Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 174 of 1982

Judges

Dr. B.P Saraf
Dr. Pratibha Upasani, JJ.

Acts

section 70 of the Maharashtra Co-operative Societies Act, 1960.
section 65(2) of the Maharashtra Co-operative Societies Act.
section 70 of the Maharashtra Co-operative Societies Act
section 256(1) of the Income-tax Act, 1961, the Income-tax
SECTION 28 INCOME TAX ACT
Maharashtra Co-operative Societies Act, 1960.
SECTION 257 INCOME TAX ACT 1961
section 37(1) of the Income-tax Act
INCOME TAX ACT 1961
ELECTRICITY SUPPLY ACT 1948
section 37 or section 28
Indian Trusts Act
INCOME TAX ACT

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Smart Summary

Legal Opinion Summary

Factual and Procedural Background

This reference arises under section 256(1) of the Income-tax Act, 1961, made by the Income-tax Appellate Tribunal at the instance of the assessee. The referred question asks whether the Tribunal was right in holding that the assessee cannot claim deduction either under section 37 or section 28 of the amount set apart for the capital contribution redemption fund.

The facts (assessment year 1975–76) are: the assessee is a co-operative society registered under the Maharashtra Co-operative Societies Act, 1960. Under a centrally sponsored scheme, the State Government contributed Rs. 21 lakhs to the society's share capital under an agreement providing that the contribution would continue for ten years unless extended. The scheme required co-operative societies to set aside amounts for a "Government share capital redemption fund" before arriving at profits for appropriation under section 65(2) of the Maharashtra Co-operative Societies Act. Amounts standing to the credit of that fund had to be deposited as fixed deposits with the central finance agency or invested in Government loans and securities in consultation with the registering authority under section 70 of the Maharashtra Co-operative Societies Act. The fund could not be used in the society's wholesale stores business.

For the relevant previous year the assessee set apart Rs. 2,10,000 and credited it to the Government share capital redemption fund. In its Income-tax return for the year the assessee claimed deduction of that amount in computing business income. The Income-tax Officer rejected the claim; the Appellate Assistant Commissioner dismissed the assessee's appeal; the Tribunal also dismissed the appeal. The Tribunal's refusal to allow the deduction produced this reference.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee cannot claim deduction either under section 37 or section 28 of the amount set apart for the capital contribution redemption fund?

Arguments of the Parties

Assessee's Arguments

The amount set apart for the Government share capital redemption fund is deductible as an amount diverted by overriding title (i.e., a case of diversion of income by overriding title).
Alternatively, the amount is an expenditure incurred wholly and exclusively for the purpose of business within the meaning of section 37(1) of the Income-tax Act and therefore deductible.

Revenue's Arguments

The case is neither one of diversion of income by overriding title nor an allowable expenditure under section 37 of the Act.
The sum set apart, though credited to a special fund, always remained the property of the assessee; it never got diverted to any other person. Therefore the doctrine of diversion by overriding title does not apply.
Reliance was placed on prior decisions of this court and the Supreme Court (including Commissioner of Income-Tax v. V.G. Bhuta; Commissioner of Income-Tax v. M.P. Poncha; and Associated Power Co. Ltd. v. Commissioner of Income Tax) to support the submission that appropriation of income to such a fund does not constitute diversion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income-Tax v. V.G. Bhuta, [1993] 203 ITR 249 (Bom)	Authority indicating that appropriation of income which remains with the assessee is not diversion by overriding title.	Relied upon as part of the line of authorities demonstrating that an obligation to set aside income does not in itself amount to diversion before the income reaches the assessee.
Commissioner of Income-Tax v. M.P. Poncha, [1995] 211 ITR 1005 (Bom)	Similar principle that monies appropriated but remaining the assessee's property are not diverted by overriding title.	Used alongside other decisions to support the conclusion that the appropriation to the fund did not divert income away from the assessee.
Associated Power Co. Ltd. v. Commissioner of Income Tax, [1996] 218 ITR 195 (SC)	Doctrine: diversion of income by overriding title applies only where income never reaches the person assessed; monies appropriated to a contingencies reserve belonged to the company because they reached and remained with it, and were invested in the company's name.	The court applied the ratio of this Supreme Court decision directly, holding that monies appropriated to the Government share capital redemption fund similarly belonged to the assessee and were not diverted, so they must be taken into account in computing business income.
CIT v. Sitaldas Tirathdas, [1961] 41 ITR 367 (SC)	Reiterates the distinction between diversion of income before it reaches the assessee and an obligation to apply income after it reaches the assessee.	Invoked to support the legal proposition that an obligation to apply income does not render it non-income of the assessee if the income has reached him.
CIT v. Imperial Chemical Industries (India) (P.) Ltd., [1969] 74 ITR 17 (SC)	Another Supreme Court authority for the principle distinguishing apportionment/obligation to apply income from diversion by overriding title.	Relied on as part of the established line of Supreme Court authority reinforcing the legal distinction central to the decision.
Indian Molasses Co. (P.) Ltd. v. CIT, [1959] 37 ITR 66	Definition of "expenditure" as something "paid out or away" and something which is "gone irretrievably".	Applied to reject the assessee's alternate submission that the appropriation was an expenditure deductible under section 37(1); the appropriation was not payment out or irretrievably gone.
Anarhali Sarabhai v. CIT, [1997] 224 ITR 422	Holding that redeeming shares means buying back shares from shareholders.	Used to characterise the nature of redemption (i.e., use of the fund to buy back the society's own shares) and to underline that the appropriation was for the assessee's own future liabilities, not a diversion to third parties.

Court's Reasoning and Analysis

The court's analysis follows a step-by-step application of legal principle to the undisputed facts:

Fact-finding: The court noted the uncontroverted fact that the amount appropriated and credited to the Government share capital redemption fund always remained with the assessee and was never diverted to any other person.
Legal principle on diversion: The court reaffirmed the settled law that the doctrine of diversion of income by reason of an overriding title applies only where, by reason of the overriding title or obligation, the income is diverted and never reaches the person in whose hands it is sought to be assessed. If the income reaches the assessee and remains his property, the doctrine does not apply.
Distinction between apportionment and diversion: The court emphasized the distinction between (a) an obligation to apply income (an apportionment after income reaches the assessee) and (b) a diversion of income before it reaches the assessee. An obligation to apply income does not convert the income into something that never became the assessee's income.
Application of precedent: The court relied on an established line of authority (including Sitaldas Tirathdas, Imperial Chemical, V.G. Bhuta, M.P. Poncha) and, in particular, the ratio in Associated Power Co. Ltd. v. CIT. That decision held that monies appropriated to a contingencies reserve belonged to the company since they reached the company and were to be invested in the company's name; consequently, diversion by overriding title did not apply. The court found that the reasoning of Associated Power squarely applied to the present facts.
Effect of statutory restrictions: The court considered the statutory restrictions (e.g., requirement to deposit as fixed deposit or invest in specified securities and restriction on using the fund in the business) but held these restrictions did not alter the legal position that the amount remained the assessee's property and was merely kept aside to ensure availability to redeem shares in future.
On the expenditure argument: The court rejected the alternative contention that the appropriation was an allowable business expenditure under section 37(1). Relying on Indian Molasses, the court held that "expenditure" is something paid out or away and gone irretrievably; appropriation to the redemption fund does not involve payment out or anything gone irretrievably, since the amount remained with the assessee.
Conclusion from reasoning: Because the amount was never diverted to anyone and was not expenditure "paid out or away", it could not be deducted either as a diversion by overriding title or as an expenditure under section 37(1).

Holding and Implications

HOLDING: The court held that the Tribunal was right: the assessee cannot claim deduction either under section 37 or section 28 of the Income-tax Act of the amount set apart for the capital contribution (Government share capital) redemption fund. The referred question is answered in the affirmative, in favour of the Revenue and against the assessee.

Implications:

Direct effect on the parties: The sum of Rs. 2,10,000 appropriated to the Government share capital redemption fund must be taken into account in computing the assessee's business income for the assessment year; it is not deductible under the invoked provisions.
No allowance as expenditure: The appropriation was not an expenditure "paid out or away" and therefore not deductible under section 37(1).
No diversion of income by overriding title: Because the amount remained the property of the assessee and was not diverted before reaching it, the doctrine of diversion by overriding title does not apply.
Broader precedent: The court applied existing Supreme Court and High Court authorities (particularly Associated Power) rather than laying down a new principle; the decision follows and applies established case law to the facts at hand.
Costs: The court made no order as to costs in the circumstances.

This summary is prepared exclusively from the content of the provided opinion and does not add information beyond what the court stated in that opinion.

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Colaba Central Co-Operative Consumers Wholesale And Retail Stores Ltd. v. Commissioner Of Income-Tax

Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion at the instance of the assessee:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee cannot claim deduction either under section 37 or section 28 of the amount set apart for the capital contribution redemption fund?”

2. This reference pertains to the assessment year 1975-76. The assessee is a co-operative society registered under the Maharashtra Co-operative Societies Act, 1960. Under the scheme of financial assistance to the consumer co-operatives under the centrally sponsored scheme, the State Government contributed to the share capital of the assessee-co-operative society a sum of Rs. 21 lakhs. An agreement was entered into between the State Government and the assessee-co-operative society for that purpose. As per the terms of the agreement, the share capital contribution of the State was to continue for a period of ten years unless extended by the Registrar. For the purpose of enabling the co-operative societies to repay the Government share capital contribution within the specified period, the co-operative societies were required to set aside necessary amount for a fund known as the “Government share capital redemption fund” before arriving at their profits for the purpose of appropriation under section 65(2) of the Maharashtra Co-operative Societies Act. The amount standing to the credit of the Government share capital redemption fund had to be deposited by the assessee as fixed deposit with the central finance agency or invested in Government loans and securities in consultation with the registering authority as contemplated under section 70 of the Maharashtra Co-operative Societies Act, 1960. The assessee-society was not entitled to use the fund standing to the credit of the above account in its business of wholesale stores. During the previous year relevant to the assessment year 1975-76, the assessee-society set apart a sum of Rs. 2,10,000 for repayment of the Government share capital contribution and transferred the same to an account named as “Government share capital redemption fund”. In its return under the Income-tax Act, 1961 (“the Act”), for the above assessment year, the assessee claimed deduction of the above amount in computing its business income. This claim of the assessee was rejected by the Income-tax Officer. An appeal of the assessee against the above decision of the Income-tax Officer was dismissed by the Appellate Assistant Commissioner. The assessee went in further appeal to the Income-tax Appellate Tribunal (“the Tribunal”). Before the Tribunal it was contended by the assessee that the amount set apart by the assessee for the Government share capital redemption fund was an allowable deduction either as an expenditure incurred for the purposes of the business or as an amount diverted by overriding title. The Tribunal did not accept the contention of the assessee and dismissed its appeal. Hence, this reference. We have heard Mr. K.B Bhujle and Mr. A. Jasani, learned counsel for the assessee, who submit that it is a case of diversion of income by overriding title. The contention of counsel is that the assessee in this case is under an obligation to set apart the amount in question for redemption of the Government share capital in future and that being so, it is a case of diversion of income by overriding title. The alternate submission is that it is an expenditure incurred wholly and exclusively for the purpose of business within the meaning of section 37(1) of the Income-tax Act and hence, a deductible expenditure.

3. Dr. V. Balasubramanian, learned counsel for the Revenue, on the other hand, submits that it is neither a case of diversion of income by overriding title nor is the amount set apart an allowable expenditure under section 37 of the Act. According to learned counsel, in the instant case, despite keeping apart the particular sum out of its income for redemption of the Government share capital in future and crediting the same to the Government share capital redemption fund, the assessee remained the owner of the amount so kept apart. In such a situation, learned counsel submits, there is no diversion of income at all. In support of this contention, reliance is placed on the decisions of this court in Commissioner Of Income-Tax v. V.G Bhuta., [1993] 203 ITR 249, Commissioner Of Income-Tax v. M.P Poncha., [1995] 211 ITR 1005 and the latest decision of the Supreme Court in Associated Power Co. Ltd. v. Commissioner Of Income Tax, [1996] 218 ITR 195.

4. We have carefully considered the rival submissions. The uncontroverted factual position in this case is that the amount appropriated by the assessee out of its income and credited to the Government share capital redemption fund always remained with the assessee. It never got diverted to anybody. Law is well settled that the doctrine of diversion of income by reason of overriding title applies only in cases where the income never reaches the assessee as his income. The mere fact that the assessee has an obligation to apply certain amount out of its income for a particular purpose cannot make it a case of diversion of income by overriding title. An obligation to apply the income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. There is a difference between an amount which a person is obliged to apply out of his income and an amount which, by the nature of the obligation, cannot be said to be a part of his income. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. The obligation to apportion the income in a particular manner cannot be termed as diversion of income by overriding title. CIT v. Sitaldas Tirathdas, [1961] 41 ITR 367 (SC); CIT v. Imperial Chemical Industries (India) (P.) Ltd., [1969] 74 ITR 17 (SC); Commissioner Of Income-Tax v. V.G Bhuta., [1993] 203 ITR 249 (Bom) and Commissioner Of Income-Tax v. M.P Poncha., [1995] 211 ITR 1005 (Bom).

5. In the instant case, the assessee was obliged to set apart a certain amount out of its income for the purpose of redemption of the Government share capital and to keep the same in a fund known as “Government share capital redemption fund”. Admittedly, the amount standing to the credit of this fund belonged to the assessee. It was kept apart with a view to ensuring the availability of the requisite funds to the assessee for redemption of a part of its share capital. Redeeming shares as held by the Supreme Court in Anarhali Sarabhai v. CIT, [1997] 224 ITR 422, in effect means buying back shares from the shareholders. That being so, in the instant case, there is no diversion of income from the assessee to anybody.

6. Reference may be made in this connection to the latest decision of the Supreme Court in Associated Power Co. Ltd. v. Commissioner Of Income Tax, [1996] 218 ITR 195. In that case the assessees were companies engaged in the business of generation of electricity and distribution thereof to consumers. The companies were governed by the Electricity (Supply) Act, 1948. By reason of the provisions of the said Act and the Sixth Schedule thereto, the assessee appropriated certain sums out of its revenue to the contingency reserve account and claimed deduction of the same in the computation of its total income for the purposes of the Income-tax Act. The Income-tax Officer rejected the claim of the assessee. However, on appeal, the Appellate Assistant Commissioner allowed the assessee's claim. On appeal by the Revenue, the Tribunal set aside the order of the Appellate Assistant Commissioner and referred the question regarding deductibility of the amount transferred to the contingency reserve fund account in arriving at the taxable business income of the assessee-company directly to the Supreme Court under section 257 of the Income-tax Act, 1961. The Supreme Court, on consideration of the facts and circumstances of the case and the scheme of the Electricity Act, observed that the monies in the contingencies reserve belonged to the electricity company. The Supreme Court, therefore, repelled the claim of the assessee that there was a diversion of income by overriding title. While doing so, the Supreme Court observed (page 207):

“The application of the doctrine of diversion of income by reason of an overriding title is quite inapposite. The doctrine applies when, by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed.”

7. Applying the above principle to the facts of the case before it, the Supreme Court observed (page 207):

“In the present case, the statute requires the electricity company to create certain reserve if its clear profit exceeds a reasonable return (clause II, Sixth Schedule). Again, the contingencies reserve is to be created from existing reserves or from ‘the revenues of the undertaking’. This clearly indicates that the monies which have to be put into the contingencies reserve, reach the electricity company and are not diverted away from it.”

8. The Supreme Court further observed:

“It is the electricity company which has to invest the sums appropriated to the contingencies reserve. The investment would be in its name and it would be the owner thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position.”

9. The Supreme Court, therefore, concluded that the amount credited to the contingencies reserve was not diverted by reason of overriding obligation or title and, in determining the business profits of the assessee, it must be taken into account.

10. The ratio of the above decision squarely applies to the facts of the present case. In this case also there is no doubt that the amount appropriated to the Government share capital redemption fund belonged to the assessee. It never got diverted to anybody. The fact that there was a restriction on the use of the amount standing to the credit of the fund in the business of the wholesale stores of the assessee or that there was an obligation on the assessee to deposit the same as fixed deposit with the central finance agency or invest it in Government loans and securities in consultation with the authority as contemplated under section 70 of the Maharashtra Co-operative Societies Act does not make any difference. The amount was merely kept apart for being used by the assessee for redeeming its share capital, i.e, buying back its own shares. The amount standing to the credit of the fund, thus, always remained with the assessee. That being so, there was no diversion of income by overriding title and the amount set apart by the assessee for the Government share capital redumption fund has to be taken into account in computing the business income of the assessee. So far as the alternate submission of counsel for the assessee that the amount so set apart should be treated as business expenditure within the meaning of section 37(1) of the Act is concerned, we do not find any merit in the same, because in this case, evidently the assessee has not incurred any expenditure at all. “Expenditure”, as defined by the Supreme Court in Indian Molasses Co. (P.) Ltd. v. CIT, [1959] 37 ITR 66, is what is “paid out or away” and something which is gone irretrievably. That is not so in the case of appropriation of profits to the share capital redemption fund. By such appropriation nothing has been paid out to anybody nor has anything gone from the assessee even for a while not to speak of “irretrievably”. That being so, the question of deduction of the same as an expenditure under section 37(1) of the Act, cannot arise.

11. In view of the above, we are of the clear opinion that the Tribunal was right in holding that the assessee cannot claim deduction either under section 37 or section 28 of the Income-tax Act of the amount set apart for the capital contribution redemption fund. Accordingly, we answer the question referred to us in the affirmative, i.e, in favour of the Revenue and against the assessee. In the facts and circumstances of the case, we make no order as to costs.

Colaba Central Co-Op... v. Commissioner Of Inco...