9911796707
TMI Blog1973 (3) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... perative 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 reserve for business losses and depreciation and shall not be available for distribution available for distribution." In computing its business income it claimed deduction of the said sum. The Income-tax Officer rejected that claim observing that the creation of such reserve is not under any statutory obligation of the society, that the reserve is intended to offset any business loss and depreciation and to safeguard the interest of its members in respect of procure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rejected the said claim on the ground that the rice sold did not belong to the members, that it is not an agricultural produce, that, therefore, the assessee, while selling rice to its members, cannot be said to market the agricultural produce of its members and that the income is assessable under the provisions of section 14(3)(ii). There was an appeal to the Appellate Assistant Commissioner but without success. On further appeal to the Tribunal it was contended that as pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 in various decisions as not amounting to appropriation of profits. Reference has been made to the decision of the Privy Council in Bejoy Singh Dudhuyia v. Commissioner of Income-tax . In that case by a compromise decree an owner of an impartible estate was made liable to pay an annual maintenance of Rs. 1,100 to his step-mother out of such estate and the maintenance was charged thereon. The Privy Council held that there was a diversion of income pro tanto from the Rajah w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 directed the executors to pay Rs. 10,000 towards the expenses of his Addya Sradh and also obtaining the probate of his will from and out of the income from his properties. The question was whether the payments made for sradh expenses and towards the probate in pursuance of an obligation imposed by the testator could be excluded in computing the chargeable income of the estate. The judicial Committee held that it was not a case in which a portion of the income was by an ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits. The latter are statutorily fixed for a specified purpose. " In Commissioner of Income-tax v. Bansi Dhar , the assessee's father was the holder of certain shares in a private company. The assessee's father died in 1949, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndifferent. 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 has framed. Admittedly, there is no legal or statutory obligation to create the reserve in question. Therefore, it is only a matter of application of the income after it has been earned by the society. As tax is attracted as soon as the income is earned, the subsequent application thereof would not affect the liability to tax. We are, therefore, of the opinion that it is purely an application of income and not a diversion at the source. In every case the matter has to be decided on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " 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 market for them as gathered from the trees. The question was whether the cured arecanuts continued to be horticultural produce. It was held therein that where any agricultural or horticultural produce has to be subjected to a minimum processing before that produce can be marketed at all, it will still retain its character as agricultural or horticultural produce despite that minimum processing. In K. Subramania Pillai v. State of Tamil Naidu, Veeraswami C. J., speaking for the Bench, expressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 upgrading that institute into a training college. The reasons given by the Tribunal for holding that it is not entitled to the deduction under section 15 B(2)(v) are that the college has not started functioning and that it is not receiving any financial help from the Government. Section 15B(2)(v) says that the institution to which the donation is made should be an institution financed wholly or in part by the Government or a local authority in order to become eligible for the exemption. Admittedl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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