TMI Blog1973 (3) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 14(3)(i)(c) of the Indian Income-tax Act, 1922? and (3) Whether, on the facts and in the circumstances of the case, the assessee was entitled to rebate under section 15B(2)(v) of the Income-tax Act in the sum of Rs. 22,013 paid to the Central Co-operative Training Institute ? " The assessee in this case is a co-operative society registered under the Madras Co-operative Societies Act. Its bye-laws had been registered with the Registrar of Co-operative Societies. In the previous year ending June 30, 1960, relevant for the assessment year 1961-62, the society debited its profit and loss account with a sum of Rs. 1,05,357 and credited the said amount to a reserve account in accordance with its bye-law 37(a)(3) which is as follows : "Notwithstanding anything contained in this bye-law the society may undertake any scheme for procurement of food grains entrusted to it by the revenue authorities under such conditions and terms as may be agreed upon by the board from time to time. Separate accounts shall be maintained for the transactions connected with the procurement operation-seventy five per cent. of the profits made on the scheme shall be carried to a special reser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble return '. A part of the excess had to be either distributed in the form of proportional rebate or to be carried in the accounts to be distributed to the consumers under the directions of the State Government. The company claimed that the amounts so credited did not form part of the assessee's real profits. This contention was upheld by the Supreme Court. It will be seen that the facts in the case before us are entirely different." The assessee attacks the view of the Tribunal by way of the first question set out above. The facts leading to the second question as found by the Tribunal are these: Some members of the society sold their paddy to the society. After purchase such paddy was hulled by the society and it sold the rice to the other members of the society. The value of rice bags so sold came to Rs. 89,344 and the profit made by the society in these transactions amounted to Rs. 62,540. Though this sum was included by the society in its business income in the previous year ending June 30, 1960, at the stage of the assessment proceedings it claimed exemption in regard to this sum under section 14(3)(i)(c) of the Indian Income-tax Act, 1922. The Income-tax Officer rejecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate Assistant Commissioner wherein the assessee's claim for exemption was accepted on the ground that the claim came under section 15B(2)(v). The revenue took the matter in appeal before the Tribunal. It was urged by the revenue that the college has not started functioning and that, in any event, it was not an institution financed either wholly or partly by the Government. The Appellate Tribunal held that the assessee was not entitled to claim exemption as regards the said sum under section 15B(2)(v). In that view the Tribunal allowed the department's appeal in this regard. As regards the first question, Mr. Padmanabhan, learned counsel for the assessee contends that the reserve created in pursuance of bye-law 37(a)(3) cannot be treated as an appropriation of profits, that it is a statutory obligation of the society to create that reserve and that, therefore, it cannot be taken as the income of the society. According to the learned counsel, even if the obligation to create a reserve under bye-law 37(a)(3) is not statutory, still it has to be treated as diversion at source by an overriding title and even a diversion on the basis of contractual obligations has been recognised i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the assessee. An obligation to apply an income in a particular way before it is received by the assessee or before it is accrued or arisen to him results in the diversion of income. But the obligation to apply the income which has accrued or arisen or has been received amounts merely to the apportionment of income. As pointed out by Sampath Iyengar in his book on Law of Income-tax, 6th edition, at page 194, the true test for the application of the rule of diversion of income by an overriding title is to find out whether the amount sought to be deducted in truth never reached the assessee as his income. There is a clear distinction between a diversion of income by an overriding title and an application of the income by the assessee's own choice, he being under no obligation to provide for any such payment. In this case the society by its own bye-law has earmarked the profits earned for a particular purpose by creating a reserve and such creation of a reserve by the assessee itself for its own purposes cannot constitute a diversion in law or by a superior title. The Privy Council in P. C. Mullick v. Commissioner of Income-tax dealt with a case where a testator had by his will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee after the income had been received by him as his own and, therefore, it is one of application of a portion of the income to discharge the assessee's own obligation and not a case in which by an overriding charge, the assessee became only a collector of another's income. In Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax, the Supreme Court held that the amounts credited by an electric supply company to the " consumers' benefit reserve account " being part of excess amounts paid to it and reserved to be returned to the consumers did not form part of the assessee's real profits and, therefore, in arriving at the taxable income of the assessee from business under section 10(1) the amounts thus credited had to be deducted. The court observed: "Income-tax is a tax on real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act: The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above decisions are that if a person has assigned his source of income in such a manner that it ceases to be his, he cannot be taxed on that income but if, on the other hand, he merely applies the income in such a manner that it passes through him and goes over to another person he may be taxable on the income notwithstanding the legal obligation to apply it for the transferee. Profits attract tax as soon as they come into being and the subsequent application thereof would be indifferent. But, if there is an overriding title created to divert the income from the assessee it cannot be considered as the income of the assessee at all. Such diversion by overriding title may be created either by a will or by law or by any other document. The crux of the problem always being--is it an application of income or a diversion at the source before becoming the income of the assessee. " On the facts of this case it cannot be said that there is a diversion of income even at source or that there has been an assignment of the source of income of the society. It is only after the assessee has earned his income a portion of the same was set apart as a reserve in pursuance of a bye-law which it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel says that rice will definitely come under the word " food-stuffs ". Reference is also made to the entry relating to cotton which shows that cotton whether ginned or unginned and cottonseed are agricultural produce. Relying on this definition it is said that merely because paddy has been hulled into rice to find a ready market it will not cease to be an agricultural produce. Reference is also made to Explanation (1) to section 2(r) of the Madras General Sales Tax Act which is as follows: " Agricultural or horticultural produce shall not include such produce as has been subjected to any physical, chemical or other process for being made fit for consumption, save mere cleaning, grading, sorting or drying. In support of the contention that in the absence of any such provision in the Income-tax Act the expression " agricultural produce " has to be understood in a wide and comprehensive sense. In State of Madras v. Saravana Pillai, the assessee grew arecanuts and gathered the same while they were still raw. They were then peeled and the kernels were, thereafter, sliced, boiled and dried. It is only after this process that the arecanuts were fit to be marketed and there is no ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the same original character as paddy in spite of the process. Paddy and rice are separate marketable commodities. Central Act 28 of 1956 is a regulatory measure and, therefore, a comprehensive definition of agricultural produce has been given. We cannot, therefore, adopt the definition of agricultural produce in Central Act 28 of 1956 in this case. If we give a literary meaning to the expression " agricultural produce of its members " occurring in section 14(3)(i)(c), it cannot be said that rice sold by the assessee is an agricultural produce of its members. Apart from the finding given by the Tribunal that the society has purchased paddy and itself hulled and sold the rice, rice is not an agricultural produce normally sold by an agriculturist. Therefore, the Tribunal was right in holding that the assessee is not entitled to the exemption under section 14(3)(i)(c). This question is, therefore, answered in the negative and against the assessee. As regards the third question, we are, however, of the view that the Tribunal's view is erroneous. It is not in dispute that the sum of Rs. 22,013 has been paid as a donation to the Co-operative Training Institute for the purpose of up ..... X X X X Extracts X X X X X X X X Extracts X X X X
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