Karnataka High Court
Commissioner Of Income-Tax vs Pandavapura Sahakara Sakkare Karkhane ... on 28 June, 1988
Equivalent citations: (1988)74CTR(KAR)54, [1988]174ITR475(KAR), [1988]174ITR475(KARN)
JUDGMENT S. Rajendra Babu, J.
1. This is a reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the "Act"), made at the instance of the Department for our opinion on the following question of law :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 9,431 paid by the assessee to the Co-operative Education Fund was allowable as a deduction in computing the assessable income."
2. The assessee is a co-operative society registered under the Karnataka Co-operative Societies Act (hereinafter referred to as the "Societies Act"). For the relevant assessment year, the assessee claimed deduction of an amount of Rs. 9,431 being the contribution to the education fund which was made as required under section 57(4)(a) of the Societies Act. The Income-tax Officer disallowed this claim. On appeal, the Appellate Assistant Commissioner allowed the same. On further appeal by the Revenue, the Tribunal confirmed the order of the Appellate Assistant Commissioner.
3. The Tribunal held that the contribution to the education fund was out of the net profits and did not fall in the exclusionary provisions of rule 22 of the said Societies Rules by which the computation of profit is made. On behalf of the Department, it was contended that the view of the Tribunal is not correct and that the contribution to the education fund is only an application of profits and not diversion of income at source in view of section 57 of the Societies Act. Learned counsel for the assessee has contended that this conclusion is correct which is based on the provisions of sections 28, 36, 37(1) and 37(4) of the Act and rules 20 and 22 of the rules framed under the Societies Act which had the effect of diverting the income by an overriding title or charge.
4. The scheme of the Societies Act is as follows : Every co-operative society (other than a co-operative society whose net profit does not exceed Rs. 500) which declares payment of a dividend to its members on the paid-up share capital at a rate of 2% or more shall contribute towards the Co-operative Education Fund at such rates not exceeding 1 1/2 % of the net profits. Rule 20 of the rules provides that the payment has to be ascertained by reference to the rate of dividend. An analysis of section 57 of the Societies Act and rule 20 of the Societies Rules will disclose that the condition for payment is that if the profits of a society exceed Rs. 500, and a declaration of payment of dividend to the members on paid-up share capital at the rate of 2% is made, then the society is under an obligation to contribute towards the Co-operative Education Fund at a rate not exceeding 1 1/2 % of the net profits. The rate of contribution depends upon the rate of dividend. The language of section 57(4)(a) of the Societies Act makes it clear that though the contribution is to be made with reference to the profits, it is not out of profits, and the rate is with reference to the rate of dividend. What is provided in the section is an obligation to contribute to the Cooperative Education Fund under certain contingencies and is a statutory liability which is an overriding charge on the income or profits of the society. In somewhat similar circumstances, in Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521, the Supreme Court has held that the assessee is a Commercial undertaking carrying on the business of supply of electricity in accordance with the provisions of the Electricity (Supply) Act. Certain amounts were credited by it to "the consumers" benefit reserve account" which was part of the excess amount paid to it and reserved to be returned to the consumers. The Supreme Court held that such amounts do not form Part of the real profits of the assessee because such amounts which were paid to the company even at source were impressed with the character or obligation that the same shall be paid or contributed to the said account. In the present case also, the contribution towards the Co-operative Education Fund is not paid out of profits, but the rate alone is fixed with reference to profits and this obligation was impressed with the character of an overriding charge on the total amount received by it which were ultimately to be computed as profits. Therefore, when the assessee makes a payment which is computed with reference to profits, the payment represents a diversion of profits at source, though computed later. When the Act by section 4 charges all income of a person to income-tax, it is what reaches the person as income, which is brought to tax. Here, by charging the whole resources of the society with a specific payment to the Co-operative Education Fund, it has, to that extent, diverted its income from it and has directed it to the fund; to that extent, what the society receives for the payment to the fund is not its income. It is not a case of application by the assessee of part of its income in a particular way, it is rather an allocation of its receipts before it becomes income in its hands.
5. In this context a reference to two cases reported in CIT v. South Arcot District Co-operative Supply and Marketing Society Ltd. and Keshkal Co-operative Marketing Society Ltd. v. CIT [1987] 165 ITR 437 (MP) is necessary. In the former case, the Madras High Court took the view that the statutory contribution of a portion of its profit to the education fund does not amount to diversion by overriding title and is only an application of income not deductible from total income, whereas, in the latter case, the Madhya Pradesh High Court took the view that the reserve fund created under statutory regulation at the instance of the Registrar of Co-operative Societies is an amount transferred to the reserve fund and diverted at source by overriding liability and the amount transferred to the reserve fund is liable for deduction. The Madras High Court took the view, on the language of section 62 of the Madras Co operative Societies Act, 1961, which provided that the net profit of the co-operative society shall be appropriated towards contribution to the education fund, while the Karnataka Act does not contain any such provision. It does not say that the appropriation should be out of the profits, but creates a liability to pay with reference to, or in relation to, profits. Therefore, there is a charge even at the source on receipt to the co-operative societies. Hence, the decision of the Madras High Court is distinguishable. The Madhya Pradesh High Court has held that the payment to the reserve fund was only an obligation created under the statute and the society was under an obligation to invest or utilise the same at the instance of the Registrar of Co-operative Societies. Applying the ratio of the Madhya Pradesh High Court decision and the decisions referred to earlier of the Supreme Court, we hold that the payment or contribution by the co-operative society in the present case is a diversion of profits at source on account of overriding charge created under the Act which is a statutory obligation on the society. Hence, such payment is liable for deduction.
6. Therefore, we answer the question referred to us in the affirmative and against the Department.