RAJESH BALIA, J. - (1.) THIS appeal is against the judgment of Tribunal, Jodhpur Bench, Jodhpur dt. 6th Feb., 2001 and concerns the assessment of the assessee -respondent for asst. yr. 1989 -90.
(2.) THE assessee is a co -operative marketing society who claimed that Rule 68 of the Rajasthan Sahakari Sansthan Rules of the Rajasthan Co -operative Society Rules, 1966 (in short the Rules of 1966) framed under the Rajasthan Cooperative Societies Act, 1965 (in short the Act of 1965} requires the society to transfer 25 per cent of its net profits to a reserve fund. The said amount, according to the assessee, does not remain under the control of assessee or the co -operative society but it goes under the control of the Registrar, Rajasthan co -operative societies, therefore, it does not form part of assessee's real income and for that reason, it was sought to be excluded from computation of taxable income of the assessee. The deduction was also claimed under Section 37 of the IT Act. Reliance for the purpose was made on a decision of the Madhya Pradesh High Court in Keshkal Co -operative Marketing Society Ltd v. CIT : [1987]165ITR437(MP) special leave petition against which was dismissed by the Supreme Court. The AO in his order dt. 31st Jan., 1991 disallowed the aforesaid claim to deduction. The AO after referring to the provisions of the Act of 1965 and the Rules of 1966 and bye -laws which also provide for creation of certain other funds out of net profits, was of the opinion, that the bye -laws of the Rules of co -operative society only guide the functioning of the society and recommend transfer of profits to a certain extent to the reserve fund for various purposes, so that the co -operative societies remain financially sound, but the transfer of profits to reserve fund is below the line adjustment and is not at all an expenditure for the assessee, which can be allowed as deduction against the profits. Before the AO, reference was made to Ramanlal Kamdar v. CIT : [1976]103ITR489(Mad) and CIT v. Kisan Co -operative Rice Mills Ltd. : [1976]103ITR264(MP) . On appeal, CIT(A) vide its order dt. 24th March, 1993 agreed with the AO and dismissed the appeal in respect of this claim. On further appeal before the Tribunal, the society succeeded. The Tribunal following the decision of Madhya Pradesh High Court in Keshkal Co -operative Marketing Society referred to above held the amount transferred to reserve fund as allowable deduction as business expenses. This appeal concerns only the aforesaid controversy which has been reflected in the following substantial question of law framed at the time of admission of the appeal : 'Whether the amount of net profit transferred to reserve fund of the society -assessee under Section 68 of the Rajasthan Co -operative Societies Rules, 1966 can be termed as expenses incurred wholly and exclusively for the purpose of business and is allowable deduction under Section 37 of the IT Act, 1961?
(3.) LEARNED counsel for the Revenue contends that the provisions of the Cooperative Societies Act relating to creation of reserve fund and its subsequent dealing goes to show that reserve fund required to be created under Section 62 of the Rajasthan Co -operative Societies Act, 1965 r/w Rule 68 of the Rules of 1966 applies only in the case of net profits of the co -operative society is positive and after it has reached it and it remains a part of assets and investment of the society to be used for the purpose of the society in accordance with law. The provisions of Act and Rules ensure that no part of reserve fund be used during the continuance of business of the society for any purpose other than for the purposes of the society. The attention of the Court was drawn to Sections 62, 63, and 82 of the Act of 1965 and Rules 55 and 56 of the Rules of 1966. It is contended that neither it is a case of expenditure which could be allowed under Section 37 nor it is a case of diversion of income at source by overriding title, nor can be said that the amount so transferred to the reserve fund is not the real income of the society so as to be excluded from computation of taxable income of the society for the relevant period.;