|CORAM:||Asha Vijayaraghavan (JM), B. Ramakotiah (AM)|
|CATCH WORDS:||application of income, Diversion of income by overriding title|
|COUNSEL:||B. Satyanarayana Murthy|
|DATE:||December 31, 2014 (Date of pronouncement)|
|DATE:||January 8, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Distinction between 'diversion of income by over-riding title' and 'application of income' explained. Contribution of 1% of net profit to the Cooperative Education Fund maintained by National Cooperative Union is an application of income|
(i) Diversion of income has multi-facets. Diversion arises where income is applied in a particular manner under statutory or contractual obligation or under the provisions of a document under which the company is constituted viz., memorandum of article of association or a firm has come into existence. In these circumstances, the principle that has emerged is that if a person has alienated or assigned the source of his income so that it is no longer remains his income, he cannot be taxed upon the income arising after the assignment of the source. In such event, it is not income of the assessee at all. On the contrary, if the source is not assigned to, or transferred but passes through the assessee to an ultimate purpose, the case of application of income in a particular manner. Even though he may enter into a legal obligation to apply it in a particular way, still it remains the income of the assessee. Sec. 61 to s. 62 provides an exception to legislative rule where notwithstanding assignment of source of income, the income is deemed to be the income of the person who has assigned such source by creating a legal fiction.
(ii) Another shade of such controversy is where the income is not applied but diverted by an overriding title from the assessee, which he would otherwise have received. Such diverted income cannot be considered the income of the assessee at all. Reference may be made to Raja Bejoy Singh Dudhuria vs. CIT (1933) 1 ITR 135 (PC);
(iii) On facts, the liability to pay the amount is after quantification of profits by the society under the Societies Act. It is only after the net profit reaches the co-operative society that the question of its disposal in terms of the provisions arise of the Act of 1965 and not earlier thereto, net profit is to be apportioned by transferring part of it as may be prescribed by Rules to the reserve fund or to other funds. Part of the profits has to be carried to the co-operative deduction fund constituted under the Rules and the balance is available for utilisation for payment of dividends to the members, bonus to the members and contribution to such other special funds as may be specified in the Rules as per Sec.63(2). As already stated earlier, assessee is not charging the amount of 1% on the profits of the year, in the year of accrual but is claiming the amount paid during the year on the profits of earlier year. This certainly indicates that the amounts have been received by assessee and utilized by assessee, then only amount was remitted to the said National Union under the Act. This indicates, there is no diversion at source but is only appropriation of profits as per principles laid down. It is also an admitted fact that there is no charge in the year in which assessee incurs losses. It is only when there are profits the amount has to be paid. This also distinguishes the issue that it is only an appropriation of profits earned but not diversion of income. If it is to be considered as diversion at source by overriding title, whether assessee incurs profits or loss, the said amount has to be paid. This is not the case here. The amount at 1% is payable only when assessee has profits in any year. This supports the view that this is not a diversion at source but an appropriation of amounts.
(iv) Thus, respectfully following the principles laid down in CIT vs. Jodhpur Cooperative Marketing Society 275 ITR 372 (Raj), we are of the opinion that the amount contributed by assessee to the National Cooperative Union, New Delhi is appropriation from the net profits. There is a right to receive the income independent of accrual and receipt of income by the assessee before third party could lay claim to any part of it. Since income reached assessee before it reached to a third party, there is no diversion. As already stated, there is no payment in the year of losses. Therefore, payment under section 63(1)(b) is only an appropriation of profit. Moreover, this amount paid during the year is also not out of the profits of this year but profits of earlier year. Therefore, on that count also amount cannot be allowed as deduction during the year.