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2015 (1) TMI 485 - AT - Income TaxContribution to education fund - application of income or diversion of income by overriding title - whether the amount is not allowable as deduction? - Held that - The amount contributed by assessee to the National Cooperative Union, New Delhi is appropriation from the net profits. There is a right to receive the income independent of accrual and receipt of income by the assessee before third party could lay claim to any part of it. Since income reached assessee before it reached to a third party, there is no diversion. As already stated, there is no payment in the year of losses. Therefore, payment under section 63(1)(b) of the multistate co-operative societies act 2002 is only an appropriation of profit. Moreover, this amount paid during the year is also not out of the profits of this year but profits of earlier year. Therefore, on that count also amount cannot be allowed as deduction during the year. For these reasons, we uphold the order of the authorities and reject assessee s grounds on the issue. In the result, appeal of the assessee is dismissed.
Issues Involved:
1. Allowance of contribution to the education fund as a revenue deduction. 2. Interpretation of Section 63 of the Multi-State Cooperative Societies Act, 2002. 3. Application of the doctrine of diversion of income by overriding title versus appropriation of income. Detailed Analysis: 1. Allowance of Contribution to the Education Fund as a Revenue Deduction The primary issue in this appeal is whether the contribution of Rs. 11,66,894 to the education fund by the assessee can be claimed as a revenue deduction. The Assessing Officer (A.O.) disallowed this deduction, asserting that it was not an expense out of the profits but a contribution to the National Cooperative Union of India out of the net profits. The Ld. CIT(A) upheld this view, leading to the present appeal. 2. Interpretation of Section 63 of the Multi-State Cooperative Societies Act, 2002 The assessee argued that under Section 63 of the Multi-State Cooperative Societies Act, 2002, they are required to credit 1% of their net profit to the Cooperative Education Fund. This amount is considered a charge on the net profit and thus, should be allowable as a deduction. The relevant section states: "63. Disposal of net profits.-(i) A multi-State co-operative society shall, out of its profits in any year, (a) transfer an amount not less than twenty-five percent to the reserve fund; (b) credit one percent to the co-operative education fund maintained by the National Co-operative Union of India Limited, New Delhi in the manner as prescribed; (c) transfer an amount not less than ten percent to a reserve fund for meeting unforeseen losses." The Ld. CIT(A) rejected the assessee's claim, emphasizing that these allocations are made out of "net profits" and are to be considered after meeting all expenditures and paying taxes, thus treating them as appropriations of profits rather than business expenses. 3. Application of the Doctrine of Diversion of Income by Overriding Title versus Appropriation of Income The assessee contended that the contribution to the education fund represents a diversion of income by overriding title, citing various judicial precedents. However, the Ld. CIT(A) and the Tribunal found that this argument lacked merit. The Tribunal referred to the case of CIT vs. Jodhpur Cooperative Marketing Society (275 ITR 372) and other relevant judgments, concluding that the contribution is an appropriation of profits rather than a diversion of income. The Tribunal noted that the amount is payable only when the society has net profits, indicating it is an appropriation of income. Additionally, the amount claimed by the assessee was based on the profits of the previous year, not the current assessment year, further supporting the view that it is an appropriation of profits. Conclusion The Tribunal upheld the disallowance of the deduction for the contribution to the education fund, agreeing with the Ld. CIT(A) that it is an appropriation of profits rather than a business expense. The appeal was dismissed, and the order of the authorities was upheld. The decision was pronounced in the open court on 31.12.2014.
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