Law:

Section:

Section 4 of the Income-tax Act, 1961 - Income - Diversion of at source by overriding title or application of income - Assessee, a co-operative society, claimed deduction of an amount being contributed to Co-operative Education Fund as required under Co-operative Societies Act - Condition for payment was that if profits of a society exceeded Rs. 500 and a declaration of dividend on paid-up share capital was made at rate of 2 per cent, then society was under an obligation to contribute towards Education Fund at rate not exceeding 1½ per cent of net profits - Whether, since assessee made contribution under a statutory obligation which was to be computed with reference to profits, payment represented a diversion of profits at source on account of overriding charge and was, therefore, liable for deduction from total income - Held, yes FACTS The assessee was a co-operative society registered under the Karnataka Co-operative Societies Act. For the relevant assessment year, it claimed deduction of an amount being the contribution to the Co-operative Educational Fund which was made as required under section 57(4)(a) of the Societies Act at the rate not exceeding 1½ per cent of net profits. The ITO disallowed this claim. On appeal, the AAC allowed the same. On further appeal by the Revenue, the Tribunal confirmed the order of the AAC. The Tribunal held that the contribution was out of the net profits and did not fall in the exclusionary provisions of rule 22 of the said Societies Rules by which the computation of profit was made. On reference: HELD An analysis of section 57 of the Societies Act and rule 20 of the Societies Rules discloses that the condition for payment is that if the profits exceed Rs. 500, and a declaration of payment of dividend to the members on paid-up share capital at the rate of 2% is made, then the society is under an obligation to contribute towards the Co-operative Education Fund at a rate not exceeding 1½per cent of the net profits. The rate of contribution depends upon the rate of dividend. The language of section 57(4)(a ) of the Societies Act makes it clear that though the contribution is to be made with reference to the profits, it is not…

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