Pr Commissioner Of Income Tax Jaipur-Ii, Jaipur v. M/S Raj State Co-Operative Bank Ltd, Apex Bank Building, Dc

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 222 / 2017 Pr Commissioner Of Income Tax Jaipur-II, Jaipur ----Appellant Versus M/S Raj State Co-Operative Bank Ltd, Apex Bank Building, DC-1, Lal Kothi, Tonk Road Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prateek Kedawat for Mr. R.B. MathurFor Respondent(s) : _____________________________________________________HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 03/10/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal of the department. 2.Counsel for the appellant has framed the followingsubstantial question of law:- “Whether in the facts and circumstances of thecase the ITAT was justified in deleting the additionof Rs. 6690540/- made by the Assessing Officer bydisallowing the contribution to Primary AgriculturalCredit Cooperative Society Development Fundbeing non business expenditure.” 3.The issue is now squarely covered by the decision of thisCourt in case of Commissioner of Income Tax vs. M/s RajasthanState Co-operative Bank Ltd. in Tax Appeal No. 18/2012 decided on 5[th] September, 2017, wherein this court has observed asunder:- “6.It seems that totally diverted points asstated hereinabove have been taken intoconsideration and the authority has wronglyrelied upon decision in case of Sri VenkataSatyanarayana Rice Mill Contractors Co. vs. CIT,223 ITR 101. To extend the details, he has takenus to the Primary Agricultural CooperativeSociety Managers, selection, appointment andservice condition rules, 2003 wherein Rule 27B &28 reads as under:- “27- osru lqj{kk dks"k% O;oLFkkidksa dks fu;fer osru miyC/k djkusds mn~ns’; ls izkFkfed osru dks"k ds ?kkVs dh iwfrZ gsrq ,d osru lqj{kk dks"kxfBr fd;k tkosxkA osru lqj{kk dks"k cSad Lrj ij la/kkfjr fd;k tkosxk]ftlesa dsUnzh; lgdkjh cSad }kjk foxr o"kZ ds nkSjku lfefr;ksa dks fn;s x;svkSlr _.k cdk;k dk 0-50 izfr’kr rFkk 'kh"kZ cSad }kjk cSad dks foxr o"kZ dsnkSjku fn;s x;s vkSlr _.k cdk;k dk 0-15 izfr’kr va’knku izR;sd foRrh;o"kZ dh lekfIr ij fd;k tk;sxkA osru lqj{kk dks"k ij vftZr C;kt Hkh izR;sd ekg ds vUr esa mDr dks"k esa cSad}kjk vUrfjr fd;k tk;sxkA cSad bl dks"k esa tek gqbZ jkf’k ,oa dks"k lsfudkyh xbZ jkf’k dk fooj.k jftLVªkj }kjk fo/kkZfjr izi= esa [k.Mh; la;qDrjftLVªkj dks izsf"kr djsxkA 28- osru dks"k lapkyu% 1- lfefr ds deZpkfj;ksa gsrq xfBr izkFkfed osru dks"k dk lapkyu lfefr dsv/;{k ,oa O;oLFkkid ds la;qDr gLrk{kj ls gksxk] fdUrq osru dk vkgj.kssZdjus ls iwoZ O;oLFkkid dks fuEu nLrkot@fjikVcSad esa vko’;d :i lstek djkuh gksxh rFkk buds tek gksus dk izek.k i= izLrqr gksus ij gh blgsrq la/kkfjr [kkrs ls osru dk Hkqxrku gks ldsxk%& ¼d½ cSad }kjk lfefr dks tkjh dh xbZ jlhn cqdksa esa ls iz;ksx esa ykbZ xbZjlhnksa dh ,d&,d izfr iwjs fooj.k lfgrA ¼[k½ ekg dh jksdM+ cgh dh izekf.kr izfrfyfiA ¼x½ ekg esa lfefr }kjk fofHkUu ftUlksa ds fy;s fd;s x;s O;kikj] Ø;foØ; ,oa vafre LVkWd dks n’kkZus okyk LVkWd fooj.k i=A¼?k½ ekg esa fd;s x;s dk;ksZa dh fofFkokj nSfud dk;Z iaftdkA ¼M+½ ekg dk vk;&O;; fooj.kA 2- O;oLFkkid ds osru dk Hkqxrku izkFkfed osru dks"k ls fd;k tkosxkA 3- ;fn lfefr dh ldy vk; dk 75 izfr’kr lfefr ds O;oLFkkid dsosru ,oa HkRrksa ds Hkqxrku gsrq de iM+rk gks rks izkFkfed osru dks"k esa bldeh dh iwfrZ gsrq cSad ls bl gsrq gq, ,d le>kSrk i= ds vk/kkj ij osrulqj{kk dks"k ls vf/kdre 3 o"kZ rd 4 izfr’kr ds C;kt ij _.k izkIr dj dhtk ldsxhA _.k dk Hkqxrku 3 o"kZ dh eksjsVksfj;ed vof/k ds i’pkrvf/kdre 10 o"kZ dh vof/k esa lfefr dh viuh vftZr vk; esa ls fd;ktk;sxkA 4- osru lqj{kk dks"k ls vkgj.k ek= O;oLFkkid ds osru ,oa HkRrksa vFkokizko/kkjh fuf/k va’knku dh iwfrZ gsrq fd;k tk ldsxkA ¼x½ ekg esa lfefr }kjk fofHkUu ftUlksa ds fy;s fd;s x;s O;kikj] Ø;foØ; ,oa vafre LVkWd dks n’kkZus okyk LVkWd fooj.k i=A¼?k½ ekg esa fd;s x;s dk;ksZa dh fofFkokj nSfud dk;Z iaftdkA ¼M+½ ekg dk vk;&O;; fooj.kA 2- O;oLFkkid ds osru dk Hkqxrku izkFkfed osru dks"k ls fd;k tkosxkA 3- ;fn lfefr dh ldy vk; dk 75 izfr’kr lfefr ds O;oLFkkid dsosru ,oa HkRrksa ds Hkqxrku gsrq de iM+rk gks rks izkFkfed osru dks"k esa bldeh dh iwfrZ gsrq cSad ls bl gsrq gq, ,d le>kSrk i= ds vk/kkj ij osrulqj{kk dks"k ls vf/kdre 3 o"kZ rd 4 izfr’kr ds C;kt ij _.k izkIr dj dhtk ldsxhA _.k dk Hkqxrku 3 o"kZ dh eksjsVksfj;ed vof/k ds i’pkrvf/kdre 10 o"kZ dh vof/k esa lfefr dh viuh vftZr vk; esa ls fd;ktk;sxkA 4- osru lqj{kk dks"k ls vkgj.k ek= O;oLFkkid ds osru ,oa HkRrksa vFkokizko/kkjh fuf/k va’knku dh iwfrZ gsrq fd;k tk ldsxkA 5- osru lqj{kk dks"k ls _.k izkIr djus lEcU/kh lfefr;ksa dh ik=rk ,oaizfØ;k jftLVªkj] lgdkjh lfefr;ka }kjk fu/kkZfjr dh tkosxhA osru lqj{kkdks"k dk mi;ksx vR;Ur vko’;drk esa lfefr dh fyf[kr izkFkZuk i= ij ghfd;k tk ldsxk] ijUrq lfefr dks mDr izkFkZuk i= ds lkFk lfefr dksO;oLFkkid dk osru nsus esa leFkZ gksus gsrq vxys rhu o"kZ dh dk;Z ;kstuk Hkhnsuh gksxhA bl ckcr ,d ,e-vks-;w- gLrk{kfjr gksxk] ftl ij fd lfefr] cSado bdkbZ vf/kdkjh ds gLrk{kj gksaxsA 7.He contended that these are the fundswhich are required to be used for specificpurposes and the same are surplus fund whichare kept. He has also relied on decision of thisCourt in case of Commissioner of Income Tax vs.Jodhpur Co-operative Marketing Society reportedin [2005] 275 ITR 372 (Raj.) wherein it has beenheld as under:- “11. Rule 55 which gives effect to Section 63clearly declares that reserve fund maintained byco-operative society will belong to the society. Italso envisaged the purpose for which the fund canbe used. Primarily, it is devised to meetunforeseen future losses. But, it makes flexibilityabout its user. In a given case, society may bepermitted to invest the fund wholly or a portionthereof in its own business. In the case of housingsociety, the reserve fund may be utilised for theexpenditure on maintenance, repairs and renewalof buildings of the society and in the case of aprocessing society, the funds can be used foracquisition or purchase or construction of land,building and machinery. Sub-rule (4) of Rule 55 unfolds the areas to whichreserve fund can be put to use. It reads: (i) to meet unforeseen losses incurred by thesociety; (ii) to meet such claims of the society as cannototherwisebemet;and (iii) to provide for other financial need in times ofspecialscarcity. The aforesaid provisions convey in no uncertainterms that the reserve fund remains part of thecapital and assets of the society and is to be usedonly for the purposes of the society in futureaccording to the needs of the society either to beadjusted against its future losses or to pay off itsdues which cannot otherwise be paid or to providefor funding needs in case of financial crisis. Nopart of reserve fund during the continuance of thesociety can be utilised for the purposes other thanfor the purpose of society albeit in consonancewith general policy of the Act. User of the reservefund which has primarily its object to havefinancial strength of the society and to thecooperative movement, has been regulated by theapproval of the Registrar but there is no absolute prohibition against user of the entire reserve fundfor the purposes of the society without therebeing necessity to reimburse and refurnishingexisting reserve fund. 19. In the present case, it may be noticed thatneither the reserve fund goes to any party otherthan the assessee itself, nor there is anyobligation to provide for such reserve before itbecomes the part of net income earned by thesociety. prohibition against user of the entire reserve fundfor the purposes of the society without therebeing necessity to reimburse and refurnishingexisting reserve fund. 19. In the present case, it may be noticed thatneither the reserve fund goes to any party otherthan the assessee itself, nor there is anyobligation to provide for such reserve before itbecomes the part of net income earned by thesociety. 25. Coming to the facts of the present case,apparently the obligation to carry a part of netprofit to a reserve fund does not envisagediversion of any part of profits in person otherthan society itself. There is no overriding titlevesting in a third party other than the assessee tolay claim to the reserve fund independent of co-operative society. While unravelling the essentialcharacter of the reserve fund, we have noticedthat reserve fund remains part of the assessee-society's corpus and is to be applied forassessee's business only, albeit its application isbeing regulated by the Registrar under theprovisions of the Act but the statue does not giveany power even to the Registrar to utilise thereserve fund so created out of the profits of thesociety for any purpose other than for thepurpose of the society. Even on dissolution of thesociety the first obligation of the assets of thesociety including the reserve fund as part of thetotal assets and not specifically, is to thedischarge of its debts outstanding and obligationtowards the shareholders to pay their contributionwith interest and dividend payable to them for theperiod such dividends are not paid. Surplus, ifany, left thereafter, is to be applied according tothe resolution of the general body of the membersof the society only. Therefore, there is no insigniaof diversion of income through an overriding titlevesting in a third party outside the corpus of thesociety itself so as to consider it to be a case ofdiversion of income by overriding title tosomebody other than the assessee. 32. We have already examined the scheme of theco-operative societies governing the creation ofreserve fund in question which clearly indicatesthat under Section 61 no part of funds other thanthe net profits of a co-operative society shall beutilised by way of bonus or dividend or otherwisedistributed amongst its members and Section 62has unequivocally provided for disposal or application of net profit. It is only after the netprofit reaches the co-operative society that thequestion of its disposal in terms of the provisionsarise of the Act of 1965 and not earlier theretonet profit is to be apportioned by transferring partof it as may be prescribed by Rules to the reservefund. Part of the profits has to be carried to theco-operative deduction fund constituted under theRules and the balance is available for utilisationfor payment of dividends to the members, bonusto the members and contribution to such otherspecial funds as may be specified in the Rules.Donations not exceeding 10 per cent of net profitsof any charitable purposes and payment of bonusto the employees of the society to the extentrequired by the bye-laws. application of net profit. It is only after the netprofit reaches the co-operative society that thequestion of its disposal in terms of the provisionsarise of the Act of 1965 and not earlier theretonet profit is to be apportioned by transferring partof it as may be prescribed by Rules to the reservefund. Part of the profits has to be carried to theco-operative deduction fund constituted under theRules and the balance is available for utilisationfor payment of dividends to the members, bonusto the members and contribution to such otherspecial funds as may be specified in the Rules.Donations not exceeding 10 per cent of net profitsof any charitable purposes and payment of bonusto the employees of the society to the extentrequired by the bye-laws. The reserve funds' object has been set out in Rule55 by declaring that it shall belong to the societyand is intended to meet unforeseen losses. That isto say for societies own purpose in future andordinarily is not to meet any existing liabilities orobligations. The unforeseen losses and otherpurposes to which such fund can be used havealso been spelt out as noticed by us that, apartfrom meeting unforeseen losses in the society, itcan also be used to meet such other purposes,viz., to pay off its debts and to use the sameduring the financial stringencies in the society bydeclaring that it shall belong to the society andhas intended to meet unforeseen losses. That isto say, not to meet any existing liabilities orobligations. Unforeseen losses and other purposefor which the reserve fund is to be applied, alsoforms part of the need of the society and noneelse. The fund is always available for the societyand forms the part of its assets for paying off itsdues and to pay off the share capital on itsdissolution. Therefore, there is no overriding titlevesting in any other person or obligation to whichsuch profit is diverted before it reaches thesociety. The requirement of surplus, if any, ondissolution of the society after application ofassets to discharge its liabilities towards creditorsand shareholders to be used for an object ofpublic utility is also an obligation of the netsurplus of the society and not merely of theremainder of reserve fund, if any, towards objectof public utility or charitable purposes as may beordained by the members of the society. That alsoclearly amounts to application of the funds of thesociety as per the decision of the general body ofthe society. At the end of the day, it may beapplication of remainder as per the requirement of law, but it does not, at the time of creation of areserve fund becomes a certain obligation which itis obliged to discharge but rest in domains ofuncertain contingency. It remains a contingentobligation of the assets of the society in futuredependent upon the surplus remaining afterdischarge of its liability and that too as per theresolution of the members of the society only. Thus, in our opinion, the principle governingdealing with the reserve fund in question, which iscreated under the Co-operative Societies Act,1965, is fully governed by the ratio of the decisionin Associated Power Co.'s case (supra), VelloreIndia Co. Ltd.'s case (supra) and not by the ratiolaid down in Poona Electric Supply Ltd. Co.'s case(supra). 33. The decision of the M.P. High Court in KeshkalCo-operative Marketing Society Ltd. (supra)undoubtedly supports the contention of theassessee-respondent. We have already noticed that the decision of M.P.High Court in Keshkal Cooperative MarketingSociety Ltd. (supra) is founded on the principleenunciated in Poona Electric Supply Co. Ltd.'scase(supra). Thus, in our opinion, the principle governingdealing with the reserve fund in question, which iscreated under the Co-operative Societies Act,1965, is fully governed by the ratio of the decisionin Associated Power Co.'s case (supra), VelloreIndia Co. Ltd.'s case (supra) and not by the ratiolaid down in Poona Electric Supply Ltd. Co.'s case(supra). 33. The decision of the M.P. High Court in KeshkalCo-operative Marketing Society Ltd. (supra)undoubtedly supports the contention of theassessee-respondent. We have already noticed that the decision of M.P.High Court in Keshkal Cooperative MarketingSociety Ltd. (supra) is founded on the principleenunciated in Poona Electric Supply Co. Ltd.'scase(supra). With utmost respect, we regret our inability to fallin line with the decision in Keshkal Co-operativeMarketing Society Ltd.'s case (supra) in thisregard. Apparently, the distinction which existedbetween the reserve fund for the benefit ofconsumers required to be created under theElectricity Supplies Act, 1948 with object to returnto the consumers the excess profit charged by thesupply company and the fund created to meet thefuture requirement of the supply company or theco-operative society had not been noticed. Wemay also notice that perhaps the attention of theCourt was not drawn to detailed scheme of theM.P. Co-operative Society Act, as we do not findany mention thereof in the decision. In the backdrop of later Supreme Court decisionin which we have adverted to the case ofconsumer benefit fund, which arose forconsideration in Poona Electric Supply Co. casewas for the benefit of consumers exclusively,could not have been equated with the reservefund created under the Co-operative Societies Actand Rules framed thereunder, which never wentout of the societies' capital asset block. It always remains the assets of the society to be used forits own purpose, albeit under the regulatorypower of the Registrar. As noticed by the apexCourt, there existed a clear distinction between areserve fund created for the benefit of theconsumers which was to be returned to theconsumes by way of rebate and the reserve fundcreated under the statute for meeting out ofcontingent liability in future. Undoubtedly, in thelatter case, it always remained capital of thecompany and notwithstanding its use could onlybe with the approval of the State Government, itdid not make any difference so far as the natureof the contingency reserve fund is concerned.Apparently, the M.P. High Court has not noticedthis distinction and has not adverted to theprovisions of the M.P. Co-operative Societies Actwhich concerned creation of reserve fund, itsobject and the Government Rules about obligationto apply the reserve fund for the purposes of thesociety. Had the same been brought to the noticeof the Court, perhaps the M.P. High Court wouldhave reached the same conclusion to which wehavereached. Be that as it may, in view of the direct decision ofthe Supreme Court in Associated Power Co. Ltd.'scase (supra) and Vellore India Co. Ltd.'s case(supra) making out a distinction between reservefund created for the benefit of consumers andreserve fund to be used for the assessee's ownincome to meet any contingencies occurring infuture cannot be excluded from the computationof total income either on principle of diversion ofincome by overriding title or on the principle ofincome not forming part of the real income or asthe part of deductible expenses under Section 37;the decision in M.P. High Court cannot beconsidered as an authority laying down theproposition in respect of reserve fund created byco-operative societies for its own purposes as thelaw laid down correctly and is impliedly overruled. 36. As a result of aforesaid discussion, we allowthis appeal and hold that the amount of reservefund (sic-net profit) transferred to the net profit(sic-reserve fund) under Section 62 of the Co-operative Societies Act, 1965 r/w Rule 68 of theCooperative Rules, 1966 is not allowable asdeduction in computing the taxable income of thesociety on any of the grounds raised by theassessee. The judgment of the Tribunal is setaside and that of the AO is restored. 8.He has also relied upon the decision of theSupreme Court in case of Associated Power Co.Ltd. vs. Commissioner of Income Tax reported in[1996] 218 ITR 195 (SC) wherein it has been heldas under:- “17. We hold that the amount credited to theContingencies Reserve is not diverted by reasonof an overriding obligation or title and, indetermining the business profits of the assessee,it must be taken into account. Mr. Sacharcontended that if the amount credited to theContingencies Reserved was includible in thecomputation of the business income of theassessee, the amount so appropriated should beallowed as a business deduction, beingexpenditure necessary to carry on the assessee'sbusiness. As the Calcutta High Court has pointedout, there is no expenditure. The amountappropriated to the Contingencies Reserve is setapart to meet possible exigencies. It is not aprovision for known, existing liabilities.” 9.The issue no. 2 in Tax Appeal No.290/2016 is already subject matter of decisionbefore the Supreme Court. 4.In view of the above, no substantial question of law arises in this appeal. 5.The appeal is accordingly dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. A.Sharma/7