Compulsory co-operative education fund contribution is not deductible business expenditure; overriding title does not apply to the outgoing payment.

Compulsory contribution by a co-operative society to an education fund under the Maharashtra Co-operative Societies Act was treated as an appropriation of profits under co-operative law, not expenditure incurred wholly and exclusively for business, so it was not deductible under section 37 of the Income-tax Act. The fact that the payment was mandatory and measured by sugarcane crushed did not change its character into a trading expense, because the measuring criterion only fixed the amount payable. The doctrine of diversion by overriding title was inapplicable, as it concerns receipts diverted before reaching the assessee, whereas this was an outgoing payment. The disallowance was upheld.

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Issues: Whether the compulsory contribution paid by a co-operative society to the education fund under the Maharashtra Co-operative Societies Act and Rules was deductible as business expenditure under section 37 of the Income-tax Act, 1961, or alternatively was diverted at source by an overriding title.

Analysis: The contribution was held to be payable by the assessee only because it was a co-operative society and not because it was carrying on the business of manufacturing sugar. The statutory scheme showed that the payment formed part of the appropriation of profits under the co-operative law and could not be treated as an item incurred wholly and exclusively for the business. The fact that the amount was mandatory, and that its quantum was linked to the sugarcane crushed, did not make it a trading expense; the measuring criterion only fixed the amount payable. The doctrine of diversion by overriding title was also inapplicable because that doctrine concerns receipts diverted before reaching the assessee, whereas the present payment was an outgoing and not a diversion of income or receipts at source.

Conclusion: The payment was not allowable as a deduction under section 37 and was not excluded by overriding title; the disallowance was upheld.

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