TaxTMI 
TaxTMI 
2015 (1) TMI 485
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....cy for insurance and is registered under Multi-State Cooperative Societies Act. In the course of assessment, A.O. noticed that assessee has claimed an amount of Rs. 11,66,894 towards education fund in the computation of income as an expenditure. He disallowed the same. 4. Before the Ld. CIT(A) assessee submitted that as per Multi-State Cooperative Societies Act, 2002 assessee has to credit 1% of its net profit to the Cooperative Education Fund maintained by National Cooperative Union, New Delhi. As per Rules, this amount was to be remitted by way of cheque or DD after approval of accounts in the Annual General Body Meeting. As per this procedure, assessee has remitted on 25.11.2009 an amount of Rs. 11,68,894 to the said union by way of contribution during the year relevant to A.Y. 2010- 2011. Since, this amount is a charge on the net profit and as there is outflow of this amount from the hands of assessee, this amount is allowable as a deduction. It was submitted that simply because this amount was quantified as a percentage on net profits, it does not mean that it is appropriation of profits. It is a charge on the profit, therefore, allowable as deduction. Ld. CIT(A) considered....
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.... prudential norms and are applicable only if there is a net profit. During the course of appeal proceedings the Id AR was asked whether the appellant would be required to credit 1% of its turnover even if there was no net profit and if there was loss. The Id AR replied that this could not be the case. It is clear from these facts that the societies act referred to supra and the specific section referred to above does not intend to make 1% as a charge on revenue, rather it is clearly a below the line allocation to be made after payment of taxes. 6.4 The appellant also argued that this 1% was actually an overriding title on the revenue. 6.5 Coming to the argument regarding overriding title, I find that this plea of the appellant is also without any basis. 6.6 In the case of Colaba Central Co-op. Consumers I Wholesale & Retail Stores Ltd. v. CfT 1998 Tax Pub (OT) 0665 ieom-nc) :(1998) 229 ITR 0209 :(1997) 142 CTR 0394 :(1998) 097 TAXMAN 0001, the assessee was obliged to set apart certain amount out of its income for the purpose of redemption of the government share capital and to keep the same in a fund known as "Government share capital redemption fund". Admittedly the amoun....
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....d by denying the liability under the Income Tax Act. Indeed, if that were the case, then the amendment itself would be ultra vires of the Constitution of India because the Constitution of India does not provide for the Cooperative Societies Act to override the Central Legislation. There is not even a hint of diversion through overriding title. The appellant has fully paid all the state taxes, local taxes, etc. wherever applicable. However, when it comes to the Income Tax Act, suddenly, the interpretation of the appellant changes hue in complete disconsonance with the Constitution of India, the Income tax Act and even the Multistate Cooperative Societies Act, 2002. 6.9 Looking into all the above facts and circumstances and the ratios of the various decisions, it is very clear that the appellant did not make any expenditure in the normal course of its activity. Every allocation of 1 % is akin to the transfer of a certain amount of net profit to the reserves and is clearly a "below the line" allocation. It is not a business expense u/s 37 of the Income Tax Act. The concept of overriding title does not apply, given the facts of the case. Therefore, I have no hesitation in holding th....
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.... (b) Constitution of, or contribution to, such special funds including Education Funds, as may be specified in the bye-laws; (c) Donation of amounts not exceeding five per cent of the net profits for any purpose connected with the development of co-operative movement or charitable purpose as defined in Section 2 of the Charitable Endowments Act, 1890(6 of 1890); Payment of ex-gratia amount to employees of the Multi State Co-operative Society to the extent and in the manner specified in the bye-laws. 4. Thus, as per Section 63(1 )(b) of the Multi State Co-operative Societies Act, 2002, the appellantbank has to credit 1 % of the net profit to the Cooperative Education Fund maintained by the National Co-operative Union of India (NCUI), New Delhi, in the manner prescribed. NCUI is an apex body of cooperatives in India. NCUI is registered under Multi-State Cooperative Societies Act, 2002 and all the provisions contained therein have the sanctity and sanction of the concerned authorities/ bodies. Education and training is one of its prime objectives well recognized by GOI and cooperatives. The role of NCUI has been recognized in the Multi-State Cooperative Societies Act, ....
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....ed in the section is an obligation to contribute to the Co-operative Education Fund under certain contingencies and is a statutory liability which is an overriding charge on the income or profits of the society. Hence, the amount paid by the assesse cooperative society to the Co-operative Education Fund is a diversion of profits at source on account of overriding charge created under the Act which is a statutory obligation on the society. Hence, such payment is an allowable deduction." This case answers the issues raised by the Hon'ble Commissioner of Income Tax (Appeals) in our case It holds that the contribution though determined on the basis of net profits, will not make any difference, that the amount paid by the Society to the account of the Cooperative Education Fund, is covered by the concept of diversion at source, on account of overriding charge created under that Act, which is a statutory obligation on the Society. The Karnataka High Court relied on the decision of the Supreme Court in Puna Electric Supply Co. Ltd. Vs. CIT(57 ITR 521), on the decision of the Madhya Pradesh High Court in the case of Keshkal Marketing Co-operative Societies Ltd. Vs. CIT(165 ITR 437) ....
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....e, the Government has stipulated under the Molasses Control Order that 1/3rd of the price charged should be transferred to a fund called Molasses Storage Fund. This amount could be used only according to the Instructions issued by the Government from time to time. It should be kept separately in a separate bank account and it is not possible to withdrawn without prior approval of the Excise Department. The Karnataka High Court held that the amount transferred to the Molasses Storage Fund is an allowable deduction as the right to the fund got diverted from the hands of the assessee by virtue of the Molasses Control Order. 10. The Karnataka High Court in the case of CIT vs. Hiranyakeshi Sahakari Sakkare Kharkhane 200 ITR 130 followed the above decision( 198 ITR 690) while dealing with transfer to Molasses Storage Fund. 11. The Bombay High Court in the case of CIT vs. Bombay State Road Transport Corporation 106 ITR 303, dealing with contribution under Section 44 of the Road Transport Corporations Act. 1950, to "third party liability fund" held that it is an allowable deduction as the contributions are made under legal obligation cast upon the assessee under a statutory rule. ....
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....association or a firm has come into existence. In these circumstances, the principle that has emerged is that, if a person has alienated or assigned the source of his income so that it no longer remains his income, he cannot be taxed upon the income arising after the assignment of the source. In such event, it is not the income of the assessee at all. On the contrary, if the source is not assigned to, or transferred but passes through the assessee to an ultimate purpose, the case of application of income in a particular manner. Even though he may enter into a legal obligation to apply it in a particular way, still it remains the income of the assessee. Section 61 to section 64 provides an exception to the legislative rule where notwithstanding assignment of the source of income, the income is deemed to be the income of the person who has assigned such source by creating a legal fiction." "Two features needs be taken into consideration. Firstly, it was a case where diversion of income under overriding title was claimed to be given to a person other than the assessee after receipt of it by the assessee. Secondly, it was held to be an obligation on income of the assessee only after....
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.... The Rajasthan High Court in the above case came to the conclusion because the amount in the Reserve Fund account does not cease to belong to the Society even after remittance and on the other hand can be used for purposes of the Society. In the present case, the contribution on its remittance to the Co-operative Education Fund ceases to belong to the Society and can be used by the National Co-operative Union of India for purposes mentioned under these rules. This is a very basic difference Our case is more covered by the decision of the Supreme Court in Puna Electric Supply Co Ltd. Vs. CIT 57 ITR 521 and is distinguishable from the decision of the Supreme Court In the case of Vellore Electric Corporation Ltd. vs. CIT 227 ITR 557 and in the case of Associated Power Co. Ltd. Vs. CIT 218 ITR 195, because of these basic differences. In the latter cases, the Supreme Court was dealing with Contingency Reserve whereas the Supreme Court was dealing with Consumer Benefit Reserve in the case of Puna Electric Supply Co. Ltd. The basic difference in the two reserves is that the Consumer Benefit Reserve is to be refunded to the consumer whereas the Contingency Reserve is to be utilised by the ....
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....adverting to the legal principles, what is to be noted here is that assessee is not claiming deduction of the amount paid out of profits of the financial year which is under consideration. Even though, it is calculated on the net profits as per section 63(1)(b), assessee is paying the amount of 1% on the profits quantified as on March, 2009. This is admitted before us that the amount claimed in each year was in fact, 1% credit of the profits of the previous year as approved by General Body Meeting of that year, paid during the year and charged in P&L account. Thus, the amount of Rs. 11,68,894 paid during the year is not out of profits of the year which were subjected to tax in this year, but out of profits of earlier year but paid during the year. This is the fundamental point to be considered that assessee is not claiming amount in the year of accruing the liability but is claiming in the year in which it is paid to the said society. Therefore, on fundamental principles the amount of claim made during the year does not pertain to the year itself as it is a liability, if at all chargeable to P & L account, of income of earlier year i.e., for the year ending March, 2009 and not for ....
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....ssessee has succeeded to the family ancestral estate on the demise of his father. Subsequent to such succession, his step-mother who had legal right to maintenance out of the estate of her husband brought a suit of maintenance against him and the assessee suffered a decree of the Court to pay a fixed monthly sum to the step-mother and it was declared that the maintenance was a charge on the ancestral estate in the hands of the assessee. The question that arose before the Privy Council was that the assessee was liable to be assessed as an individual in respect of the amount of maintenance which was payable to step-mother; to that extent what he received for her was not his income. It was not a case of the application by the appellant of part of his income in a particular way. Lord Macmillan delivering the opinion of the board stated: "In the present case, the decree of the Court by charging the appellant's whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his inco....
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....assessee after receipt of it by the assessee. Secondly, it was held to be an obligation on income of the assessee only after it had accrued and was not a case of diversion of any sum of money before it became the income of the assessee. This brings out another essential feature of application of principle of diversion of income by overriding title, viz., that income not only payable should reach other than the assessee but income should be reachable to the third party before it becomes the income of the assessee. 38. In the present case, it may be noticed that neither the reserve fund goes to any party other than the assessee itself, nor there is any obligation to provide for such reserve before it becomes the part of net income earned by the society. 39. In the like way is the case of K.A. Ramachar & Anr. vs. CIT (1961) 42 ITR 25 (SC), where though under the deed of settlement which was irrevocable, each of the beneficiaries of the settlement was entitled to receive 1/4 of the share of the settlement in the profits of the firm during a period of 8 years from the date of settlement, the beneficiaries were entitled to directly receive and collect from the firm their shares und....
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....n our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by the obligation, income is diverted before it, reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income which has been received and is since applied. The first is a case in which the income never reaches the assessee who even if he were to collect it, does so, not as part of his income, but for and on behalf of person to whom it is payable." 44. In CIT vs. Imperial Chemical Industries (India) (P) Ltd. (1969) 74 ITR 17 (SC) the C....
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....cts of the present case, apparently, the liability to pay the amount is after quantification of profits by the society under the Societies Act. It is only after the net profit reaches the co-operative society that the question of its disposal in terms of the provisions arise of the Act of 1965 and not earlier thereto, net profit is to be apportioned by transferring part of it as may be prescribed by Rules to the reserve fund or to other funds. Part of the profits has to be carried to the co-operative deduction fund constituted under the Rules and the balance is available for utilisation for payment of dividends to the members, bonus to the members and contribution to such other special funds as may be specified in the Rules as per Sec.63(2).As already stated earlier, assessee is not charging the amount of 1% on the profits of the year, in the year of accrual but is claiming the amount paid during the year on the profits of earlier year. This certainly indicates that the amounts have been received by assessee and utilized by assessee, then only amount was remitted to the said National Union under the Act. This indicates, there is no diversion at source but is only appropriation of p....
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.... amount appropriated in the consumers' benefit has to be returned to the consumers and it is as if the electricity company had not received that amount which it is obliged to return. The position is altogether different in the case of monies standing to the credit of the contingencies reserve, which are set apart to be utilised by the electricity company for the purpose set out in Para V of the Sch. VI to the Electricity (Supply) Act, which are the expenses which the electricity company has to incur and the reservation is made so that money is always available for meeting these expenses and the supply of electricity is not interrupted." 32. We have already examined the scheme of the cooperative societies governing the creation of reserve fund in question which clearly indicates that under s. 61 no part of funds other than the net profits of a co-operative society shall be utilised by way of bonus or dividend or otherwise distributed amongst its members and s. 62 has unequivocally provided for disposal or appropriation of net profit. It is only after the net profit reaches the cooperative society that the question of its disposal in terms of the provisions arise of the Act of....
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....er the requirement of law, but it does not, at the time of creation of a reserve fund becomes a certain obligation which it is obliged to discharge but rest in domains of uncertain contingency. It remains a contingent obligation of the assets of the society in future dependent upon the surplus remaining after discharge of its liability and that too as per the resolution of the members of the society only. Thus, in our opinion, the principle governing dealing with the reserve fund in question, which is created under the Co-operative Societies Act, 1965, is fully governed by the ratio of the decision in Associated Power Co.'s case (supra), Vellore India Co. Ltd.'s case (supra) and not by the ratio laid down in Poona Electric Supply Ltd. Co.'s case (supra). 33. The decision of the M.P. High Court in Keshkal Cooperative Marketing Society Ltd. (supra) undoubtedly supports the contention of the assessee-respondent. We have already noticed that the decision of M.P. High Court in Keshkal Co-operative Marketing Society Ltd. (supra) is founded on the principle enunciated in Poona Electric Supply Co. Ltd.'s case (supra). With utmost respect, we regret our inability to fall in line with ....
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....consumers and reserve fund to be used for the assessee's own income to meet any contingencies occurring in future cannot be excluded from the computation of total income either on principle of diversion of income by overriding title or on the principle of income not forming part of the real income or as the part of deductible expenses under s. 37; the decision in M.P. High Court cannot be considered as an authority laying down the proposition in respect of reserve fund created by cooperative societies for its own purposes as the law laid down correctly and is impliedly overruled. 34. The other decisions referred to and relied on by the learned counsel for the Revenue in Pandavapura Sahakara Sakkare Karkhane Ltd. (supra), Hiranyakeshi Sahakara Sakkare Karkhane (supra) all from Karnataka High Court proceed on the principle laid in the Poona Electric Supply's case, without noticing the aforesaid distinction as noticed by the apex Court in Associated Power Supply's case and Vellore India Co. Ltd.'s case (supra). For the reason stated above while considering decision of M.P. High Court in Keshkal Co-operative Societies' case, we express our inability to agree with the aforesaid decis....