TMI Blog1993 (5) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... is amount shall be separately funded and shall be utilised in accordance with the orders that may be issued for the regulation of such funds." 3. Pursuant to the said direction, the assessee company, it is common ground, set apart under the head ' Effluent Disposal Reserve " sums detailed below : Assessment year Amount 1985-86 Rs. 76,184 1986-87 Rs. 57,826 1987-88 Rs. 67,080 The assessee contended before the Assessing Officer that the said sums were revenue deductible on the ground that the amount set apart could not be utilised for any other purpose. The Assessing Officer rejected the assessee's claim. In this regard he was impelled by the consideration that in the earlier years identical claim of the assessee had been negatived on the ground that this was a case of not of diversion of income by over-riding title but of application of income. The CIT (Appeals) and the ITAT had declined to interfere in the matter. 4. In this regard it may here be noted that in the cross-objection bearing No. 134(Mds.)/ 1980 in ITA No. 1813 (Mds.)/ 1980 (assessment year 1977-78) filed by it, the assessee-company had contended before the Tribunal that the amount set apart by it under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances that the assessee is now before us. 8. Smt. Meenakshi Krishnaswamy, the learned counsel for the assessee took us through the facts and circumstances of the case and reiterated the arguments that had earlier been advanced, unsuccessfully, before the first appellate authority. According to her, the aforesaid Madras case is distinguishable because that was a case of funding for an " education fund with no obligation attached on the part of the assessee to its being spent for a particular statutory requirement ". In other words, once the society set apart the sums in question, the matter ended there. Further, the sum was set apart out of the profits of the society. In the case before us, however, the sum to be set apart formed part of the turnover of the assessee. The second limb of Smt. Meenakshi Krishnaswamy's argument was that, as in the case of Sugar Mills setting apart funds for Molasses Storage Fund, so in the case of the assessee, which had set apart funds for effluent disposal reserve, the sum set apart is revenue deductible. 9. On his part. Shri K. Argal, the learned Departmental Representative, strongly supported the impugned orders of the lower authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amamurthi [1977] 110 ITR 453. 13. Normally the matter should have rested there. Even so, since the learned counsel for the assessee sought to distinguish on facts the Madras case of South Arcot Distt. Co-operative Society Ltd., we proceed to consider the arguments advanced by the learned counsel in that regard. The first point made by her in this regard was that the setting apart by the assessee-society of a part of its profits for the purpose of education fund saw the end of the matter. The basis on which the said argument came to be advanced is not quite clear. The intention of the State Government is clear, namely, that the society must set apart funds for the purpose of education fund, which fund would be used in due course for education purposes. In any event, no evidence was produced to show that the education fund was spent otherwise than for purposes of education by the State Government. 14. The second point made in this regard was that whereas in the said case a part of the profit was to be set apart and credited to education fund, in the case before us a part of the turnover was to be set apart and credited to effluent disposal reserve. As we see it, the said distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the value of the asset. In Californian Copper Syndicate v. Harris [1904] 5 Tax Cas. 159, 167. Lord Trayner in dealing with a case of assessment to income-tax of a company, formed for the purpose, inter alia of acquiring and reselling mining property, which resold the whole of its assets to a second company and received payment in fully paid shares of the purchasing company, observed : 'A profit is realised when the seller gets the price he has bargained for. No doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit, except when that is paid in cash, the shares were realisable and could have been turned into cash, if the Appellant had been pleased to do so. I cannot think that income-tax is due or not according to the manner in which the person making the profit pleases to deal with it'. " In view of the foregoing, therefore, we reject the related contentions of the learned counsel for the assessee. 15. This brings us on to the question whether the case before us is one of diversion of income by overriding title, or one of application of income. The doctrine of diversion of income by over-riding title postulates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. . . . " (Emphasis supplied) In the case before us the assessee, it is common ground, had received in full the controlled price of Ethyl Alcohol supplied by it to Its constituents. It is also common ground that, as stipulated in the Ethyl Alcohol (Price Control) Order. 1971, it credited to effluent disposal reserve account various sums as stipulated in the note attached to the table given in clause 2 of the Order. It is also not in dispute that the said adjustments were made through journal entries. But the question that arises for consideration is, did the assessee actually pay out cash to a third person, namely, Government of India, and thereby lose domain and control over the funds in question ? The answer is no. Even after passing the requisite journal entries the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r erection of adequate storage facilities in accordance with the orders that may be issued by the Central Government for the regulation of such funds." Pursuant to the said provision, the assessee did credit a sum of Rs. 62,200 to the said fund and claimed that the sum in question was revenue deductible. The assessee was unsuccessful all through. And the matter reached Madhya Pradesh High Court. After noticing, inter alia, the Supreme Court case of Sitaldas Tirathdas, the High Court held that the case before it was not one of diversion of income but of application of income. 20. Two points are here noteworthy. First, the provisions of the Molasses Control Order, 1961 as amended by the Molasses Control (Amendment) Order, 1975, insofar as they related to the setting up of molasses storage fund are analogous to those of the Ethyl Alcohol (Price Control) Order, 1971. Therefore, the ruling in the said Madhya Pradesh case is directly applicable to the case before us. Secondly, in the case of certain other sugar mills the Tribunal had taken the contrary view to the effect that the amount credited to molasses storage fund is revenue deductible. But such decision cannot avail the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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