lost to the assessee. Therefore, in our opinion just as the amount appropriated to the development reserve,' the amount appropriated to the contingencies reserve also cannot be deducted for arriving at the assessable profits."

19. In the case of Commr. of Income‑tax. West Bengal v. Calcutta Electric Supply Corporation Ltd. (1982) 138 I T R 111: (1981 Tax L R 1316) a case decided under the Super Profit's Tax Act, a Division Bench of this Court agreed with the view expressed by ‑the Madras High Court in the case of Vellore Electric 'Corporation Ltd. v. Commr, of Income‑tax, Madras‑I (1977) 109 I T R 454: (1977 Tax L R 1415). In that case the question was whether the contingencies reserve was to be treated as "provision" or "reserve" for the purpose of computation of capital under the Super Profits Tax Act. In that connection, an argument was advanced on‑behalf of the Revenue that the amount that was appropriated to the‑ contingencies reserve was not available to the electricity company and there was a diversion of the amount by an overriding title at source and, therefore, this reserve could not be treated to be an asset of the company. Reliance ‑was placed upon the decision of the Kerala High Court in the case of Cochin State Power & Light Corporation Ltd. and also the decision of the Bombay High Court in the case of Amalgamated Electricity Company Limited. In that case, after an analysis of the provisions of the Electricity Act and the relevant Schedule, it was held that‑ on this aspect of the matter the views expressed‑ by the Madras High Court in the case of Vellore Electric Corporation Limited was preferable to the views expressed by the Kerala High Court and the Bombay High Court. The argument of diversion by an overriding title was specifically negatived in that case in the following words at pages 133‑134 (of. I T R).: .(et pp. 1331‑32 of Tax L R): "During the currency of the licence, the contingencies reserve might be drawn to meet such charges as aforesaid as the State Government might approve, C

1. 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 licence to the consumers in certain events and, therefore, did not form a part of the assessees 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 overrding 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 utilises 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

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." '

20. The controversy raised in this case, so far as this Court is concerned, appears to be concluded by this judgment. The assessee has, however, tried to distinguish this judgment and also, the judgment of the Bombay High Court in the case of Bombay Suburban Electric Supply Limited on the ground that these two cases were not decided under the Income‑tax Act. It is true that the judgment of this Court was under the provisions of the Super Profits Tax Act and the judgment of the Bombay High Court was under the provisions of the Wealth‑tax Act. But the question whether there was any diversion of income at source by creation of .the contingencies reserve was necessary to be decided in the case of Calcutta Electric Supply Corporation Limited. The Bombay High Court in the Wealth‑tax case was faced with the question whether the contingencies reserve fund belonged to the assessee‑company or not for the purpose of the Wealth‑tax Act and it had to come to a finding as to the nature and purpose of that fund in order to decide the controversy raised before it. The views expressed by the Bombay High Court in that case are in consonance with the views expressed by this Court in the case of Calcutta Electric Supply Corporation Ltd. (1981 Tax LR 1316):

21. It has been strenuously contended on behalf of the assessee that the case .of Bombay Suburban Electric. Supply Ltd. (1976‑103 ITR 384) was decided under the Wealth‑tax Act and the question of real income did not arise in that case at all. We have already quoted in extenso from the judgment of Kantawala, C.J. in that case. In that case it was held that the amount standing credited to the contingencies reserve belonged to the assessee because the sum could be utilised either for discharging the liability of the assessee‑company or for replacement or renewal of plant or works of the assessee‑company. It was held that a sum, which could be utilised for such purpose could not be treated as belonging to anybody other than the assessee itself. It was further held that "if the power of compulsory purchase is not exercised, then under section 8, it continues to form part of the assets of the undertaking and can be dealt with like any other assets belonging to the assessee‑company", We fail to comprehend how an amount which "continue to form part of the assets of the undertaking and can be dealt with like any other assets belonging to the assessee -company' can be said to have been diverted at source from the assessee -company by an overriding title. 22.' The amount which has been appropriated to the contingencies reserve is a part of the revenue collected by the assessee ire its business of generation and sale of electricity. The amount was not collected by the assessee‑company for and on behalf of any other person to whom it was payable. The concept of real income or diversion of income by an overriding title was explained by Hidayatullah, J. in the case of Commr. of Income‑tax Bom. City II v. Sitaldas Tirathdas, (1961) 41 1 T A 367 at pages 374, 375 %'A I R 1961 S C 728 at p. 732): "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations', no doubt, there are in every case, but it is the nature of the obligation, which is the decisive fact. There is a difference between an amount, which a person is obliged to apply out of his income and an amount, which by the nature of the obligation cannot be said to be a part of the income of the assessee. . Where by .the obligation income is diverted before it reaches the assessee, it the obligation deductible; but where the income is required to be applied to discharge, an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first 'kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it is payable."

23. If this test is applied, it will be seen that there has been no diversion of income by an overriding title at all. The amount appropriated to the contingencies reserve was collected by the assessee as its revenue from sale of electricity. The amount remains at the disposal of the assessee and for the benefit of the assessee. It can be used only for a few specified purposes but the purposes for which the fund can be used are all the business purposes of the assessee‑company. Payment of compensation to workers, replacement of plant and machinery or other expenditures envisaged in clause V which we have set out earlier, are all normal business expenditures of a company. This is not 9 case of diversion of income‑ before it reaches the assessee, but only a case of setting apart of the assessees income under compulsion of law for the use and benefit of the assessee although the mode and the objects of the expenditure are statutorily restricted.

24. Strong reliance was placed on behalf of the assessee on the decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. Commr. of Income‑tax, Bombay City 1, (1965) 57 I T R 521: (A I R 1966 S C 30). In that case it was held that the amounts credited by the assessee an electricity supply company, during the relevant accounting year to the Consumers Benefit Reserve Account did not form part of the assessee's real profits and had to be deducted from the taxable income of the assessee‑company. There the Supreme Court referred to the nature and the object of the Consumers Benefit Reserve Account. Under the relevant provisions of the Electricity (Supply) Act, 1948, the company's "clear profit" in any year should not as far as possible, exceed the amount of "reasonable return" as defined under the Act. The excess, if any; after making tome deductions, had to be distributed to the consumers in the form of rebate. During the assessment years 1953‑54 and 1954‑55 the company claimed deduction of two amounts of Rs.42,148 and Rs..77,138 for the said two years from its taxable income as they were credited to Consumers Benefit Reserve Account the Income‑tax Officer disallowed the claim, but ultimately the Tribunal allowed the claim of the assessee. The controversy that was raised in that case was formulated by the Supreme Court thus: "Briefly stated, the scheme of the provisions is that a part of the excess collected is returned to the consumer by way of rebate. The question is whether the amounts so returned or returnable by the licensee to his consumer is deductible for ascertaining his taxable income from his business under section 10(1) or section 10(2) (xv) of the I.T. Act.". The Supreme Court held at: pages 525‑526 (of I T R): (at p. 32 of A I R) of the report: Under section 10(1) of the I. T. Act, tax shall be payable by an assessee under the head "profits and gains of business" in respect of profits and gains of any business carried on, by him. The said profits and gains are not profits regulated by, any statute, but profits in a business computed on business principles. They are business profits and not statutory profits. They are real profit of and' not national profits the real profit a businessman under section 10(1) of the Income‑tax Act cannot obviously include the amounts returned by him by way of rebate to the consumers under statutory compulsion. It is as if he received only from the consumers the original amount minus the amount he returned to them. ' In substance there cannot be any difference between a businessman collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs. Y to them and another businessman collecting Rs. X alone. The amount returned is not a part of the profits at all."

25. But in the case before us, the amount set apart by the assessee- company as contingencies reserve will not have to be returned to the consumers or handed over to any other person so long as the company continues to do business of generation and supply .of electricity. The amount has been set apart under compulsion of law for the purpose of meeting certain business obligations of the assessee. Such an amount cannot be said to have been diverted from the' assessee in any' manner at all. In this connection, it has to be noted that in the case of Poona Electric Supply Company Limited, the Supreme Court distinguished the case of Mersey Docks and Harbour Board v. Lucas, (1883) 2 Tax. Cas

25. The Supreme Court has, however, held that that case had been rightly decided. In that case, the Harbour Board, the assessee, was empowered by alt Act of Parliament to levy dock dues to be applied in maintaining the concern and. in paying interest on moneys borrowed; any surplus income remaining after meeting these charges was directed to be applied in forming a sinking fund to extinguish the debt incurred in the construction of the docks. The question was whether the sum carried to the sinking fund, and the suprlus carried to the following year's accounts, were profits, within the meaning of the Income‑tax Act. The House of Lords held that the surplus was profit assessable 'to income‑tax. The Supreme Court observed (at pp. 34‑35 of A I R):‑ "In this case the surplus income formed the sinking fund and was utilised to pay off the debts of the Harbour Board, therefore, the Court rightly held that the said amount was utilised by the Board from and out of its profits and, therefore, the said surplus could not be an allowable deduction."

26. In our view, therefore, the answer to the question that has been raised in the instant case will depend on the nature and purpose of the contingencies reserve fund. The fact that this fund was created under compulsion of law is not really of any consequence. 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 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. There is no question of intervention of any other title in this case. Neither the consumers nor the public at large have any beneficial interest in this fund. What will happen to the contingencies reserve fund, if and when the undertaking of the company is purchased by the Board, is not really germane to the issue before us. A portion of, the revenue earned by the company 'has been set apart and kept in a reserve fund for some specific purposes of the company. That fund belongs to the assessee‑company; the assessee‑company has title to the fund, dominion over the fund and also the use of the fund. In these circumstances, it cannot be said that there has been any diversion of income at source by an overriding title from the assessee‑company or that the amount that has been appropriated to the fund does not form part of the real income of the assessee. '

27. It was also contended that the appropriation to the contingencies reserve fund made by the assessee was, in any event, an expenditure wholly and exclusively laid out for the assessee's business and should I be allowed as a deduction under section 37 of the I. T. Act. This argument also cannot be accepted. The appropriation 'that has been made in the instant case is not towards any known liability or any liability which has accrued during the relevant accounting year. The money has been set apart for meeting unknown future liability of the company. It has been held in the case of ‑Calcutta Electric Supply Corporation Limited (1981 Tax LR 1316) that the contingencies reserve is not a provision but a reserve "which .has to be taken into account for meeting future unknown liability of, the company. Therefore, there has not been any expenditure in the real sense of the term in this case at all. Moreover, the fund may be utilised for purchase of plant and machinery and making other capital expenditures.

28. In the premises, the question referred by the Tribunal is answered in the negative and in favour of the Revenue. SABYASACHI MUKHARJI, J.:‑I agree. M.B.A. Reference answered in negative.