Statutory reserve fund transfers are not diversion by overriding title and are not deductible as business expenditure.

Amounts transferred to a statutory reserve fund under the Gujarat State Cooperative Societies Act are described as an appropriation of profits, not a diversion of income at source by overriding title, because the fund remains available for use in the business of the society. The text also states that such a transfer is not deductible as business expenditure under the Income-tax Act since it is not an actual outgoing incurred for business purposes but only a reserve appropriation. On that basis, the substantial questions of law were answered against the assessee and the tax appeals failed.

---

---

Issues: (i) Whether the amount transferred to the reserve fund under section 67 of the Gujarat State Cooperative Societies Act, 1957 was a diversion of income at source by overriding title; (ii) Whether such transfer could be treated as business expenditure deductible under sections 28 or 37 of the Income-tax Act, 1961.

Issue (i): Whether the amount transferred to the reserve fund under section 67 of the Gujarat State Cooperative Societies Act, 1957 was a diversion of income at source by overriding title.

Analysis: The reserve fund was only a setting apart of profits under the statutory scheme. The fund remained available for use in the business of the society, and the statutory provisions did not create an external title diverting income away before it accrued to the assessee.

Conclusion: The transfer was not a diversion of income at source by overriding title and the finding was against the assessee.

Issue (ii): Whether such transfer could be treated as business expenditure deductible under sections 28 or 37 of the Income-tax Act, 1961.

Analysis: Since the amount was only appropriated to a reserve fund and not spent as an outgoing for business purposes, it could not be characterised as revenue expenditure allowable under the deduction provisions.

Conclusion: The transfer was not deductible as business expenditure and the finding was against the assessee.

Final Conclusion: The substantial questions of law were answered against the assessee, the Tribunal's orders were affirmed, and the tax appeals failed.

Ratio Decidendi: Amounts statutorily credited to a reserve fund that remain available for use in the business of the assessee do not amount to diversion of income by overriding title and are not allowable as business expenditure unless they constitute an actual outgoing deductible under the Act.

---