1997 (7) TMI 91 - HC - Income Tax

Cooperative society's capital contribution fund not deductible under Income-tax Act

The court ruled that the amount set aside for the capital contribution redemption fund by a cooperative society was not deductible under sections 37 or 28 ... Business Expenditure, Diversion Of Income, Income By Overriding Title Issues Involved: The judgment involves the issue of whether the assessee can claim deduction under section 37 or section 28 of the Income-tax Act, 1961 for the amount set apart for the capital contribution redemption fund.Details of the Judgment:Issue 1: Deduction under Section 37 or Section 28The assessee, a co-operative society, received a sum from the State Government for share capital and set aside an amount for redemption of the Government share capital contribution. The assessee claimed deduction for this amount in its business income, which was rejected by the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal also dismissed the appeal, leading to this reference. The assessee argued for diversion of income by overriding title or as an allowable expenditure under section 37(1) of the Act. However, the Revenue contended that there was no diversion of income as the amount remained with the assessee. The court held that the doctrine of diversion of income by overriding title applies only when income never reaches the assessee, and in this case, the amount set apart belonged to the assessee, concluding that no diversion occurred.Issue 2: Application of Legal PrecedentsThe court referred to legal precedents such as CIT v. V. G. Bhuta and CIT v. M. P. Poncha to support its decision that an obligation to apply income for a specific purpose does not constitute diversion of income by overriding title. It emphasized that the obligation to apportion income does not equate to diversion of income. Additionally, the court cited the Supreme Court's decision in Associated Power Co. Ltd. v. CIT, where it was held that appropriation of funds by a company for specific reserves did not amount to diversion of income by overriding title.ConclusionThe court concluded that the amount set apart for the capital contribution redemption fund was not deductible under section 37 or section 28 of the Income-tax Act. It determined that the amount belonged to the assessee and was not diverted to any other entity. Therefore, the court upheld the Tribunal's decision, ruling in favor of the Revenue and against the assessee. No costs were awarded in this case.This summary provides a detailed overview of the judgment, highlighting the key legal arguments and decisions made by the court.