Judgment Rajesh Balia, J.-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. Theassessee 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 vs. CIT (1987) 165 ITR 437 (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 vs. CIT (1976) 103 ITR 489 (Mad) and CIT vs. Kisan Co-operative Rice Mills Ltd. (1976) 103 ITR 264 (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. 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. 3. 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? 4. 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 nw 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. 5. Mr. 5. Mr. N.M. Ranka, learned senior counsel appearing for the assessee, urged that the reserve fund required to be created under Section 62 nw Rule 68 is not under the volition of the assessee but under the compulsion of statute which cannot be used by the assessee at his option. Its control is absolutely outside the society and rest with the Registrar of Co-operative Societies. It was also urged that the amount of reserve fund is ultimately to be used for some object of public utility as it appears from Rule 56 of the Rules. The residue has to be applied for any public purpose either as per resolution by the society or as per the direction of the State Government, on the society’s failure to resolve about the public utility to which the residue reserve fund is to be applied. These requirements clearly indicate that the amount which has to be transferred to the reserve fund before utilisation of net profits for the purposes of the society, really does not become the income of the society in the sense in which income is ordinarily understood. Since the amount is carried under the compulsion of the statute to a reserve fund ultimately to be used for some object of public utility, it amounts to the diversion of the net profits to the reserve fund is under overriding legal obligations to be used for object of public utility, which is the specified beneficiary of the fund, and therefore, it also amounts to diversion of income by overriding title which never becomes a part of assessee’s profits which can be used by him. Alternatively, it was also urged that if it is not termed as diversion of income by overriding title, and forming part of real income of the assessee, the assessee is still entitled to claim the amount transferred to the reserve fund as a business expenditure under Section 37. Mr. Ranka contends that the amount transferred to reserve fund in terms of Section 62 nw Rule 68 is amount laid out wholly and exclusively for the purposes of carrying on the business of the assessee to further the requirements of law for running the business. He strongly relied on the decision of the MP High Court in Keshkal Co-operative Marketing Society’s case (supra), Poona Electric Supply Co. He strongly relied on the decision of the MP High Court in Keshkal Co-operative Marketing Society’s case (supra), Poona Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC), Ramanlal Kamdar (supra), Kisan Cooperative Rice Mills Ltd. (supra). He also relied on the decision of the Karnataka High Court in CIT vs. Pandavapura Sahakara Sakkare Karkhane Ltd. (1988) 174 ITR 475 (Kar); CIT vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690(Kar) and CIT vs. Hiranyakeshi Sahakari Sakkare Kharkhane (1993) 200 ITR 130 (Kar) buttressing with submission that special leave petition against the last mentioned decision has also been dismissed by the Supreme Court. 6. Before considering the various precedents having some bearing on the controversy before us, it would be apposite to acquaint with the relevant provisions of the Co-operative Societies Act, 1965 which deals with the creation of reserve fund and its user to understand the exact nature of reserve fund in question. The object for enacting the Rajasthan Co-operative Societies Act, 1965 was to provide for long-term loans to holders of land to enable them to discharge their debts, to carry out agricultural improvements, to acquire land for the formation of economic holding and other like purpose and thereby to promote thrift and self-help among them and for these purposes to give effect to the concept of State partnership in share capital and State participation in the management of the co-operative society. The various provisions of the Co-operative Societies Act show that while giving room for a fair amount of autonomy, the State Government has also kept its regulatory and guiding hand to ensure a balanced and strong growth of cooperative movement as principal organ of rural economy through co-operative societies to be set up under the Act. Chapter n requires and deals with registration of co-operative societies. While providing for management of cooperative societies, it is envisaged under Section 29 of the Act that final authority in a co-operative society shall vest in its general body of members. Under Chapter IV it is envisaged that where a State has contributed a substantial amount towards share capital directly or indirectly, the State Government can nominate Government servant as member of the society to a limited extent under Section 35; and can also appoint its Chief Elective Officer or Executive Officer, as the case may, be under Section 55A and Section 35B, respectively. Chapter VI delineates the policy of State to see all steps to encourage the cooperative movement in the State. Sec. 46 casts a duty on the State Government to encourage and promote co-operative movement in the State and also to take such steps in this direction as may be necessary and in this direction providing a guiding provision. Significantly, Chapter VII deals with properties and funds of the co-operative societies and their management. Having a glance at provisions of Chapter VII reveals that State Government not only has its regulatory role in creation of a reserve fund which is subject-matter of this appeal but also in all spheres of managing its assets. Section 61 prohibits payment by way of bonus or dividend out of the funds of the society and restricting such distribution to be out of the net profits of the society. Section 62 deals with the disposal of net profits and Section 63 deals with investment of funds. Section 64 to Section 66 provide restriction on borrowing, advancing loans, limit of interest and restriction on transaction with non-members, All these provisions indicate the zealousness with which the financial interest of the co-operative society is regulated to ensure avoidance of high risk and building up of sound financial base for rural economy, such regulatory provisions are not confined to reserve fund to be created under Section 62 nw Rule 68 but extends to properties of the society in its entirety of which reserve fund in question only forms a part. It cannot be treated in such an isolated vision as has been projected by the assessee. Section 62 and 63 which directly concern us in appeal, reads as under: “62. Disposal of net profits:--(1) A co-operative society shall, out of its net profits in any year- .(a) transfer, to the reserve funds, such percentage of its profits and within such period as may be prescribed; and .(b) credit such portion of the profits, as may be prescribed, to the co-operative education fund constituted under the rules. Disposal of net profits:--(1) A co-operative society shall, out of its net profits in any year- .(a) transfer, to the reserve funds, such percentage of its profits and within such period as may be prescribed; and .(b) credit such portion of the profits, as may be prescribed, to the co-operative education fund constituted under the rules. .(2) The balance of the net profits may be utilised for all or any of the following purposes, namely:-- .(a) payment of dividend to members on their paid up share capital at a rate not exceeding the prescribed limit; .(b) payment of bonus on the amount or volume of business done by them with the society, to the extent and in the manner specified in the bye-laws; .(c) constitution of or contribution to such special fund as may be specified in the bye-laws; .(d) donationsof amounts not exceeding ten percentum of the net profits for any charitable purpose as defined in Section 2 of the Charitable Endowments Act, 1890 (Central Act 6 of 1890); and .(e) payment of bonus to employees of the society, to the extent and in the manner specified in the bye-laws. 63. Investment of funds:--(1) Except as otherwise provided in Sub-section (2), a cooperative society shall invest its funds in one or more of the following:- .(a) Central Co-operative Bank; .(b) Apex Bank; (c) in the shares or securities or debentures issued by any other co-operative society with limited liability; (d) in any other mode permitted by the rules or by general or special order of the Government. .(2) A co-operative society may deposit its funds for a temporary period in such manner as may be prescribed. 7. Another relevant provision that need be noticed in this regard is Section 82 which deals with disposal of surplus assets which is amalgam of all assets of the society including the reserve fund in the case of winding up or dissolution of society which reads as under: “82. 7. Another relevant provision that need be noticed in this regard is Section 82 which deals with disposal of surplus assets which is amalgam of all assets of the society including the reserve fund in the case of winding up or dissolution of society which reads as under: “82. Disposal of surplus assets:--After all the liabilities including the paid up share capital of the cancelled society have been met, the surplus assets shall not be divided amongst its members but they shall be devoted to any object or objects described in the bye-laws of the society and when no object is so described, to any object of public utility determined by the general meeting of the society and approved by the Registrar or they may, in consultation with the members, either be assigned by the Registrar, in whole or in part to any or all of the following-- .(a) an object of public utility .(b) a charitable purpose as defined in Section 2 of the Charitable Endowments Act, 1890. or may be placed in deposit with the financing bank until such time as a new society with similar conditions is registered when, with the consent of the Registrar, such surplus may be credited to the reserve fund of such new society. It ordains that after the liabilities of the society including liability towards shareholders is paid, surplus is not to be used for distribution amongst the member of the society but shall be applied for any objects or object described in the bye-laws of the society and if no such purpose or object is provided in the bye-laws, the surplus is to be applied to any object of public utility determined by the general body of the society and approved by the Registrar. In case the general body also does not approve any such object to which the surplus can be utilised, it is to be in consultation with the members either be assigned by the Registrar to an object of public utility or to a charitable purpose as defined under Section 2 of the Charitable Endowments Act, 1890 or may be placed in fixed deposit with the financing bank until such time as a new society with similar conditions is registered and such surplus may be credited to the reserve fund of such new society. Apparently, this dealing of surplus after paying all outstanding of the society applies to residue of entire assets of the society including the funds created under Section 62 of the Act nw Rule 68 of the Rules. The distribution of reserve fund is not in isolation but is a part of general scheme of the Act dealing with assets and profits of the society in general during the continuance of its business as well as after the society ceases to exist leaving its assets firstly to discharge its own liability towards persons other than share capital, then to repay of its member, the share capital contributed by the members with dividends to the extent permissible and the remaining surplus, if any, either to be utilised for any object of public Utility or for the purposes of charitable purpose as defined under the Charitable Endowment Act, 1890 or corpus to be retained for a new society to come into existence in future with the like object as were with the cancelled society. Significantly, the application of surplus assets to an object of public purpose to be assigned by Registrar for public utility or charitable purpose or it is to become corpus fund of new society of like nature remains the decision of the society through its members in general body either providing for such contingencies in bye-laws or by resolving in general body about how to use the surplus. From these provisions, it cannot be spelled, except generality ot application of surplus of all its assets, that creation of reserve fund is for the purpose of feeding any object of public utility or charity. 8. In this connection, it is significant that Section 62, not only provides for creation of reserve fund to be used for society in contingencies to which we shall presently advert to, but also to education fund to be constituted under Rules and to constitute such other special funds which may be envisaged under bye-laws and it also envisages donations to charitable purpose as defined under Section 2 of Charitable Endowment Act, 1890 such part of net profit not exceeding 10 per cent of net profit. Thus, creation of number of funds for different purposes is envisaged under the statute, Rules and bye-laws of a co-operative society under the Act of 1965. Thus, creation of number of funds for different purposes is envisaged under the statute, Rules and bye-laws of a co-operative society under the Act of 1965. Significant for the present controversy, statute also requires a regular donation to charity out of its annual net profits not exceeding 10 per cent of it. Commensurate with the general scheme of application of net profit by way of contribution to reserve fund, distribution of bonus and dividends and towards charitable purpose, on cessation of business as a result of winding up or cancellation of the society also surplus of assets, if any, left after clearing the claim of creditors and shareholder members, is to be applied to charity or corpus be kept alive to be used by a future co-operative society. These provisions neither make running of business by co-operative society for a public utility object or charitable purpose, nor it in any way creates a nexus between reserve fund created under Section 62 and the object of any public utility as its unconditional beneficiary. User of surplus at the end can also not be referable to any specific asset forming part of the total mass of assets of the society. Thus, the contention that reserve fund is created for an object of public utility is rejected. 9. The relevant rule which deals with the creation of the reserve fund and its utilisation which give effect to the above provision may now be noticed. Rule 68 while giving effect to Section 62 provides that in a society with shares and limited liability, not less than one-fourth of the net profits shall be carried to the reserve fund. In a society with shares and unlimited liability, not less than one-third of the net profits shall be carried to the reserve fund. In the latter case, 1/3 share of the net profits to be transferred continuously until the reserve fund equals to the paid up share capital of the society. Thereafter, such society has also to carry 25 per cent of its net profits to the reserve fund, However, looking to the financial position of any society and its needs, the Registrar may fix a lower rate of contribution made to reserve fund but not below 1/10th of the net profits. Sub-rule (2) provides for setting apart such part of its net profits by any agricultural credit society other than a land development bank. Sub-rule (2) provides for setting apart such part of its net profits by any agricultural credit society other than a land development bank. This is in addition to reserve fund envisaged under Sub-rule (1). This fund is to be utilised to enable the borrower to make postponement of repayment of loan on account of famine, drought or such unforeseen causes. Sub-rule (3), (4) and (5) of Rule 68 provide for distribution of dividends and bonus out of remainder to its members to the extent of business run by these members with the society, details of which we are not concerned here. 10. We have noticed above that Section 63 of the Parent Act provides for avenues in which the co-operative society is to invest its fund including reserve funds. It ensures that the funds are to be invested in such avenues where there is no risk to its repayability and for a fairly longevity of time to yield good return to society. The investment of the co-operative society funds for a temporary period is left to the discretion of the society. 11. Rule 55 which gives effect to Section 63 clearly declares that reserve fund maintained by co-operative society will belong to the society. It also envisaged the purpose for which the fund can be used. Primarily, it is devised to meet unforeseen future losses. But, it makes flexibility about its user. In a given case, society may be permitted to invest the fund wholly or a portion thereof in its own business. In the case of housing society, the reserve fund may be utilised for the expenditure on maintenance, repairs and renewal of buildings of the society and in the case of a processing society, the funds can be used for acquisition or purchase or construction of land, building and machinery. Sub-rule (4) of Rule 55 unfolds the areas to which reserve fund can be put to use. It reads: .(i) to meet unforeseen losses incurred by the society; .(ii) to meet such claims of the society as cannot otherwise be met; and (iii) to provide for other financial need in times of special scarcity. Sub-rule (4) of Rule 55 unfolds the areas to which reserve fund can be put to use. It reads: .(i) to meet unforeseen losses incurred by the society; .(ii) to meet such claims of the society as cannot otherwise be met; and (iii) to provide for other financial need in times of special scarcity. The aforesaid provisions convey in no uncertain terms that the reserve fund remains part of the capital and assets of the society and is to be used only for the purposes of the society in future according to the needs of the society either to be adjusted against its future losses or to pay off its dues which cannot otherwise be paid or to provide for funding needs in case of financial crisis. No part of reserve fund during the continuance of the society can be utilised for the purposes other than for the purpose of society albeit in consonance with general policy of the Act. User of the reserve fund which has primarily its object to have financial strength of the society and to the cooperative movement, has been regulated by the approval of the Registrar but there is no absolute prohibition against user of the entire reserve fund for the purposes of the society without there being necessity to reimburse and refurnishing existing reserve fund. 12. In the case of winding up of a co-operative society, Rule 56 gives effect to Section 82 of the Parent Act which we have adverted to above, which ordains that firstly, the debentures be paid then to repay the paid up share capital with dividend not exceeding 6 per cent return for any period or periods for which the dividends have not been paid. It is only after all these sums are paid and all the liabilities of society to its creditors and shareholders are discharged, if there remains any surplus funds or for that matter, surplus assets, the same are to be applied to such object of public utility as is resolved in the event of dissolution or cancellation of society. In distribution of the assets of which the reserve fund is also a part, no distinction is made in the application of surplus. In distribution of the assets of which the reserve fund is also a part, no distinction is made in the application of surplus. Surplus, if any left, is of the entire assets of the society without being any mark of any particular asset or fund, has to be applied for some object of public utility or for charitable purposes, as defined under Charitable Endowments Act as may have been approved by its members, whether through bye-laws or by resolution of general body of members. The provision clearly brings out the following features about the nature of the reserve fund .(i) The net profits of the society are first to be determined on the basis of declaration by the Registrar after making adjustment in accounts as per the requirements of the bye-laws and after the net profit is so worked, out of it, has to be divided in two parts; 25 per cent of net profit is ordinarily to be transferred to reserve fund, the remainder is to be used by the society towards education fund constituted under Rules and other specific purposes, if any, constituted under the bye-laws and towards payment of dividend and bonus to the shareholders as may be provided by bye-laws subject to the maximum limits in that regard prescribed and towards donation to charitable purpose. .(ii) Thereserve fund along with other funds of the society as may be required to be constituted by the bye-laws are to be invested in the avenues provided under the Act subject to relaxation that may be granted by the Registrar for utilising the funds for its running business. (iii) Reserve fund so required to be created compulsorily remains the property and part of the capital block of the society. .(iv) Till the continuance of society, reserve fund created out of net profit can be used for no purpose other than for the society itself .(v) The reserve fund so created is for the purpose of meeting the future exigencies like enduing loss or the repayment of debts which cannot otherwise be repaid or significantly to use the reserve fund as finance of the society for its own purpose in case of scarcity of finance from other sources. .(vi) The fact that the utilisation of reserve fund is subject to regulatory control of the Registrar does not make it any less the property of the society is clearly envisaged in Rule 68 and is reinforced from the fact that Registrar has no power to use the reserve fund credited under Section 62 of the Act for any purpose other than for the purpose of the society during the existence of the society. (vii) Even after the society is dissolved or cancelled, it can be used primarily for the repayment of debts of the society and the repayment of share capital with dividend upto the maximum rate of dividends provided under the law. (viii) It is only if there remains surplus of the assets, which may include the part of reserve fund also, is not to be divided amongst shareholders but is either to be utilised for some object of public utility decided by members of the society through its bye-laws or by passing a resolution to that effect in its general body or in consultation with general body, or for any charitable purposes as defined under Charitable Endowments Act, 1890 or to be kept a live corpus with a view to become the corpus of future society with the like objects. But, it does not ever become part of the State funds as such to be utilised by the State for its own purposes. 13. The contention raised before us is to be decided on the anvil of aforesaid nature and characteristic of reserve fund created under the Act. 14. Thefirst issue which arises for consideration is whether in the circumstances stated above, carrying forward a part of net profit of the society amounts to diversion or income by overriding title. 15. The 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. 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. Section 61 to Section 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, 16. 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) where the assessee has succeeded to the tamily ancestral estate on the demise of his father. Subsequent to such succession, his stepmother who had legal right to maintenance out of the estate of her husband brought a suit of maintenance against him and the assessee suffered a decree of the Court to pay a fixed monthly sum to the step-mother and it was declared that the maintenance was a charge on the ancestral estate in the hands of the assessee. The question that arose before the Privy Council was that the assessee was liable to be assessed as an individual in respect of the amount of maintenance which was payable to step-mother; to that extent what he received for her was not his income. It was not a case of the application by the appellant of part of his income in a particular way. It was not a case of the application by the appellant of part of his income in a particular way. Lord Macmillan delivering the opinion of the board stated: “In the present case, the decree of the Court by charging the appellant’s whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands.” It may be noticed that the title to receive the income in the aforesaid case vested with assessee but the assessee has received it for someone else than himself and the income at no stage become part of the assesse’s capital block which could be used by him in future for his own purpose. In fact, it was made a charge on assessee’s income which if the assessee failed to pay, could be directly recovered before it reached the assessee. This case is more akin to Poona Electric Supply case (supra) to which we shall shortly advert to. 17. In Provat Kumar Mitter vs. CIT (1961) 41 ITR 624 (SC), the assessee who was a registered dealer of 500 ordinary shares in a limited company, assigned to his wife, by a deed of settlement, the right, title and interest to all dividends and sums of money which might be declared or which may be due and payable in respect of those shares for the term of her natural life and covenanted to deliver and endorse over to her any dividend warrant or other document of title to such dividends or sums of money and to instruct the company to pay such dividends and sums of money to her. The assessee claimed exclusion of dividends on the aforesaid 500 ordinary shares on the ground of transfer of diversion of income by overriding title. The assessee claimed exclusion of dividends on the aforesaid 500 ordinary shares on the ground of transfer of diversion of income by overriding title. The Supreme Court repelled the contention by holding that the deed of assignment was, it its true nature, only a contract by the assessee to transfer, or make over, to his wife in future all dividends that may be declared in respect of the shares; as a company can pay dividend only to the registered holder of the shares, neither Section 16(1)(c) nor its third proviso was applicable to the case; the income continued to accrue to the assessee and was assessable in the hands of the assessee as his income, even though it was ultimately payable to his wife under the terms of the deed. It was a case of application of income after it had accrued and not a case of diversion of any sum of money before it had become the income of the assessee nor was a case where the assessee