2017 (11) TMI 522 - HC - Income Tax

Allowable business expenditure - Disallowing the contribution to Primary Agricultural Credit Cooperative Society Development Fund being non business expenditure - Held that - Held that - The issue is now squarely covered by the decision of this Court in case of Commissioner of Income Tax vs. M/s Rajasthan State Co-operative Bank Ltd 2017 (11) TMI 453 - RAJASTHAN HIGH COURT wherein held that as looking to the provisions of the Rule 2003 the expenses are mandatory in nature, thus, they are required to be deducted to be kept in reserve fund and they are expenses as stated under Rule 28. - Decided in favour of assessee.

Summary

Issues:
- Appeal against Tribunal's order dismissing department's appeal.
- Substantial question of law regarding deletion of addition by ITAT.

Analysis:

1. The appellant challenged the Tribunal's order dismissing the department's appeal. The substantial question of law framed was whether the ITAT was justified in deleting the addition made by the Assessing Officer by disallowing the contribution to the Primary Agricultural Credit Cooperative Society Development Fund as non-business expenditure.

2. The court referred to the decision in the case of Commissioner of Income Tax vs. M/s Rajasthan State Co-operative Bank Ltd., where it discussed the provisions related to reserve funds maintained by cooperative societies. It emphasized that the reserve fund belongs to the society and is to be used for the society's purposes only, such as meeting unforeseen losses or providing for financial needs during special scarcity. The court highlighted that the reserve fund remains part of the society's assets and cannot be utilized for purposes other than those of the society.

3. The court also referred to the decision of the Supreme Court in Associated Power Co. Ltd. vs. Commissioner of Income Tax, where it was held that the amount credited to the Contingencies Reserve is not diverted by an overriding obligation or title and must be taken into account in determining the business profits of the assessee. The court clarified that such appropriation is not considered as expenditure but is set aside to meet possible exigencies, not known existing liabilities.

4. The court concluded that no substantial question of law arose in the appeal and accordingly dismissed the appeal. It held that the amount transferred to the reserve fund under the Cooperative Societies Act is not allowable as a deduction in computing the taxable income of the society, reinstating the Assessing Officer's decision overruling the Tribunal's order.

5. The court highlighted the distinction between reserve funds created for the benefit of consumers and those created under the Co-operative Societies Act for the society's own purposes. It emphasized that the reserve fund created for the society's purposes cannot be excluded from the computation of total income, as it forms part of the society's assets and is intended for the society's needs only.

6. The court's decision was based on the interpretation of relevant provisions and previous judgments, emphasizing the regulatory framework governing reserve funds in cooperative societies and the principles regarding the utilization of such funds for the society's purposes only.