1. The assessee is a co-operative society registered under the Maharashtra Co-operative Societies Act, 1960 ('the Societies Act'). An original assessment was made in this case. Subsequently the Commissioner, looking into the file of the assessee, found that a wrong deduction of Rs. 25,000 had been granted to the assessee, being the provision for contribution to the education fund. Giving the assessee an opportunity to present its case, the Commissioner directed the ITO to withdraw the allowance of Rs. 25,000. He went in detail into the representation on behalf of the assessee that the decision in the case of CIT v. Bombay State Road Transport Corporation  106 ITR 303 (Bom.) was applicable to the case and the case could be distinguished from the Madras High Court case of CIT v. South Arcot District Co-operative Supply & Marketing Society Ltd.  127 ITR 467 which dealt with a co-operative society under the Tamil Nadu Co-operative Societies Act. The assessee's contention that there was a vast difference between the provisions of the Societies Act and the Tamil Nadu Co-operative Societies Act was also rejected by the Commissioner.
The present appeal is laid before us against the above order of the Commissioner.
2. The learned counsel for the assessee has referred to the provisions of Section 69 of the Societies Act and pointed out that setting apart of a sum for the education fund was intended to see that the management did not fritter away the money of the co-operative society and that it used it for positively useful purposes. Reference was made to the provisions of Section 68 of the Societies Act and Rule 53 thereunder which deal with the rate of contribution. Whether a profit or loss was made, the contribution to the education fund has to be made though it was payable at the end of the year. It was a clear diversion by way of an overriding title before the profit reached the assessee. According to the learned counsel, the contribution to the education fund created by the Government was not an appropriation of the profit of the assessee. This was a statutory obligation imposed on the assessee co-operative society to make the payment whether there was a profit or not. Making the claim under two distinct heads as an expenditure under Section 37 of the Income-tax Act, 1961 ('the Act') and on account of a diversion by an overriding title, the learned counsel has pointed out that the expenditure incurred in the present case is not a capital expenditure. It does not have any of the ingredients of a capital expenditure as understood in law and does not give rise to any permanent advantage for the assessee. It is also incurred wholly and necessarily for the purpose of the business of the assessee. If the payment to the education fund was not made, the assessee could not carry on its business. Its assets would be attached and the business would come to a standstill. The expenditure, according to the learned counsel, therefore, is exclusively and primarily intended for the purpose of the business of the assessee. It has no other relevance as far as the assessee was concerned. Emphasising the point about the overriding title, it is pointed out that this amount is not set apart and retained in the business but is paid out and is completely lost to the assessee. With regard to the other payments, it could be perhaps stated that the amounts are retained in the business of the assessee but that does not apply to the payment to the education fund. It is also pointed out that this payment is similar to a contribution such as to Chambers of Commerce or Industrial Association which protect the assessee's interest. Unless the assessee paid the education fund amount, any additions that may accrue to the assessee by way of expansion of co-operative education will not accrue to it. According to the learned counsel the funds were to be utilised for the specific purposes of co-operative training, diffusion of knowledge, etc., which are vital in the context of the assessee's business. It is also pointed out that there are material differences between the Tamil Nadu and Maharashtra Co-operative enactments so that a decision given under the former Act cannot be applied to the assessee's case. Under the Tamil Nadu Co-operative Societies Act, the net profit has to be approved by the Registrar and the money goes out of the net profit as is clearly laid down by the provisions of the Tamil Nadu Co-operative Societies Act. The position was entirely different in the assessee's case. Here was a case of legal obligation for payment of certain amounts based on a statutory obligation and statutory rules. The rules of the assessee's society also compelled making the payment as the bye-laws thereof indicated. The decision in the case of Bombay State Road Transport Corporation (supra) directly applied.
3. It is also pointed out that as an expenditure the payment has a direct bearing on the production cost of the assessee. Its real income goes down on account of the payment. Section 65 of the Societies Act created a charge, whereas Section 68 created a legal obligation which the assessee cannot otherwise get rid off. Both from the points of view of a charge or a legal obligation inevitable in the circumstances of the case and also as an item of expenditure directly relatable to the business of the assessee, the amount has to be allowed as a deduction.
Reference is also made to the decision in the case of Amalgamated Electricity Co. Ltd. v. CIT  97 ITR 334 (Bom.) which was followed in Bombay State Road Transport Corporation's case (supra).
4. For the department it is pointed out that the amount in dispute is a specific amount paid under Section 68. Emphasising the background of Section 68 and the purpose of the payment, the learned counsel has pointed out that there is no connection between the payment made and the assessee's business. In determining the allowability of this amount, both the general provisions of the Societies Act as well as the specific provisions of Section 68 have to be kept in view. The general purpose is to encourage and regulate the co-operative movement keeping in view the directive principles of the Constitution. The co-operative societies, according to the learned counsel, have a double role as a member of the community and as a trader, investor, etc. The computation of income under the Act is to be made under its various provisions and in this respect the net profit for the purpose of the Societies Act is different from that for the purposes of the 1961 Act. Section 65 and Section 68 of the Societies Act specified the special purpose. The learned counsel has also drawn a distinction between the profits and gains of the business and the profit available for distribution by way of dividend. Taking us through the provisions of the Societies Act, especially Sections 65, 68, 69, 69A and 70, it is pointed out that these sections and other sections are related and all these cannot be said to be peculiar to co-operative societies running a business and especially a sugar manufacturing business. Section 68 before the amendment was dependent on the declaration of dividend, whereas after the amendment it was qualified by the provisions of Rule 53. In fact, according to the learned counsel, Rule 5 prescribing various rates could even be said to go beyond the provisions of the sections. Section 68 is to be read with Section 65 and be interpreted irrespective of the characteristic of the assessee. Even though the payment is made in the present case on the basis of the crushing done, it is an appropriation of the profit of the assessee. It is also pointed out that the liability under Section 68 falls on the assessee as a co-operative society and not in its capacity as a trader. An expenditure which is not referable to the trader cannot be allowed under the Act. The contribution is made in its capacity as a co-operative society and not exclusively referable to the business. An expenditure to be allowable, according to the learned counsel, must secure some return for the assessee's business which does not happen in the present case since the contribution is to a general fund unrelated to the business of the assessee.
5. On the ground of an overriding charge, the learned counsel has pointed out that such a charge relates to the case of receipts diverted at source and not to payments such as those prescribed under Rule 53.
There is no contract leading to an overriding title as of right in the present case. The source is not charged, Even in a case where payment is compulsory, it is not always deductible ; a mere obligation to pay simpliciter is not enough but there should be a clear liability arising out of trade commitment. Referring to the decisions in CIT v. Malayalam Plantations Ltd.  53 ITR 140 (SC), Murlidhar Himatsingka v. CIT  62 ITR 323 (SC), CIT v. Dr. P.N. Awasthi  105 ITR 320 (All.), Bombay State Road Transport Corporation's case (supra) and Life Insurance Corporation of India v. CIT  119 ITR 900 (Bom.), the learned counsel has pointed out that none of the ingredients necessary to make this payment a deductible expenditure obtained in the case.
6. Referring to the provisions of the Tamil Nadu and Maharashtra Co-operative Societies Act, it is pointed out that there is no difference between the two, the payment in both the cases being a matter of disbursement after the profit is realised. Even in the case of a loss a payment has to be made which indicates that the payment related to the provisions of the rules which in fact went beyond the sections of the Act. in fact this is a voluntary payment in connection with the business. The comparison with a payment to the Chambers of Commerce, according to the learned counsel, is not proper since no facility as in the case of such a payment is enjoyed by the assessee by making this contribution to the education fund.
7. The assessee is a co-operative sugar factory established under the Societies Act nearly two decades back. The point in dispute lies within a short compass. The assessee paid a sum of Rs. 25,000 to the education fund created by the Government of Maharashtra under a notification.
Co-operative societies were to make payments towards the education fund as per the provisions of the Societies Act. The structure of the co-operative societies under the Act in the Maharashtra State presents a picture of an Apex State Federal Society at the top with district level societies which themselves come under rural societies and urban societies. The manner of accumulating property and funds of the society and distributing them is all provided for extensively in the Societies Act. The relevant provisions are Sections 64, 65, 66, 67, 68 and 69 which are reproduced below : 64. Funds not to be divided.-No part of the funds, other than the dividend equalisation or bonus equalisation funds as may be prescribed or the net profits of a society, shall be paid by way of bonus or dividend, or otherwise distributed among its members : Provided that, a member may be paid remuneration on such scale as may be laid down by the bye-laws, for any services rendered by him to the society.
65. Appropriation of profits.-(1) A society earning profits, shall calculate the net profits by deducting from the gross profits for the year, all interest accrued and accruing in accounts which are overdue establishment charges, interest payable on loans and deposits, audit fees, working expenses including repairs, rent, taxes and depreciation, bonus payable to employees under the Payment of Bonus Act, 1965 and equalisation fund for such bonus, provision for payment of income-tax and making approved donation under the Income-tax Act, 1961 provision for payment of contribution to education fund of the State Federal Society which may be notified by the State Government in this behalf, provision for payment of contribution to the Co-operative State Cadre Employment Fund established under Section 69A, development rebate, provision for development fund, bad debt fund, price fluctuation fund, dividend equalisation fund, share capital redemption fund, investment fluctuation fund, provision for retirement benefits to employees and in the case of consumers co-operative stores provision for purchase rebate to be paid to purchasers and after providing for or writing off bad debts and losses not adjusted against any fund created out of profits. A society may, however, add to the net profits for the year, interest accrued in the preceding years, but actually recovered during the year. The net profits thus arrived at, together with the amount of profits brought forward from the previous year, shall be available for appropriation.
(2) A society may appropriate its net profits to the reserve fund or any other fund, to payment of dividends to members on their shares, to the payment of bonus on the basis of support received from members and persons who are not members to its business, to payment of honoraria and towards any other purpose which may be specified in the rules or bye-laws : Provided that no part of the profits shall be appropriate except with the approval of the annual general meeting and in conformity with the Act, rules and bye-laws.
66. Reserve fund.-(1) Every society which does, or can, derive a profit from its transactions shall maintain a reserve fund.
(2) Every society shall carry at least one-fourth of the net profits each year to the reserve fund ; and such reserve fund may, subject to the rules made in this behalf, if any, be used in the business of society or may, subject to the provisions of Section 70, be invested, as the State Government may by general or special order direct, or may, with the previous sanction of the State Government, be 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 : Provided that the Registrar may, having regard to the financial position of any society or class of societies, fix the contribution to be made to the reserve fund under this sub-section at a lower rate, but not lower than one-tenth of the net profits of the society or societies concerned.
67. Restrictions on dividend.-No society shall pay a dividend to its members at a rate exceeding 12 per cent : Provided that, where the rate of dividend to be paid to the members exceeds 9 per cent, the amount, which is in excess of the portion of the dividend calculated at the rate of 9 per cent, shall be credited to the share account of the members concerned.
68. Contribution to education fund of the State federal society.-(1) Every society shall contribute annually towards the education fund of the State federal society which may be notified in this behalf by the State Government at such rate as may be prescribed and different rates may be prescribed for different societies or classes of societies depending on their financial condition.
(2) Every society shall pay its contribution to the said fund, within two months from the date on which its accounts are adopted by the general body of members. Any officer wilfully failing to comply with the requirement of this section, shall be personally liable for making good the amount to the federal society notified as aforesaid.
69A. Constitution of Co-operative State Cadre of Secretaries of certain societies and establishment of employment fund for such cadre.-(1) There shall be constituted a Co-operative State Cadre of Secretaries of primary agricultural credit societies, multipurpose co-operative societies and service co-operative and such other classes of societies as may be prescribed in this behalf (hereinafter in this section referred to as 'the Co-operative State Cadre'), consisting of persons recruited for. this purpose by the Central Societies notified in this behalf by the State Government.
The number of persons to be recruited and their conditions of service shall be determined by the Central Societies in accordance with the general or special orders as may be issued by the State Government, from time to time.
(2) A Central society may, from time to time, depute any person appointed by it to that cadre to work under any society referred to in Sub-section (1), as it may consider necessary. Where any such person is posted to work under any society, his services shall be taken over by the society, on such post, for such period and on such other terms and conditions, as the Central society may determine, but the person so posted shall draw his salary and allowances from the fund established under the next succeeding sub-section.
(3) An Apex society notified in this behalf by the State Government shall establish a fund to be called 'the Co-operative State Cadre Employment Fund', which, when established, shall be deemed to have been established with effect from the 1st day of July, 1973. It shall be utilised for meeting the expenses on the salaries, allowances and other emoluments to be paid to the persons appointed to the Co-operative State Cadre and the other expenditure relating to the cadre.
(4) (a) Every society or class or classes of societies, which in the opinion of the State Government, derive any benefit directly or indirectly, from the services of any Secretary belonging to the Co-operative State Cadre of Secretaries, and (b) Even other body corporate carrying on any trade, business or class or classes of such corporate bodies, which in the opinion of the State Government, derive such benefit as aforesaid and which are notified by the State Government in this behalf, from time to time by general or special order shall, with effect from the 1st day of July, 1977, contribute annually to the said fund, at such rate in such manner as may be prescribed and different rates may be prescribed for different societies or other corporate bodies or class or classes of societies or class or classes of other corporate bodies. In determining the rate or rates of contribution, the State Government shall take into consideration the expenditure referred to in Sub-section (3), the services likely to be rendered and the financial condition of the societies or other bodies concerned.
Explanation : Notwithstanding anything contained in any law for the time being in force, for the purpose of levy and collection of the contribution to the said fund by any other corporate body to which this section applies, such corporate body shall be deemed to be a society governed by this Act.
(5) Where there is a failure to comply with the requirements of the last preceding sub-section, the Registrar may serve a demand notice on the society concerned to pay the contribution within two months from the date of demand. Such demand shall be a charge on the income of the society. If the contribution is not paid within the period aforesaid, the Registrar may direct any bank or person having custody of the funds of the society to pay the amount of the contribution immediately and such bank or person shall comply with the orders of the Registrar. Every payment made pursuant to such direction shall be a sufficient discharge to such bank or person from all liability to the society in respect of any sum so paid by it or him out of the moneys of the society in his custody.
(6) The State Government may make rules regulating all matters connected with or ancillary to the custody and maintenance of, the payment of moneys into and the expenditure and withdrawal of moneys from, the said fund.
The contribution to the education fund of the State Federal Society is referred to in Section 68. Accordingly, every society should contribute annually towards the education fund of the State Federal Society notified in this behalf by the State Government at such rates as are prescribed for different societies or classes of societies. The payment, according to the section, is to depend on the financial condition of the society. Rule 53 of the Maharashtra Co-operative Societies Rules, 1961 enumerates the rates of annual contribution to be made. There are 43 items with appropriate rates of contribution provided in the list. The first item thereof refers to the Maharashtra State Co-operative Bank for which the rate of contribution is one-tenth of the working capital subject to the maximum of Rs. 2,50,000. The second item is the Maharashtra State Co-operative Land Development Bank for which the rate of contribution is one-tenth per cent of the working capital subject to the maximum of Rs. 50,000. There are other classes of societies which have to pay fixed amounts, e.g., District, Central Co-operative Bank of Thana, Colaba and Ratnagiri Rs. 5,000, Sholapur District Industrial Co-operative Bank Rs. 5,000. There are also other fixed rates such as spinning mills which have not gone into production [the payment is] Rs. 100, whereas for spinning mills which have gone into production the payment is Rs. 5,000. For agricultural and credit societies including large sized, small sized or sewa societies the payment is Rs. 10 in respect of those which have suffered loss during the previous co-operative year. Lift Irrigation Societies have to pay Rs. 100 in respect of those which have a working capital of more than Rs. 5 lakhs and Rs. 50 where the working capital is less than Rs. 5 lakhs. The assessee is a co-operative sugar factory. Item No: 5 of the table provides the rate of contribution for this society at the rate of 25 paise per tonne of sugarcane crushed subject to a maximum of Rs. 50,000. This seems to have been changed to Rs. 25,000. It is thus that the assessee co-operative society under the provisions of Section 68 read with Rule 53 had to make a payment of Rs. 25,000 to the education fund.
8. Since the same issue which came up under the Tamil Nadu Co-operative Societies Act has been referred to before us, it is necessary to note the appropriate provisions of that Act. Section 62 of the Madras Co-operative Societies Act, 1961 and Rule 43 thereunder are as under : 62. Disposal of net profits.-The net profits of any registered society as declared by the Registrar for the purposes of this Act in respect of any co-operative year shall be appropriated- Firstly, for being credited to a reserve fund, the amount so credited being not less than twentyfive per cent of the net profits ; Secondly, towards contribution to such other funds and at such rates as may be specified in the rules ; Thirdly, towards payment of dividends on shares to members at such rate as may be specified in the rules ; Fourthly, towards payment of bonus to members and paid employees of the registered society at such rate and subject to such conditions as may be specified in the rules ; Fifthly, towards contribution to the co-operative education fund at such rate not exceeding two per cent of the net profits as may be specified in the rules ; Sixthly, towards contribution to such other funds and at such rates as may be specified in the bye-laws ; Seventhly, towards contribution to the common good fund at such rate not exceeding ten per cent of the net profits as may be specified in the rules ; and Eighthly, (he balance, if any, of the net profits being credited to the reserve fund.
Rule 46 is the rule regulating the contribution to such other funds as are contemplated in Section 62. Rule 46 insofar as it is relevant, runs as follows : 46. Distribution of net profits.-. . . (6)(i) Every society shall set apart a sum calculated at two per cent of its net profits subject to a maximum of Rs. 2,500 for contribution to the co-operative education fund.
The sum so allocated shall be remitted to the Tamil Nadu Co-operative Union within two months of the date of allocation of the net profits by the general body.
(ii) The fund shall be maintained and administered by the Tamil Nadu Co-operative Union. It shall be utilised for the furtherance of co-operative education including propaganda as contemplated in the bye-laws of the said Union.
(iii) No part of the co-operative education fund shall be spent by the Tamil Nadu Co-operative Union except in accordance with the bye-laws of the Union and the general directions that may be issued by the Registrar from time to time.
(iv) The Tamil Nadu Co-operative Union shall maintain a separate account for this fund in accordance with regulations to be framed by the Union with the approval of the Registrar.
(v) It shall be competent for the Registrar to constitute a committee of not more than five persons, of whom two shall be members of the committee of the Tamil Nadu Co-operative Union, for the administration of the fund....
9. The assessee has claimed the allowance of this expenditure under Section 37 and, alternatively, as an amount not available to it having been diverted even at the beginning by an overriding title.
10. An expenditure to be allowed under Section 37 should not be a capital or personal expenditure of the assessee and must be wholly and necessarily incurred for the purpose of the business. The question is whether the fact of the payment in the present case satisfies this condition. It is apparent that the assessee has no option but to make the payment. The main question is whether this is an expenditure of the business as claimed by it or only a parting with of its profits.
Section 64 of the Act, quoted above, provides that only dividend equalisation or bonus equalisation fund or the net profits of the society can be utilised for the purpose of payment of bonus or dividend. Section 65 deals with the question of appropriation of profits. It is by referring to this section where the net profit is to be calculated by deducting from the gross profit certain items including the provision for payment of contribution to the education fund, that the learned counsel for the assessee has pointed out that the payment to the fund is a compulsory item of expenditure. A reading of the provision of the Societies Act, however, does not indicate for what purpose the 'net profits' of the co-operative society should be computed, though Section 65(2) states that society may appropriate its net profit to the reserve fund or to any other fund, to the payment of dividends, to the payment of bonus, etc. The crucial point for decision in the present case is whether the payment to the education fund is in the first instance an expenditure so as to be deducted under Section 37 or it is only an appropriation from the profit of the society. The concept of net profits referred to in Section 65 and to which our attention had been drawn by the learned counsel for the assessee does not help him in this regard. The deduction allowed or required to be made under Section 65 refers to an assortment of items. Some of them in the accountancy or income-tax context could be regarded as items directly deductible while arriving at the profit, whereas other items are clearly alien to any concept of profit as such. Thus interest payable on loans and deposits, working expenses including repairs, rent, taxes and depreciation, bonus payable to the employees under the Payment of Bonus Act are items clearly to be deducted in arriving at a profit either on the commercial basis or for income-tax purposes, the proprietor of the business earns. On the contrary provision for development fund, a dividend equalisation fund, share capital redemption fund, etc., can never be regarded as items to be deducted in arriving at a profit. Prima facie, therefore, the reliance of the learned counsel of the assessee on Section 65(1) for supporting his case that education fund payment should be deducted to arrive at the profit cannot be accepted. The fact that no particular purpose is spelt out by the Act for working out the net profit of the society makes the position only worse.
11. Apart from the provisions for appropriations, etc., Section 67 of the Societies Act restricts the payment of dividends to 12 per cent. In a year when the society makes a substantial profit even after making out all necessary expenditure or appropriations referred to under Section 65 or commercially required, if there is an excess over 12 per cent that can only again be treated as profit for appropriation. The payment, therefore, for the education fund whether made prior to working out of profit for accountancy and other purposes, or subsequently, such working may not in a year where the society has a very high profit make any difference at all. The basis of the restriction on dividend is that the co-operative movement is based on the principle that the societies should have their own funds and should not fritter away their resources. The amount of dividend or interest on capital is also as against the capitalistic movement restricted in the case of co-operative societies. The nature of any payment, therefore, will have to be judged against the overall background of the co-operative principle and movement.
12. The reference made by the learned counsel for the department to the dual capacity in which a co-operative society works, one as a member of the co-operative movement and the other as a trader, investor, etc., is very significant. The Government, largely in pursuance of the directive principles of the Constitution, has fastened substantial social obligations on co-opera-tive societies both in the rural and the urban sectors. The purpose is to encourage and regulate the co-operative movement which stands as a bulwark against the capitalistic aim of accumulation of wealth inevitably followed by economic distress at particular levels of society. Many of the sections of the Societies Act including those relating to the property and funds of the societies have this aim in view. It would not, therefore, be proper to cull out any provision of these sections and apply it as if it were a provision recognised under the Act. The method of computation of net profit-for whatever purposes it be intended in Section 68-therefore, cannot have any relation to the computation of profit under the 1961 Act. Even on general principles while commercial profit of a business is taken as a basis for working out the taxable profit, it is well understood that what is taxable is only the income worked out according to the provisions of the Act. Any method of computation of net profit, therefore, in the Societies Act cannot be even regarded as a guideline for fixing the allow-ability of any expenditure. 'Net profit' for the purpose of the 1961 Act is thus clearly different from any concept of it for whatever purpose it be, obtaining in the Societies Act. Sections 65 and 68 do not, therefore, help the assessee in determining the nature of the expenditure for the purpose of deduction.
13. In order that an expenditure may be allowable under Section 37 it should not be a capital item of expenditure and should also be wholly and necessarily incurred for the purpose of the business. The learned counsel for the assessee has pointed out that the payment to the education fund is exclusively for the purpose of the business of the assessee. If the payment were not made, the business cannot be carried on and the Government would attach or otherwise interfere with the business. Reference is made in this connection to Sub-section (2) of Section 68. The real test to determine whether an expenditure is allowable has been laid down in the Supreme Court's decision in the case of Malayalam Plantations Ltd.'s case (supra). The Supreme Court held : ...The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory ; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business....(p. 150) Their Lordships clearly made out a difference between an expenditure incurred by an assessee in the capacity as a trader and in other capacities. Only that payment can be regarded as relevant to the business and, hence, allowable under Section 37 which relates to the assessee's position as a trader. An expenditure may be incurred in either of these capacities and the non-incurring of the expenditure may prevent the business from being carried on or even get the assets of the business attached. This, however, would not make the expenditure allowable. Non-payment of a tax, (sic) non-fulfilment of obligations of a businessman not as a trader but in his personal capacity often attract payments. Merely because the individual also carries on a business, the expenditure cannot be deducted. Ultimately, therefore, what is to be decided in the present case is whether the assessee makes the payment to the education fund in its capacity as a co-operative society or as an essential ingredient of the business which it carries on.
14. The above point can be decided if the expenditure is looked at from two angles : (1) whether the scheme of the Societies Act including the nature of the business, the accounts maintained, etc., renders this the expenditure on incurred prior to computation of profit (sic) and (2) whether the expenditure is incurred in the assessee's capacity as a trader.
15. With regard to the former, we have seen that none of the provisions of the Societies Act would require the deduction of this payment for arriving at the net income. The payment of the education fund is classed even in Section 68 along with items properly referable to the appropriation account. The assessee carries on the business of manufacturing sugar. Neither the trading account which could be cast for the purposes of working out the profit nor the profit and loss account relating to the business would permit debiting a payment to the education fund as directly relatable to it. Whether a payment is made to the education fund or not, the assessee could manufacture sugar and also make a profit on such manufacturing. There is no contribution to education fund payable by manufacturers other than co-operative societies. The payment is made in this case only because the assessee, manufacturer of sugar, is also a co-operative society. This puts the matter in the clear light that payment to the education fund of the federal society is not an essential expenditure for the purposes of manufacturing sugar such as payment for purchasing sugar-cane, of wages, of rent, rates, etc. If that were so all manufacturers of sugar would have to pay it.
16. The section also properly read puts the matter in further relief.
The assessee makes this payment only because it is a co-operative society. If any other person were to do the sugar manufacturing business, he is not required to make the payment. The expenditure, therefore, is incurred in the capacity of the owner of the business or property rather than as a manufacturer of sugar or a person carrying on the business. The ratio of the Supreme Court decision in the case of Malayalam Plantations Ltd. (supra) makes such an expenditure non-deductible. Another aspect of the matter also strengthens our view in this regard. A detailed consideration of the rates provided in Rule 53 indicates that the payment to the education fund is to be made on certain criteria laid down in the rule. The liability is not dependent at all on the business of the assessee ; rather it is based on the nature of the assessee. Thus under item No. 28 : industrial estates have to pay Rs. 100, banks have to pay a proportion of the working capital. In the assessee's case the payment is made at the rate of 25 paise per tonne of sugarcane crushed subject to a maximum. It was sought to be argued before us that the fact that the payment is directly based on the quantity of sugarcane crushed, in fact puts an obligation on this quantity taking the expenditure directly to the trading account. In other words, the contention is that the payment dependent as it is on the quantity of sugarcane crushed, has a direct and unimpeachable casual connection between the assessee's business and the payment made. In our opinion, there is a fallacy in this argument.
As the rates provided in Rule 53 indicate, the payment to the education fund has been fixed on certain criteria in the case of the assessee this is based on the sugarcane crushed. If no sugar is crushed, the assessee will not pay any amount to the education fund. If the crushing level goes to a very large extent beyond the minimum amount payable to the education fund, then there is a limit on the payment. This alone indicates that the extent of crushing has been only utilised as a measure in fixing the quantum of payment. The crushing as such has nothing to do with the payment at all. Just as in the other cases the amount is fixed with reference to the working capital or the nature of the business or whether a society has gone into production or not, here the criterion is the extent of crushing. What is a simply measuring rod cannot be regarded as an intimate part of the thing measured. The education fund payment, therefore, cannot be regarded as a part of the crushing of sugarcane or intimately connected with the assessee's business.
17. An attempt was made to refer to the provisions of the Tamil Nadu Co-operative Societies Act in connection with which their Lordships of the Madras High Court in South Arcot's case (supra) disallowed such a payment. It was claimed that the provisions of these two Acts differ from each other substantially which justified the decision of the Madras High Court. In our view there is absolutely no difference between the provisions of the Maharashtra and the Tamil Nadu Co-operative Societies Acts. In the decision in IT Appeal Nos. 43 & 44 of 1980 dated 31-10-1980 the relative provisions of these two Acts were compared to come to the conclusion that Section 68 of the Societies Act made the payment to the fund compulsory, whereas Section 62 of the Tamil Nadu Co-operative Societies Act was based on a net profit of the society. It was also thought that Section 65 of the Societies Act made the contribution a charge on the profit and loss account, whereas under Section 62 of the Tamil Nadu Co-operative Societies Act the contribution was an appropriation of the profit. The provisions of these two enactments have been set out earlier. In our view, there is absolutely no difference between the two provisions. As pointed out earlier, Section 65 of the Societies Act dealing with appropriation of profits refers to the contribution to the education fund. Section 62 of the Tamil Nadu Act deals with the disposal of the net profits, in connection with which, it talks of appropriating the net profits. Under both the provisions 'appropriation of profit' is the basis of the payment. The mere fact that in one case it is a percentage of the net profit computed, while in the other case it is a certain amount per tonne of sugarcane crushed does not make any difference. This is only a measure of computing the amount payable to the education fund. As pointed out earlier, Rule 53 lays down even under that Act different criteria for computing the payment in the case of different co-operative societies. Our view is strengthened by the further fact that some of the entities mentioned in Rule 53, while coming under the head co-operative societies' may not be running any business at all, for instance, Grain Banks, Milk Unions, 18. An expenditure allowable under Section 37 while it may not be relevant or related to the profit of the business, must refer to the purpose of the business and should at the same time be incurred for that purpose. In other words, the expenditure should bring to the assessee some return almost as if it were a quid pro quo. Apparently the payment in the present case is made without any return expected.
The fund is a general fund and has nothing to do with the particular business of the assessee or in fact the business of any of the co-operative societies enumerated in Rule 53. Some of them do not have any business at all. It was pointed out before us that the education fund is utilised for the purposes of propagating the co-operative movement, assisting in the improvement and co-ordination of the work of the societies, giving training and education to the members of the co-operative societies and workers, to encourage the study of problems connected with co-operation, etc. The assessee may not be doing all these individually, but by making a contribution to the education fund, these benefits are available to the assessee. There is in fact a quid pro quo for the expenditure incurred. In this connection, the payment is likened to a subscription paid to a Chamber of Commerce which cannot be disallowed on any ground.
19. The alleged relation between the payment and any advantage gained by the assessee is too meagre to establish a casual relationship between the two. in fact factually no benefit has been shown to have accrued to the society on account of the payment. While we had not the benefit of knowing the manner in which the amounts in the education fund is spent by the Government and the advantages it can secure to the assessee or other co-operative societies, prima facie, this is a payment to a fund with a large sweep which may or may not benefit the asscssee's business. This is clear from the fact that payment is made even by non-business co-operative societies. The claim of 'wholly and exclusively' benefit to a business is not satisfied unless the particular advantage derived is indicated. This has not been done in the present case.
20. We have, therefore, no hesitation in holding that the payment to the education fund is not related to the assessee's business but could at best be regarded as a payment by the assessee as a co-operative society. It requires to be noted-a fact to which the learned counsel for the department drew our attention-that unlike under the Indian Income-tax Act, 1922, the 1961 Act provides a definition of the word 'person'. 'Personal' would be a quality of a person. Section 37 prohibits a personal expenditure from being deducted. Even in the case, therefore, of a non-physical person like a co-operative society or company under the Act it could be possible to think of personal expenditure not entitled to deduction as a business expenditure. Such an item of expenditure would be something incurred for and relevant to the real personality of the trader whether it be a co-operative society, a company, etc. This is the same point as their Lordships of the Supreme Court clarified in Malayalam Plantations Ltd. 's case (supra) holding that an expenditure incurred in the capacity of a trader only is allowable and not other items of expenditure.
21. The alternate claim made for allowance of this expenditure is that there is an overriding title in respect of this amount paid to the 'Education Fund' and it is diverted even before it becomes the assessee's income. In other words, amounts to the extent of Rs. 25,000 does not reach the assessee at all. In support of this point, reference has been made to certain judicial decisions as well. In our view the resting of this claim on diversion by an overriding title involves a fallacy. This concept really applies to a case where a 'receipt' is brought to tax and in the process the claim is made that part of it is diverted before reaching the assessee at all. It does not belong really to the assessee as a receipt but is someone else's receipt and the assessee is only a conduit pipe for receiving it. Even before the amount reaches the assessee, the charge of the other person operates on the amount.
22. The above concept cannot have any relevance to an expenditure or payment. The payment made to the 'Education Fund' is clearly an outgoing and has no connection with any receipt. On the contrary in the facts of the present case whether the assessee makes a profit or not, whether the assessee has in fact any receipt or not, a payment has to be made to the 'Education Fund'. Apart from a direct obligation to make the payment without mentioning any realisation of profit, the computation of the payment also refers to the quantity of sugarcane crushed. If the assessee crushes one tonne of sugarcane, whether it results in sugar or gets a receipt for the assessee or not, he has to pay 25 paise to the 'Education Fund'. It would be anomalous to say that there is a diversion of money out of the process of crushing sugarcane.
This itself will show that the doctrine of an overriding title, as explained in judicial decisions, cannot have a relevance to the present case. The assessee makes the payment to the 'Education Fund' irrespective of whether it has receipts or makes a profit. There is no question of the Government diverting a portion of the assessee's receipts towards the 'Education Fund' before its reaching it. There is also no contract leading to the overriding title as of right. Rule 53 also clarifies this further, for instance, it is provided that a Fishing Co-operative Society which may have no income at all, also should make a payment to the 'Education Fund'.
23. Even granting that there is an obligation to make a payment and that it need not be related to any receipt, in bringing in the notion of diversion, there must be charge at least on the source of income if not on the income itself. The decision referred to by the learned counsel for the department in Murlidhar's case (supra) supports this view. That the assessee has to make this payment compulsorily cannot be denied in view of the specific provisions of the Act. But every compulsory payment is not a deductible item for the purposes of computing the income under the Act. A mere obligation to pay an amount simpliciter is not enough. The decisions in Malayalam Plantations Ltd.'s case (supra), Bombay State Road Transport Corporation's case (supra) and Life Insurance Corpn. of India's case (supra) are relevant in this connection. There are several situations when an assessee has to make a payment. Some of them have to be made prior to the computation of profit and are essentially involved in the conduct of the business. They are a charge on the business and the earning of the income. Others are made after the income is earned ; they may also be compulsory and are often not dependent on making a profit. Certainly this latter cannot be related to the profit of the business. There is no charge or encumbrance or other legal obligation operating to divert by an overriding title either the receipts or income of the assessee in the present case.
24. The decision of Bombay Road Transport Corpn.'s case (supra) deals with an allowance of contribution for the purpose of discharging the assessee's own liability to third parties on account of accidents relating to the bus services run by the assessee. The contribution made by the assessee in that case was clearly referable to the advantage the assessee had of avoiding a payment of compensation or damages on the occurrence of any accident. In fact, it was a prior accumulative payment just like an insurance payment to avoid heavier payment on a subsequent occasion. That decision does not help the assessee. We find also no difference between the provisions of the Tamil Nadu Co-operative Societies Act and the Societies Act with regard to the contribution made to the education fund. In both the cases it is a payment unrelated to the business of the assessee and is payable only because of the assessee being a co-operative society. If the business has been carried on by any other person than a co-operative society under both the enactments, the payment would not become necessary. The basic principle for the allowance of the expenditure that it should be relevant to the assessee's business and his capacity as a businessman applies in the same way in respect of both the enactments. A comparison of the provisions set out earlier in this order also shows no difference between these two enactments.
25. We, therefore, hold that the assessee is not entitled to a deduction of the sum of Rs. 25,000 paid towards the 'Education Fund'.
The order of the Commissioner is upheld.27. We express our thanks to Shri Kulkarni (intervenor) for his assistance in the above appeal.