1983 (4) TMI 129 - AT - Income Tax

Summary

Issues Involved:
1. Deductibility of contribution to the education fund under section 37 of the Income-tax Act, 1961.
2. Applicability of the doctrine of diversion by overriding title.
3. Comparison of the Maharashtra Co-operative Societies Act and the Tamil Nadu Co-operative Societies Act.

Detailed Analysis:

1. Deductibility of Contribution to the Education Fund:
The assessee, a co-operative society, claimed a deduction of Rs. 25,000 paid to the education fund under section 37 of the Income-tax Act, 1961. The Commissioner directed the Income Tax Officer (ITO) to withdraw this allowance, asserting it was a parting of profits rather than a business expenditure. The assessee argued that the contribution was a statutory obligation and not an appropriation of profit, emphasizing that the payment was essential for the business operation and not a capital expenditure.

The Tribunal examined sections 64, 65, 66, 67, 68, and 69 of the Maharashtra Co-operative Societies Act, 1960, and concluded that the payment to the education fund, although compulsory, was an appropriation of profits rather than a business expenditure. The Tribunal noted that the payment was not directly related to the business operations of the assessee but was a statutory obligation imposed on the co-operative society. The Tribunal emphasized that the expenditure must be incurred in the capacity of a trader to be deductible under section 37, which was not the case here.

2. Applicability of the Doctrine of Diversion by Overriding Title:
The assessee alternatively claimed that the contribution to the education fund was diverted by an overriding title and thus should not be considered as income. The Tribunal clarified that the doctrine of diversion by overriding title applies to receipts and not to payments. The payment to the education fund was an outgoing and had no connection with any receipt. The Tribunal stated that the payment was a statutory obligation and not a diversion of income before it reached the assessee.

3. Comparison of the Maharashtra Co-operative Societies Act and the Tamil Nadu Co-operative Societies Act:
The assessee contended that there were significant differences between the Maharashtra and Tamil Nadu Co-operative Societies Acts, which justified the deduction. The Tribunal compared the relevant provisions of both Acts and found no substantial differences. Both Acts treated the contribution to the education fund as an appropriation of profits. The Tribunal referred to the Madras High Court decision in CIT v. South Arcot District Co-operative Supply & Marketing Society Ltd., which disallowed such a payment under the Tamil Nadu Act, and concluded that the same principle applied to the Maharashtra Act.

Conclusion:
The Tribunal upheld the Commissioner's order, disallowing the deduction of Rs. 25,000 paid to the education fund. The payment was deemed an appropriation of profits and not a business expenditure under section 37 of the Income-tax Act, 1961. The doctrine of diversion by overriding title was found inapplicable to the payment. The Tribunal also found no significant differences between the Maharashtra and Tamil Nadu Co-operative Societies Acts that would justify a different treatment of the contribution to the education fund. The appeal was dismissed.