2015 (4) TMI 621 - HC - Income Tax

Diversion of income at source by overriding title - Transfer to reserve fund - ITAT holding that the amount transferred to reserve fund account as per the provisions of Sec.67 of Gujarat State Co operative Societies Act was not a diversion of income at source by overriding title - ITAT holding that the transfer to reserve fund cannot be treated as a business expenditure and allowed deduction u/s 28/37 - Held that - The two questions, at the instance of the assessee, stands concluded by the decision of the Apex Court in the case of Associated Power Co. Ltd. Vs. Commissioner of Income tax (1995 (11) TMI 5 - SUPREME Court). Furthermore, as can be seen from provisions of Section 67(2) of the Cooperative Societies Act the question of control of the State Government by specifying the mode of investment or the mode of use of the reserve fund can arise only in the eventuality when the society does not use the reserve fund in the business of the society. It is only in the event the society does not choose to use the reserve fund for the business of the society that the question about investing the reserve fund in the specified category of investments and thereafter utilizing the same for the objects specified by the State Government can arise. Hence, not only is there no diversion of income by overriding title but in fact there is no outgoing of funds from the domain of the assessee society. In fact, the profits at the specified percentage are set apart so as to be available to the society for use in the business of the society at a later point of time. Once the society is in a position to use the funds lying in the reserve fund for the business of the society as and when the society so chooses, there can be no question of keeping out such profits from the purview of taxation. Accordingly, the amount transferred to the reserve fund account as per provisions of Section 67 of the Gujarat Cooperative Societies Act, 1961 was not diversion of income at source by overriding title nor can such transfer be treated as a business expenditure deductible either under Section 28 or Section 37 of the Act. Decided in favour of the Revenue.

Summary

Issues:
1. Challenge to order passed by the Income Tax Appellate Tribunal
2. Interpretation of provisions of Sec.67 of Gujarat State Co-operative Societies Act
3. Treatment of transfer to reserve fund as business expenditure

Analysis:
1. The appellant-assessee challenged the order passed by the Income Tax Appellate Tribunal (ITAT) dated 04.07.2003 and 4.12.2003. The High Court admitted the appeals and formulated substantial questions of law for consideration.

2. The main issue revolved around the interpretation of Sec.67 of the Gujarat State Co-operative Societies Act. The Court deliberated on whether the amount transferred to the reserve fund account under this provision constituted a diversion of income at source by overriding title. The Court analyzed the provisions of the Act and previous judgments to determine the nature of such transfers.

3. Another significant issue was the treatment of the transfer to the reserve fund as a business expenditure. The Court examined whether such transfers could be allowed as deductions under Section 28/37 of the Income Tax Act, 1961. The Court considered the purpose and implications of such transfers in the context of business operations.

4. The facts of the case indicated that the Assessing Officer had assessed the appellant-assessee's total income, leading to subsequent appeals before the CIT(A) and the ITAT. The Tribunal partly allowed both appeals, prompting the appellant to challenge the decision before the High Court.

5. The Court noted that the facts of the case were similar to another appeal (ITR No.65 of 1997) and referred to a previous decision related to the same questions of law. The Court observed that the issues raised in the appeals were already settled by the earlier decision and concurred with the findings of the previous Division Bench.

6. Ultimately, the High Court dismissed the present appeals based on the conclusions drawn from the previous decision and upheld that the amount transferred to the reserve fund account was not a diversion of income at source by overriding title. The Court also ruled that such transfers could not be treated as business expenditure deductible under the Income Tax Act, 1961. The questions of law posed in the appeals were answered in favor of the revenue and against the assessee.