Section 28 :Amount transferred to the reserve fund is not business Expenditure

Q: Whether the amount transferred to the reserve fund account as per the provisions of section 67 of the Gujarat Co-operative Societies Act, 1962, was diversion of income at source by overriding title or could such transfer be treated as business expenditure deductible either under section 28 or section 37?

 CIT v. Mehsana District Co-op. Milk Producers’ Union Ltd. (2008) 307 ITR 83 (Guj.)  Section – 28

• The assessee contended that under sub-section (2) of section 67 of the Gujarat Co-operative Societies Act, 1962, at least one-fourth of the net profits of the society were required to be carried to the reserve fund every year, and hence there was a diversion at source by virtue of the provisions of section 67 which operates as an overriding title.

• Hence, it was submitted that the amount transferred to the reserve fund could not be charged as income liable to tax under the Act. Alternatively, it was pleaded that the amount of profits transferred to the reserve fund would constitute a charge on the taxable income under the provisions of section 28 of the Income-tax Act, 1961, or an expenditure having the characteristics of business expenditure under section 37. The Assessing Officer rejected the contention and this was upheld by the Tribunal.

• The High Court held that it was only in the event the society did not choose to use the reserve fund for the business of the society that the question about investing the reserve fund in the specified category of investments and thereafter utilizing the same for the objects specified by the State Government could arise.

• Hence, not only was there no diversion of income by overriding title but in fact there was no outgoing of funds from the domain of the assessee society. In fact, the profits at the specified percentage were set apart so as to be available to the society for use in the business of the society at a later point of time.

• Once the society was in a position to use the funds lying in the reserve fund for the business of the society as and when the society so chose, there could be no question of keeping out such profits from the purview of taxation.

• The Tribunal was right in law in holding that the amount transferred to the reserve fund account as per the provisions of section 67 of the Gujarat Co-operative Societies Act, 1962, was not diversion of income at source by overriding title nor could such transfer be treated as business expenditure deductible either under section 28 or section 37.