2015 (4) TMI 624 - HC - Income Tax

Transfer to reserve fund - whether the amount transferred to reserve fund account as per provisions of Sec. 67 of the Gujarat State Cooperative Societies Act, 1957 was not a diversion of income at source by overriding title? - transfer to reserve fund cannot be treated as business expenditure and allowed deduction u/s 28/37 as held by Tribunal - 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. See Gujarat CO-OP. Milk Marketing Federation Ltd Versus DY. Commissioner Of Income-Tax 2015 (4) TMI 621 - GUJARAT HIGH COURT - Decided in favour of the Revenue.

Summary

Issues:
1. Interpretation of provisions of Sec. 67 of the Gujarat State Cooperative Societies Act, 1957 regarding transfer to reserve fund.
2. Whether the transfer to reserve fund can be treated as business expenditure under Income Tax Act, 1961.

Analysis:
1. The High Court considered the common issues in a group of appeals related to the Gujarat Cooperative Milk Marketing Federation Limited. The primary questions of law were whether the transfer to the reserve fund account under Sec. 67 of the Gujarat State Cooperative Societies Act constituted a diversion of income at source by overriding title and whether such transfer could be classified as business expenditure under the Income Tax Act, 1961.

2. The Court noted that the issues raised in the appeals had been previously addressed in a decision by the Division Bench of the same Court in a related matter. The Division Bench had concluded that the transfer to the reserve fund did not amount to a diversion of income at source by overriding title. It was observed that the reserve fund could be used by the society for its business activities, and hence, there was no outgoing of funds from the society's domain. The Court affirmed that the transfer to the reserve fund was not a business expenditure deductible under the Income Tax Act.

3. The Court further highlighted that similar questions of law raised in other tax appeals concerning the same assessee or different assessment years had been dismissed based on the precedent set by the Division Bench's decision. The Court, after reviewing the earlier decision and considering the reasoning provided therein, answered the substantial questions of law against the assessee and in favor of the revenue. Consequently, all the appeals were dismissed, upholding the judgments and orders passed by the Tribunal.

In conclusion, the High Court, through a detailed analysis of the provisions of the Cooperative Societies Act and the Income Tax Act, affirmed that the transfer to the reserve fund by the Gujarat Cooperative Milk Marketing Federation Limited did not amount to a diversion of income at source or qualify as a deductible business expenditure. The Court relied on precedent and legal interpretation to rule in favor of the revenue and dismiss the appeals.