1979 (12) TMI 88 - AT - Income Tax

Co-op Society appeal denied for deduction on Capital Redemption Fund contributions.

The Tribunal dismissed the appeal of a Co-operative Society seeking a deduction for contributions to the Capital Redumption Fund while computing income. ... - Issues:- Allowability of contribution to Capital Redumption Fund as a deduction while computing income for a Co-operative Society under the Maharashtra Co-op. Societies Act, 1960.Detailed Analysis:1. The assessee, a Co-operative Society, appealed for the deduction of their contribution to the Capital Redumption Fund while computing income. The society was registered under the Maharashtra Co-op. Societies Act, 1960, which includes provisions on aids provided by the State to the societies. The State Govt. had entered into an agreement with the assessee for financial assistance, specifying terms and conditions for such grants, including the creation of the Capital Redumption Fund.2. The terms of the agreement required the society to set aside a specific amount to the Capital Redumption Fund before determining profits. The society claimed this amount as a deduction, citing mandatory provisions in the Co-op. Society Rules and the Act. However, the Income Tax Officer (ITO) disallowed the deduction, stating it was not allowable. The Appellate Assistant Commissioner (AAC) also ruled against the deduction, considering it akin to repaying borrowed capital.3. The matter was brought before the Tribunal, where the society argued that the contribution to the Fund was mandatory under the Act and Rules, emphasizing the favorable treatment of funds provided by the Government compared to ordinary loans. The society relied on legal precedents to support its claim for deduction, either through overriding title or as an allowable loss under Section 28.4. The Departmental Representative contended that the provisions in the Act regarding the Fund were to ensure responsible fund management by Co-op. Societies and that loans, even from the Government, do not change their character. Reference was made to a House of Lords decision where no deduction was allowed under similar circumstances.5. The Tribunal, after considering the arguments, concluded that the claimed deduction could not be allowed. It distinguished the case from legal precedents cited by the society, emphasizing that the creation and use of the Fund were different from reserves under the Electricity (Supply) Act, 1948. The Tribunal found that the Fund was created from the society's profits and used for repaying capital provided by the Government, benefiting only the society.6. The Tribunal rejected the society's contention that the Fund creation was mandatory, clarifying that it arose from the terms of the financial assistance agreement, not the Act. It highlighted that the taxability was governed by legal principles related to contractual obligations, citing relevant legal precedents.7. The Tribunal emphasized the distinction between the Fund in question and reserves under the Electricity (Supply) Act, stating that the society had control and interest in the Fund, unlike the reserves. It concluded that the society was not entitled to claim the Fund as non-taxable income or as a diversion by overriding title, ruling out considerations under Section 28 or Section 37.8. Ultimately, the Tribunal dismissed the appeal, affirming that the society could not claim the amount set aside for the Capital Redumption Fund as a deduction from its income, as it did not meet the criteria for overriding title, loss under Section 28, or expenditure under Section 37.