Reserve fund transfers do not create diversion of income at source and are not deductible as business expenditure.

Deletion of the addition for alleged extra milk price paid to member co-operative societies was upheld because the issue had already been decided in the assessee's favour in the immediately preceding year. The transfer of profits to the reserve fund under section 67 of the Gujarat Co-operative Societies Act, 1962 was not treated as diversion of income at source by overriding title, since the statutory setting apart of profits did not divest the assessee of income and the fund remained available for business use. It was also not allowable as business expenditure. The first issue was answered for the assessee, and the reserve-fund issue for the Revenue.

---

---

Issues: (i) Whether the deletion of the addition representing the alleged additional price of milk paid to member co-operative societies was correct. (ii) Whether the transfer of profits to the reserve fund under section 67 of the Gujarat Co-operative Societies Act, 1962 constituted diversion of income at source by overriding title or allowable deduction as business expenditure.

Issue (i): Whether the deletion of the addition representing the alleged additional price of milk paid to member co-operative societies was correct.

Analysis: The issue was already concluded by an earlier decision in the assessee's own case for the immediately preceding year. The reference was therefore to be answered in the same manner as the earlier binding decision.

Conclusion: The deletion of the addition was upheld and the question was answered in favour of the assessee and against the Revenue.

Issue (ii): Whether the transfer of profits to the reserve fund under section 67 of the Gujarat Co-operative Societies Act, 1962 constituted diversion of income at source by overriding title or allowable deduction as business expenditure.

Analysis: The statutory requirement to carry a specified portion of net profits to reserve fund did not divest the assessee of the income. The reserve fund could be used in the business of the society, and the control over investment or later utilisation arose only if the society did not use the fund in its business. A statutory setting apart of profits did not amount to diversion at source, nor did it create a deductible outgoing under the income-tax provisions.

Conclusion: The transfer to the reserve fund was not diversion of income by overriding title and was not deductible as business expenditure; the questions were answered in favour of the Revenue and against the assessee.

Final Conclusion: The reference was disposed of by upholding the assessee's relief on the milk price addition while rejecting the assessee's challenge regarding the reserve fund transfer.

Ratio Decidendi: A statutory obligation to set apart profits into a reserve fund does not, by itself, amount to diversion of income at source or an allowable deduction where the fund remains available for the business of the assessee.

---