Reserve fund transfer treated as application of income, not diversion at source or deductible business expenditure.

Transfer of a portion of income to a reserve fund under the Gujarat Co-operative Societies Act, 1961 was treated as neither diversion of income at source by overriding title nor allowable as business expenditure under the Income-tax Act, 1961. The Court followed its reasoning in an earlier same-day decision between the same parties and applied that approach to the referred questions. The reserve fund transfer was therefore characterised as an application of income rather than a deductible outgoing or income diverted before accrual, and the questions were answered in favour of the Revenue.

---

---

Issues: Whether the transfer of a portion of income to a reserve fund under the Gujarat Co-operative Societies Act, 1961 constituted diversion of income at source by overriding title, or was allowable as business expenditure under the Income-tax Act, 1961.

Analysis: The questions referred were stated to be covered by an earlier decision between the same parties rendered on the same day. On that basis, the Court adopted the same reasoning and treated the reserve fund transfer as not amounting to diversion of income at source by overriding title and not as deductible business expenditure under the income-tax provisions invoked.

Conclusion: The questions were answered in the affirmative, in favour of the Revenue and against the assessee.

---