1993 (5) TMI 70 - AT - Income Tax

Tribunal rules effluent disposal reserve not tax deductible, assessee's appeals dismissed

Coimbatore Alcohols And Chemicals Limited. Versus Inspecting Assistant Commissioner.

Coimbatore Alcohols And Chemicals Limited. Versus Inspecting Assistant Commissioner. - ITD 046, 303, Issues Involved:1. Revenue Deductibility of Amounts Set Apart for Effluent Disposal Reserve2. Application of Income vs. Diversion of Income by Overriding TitleDetailed Analysis:1. Revenue Deductibility of Amounts Set Apart for Effluent Disposal Reserve:The assessee, a distillery company, set apart sums under the head 'Effluent Disposal Reserve' for the assessment years 1985-86, 1986-87, and 1987-88, as mandated by the Ethyl Alcohol (Price Control) Order, 1971. The assessee contended that these sums were revenue deductible because they could not be utilized for any other purpose. However, the Assessing Officer rejected this claim, considering it as an application of income rather than a diversion of income by overriding title. The CIT (Appeals) and the ITAT had previously declined to interfere in this matter.The Tribunal found that the issue should be concluded against the assessee based on the Madras High Court's decision in the case of CIT v. South Arcot District Co-operative Supply & Marketing Society Ltd. [1981] 127 ITR 467 (Mad.), which supported the Department's case that the sum set apart was not revenue deductible.2. Application of Income vs. Diversion of Income by Overriding Title:The assessee argued that the Madras case was distinguishable because it involved a statutory contribution of profits to an education fund, whereas in their case, the amount set apart was part of the sale proceeds, not profits. The assessee claimed that setting apart a portion of sale proceeds should be deducted from total sale proceeds before computing income. They also cited the ITAT's consistent rulings in the case of Sugar Mills, where amounts credited to the Molasses Storage Fund were not considered part of the income.The CIT (Appeals) did not find favor with these arguments and declined to interfere. The learned counsel for the assessee reiterated these arguments before the Tribunal, emphasizing that the sums set apart formed part of the turnover and were revenue deductible, similar to the Molasses Storage Fund in Sugar Mills.The Departmental Representative supported the lower authorities' orders and cited the M.P. case of Jiwajirao Sugars Co. Ltd. v. CIT [1989] 176 ITR 182, where the High Court held that amounts set apart under the Molasses Control Order did not amount to diversion of income by overriding title but were mere application of income.The Tribunal considered whether the sums transferred to the effluent disposal reserve through journal entries entailed any outflow of cash and whether the assessee retained control over the cash. The learned counsel for the assessee conceded that the assessee retained control over the cash and would be entitled to the outstanding amount credited in the effluent disposal reserve account if the business ceased.The Tribunal noted that in the assessment year 1977-78, the issue was decided against the assessee, and there was no change in the fact-situation for the assessment years under consideration. The Tribunal rejected the assessee's claim based on the Madras High Court case of CIT v. L.G. Ramamurthi [1977] 110 ITR 453.The Tribunal further analyzed whether the case was one of diversion of income by overriding title or application of income. The doctrine of diversion of income by overriding title requires the existence of more than one person and that part of the income is diverted to another person with superior title. In contrast, application of income involves alienation of one's own income, either voluntarily or due to an obligation.The Tribunal concluded that the sums credited to the effluent disposal reserve were not revenue deductible. The assessee retained control over the funds, and the obligation to set apart funds for effluent disposal facilities did not equate to diversion of income by overriding title. The Tribunal also noted the Madhya Pradesh case of Jiwajirao Sugars Co. Ltd., where the High Court held that amounts credited to the molasses storage fund were not revenue deductible.In the absence of a ruling from the jurisdictional High Court, the Tribunal followed the Madhya Pradesh ruling and dismissed the assessee's appeals.Conclusion:The Tribunal dismissed all three appeals of the assessee, holding that the sums credited to the effluent disposal reserve were not revenue deductible and constituted application of income rather than diversion of income by overriding title.