Reserve fund transfer is appropriation of profits, not diversion at source, and is not deductible as business expenditure.

A statutory transfer to a reserve fund under co-operative societies law was treated as an appropriation of profits, not a diversion of income at source by overriding title, because the fund remained available for the society's business and the State did not take title to the income before it reached the assessee. The amount was therefore taxable in the assessee's hands. The transfer was also not allowable as business expenditure under the Income-tax Act, since it was merely setting aside profits for future business use and not an outgoing incurred for business expenditure. Accordingly, no deduction was permissible on that account.

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Issues: (i) Whether the amount transferred to the reserve fund under the co-operative societies law amounted to diversion of income at source by overriding title. (ii) Whether the transfer to the reserve fund was allowable as business expenditure under the Income-tax Act.

Issue (i): Whether the amount transferred to the reserve fund under the co-operative societies law amounted to diversion of income at source by overriding title.

Analysis: The reserve fund was treated as an appropriation out of profits and not as a compulsory diversion that took income away before it reached the assessee. The fund remained available for use in the business of the society, and the statutory control over its use did not amount to the State taking title to the income at source.

Conclusion: The transfer did not constitute diversion of income at source by overriding title and was taxable in the hands of the assessee.

Issue (ii): Whether the transfer to the reserve fund was allowable as business expenditure under the Income-tax Act.

Analysis: The transfer to the reserve fund was not an outgoing incurred for the purpose of business expenditure. It was a setting apart of profits for future use in the business, and therefore did not satisfy the requirements of deduction under the claimed provisions.

Conclusion: The transfer was not deductible as business expenditure under the Income-tax Act.

Final Conclusion: The appeals failed because the reserve fund transfer was held to be an appropriation of income, not a diversion at source, and no deduction was allowable on that account.

Ratio Decidendi: A statutory reserve fund that remains available for future business use does not create diversion of income at source or overriding title, and the transfer to such a fund is not deductible as business expenditure.

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