TMI Blog1983 (4) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... ich, dealt with a co-operative society under the Tamil Nadu Co-operative Societies Act. The assessee's contention that there was a vast difference between the provisions of the Societies Act and the Tamil Nadu Co-operative Societies Act was also rejected by the Commissioner. The present appeal is laid before us against the above order of the Commissioner. 2. The learned counsel for the assessee has referred to the provisions of section 69 of the Societies Act and pointed out that setting apart of a sum for the education fund was intended to see that the management did not fritter away the money of the co-operative society and that it used it for positively useful purposes. Reference was made to the provisions of section 68 of the Societies Act and rule 53 thereunder which deal with the rate of contribution. Whether a profit or loss was made, the contribution to the education fund has to be made though it was payable at the end of the year. It was a clear diversion by way of an overriding title before the profit reached the assessee. According to the learned counsel, the contribution to the education fund created, by the Government was not an appropriation of the profit of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The position was entirely different in the assessee's case. Here was a case of legal obligation for payment of certain amounts based on a statutory obligation and statutory rules. The rules of the assessee's society also compelled making the payment as the bye-laws thereof indicated. The decision in the case of Bombay State Road Transport Corpn. directly applied. 3. It is also pointed out that as an expenditure the payment has a direct bearing on the production cost of the assessee. Its real income goes down on account of the payment. Section 65 of the Societies Act created a charge, whereas section 68 created a legal obligation which the assessee cannot otherwise get rid off. Both from the points of view of a charge or a legal obligation inevitable in the circumstances of the case and also as an item of expenditure directly relatable to the business of the assessee the amount has to be allowed as a deduction. Reference is also made to the decision in the case of Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334 (Bom.) which was followed in Bombay State Road Transport Corpn.'s case. 4. For the department it is pointed out that the amount in dispute is a specific am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee's business which does not happen in the present case since the contribution is to a general fund unrelated to the business of the assessee. 5. On the ground of an overriding charge, the learned counsel has pointed out that such a charge relates to the case of receipts diverted at source and not to payments such as those prescribed under rule 53. There is no contract leading to an overriding title as of right in the present case. The source is not charged. Even in a case where payment is compulsory, it is not always deductible ; a mere obligation to pay simpliciter is not enough but there should be a clear liability arising out of trade commitment. Referring to the decisions in CIT v. Malayala Plantations Ltd. [1964] 53 ITR 140 (SC), Murlidhar Himatsingka v. CIT [1966] 62 ITR 323 (SC), CIT v. Dr. P.N. Awasthi [1976] 105 ITR 320 (All.), Bombay State Road Transport Corpn.'s case and Life Insurance Corporation of India v. CIT [1979] 119 ITR 900 (Bom.), the learned counsel has pointed out that none of the ingredients necessary to make this payment a deductible expenditure obtained in the case. 6. Referring to the provisions of the Tamil Nadu and Maharashtra Cooperati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for payment of income-tax and making approved donation under the Income-tax Act, 1961, provision for payment of contribution to education fund of the State Federal Society which may be notified by the State Government in this behalf, provision for payment of contribution to the Co-operative State Cadre Employment Fund established under section 69A, development rebate, provision for development fund, bad debt fund, price fluctuation fund, dividend equalisation fund, share capital redemption fund, investment fluctuation fund, provision for retirement benefits to employees and in the case of consumers co-operative stores provision for purchase rebate to be paid to purchasers, and after providing for or writing off bad debts and losses not adjusted against any fund created out of profits. A society may, however, add to the net profits for the year, interest accrued in the preceding years, but actually recovered during the year. The net profits thus arrived at, together with the amount of profits brought forward from the previous year, shall be available for appropriation. (2) A society may appropriate its net profits to the reserve fund or any other fund, to payment of dividends ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be personally liable for making good the amount to the federal society notified as aforesaid. " " 69A. Constitution of Co-operative State Cadre of Secretaries of certain societies and establishment of employment fund for such cadre.--(1) There shall be constituted a Co-operative State Cadre of Secretaries of primary agricultural credit societies, multipurpose co-operative societies and service co-operative and such other classes of societies as may be prescribed in this behalf (hereinafter in this section referred to as 'the Co-operative State Cadre'), consisting of persons recruited for this purpose by the Central Societies notified in this behalf by the State Government. The number of persons to be recruited and their conditions of service shall be determined by the Central Societies in accordance with the general or special orders as may be issued by the State Government, from time to time. (2) A Central society may, from time to time, depute any person appointed by it to that cadre to work under any society referred to in sub-section (1), as it may consider necessary. Where any such person is posted to work under any society, his services shall be taken over by the society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... society. If the contribution is not paid within the period aforesaid, the Registrar may direct any bank or person having custody of the funds of the society to pay the amount of the contribution immediately, and such bank or person shall comply with the orders of the Registrar. Every payment made pursuant to such direction shall be a sufficient discharge to such bank or person from all liability to the society in respect of any sum so paid by it or him out of the moneys of the society in his custody. (6) The State Government may make rules regulating all matters connected with or ancillary to the custody and maintenance of, the payment of moneys into and the expenditure and withdrawal of moneys from, the said fund. " The contribution to the education fund of the State Federal Society is referred to in section 68. Accordingly, every society should contribute annually towards the education fund of the State Federal Society notified in this behalf by the State Government at such rates as are prescribed for different societies or classes of societies. The payment, according to the section, is to depend on the financial condition of the society. Rule 53 of the Maharashtra Co-operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch other funds and at such rates as may be specified in the rules ; Thirdly, towards payment of dividends on shares to members at such rate as may be specified in the rules ; Fourthly, towards payment of bonus to members and paid employees of the registered society at such rate and subject to such conditions as may be specified in the rules ; Fifthly, towards contribution to the co-operative education fund at such rate not exceeding two per cent of the net profits as may be specified in the rules ; Sixthly, towards contribution to such other funds and at such rates as may be specified in the bye-laws ; Seventhly, towards contribution to the common good fund at such rate not exceeding ten per cent of the net profits as may be specified in the rules ; and Eighthly, the balance, if any, of the net profits being credited to the reserve fund. " Rule 46 is the rule regulating the contribution to such other funds as are contemplated in section 62. Rule 46 insofar as it is relevant, runs as follows : " 46. Distribution of net profits.--... (6)(i) Every society shall set apart a sum calculated at two per cent of its net profits subject to a maximum of Rs. 2,500 for contribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , however, does not indicate for what purpose the 'net profits' of the co-operative society should be computed, though section 65(2) states that society may appropriate its net profit to the reserve fund or to any other fund, to the payment of dividends, to the payment of bonus, etc. The crucial point for decision in the present case is whether the payment to the education fund is in the first instance an expenditure so as to be deducted under section 37 or it is only an appropriation from the profit of the society. The concept of net profits referred to in section 65 and to which our attention had been drawn by the learned counsel for the assessee does not help him in this regard. The deduction allowed or required to be made under section 65 refers to an assortment of items. Some of them in the accountancy or income-tax context could be regarded as items directly deductible while arriving at the profit, whereas other items are clearly alien to any concept of profit as such. Thus interest payable on loans and deposits, working expenses including repairs, rent, taxes and depreciation, bonus payable to the employees under the Payment of Bonus Act are items clearly to be deducted in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at particular levels of society. Many of the sections of the Societies Act including those relating to the property and funds of the societies have this aim in view. It would not, therefore, be proper to cull out any provision of these sections and apply it as if it were a provision recognised under the Act. The method of computation of net profit--for whatever purposes it be intended in section 68--therefore, cannot have any relation to the computation of profit under the 1961 Act. Even on general principles while commercial profit of a business is taken as a basis for working out the taxable profit, it is well understood that what is taxable is only the income worked out according to the provisions of the Act. Any method of computation of net profit, therefore, in the Societies Act cannot be even regarded as a guideline for fixing the allowability of any expenditure. 'Net profit' for the purpose of the 1961 Act is thus clearly different from any concept of it for whatever purpose it be, obtaining in the Societies Act. Sections 65 and 68 do not, therefore, help the assessee in determining the nature of the expenditure for the purpose of deduction. 13. In order that an expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business from being carried on or even get the assets of the business attached. This, however, would not make the expenditure allowable. Non-payment of a tax, (sic) non-fulfilment of obligations of a businessman not as a trader but in his personal capacity often attract payments. Merely because the individual also carries on a business, the expenditure cannot be deducted. Ultimately, therefore, what is to be decided in the present case is whether the assessee makes the payment to the education fund in its capacity as a co-operative society or as an essential ingredient of the business which it carries on. 14. The above point can be decided if the expenditure is looked at from two angles : (1) whether the scheme of the Societies Act including the nature of the business, the accounts maintained, etc., renders this the expenditure on incurred prior to computation of profit (sic), and (2) whether the expenditure is incurred in the assessee's capacity as a trader. 15. With regard to the former, we have seen that none of the provisions of the Societies Act would require the deduction of this payment for arriving at the net income. The payment of the education fund is classed eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count. In other words, the contention is that the payment dependent as it is on the quantity of sugarcane crushed, has a direct and unimpeachable casual connection between the assessee's business and the payment made. In our opinion, there is a fallacy in this argument. As the rates provided in rule 53 indicate, the payment to the education fund has been fixed on certain criteria. In the case of the assessee this is based on the sugarcane crushed. If no sugar is crushed, the assessee will not pay any amount to the education fund. If the crushing level goes to a very large extent beyond the minimum amount payable to the education fund, then there is a limit on the payment. This alone indicates that the extent of crushing has been only utilised is a measure in fixing the quantum of payment. The crushing as such has nothing to do with the payment at all. Just as in the other cases the amount is fixed with reference to the working capital or the nature of the business or whether a society has gone into production or not, here the criterion is the extent of crushing. What is a simply measuring rod cannot be regarded as an intimate part or the thing measured. The education fund payment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile it may not be relevant or related to the profit of the business, must refer to the purpose of the business and should at the same time be incurred for that purpose. In other words, the expenditure should bring to the assessee some return almost as if it were a quid pro quo. Apparently the payment in the present case is made without any return expected. The fund is a general fund and has nothing to do with the particular business of the assessee or in fact the business of any of the co-operative societies enumerated in rule 53. Some of them do not have any business at all. It was pointed out before us that the education fund is utilised for the purposes of propagating the co-operative movement, assisting in the improvement and co-ordination of the work of the societies, giving training and education to the members of the co-operative societies and workers, to encourage the study of problems connected with co-operation, etc. The assessee may not be doing all these individually, but by making a contribution to the education fund, these benefits are available to the assessee. There is in fact a quid pro quo for the expenditure incurred. In this connection, the payment is likened to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point, reference has been made to certain judicial decisions as well. In our view the resting of this claim on diversion by an overriding title involves a fallacy. This concept really applies to a case where a 'receipt' is brought to tax and in the process the claim is made that part of it is diverted before reaching the assessee at all. It does not belong really to the assessee as a receipt but is someone else's receipt and the assessee is only a conduit pipe for receiving it. Even before the amount reaches the assessee, the charge of the other person operates on the amount. 22. The above concept cannot have any relevance to an expenditure or payment. The payment made to the 'Education Fund' is clearly an outgoing and has no connection with any receipt. On the contrary in the facts of the present case whether the assessee makes a profit or not, whether the assessee has in fact any receipt or not, a payment has to be made to the 'Education Fund'. Apart from a direct obligation to make the payment without mentioning any realisation of profit, the computation of the payment also refers to the quantity of sugarcane crushed. If the assessee crushes one tonne of sugarcane, whether it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of discharging the assessee's own liability to third parties on account of accidents relating to the bus services run by the assessee. The contribution made by the assessee in that case was clearly referable to the advantage the assessee had of avoiding a payment of compensation or damages on the occurrence of any accident. In fact, it was a prior accumulative payment just like an insurance payment to avoid heavier payment on a subsequent occasion. That decision does not help the assessee. We find also no difference between the provisions of the Tamil Nadu Co-operative Societies Act and the Societies Act with regard to the contribution made to the education fund. In both the cases it is a payment unrelated to the business of the assessee and is payable only because of the assessee being a co-operative society. If the business has been carried on by any other person than a co-operative society under both the enactments, the payment would not become necessary. The basic principle for the allowance of the expenditure that it should be relevant to the assessee's business and his capacity as a businessman applies in the same way in respect of both the enactments. A comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X
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