The ONGC Emp.Co.Op.Cre. & Cons.Soc.Ltd., Bharuch V. The Income tax Officer, Ward-3, Bharuch

ITA 829/AHD/2005

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5657 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 01-07-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 16-03-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K M MAHESH
• Assessee Lawyers: M K PATEL
• Keywords: Gift; Business income
• Section: 37(1)

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M THE ONGC EMP. CO-OP.CR. & CONS. SOC. LTD. C/O B.C. MEHTA, 15, AJANTA NAGAR, BHARUCH-392001. VS. INCOME-TAX OFFICER, WARD (3), BHARUCH. (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI M. K. PATEL, AR REVENUE BY:- SHRI K. M. MAHESH, SR.DR O R D E R PER D. C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FO LLOWING GROUNDS:- 1. THE LD. RESPONDENT AO GROSSLY ERRED IN HOLDING THAT THE CREATION OF STATUTORY RESERVE FROM OUT OF PROFITS A RRIVED AT U/S 66(2} OF THE SAID ACT IS THE APPLICATION OF THE PRO FITS EARNED BY THE APPELLANTS. 2. THE LD. RESPONDENT AO SHOULD HAVE HELD THAT THE CREATION OF STATUTORY RESERVES AMOUNTS TO DIVERSION OF PROFITS BY OVERRIDING TITLE AND HENCE DEDUCTIBLE UNDER THE INCOME-TAX ACT , 1961 (THE ACT). 3. THE LD. RESPONDENT AO SHOULD HAVE HELD THAT BY CREA TING THE STATUTORY RESERVES IN COMPLIANCE WITH THE PROVISION S OF THE SAID ACT, THE APPELLANTS LOST THE CONTROL OF THE AMOUNTS INVOLVED AND THE SAID AMOUNTS CAME WITHIN THE DOMAIN OF THE REGI STRAR OF GUJARAT CO-OPERATIVE SOCIETIES. FURTHER, THE LD. RE SPONDENT AO SHOULD HAVE HELD THAT THE APPELLANT ARE NOT ENTI TLED TO UTILIZE ITA NO.829/AHD/2005 ASST. YEAR :2001-02 2 THE AMOUNTS OF STATUTORY RESERVES FOR THE PURPOSE O F BUSINESS BUT ARE TO UTILIZE THE SAME STRICTLY AS PER THE RELEVAN T PROVISIONS OF THE SAID ACT AND THE RULES AND THE BY-LAWS MADE AND FRAMED THERE-UNDER THE RESPONDENT AO SHOULD HAVE SEEN THAT THE APPELLANTS DO NOT DEBIT THE PROFIT AND LOSS ACCOUNT EITHER AT THE TIME OF CREATION OF THE RESERVES OR AT THE TIME OF UTILIZATION THEREOF. HENCE, THE CLAIMED AMOUNT OF DEDUCTION IS THE NOTIONAL INCOME AND SHOULD NOT HAVE BEEN TAXED. 4. THE LD. RESPONDENT AO GROSSLY ERRED IN TAXING THE P ROFIT ARRIVED AT AS PER SECTION 66(2) OF THE GUJARAT CO-OP. SOCIE TIES ACT (THE SAID ACT) IGNORING THE DEDUCTIONS CLAIMED ON ACCOUN T OF VARIOUS RESERVES AS PER ANNEXURE-A FORMING PART OF COMPUTAT ION SHEET OF THE RETURN SUPPORTED BY THE 27 TH ANNUAL REPORT FILED WITH THE WRITTEN SUBMISSIONS WHERE UNDER THE CREATION OF RES ERVES BY APPROPRIATION OF PROFIT IS VERY CLEARLY SPELT OUT. 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS THAT A O HAS NOT ALLOWED THE EXPENDITURE RESERVE CLAIMED BY HIM AT RS.4,11,0 92 AND LD. CIT(A) HAS CONFIRMED HIS ORDER. 3. THE FACTS OF THE CASE ARE THAT ASSESSEE IS A CO- OP. SOCIETY REGISTERED UNDER GUJARAT CO-OP. SOCIETIES ACT, 1961 AND IS GOV ERNED BY THE SAID ACT & RULES AND BYE-LAWS FRAMED THEREUNDER. THE ASSESSE E SOCIETY DEALS IN RE-SALE OF REFILLED GAS BOTTLES. IT IS MAINTAINING CASH BOOK, LEDGER, SALE/PURCHASE REGISTER, BANK BOOK ETC. TOTAL SALES ARE SHOWN AT RS.3,00,20,097/- AND GP IS SHOWN AT RS.20,62,803/-. IT GAVE GP RATE OF 6.87% AND N.P. OF RS.7,68,864/- GIVING N.P. RATE OF 2.56%. DURING THE ASST. YEAR THE SOCIETY CLAIMED FOLLOWING DEDUCTIONS :- 1. RESERVE FUND RS.1,92,216/- 2. EDUCATION RESERVE FUND RS.19,222/- 3. RATE DIFF.RESERVE FUND RS.1,15,330/- 4. CHARITY RESERVE FUND RS.2,108/- 5. STAFF BONUS FUND RS.42,162/- 6. CO-OP. PROPAGATION FUND RS.21,081/- ------------- RS.4,11,092/- 3 ACCORDING TO THE ASSESSEE RESERVE FOR EXPENDITURE W AS CREATED IN ACCORDANCE WITH SECTION 66(2) AND 67 OF THE GUJARAT CO-OP. SOCIETIES ACT, 1961 (G.C.S.A. IN SHORT) AND ACCORDINGLY DEDUCTIONS WERE. THE SOCIETY DOES NOT HAVE RIGHT TO UTILIZE THESE RESERVES AS PE R ITS ABSOLUTE DISCRETION. THESE AMOUNTS ARE NOT REAL PROFIT AS THEY ARE SEPAR ATED OUT, THEREFORE, NO TAX CAN BE LEVIED THEREON. THE AO, HOWEVER, DID NOT AGREE. ACCORDING TO HIM THIS WILL NOT BE EXPENDITURE FOR BUSINESS PURPO SES AND HENCE NOT ELIGIBLE FOR DEDUCTION UNDER THE PROVISIONS OF SECT ION 28,36 & 37(1) OF THE I.T. ACT. 4. THE LD. CIT(A) CONFIRMED THE ORDER OF THE AO ON THE GROUND THAT THEY DO NOT REPRESENT ACTUAL EXPENDITURE AND THE SA ME HAS NEITHER BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE SOCIETY NOR A CHARGE CREATED AGAINST THE PROFIT WHI CH CAN BE ALLOWED UNDER SECTION 37(1) OF THE ACT. SINCE THE CREATION OF THE ABOVE RESERVES FUND HAVE NOT PASSED THROUGH THE PROFITS AND LOSS ACCOUN T OF THE SOCIETY AND THERE IS NO ACTUAL UTILIZATION OF FUNDS FOR THE PUR POSES OF BUSINESS OF THE CO-OP. SOCIETY, THE CLAIM OF DEDUCTION COULD NOT BE ALLOWED. 5. AGAINST THIS, LD. AR SUBMITTED THAT ASSESSEE IS UNDER STATUTORY OBLIGATION TO CREATE RESERVES AS PER G.C.S.A. THEY ARE AS UNDER :- RESERVES UNDER GUJARAT CO.OP. SOCIETIES ACT - (I) 25% OF THE NET PROFIT SHALL BE APPROPRIATED TO RESERVE ACCOUNT (SEC.67 OF THE GUJ. CO-OP. SOCIETIES ACT). THE RESE RVE FUND SO APPROPRIATED NAMED AS STATUTORY RESERVE: SECTION 67 READS AS UNDER : (1) EVERY SOCIETY WHICH DOES, OR CAN DERIVE A PRO FIT FROM ITS TRANSACTIONS, SHALL MAINTAIN A RESERVE FUND. 4 (2) AT LEAST ONE-FOURTH OF THE NET PROFIT OF TH E SOCIETY EACH YEAR, SHALL BE CARRIED TO THE RESERVE FUND AS SUCH RESERV E FUND MAY BE USED IN THE BUSINESS OF THE SOCIETY OR MAY SUBJE CT TO THE PROVISIONS OF SECTION 71 BE INVESTED, AS THE STATE GOVERNMENT MAY BY GENERAL OR SPECIAL ORDER DIRECT, OR MAY, WITH THE PREVIOUS SECTION OF THE STATE GOVERNMENT B E USED IN PART FOR SOME PUBLIC PURPOSE LIKELY TO PROMOTE THE OBJECTS OF THIS ACT, OR FOR SOME SUCH PURPOSE OF THE STATE OR OF LOCAL INTEREST. (II) NOT MORE THAN 3% OF THE NET PROFIT SHALL BE AP PROPRIATED TOWARDS EDUCATION FUND (SEC.69). (III) UPTO 20% OF THE NET PROFIT SHALL BE APPROPRIA TED TOWARDS CHARITY FUND. THIS FUND IS UTILIZED FOR GIVING CHARITY (SEC .70). (I) 2% OF THE NET PROFIT SHALL BE APPROPRIATED T O DIVIDEND EQUILISATION FUND (AS PER BY LAWS). THE AMOUNT SHALL BE UTILIZED FOR PAYMENT OF DIVIDEND IN CASE OF NO PROFIT OR INADEQUATE PROFIT. (II) 15% OF THE NET PROFIT SHALL BE APPROPRIATED TO BUILDING FUND ACCOUNT. THE AMOUNT STANDING TO THE SAID RESERVE ACCOUNT CAN BE UTILIZED FOR ACQUIRING BUILDING OR MAINTENANCE THEREOF. (III) UPTO 30% OF THE NET PROFIT SHALL BE APPROPR IATED FOR MEMBER WELFARE FUND. THIS FUND IS UTILIZED FOR HELPING THE MEMBERS IN CASE OF DIFFICULTY AND FOR GIVING GIFT. ONCE THESE RESERVES ARE CREATED IN ACCORDANCE WITH THE STATUTORY PROVISIONS THEN THEY ARE AUTOMATICALLY A CHARGE OVE R THE PROFITS OF THE SOCIETY AND THEREFORE, CLAIM IS REQUIRED TO BE ALLO WED. 6. AGAINST THIS, LD. DR SUBMITTED THAT EXPENDITURE COULD BE ALLOWED WHEN IT IS ACTUALLY INCURRED BY THE ASSESSEE EITHER BY STATUTORY PROVISIONS OR CONTRACTUAL AGREEMENT. HE SUBMITTED THAT GCSA ON LY ALLOWS CREATION OF RESERVES BUT DOES NOT OVERRULE THE PROVISIONS OF INCOME-TAX ACT WHEREIN EXPENDITURE COULD BE ALLOWED ONLY IF IT IS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. ACCORDING TO HIM, IT IS NOT A TRUST 5 WHERE CASH OUTFLOW IS TO BE SEEN FROM THE POINT OF VIEW OF APPLICATION OF FUND WHICH IS APPARENTLY THE PURPOSE AS PER GCSA. T HE ASSESSEE IS IN FACT DEALING IN BUSINESS AND, THEREFORE, EXPENDITURE REL ATING TO THE BUSINESS ALONE HAS TO BE ALLOWED WHICH HAS ACTUALLY BEEN ALL OWED AND, THEREFORE, NO FURTHER EXPENDITURE IN THE FORM OF SUCH RESERVES CAN BE ALLOWED. IN FACT ONCE ASSESSEE IS CARRYING OUT BUSINESS THEN ONLY TH OSE EXPENDITURE WHICH ARE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE S OF BUSINESS ALONE CAN BE ALLOWED. RESERVES CREATED AS PER SOME OTHER STATUTE CANNOT BE TREATED AS A CHARGE ON THE PROFIT OF THE ASSESSEE. IT WILL BE AN APPLICATION OF INCOME WHICH CANNOT BE ALLOWED. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. WE AGREE TO CERTAIN EXTENT WITH THE ARGU MENTS OF LD. DR THAT ONLY THOSE EXPENDITURE WHICH ARE INCURRED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ALONE BE ALLOWED UNDER SECTION 37(1) AND SUCH EXPENDITURE HAVE ALREADY BEEN DEBITED IN THE PROFIT S AND LOSS ACCOUNT OF THE ASSESSEE. THEREAFTER NET PROFIT HAS BEEN WORKED OUT AT RS.7,68,864/-. BUT RESERVES CREATED AS PER STATUTORY PROVISIONS FO R SPENDING IN FUTURE HAVE ALSO TO BE CONSIDERED AS CHARGE ON SUCH PROFIT S PROVIDED THEY ARE IN CONNECTION WITH THE BUSINESS OF THE ASSESSEE. WHERE A RESERVE DIRECTED TO BE CREATED IS NOT AIMED AT BUSINESS OF THE ASSESSEE BUT IS AIMED FOR CHARITY THEN SUCH RESERVE CANNOT BE CONSIDERED AS WHOLLY AN D EXCLUSIVELY INCURRED FOR THE PURPOSES OF BUSINESS. THUS AN EXPE NDITURE INCURRED BY THE ASSESSEE FOR EARNING INCOME IS TO BE ALLOWED AN D SIMILARLY A RESERVE CREATED AS PER STATUTORY PROVISIONS AND AIMED AT BU SINESS OF THE ASSESSEE WILL HAVE TO BE ALLOWED EVEN THOUGH ACTUAL EXPENDIT URE HAS TO BE INCURRED IN FUTURE. WHERE AS PER ELECTRICITY SUPPLY ACT, 194 8 CONSUMERS BENEFIT RESERVE ACCOUNT WAS CREATED AND CREDITED AND AMOUNT SO CREATED WAS CLAIMED AS DEDUCTION THEN HON. SUPREME COURT IN PUN A ELECTRIC SUPPLY 6 CO. LTD. VS. CIT (1965) 56 ITR 29 HELD THAT AMOUNT CREDITED BY THE ASSESSEE DURING THE ACCOUNTING YEAR TO THE CONSUMER S BENEFIT RESERVE ACCOUNT, THEN SUCH AMOUNT SET APART AS RESERVE FOR FUTURE PAYMENT WERE DEDUCTIBLE IN COMPUTING INCOME AND PROFITS AND GAIN S FROM THE ASSESSEES BUSINESS IN THE RELEVANT YEAR. SINCE SUCH RESERVE R ELATED TO THE FUTURE BUSINESS LIABILITY AND CREATED AS PER STATUTORY PRO VISIONS ARE ALLOWABLE THEN WE RESTORE THE MATTER TO THE FILE OF AO TO EXA MINE EACH RESERVE CREATED AS PER GCSA AND FIND OUT WHETHER THEY WERE RELATED TO THE BUSINESS OF THE ASSESSEE OR WERE OF THE NATURE OF A PPLICATION OF INCOME. IN THE FORMER CASE SUCH RESERVE WOULD BE ALLOWED AS DE DUCTION IN VIEW OF THE DECISION OF HON. SUPREME COURT IN PUNA ELECTRIC SUPPLY CO. LTD. (SUPRA)S CASE AND OTHER PART OF RESERVE SO CREATED CANNOT BE ALLOWED AS THEY ARE ONLY APPLICATION OF INCOME. WITH THESE DIR ECTIONS, WE RESTORE THE MATTER TO THE FILE OF AO FOR EXAMINING THE ISSUE AF RESH AND DECIDE THE SAME. THE APPEAL OF THE ASSESSEE IS ALLOWED BUT FOR STATISTICAL PURPOSES. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED BUT FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 9/7/2010 SD/- SD/- (BHAVNESH SAINI) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, DATED : 9/7/2010 MAHATA/- 7 COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD