2008 (3) TMI 278 - HC - Income Tax

Society - Tribunal was right in law in holding that the amount transferred to the reserve fund account as per provisions of Section 67 of the Gujarat Co-operative Societies Act, 1962 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

Summary

Issues:
1. Confirmation of deletion of additional price of milk paid to co-operative societies.
2. Transfer to reserve fund account under Gujarat Co-operative Societies Act.
3. Treatment of reserve fund transfer as business expenditure under Income-tax Act.

Issue 1: Confirmation of deletion of additional price of milk paid to co-operative societies

The Income-tax Appellate Tribunal referred a question regarding the confirmation of the Commissioner of Income-tax (Appeals) order deleting the addition of alleged additional price of milk paid to member co-operative societies. The Tribunal noted a similar issue in the assessee's case from the previous year, which was resolved in favor of the assessee based on a previous judgment. Consequently, the question was required to be answered in favor of the assessee.

Issue 2: Transfer to reserve fund account under Gujarat Co-operative Societies Act

The Tribunal raised two questions at the instance of the assessee regarding the transfer to the reserve fund account as per the Gujarat Co-operative Societies Act. The assessee argued that the transfer to the reserve fund was a diversion of income at source by overriding title, making it not liable for taxation under the Income-tax Act. The assessee also contended that the transfer should be treated as a deductible expenditure. However, the Revenue relied on a Supreme Court decision to argue against these claims.

Issue 3: Treatment of reserve fund transfer as business expenditure under Income-tax Act

The Tribunal analyzed the provisions of Section 67(2) of the Co-operative Societies Act and determined that there was no diversion of income by overriding title in the case of transferring funds to the reserve fund. It was clarified that the reserve fund could be used in the business of the society, and until then, the funds were available for the society's use. Therefore, the Tribunal held that the transfer to the reserve fund account was not a diversion of income at source by overriding title and could not be treated as a deductible business expenditure under the Income-tax Act. Consequently, both questions raised by the assessee were answered in favor of the Revenue.

In conclusion, the judgment addressed the issues related to the confirmation of deletion of additional price of milk paid to co-operative societies, the transfer to the reserve fund account under the Gujarat Co-operative Societies Act, and the treatment of reserve fund transfer as business expenditure under the Income-tax Act. The Tribunal's decision favored the assessee in the first issue but ruled in favor of the Revenue in the subsequent issues, based on the interpretation of relevant legal provisions and precedents.