Judgment:
DR. B. P. SARAF, J. :
By this reference under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following question of law to this Court for opinion at the instance of the assessee :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee cannot claim a deduction either under s. 37 or s. 28 of the amount set apart for the capital contribution redemption fund ?'
2. This reference pertains to the asst. yr. 1975-76. The assessee is a co-operative society registered under the Maharashtra Co-operative Societies Act, 1960. Under the Scheme of financial assistance to the Consumer Co-operatives under the Centrally sponsored scheme, the State Government contributed to the share capital of the assessee co-operative society a sum of Rs. 21 Lakhs. An agreement was entered into between the State Government and the assessee co-operative society for that purpose. As per the terms of the agreement, the share capital contribution of the State was to continue for a period of ten years unless extended by the Registrar. For the purpose of enabling the co-operative societies to repay the Government share capital contribution within the specified period, the co-operative societies were required to set aside necessary amount for a fund known as the 'Government share capital redemption fund' before arriving at its profits for the purpose of appropriation under s. 65(2) of the Maharashtra Co-operative Societies Act. The amount standing to the credit of Government share capital redemption fund had to be deposited by the assessee as fixed deposit with the Central Finance Agency or invested in the Government loan and securities in consultation with the registering authority as contemplated under s. 70 of the Maharashtra Co-operative Societies Act, 1960. The assessed-society was not entitled to use the fund standing to the credit of the above account in its business of wholesale stores. During the previous year relevant to the asst. yr. 1975-76, the assessed-society set apart a sum of Rs. 2,10,000 for repayment of the Government share capital contribution and transferred the same to an account named as 'Government share capital redemption fund'. In its return under the IT Act, 1961 ('the Act'), for the above assessment year, the assessee claimed deduction of the above amount in computing its business income. This claim of the assessee was rejected by the ITO. Appeal of the assessee against the above decision of the ITO was dismissed by the AAC. The assessee went in further appeal to the Tribunal. Before the Tribunal it was contended by the assessee that the amount set apart by the assessee for the Government share capital redemption fund was an allowable deduction either as an expenditure incurred for the purposes of the business or as an amount diverted by overriding title. The Tribunal did not accept the contention of the assessee and dismissed its appeal. Hence, this reference.
3. We have heard Mr. K. B. Bhujle and Mr. A. Jasani, learned counsel for the assessee, who submit that it is a case of diversion of income by overriding title. The contention of the counsel is that the assessee in this case is under an obligation to set apart the amount in question for redemption of the Government share capital in future and that being so, it is a case of diversion of income by overriding title. The alternate submission is that it is an expenditure incurred wholly and exclusively for the purpose of business within the meaning of s. 37(1) of the IT Act and hence, a deductible expenditure.
4. Dr. V. Balasubramanium learned counsel for the Revenue, on the other hand, submits that neither it is a case of diversion of income by overriding title nor the amount set apart is an allowable expenditure under s. 37 of the Act. According to the learned counsel, in the instant case, despite keeping apart the particular sum out of its income for redemption of Government share capital in future and crediting the same to the Government share capital redemption fund, the assessee remained the owner of the amount so kept apart. In such a situation, the learned counsel submits, there is no diversion of income at all. In support of this contention, reliance is placed on the decision of this Court in CIT vs. V. G. Bhuta : [1993]203ITR249(Bom) CIT vs. M. P. Puncha : [1995]211ITR1005(Bom) and the latest decision of the Supreme Court in Associated Power Co. Ltd. vs. CIT : [1996]218ITR195(SC)
5. We have carefully considered the rival submissions. The un-controverter factual position in this case is that the amount appropriated by the assessee out of its income and credited to the Government share capital redemption fund always remained with the assessee. It never got diverted to anybody. Law is well settled that the doctrine of diversion of income by reason of overriding title applies only in cases where the income never reaches the assessee as his income. The mere fact that the assessee has an obligation to apply certain amount out of its income for a particular purpose cannot make it a case of diversion of income by overriding title. An obligation to apply the income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. There is a difference between an amount which a person is obliged to apply out of his income and an amount which, by the nature of the obligation, cannot be said to be a part of his income. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. The obligation to apportion the income in a particular manner cannot be termed as diversion of income by overriding title. [CIT vs. Sitaldas Tirathdas : [1961]41ITR367(SC) CIT vs. Imperial Chemical Industries (India) Ltd. : [1969]74ITR17(SC) CIT vs. V. G. Bhuta (supra) and CIT vs. M. P. Puncha (supra)].
6. In the instant case, the assessee was obliged to set apart certain amount out of its income for the purpose of redemption of the Government share capital and to keep the same in a fund known as 'Government share capital redemption fund'. Admittedly the amounts standing to the credit of this fund belonged to the assessee. It was kept apart with a view to ensuring the availability of the requisite funds to the assessee for redemption of a part of its share capital. Redeeming shares as held by the Supreme Court in Anarkali Sarabhai vs. CIT : [1997]224ITR422(SC) , in effect, means buying back shares from the shareholders. That being so, in the instant case, there is no diversion of income from the assessee to anybody.
7. Reference may be made in this connection to the latest decision of the Supreme Court in Associated Power Co. Ltd. vs. CIT (supra). In that case the assessees were the companies engaged in the business of generation of electricity and distribution thereof to consumers. The companies were governed by the Electricity (Supply) Act, 1984. By reason of the provisions of the said Act and the 6th Schedule thereto, the assessee appropriated certain sums out of its revenue to contingency reserve account and claimed deduction of the same in the computation of its total income for the purposes of IT Act. The ITO rejected the claim of the assessee. However, on appeal, the AAC allowed the assessees claim. On appeal by the Revenue, the Tribunal set aside the order of the AAC and referred the question regarding deductibility of the amount transferred to contingency reserve fund account in arriving at the taxable business income of the assessee-company directly to the Supreme Court under s. 257 of the IT Act, 1961. The Supreme Court, on consideration of the facts and circumstances of the case and the scheme of the Electricity Act, observed that the monies in the contingencies reserve belonged to the electricity company. The Supreme Court, therefore, repelled the claim of the assessee that there was a diversion of income by overriding title. While doing so, the Supreme Court observed :
'The application of the doctrine of diversion of income by reason of an overriding title is quite inapposite. The doctrine applies when, by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed.'
Applying the above principle to the facts of the case before it, the Supreme Court observed :
'In the present case, the statute requires the electricity company to create a certain reserve if its clear profit exceeds a reasonable return (cl. II, Sixth Schedule). Again, the contingencies reserve is to be created from existing reserves or from 'the revenue of the undertaking'. This clearly indicates that the monies which have to be put into the contingencies reserve reach the electricity company and are not diverted away from it.'
The Supreme Court further observed :
'It is the electricity company which has to invest the sums appropriated to the contingencies reserve. The investment would be in its name and it would be the owner thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position.'
The Supreme Court, therefore, concluded that the amount credited to the contingencies reserve was not diverted by reason of overriding obligation or title and in determining the business profits of the assessee, it must be taken into account.
8. The ratio of the above decision squarely applies to the facts of the present case. In this case also there is no doubt that the amount appropriated to the Government share capital redemption fund belonged to the assessee. It never got diverted to anybody. The fact that there was a restriction on the use of the amount standing to the credit of the fund in the business of the wholesale stores of the assessee or that there was an obligation on the assessee to deposit the same as fixed deposit with the Central Finance Agency or invest it in the Government loan and securities in consultation with the authority as contemplated under s. 70 of the Maharashtra Co-operative Societies Act does not make any difference. The amount was merely kept apart for being used by the assessee for redeeming its share capital, i.e., buying back its own shares. The amount standing to the credit of the fund, thus, always remained with the assessee. That being so, there was no diversion of income by overriding title and the amount set apart by the assessee for the Government share capital redemption fund has to be taken into account in computing the business income of the assessee.
9. So far as the alternate submission of the counsel for the assessee that the amount so set apart should be treated as a business expenditure within the meaning of s. 37(1) of the Act is concerned, we do not find any merit in the same, because in this case, evidently the assessee has not incurred any expenditure at all. 'Expenditure', as defined by the Supreme Court in Indian Molasses Co. (P) Ltd. vs. CIT : [1959]37ITR66(SC) is what is 'paid out or away' and something which is gone irretrievably. That is not so in case of appropriation of profits to the share capital redemption fund. By such appropriation nothing has been paid out to anybody nor anything has gone from the assessee even for a while not to speak of 'irretrievably'. That being so the question of deduction of the same as an expenditure under s. 37(1) of the Act, cannot arise.
10. In view of the above, we are of the clear opinion that the Tribunal was right in holding that the assessee cannot claim deduction either under s. 37 or s. 28 of the IT Act of the amount set apart for the capital contribution redemption fund. Accordingly we answer the question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. In the facts and circumstances of the case, we make no order as to costs.