Statutory profit appropriation and capital loss on surplus securities were both denied as business deductions.

Amounts appropriated from net profits under a statutory profit-distribution scheme are not deductible unless they are diverted before income accrues or constitute expenditure incurred to earn income. A co-operative society's contribution to the education fund was an appropriation out of profits under the statutory scheme, so it was not deductible. Loss on sale of Government securities held as surplus investment assets, rather than trading stock, was capital in nature; the sale did not convert the asset into stock-in-trade, so the loss was not allowable as a business deduction.

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Issues: (i) Whether contributions made by a co-operative society to the education fund under the statutory scheme were deductible in computing taxable income; (ii) Whether loss arising from sale of Government securities held by the assessee was allowable as a business loss or was a capital loss.

Issue (i): Whether contributions made by a co-operative society to the education fund under the statutory scheme were deductible in computing taxable income.

Analysis: The statutory scheme under Section 62 of the Madras Co-operative Societies Act, 1961 contemplated disposal and appropriation of net profits after profits had arisen. Rule 46 of the relevant Rules was treated as a provision implementing that statutory allocation of post-profit distribution. The payment to the education fund was conditioned on net profits and was an appropriation out of profits, not a diversion before income accrued. It was neither expenditure incurred to earn the income nor a diversion by overriding title.

Conclusion: The contribution to the education fund was not deductible and the question was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether loss arising from sale of Government securities held by the assessee was allowable as a business loss or was a capital loss.

Analysis: The securities were surplus funds invested under the statutory investment power and were not stock-in-trade of a dealer in securities or of a banking or financing concern. Their sale occurred because of financial necessity, but that did not change the character of the asset from capital to revenue. A profit or loss on realisation of such capital assets remained on capital account, and the authorities relied on for financiers did not apply to a co-operative society carrying on a different business.

Conclusion: The loss on sale of Government securities was a capital loss and was not allowable as a business deduction, the question being answered against the assessee.

Final Conclusion: Both questions were decided against the assessee, and the reference was disposed of with no order as to costs.

Ratio Decidendi: Amounts appropriated from net profits under a statutory profit-distribution scheme are not deductible unless they are diverted before income accrues or constitute expenditure incurred to earn income, and loss on realisation of surplus investment assets not held as trading stock is capital in nature.

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