Cooperative society funds diverted for tanks construction not taxable as income

The High Court held that the sum of Rs. 91,476, collected by a cooperative society for constructing storage tanks as per statutory obligations, should not be included in the assessee's income. The Court found that the amount was diverted by an overriding title, making the assessee a trustee of the funds. Therefore, the High Court concluded in favor of the assessee, ruling that there was a diversion of income at the source, and the amount should not be considered as part of the assessee's income.

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Issues Involved:
1. Whether the sum of Rs. 91,476 kept separately for the construction of storage tanks can be included in the assessee's income.
2. Whether there is a diversion of income by overriding title.
3. Whether the amount collected for the molasses storage fund is deductible as revenue expenditure.

Summary:

1. Inclusion of Rs. 91,476 in Assessee's Income:
The Tribunal referred the question to the High Court u/s 256(2) of the Income-tax Act, 1961, regarding whether the sum of Rs. 91,476, kept separately for constructing storage tanks, should be included in the assessee's income. The assessee, a co-operative society involved in sugar manufacturing, collected this amount as per the Molasses Control (Amendment) Order, 1972, which mandated that a portion of the sale price of molasses be set aside for storage facilities.

2. Diversion of Income by Overriding Title:
The Income-tax Officer rejected the assessee's claim, treating the amount as an appropriation of a reserve rather than an expenditure. The Tribunal, however, allowed the deduction, following its earlier decision in the case of Madura Sugars Ltd. The Tribunal held that the amount was diverted by an overriding title, as the assessee was under a statutory obligation to use the funds for specific purposes, making the assessee a trustee of these funds. The High Court agreed, citing the Bombay High Court's decision in Somaiya Orgeno-Chemicals Ltd. v. CIT and the Karnataka High Court's decision in CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd., which supported the view that such statutory obligations result in a diversion of income at the source.

3. Deductibility as Revenue Expenditure:
The assessee argued that the amount collected for the molasses storage fund should be deductible as revenue expenditure u/s 37 of the Act. However, the High Court noted that no specific question was referred by the Tribunal on this aspect. The Tribunal had not considered the allowability of the claim as revenue expenditure under section 37 of the Act in its earlier order. Therefore, the High Court did not address this issue, focusing instead on the diversion of income by overriding title.

Conclusion:
The High Court concluded that the Tribunal was correct in holding that there was a diversion of income by overriding title at the source when the assessee collected the amount for the molasses storage fund. Accordingly, the sum of Rs. 91,476 should not be included in the assessee's income. The question was answered in the affirmative and against the Department, with no costs awarded.

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