TMI Blog1992 (1) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. Under an Act called 'Maharashtra Co-operative Societies Act, 1960, the Government have taken powers to issue directions to these Co-operative Societies in public interest and more particularly in the matter of fixation of sugarcane price to be paid to the cultivators. The control of sugar factories is kept under an officer called 'Director of Sugar', who conveys to the sugar factories from time to time the decisions of the Government on matters like collection of money for various purposes and also for the initiation and implementation of various schemes and programmes for the improvement of agriculture and irrigation, which will ultimately benefit cane development and therefore cane growers and thus ensure all round development of the economy of the State. The State Government also provided certain share capital with a view to meet the financial requirements of the sugar factories at the initial stages and also helped the sugar factories to obtain term loans from financial institutions like LIC, IFCI etc. Thus socio economic development schemes also are sought to be initiated and implemented through these Co-operative sugar factories. For the internal management of these Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the facts of that case. The Commissioner of Income-tax felt that the principle laid down therein was a principle of law of universal application and applying that principle to the facts of this case, initiated action under section 263 and rejecting the arguments advanced by the assessee that the facts of this case were totally distinguishable from the facts in the case of Bazpur Co-operative Sugar Factory Ltd. held that these deposits were all taxable. The common reason adduced by the Commissioner of Income-tax to bring to tax these deposits as trading receipts was that these deposits were made by way of deductions in the course of the assessee's trading operations. Since the business of the assessee was of manufacture and sale of sugar, from the sugarcane purchased by it the deductions made by the assessee in the course of the assessee's trading operations became part of assessee's trading operations. That was the refrain to tax all these deposits as trading receipts, i.e., to say the deductions made by the assessee from the cane price payable to the cane growers and credit towards these deposits accounts as per the directions of the Director of Sugar and also as per the bye-la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that these deposits were not refundable at all although they were so nomenclatured. He also referred to a letter issued by the Director of Sugar dated 13-3-1984 which authorised the sugar factory to utilise these deposits for set off of losses incurred by the sugar factories, which was exactly similar to the condition prevailing in the case of Bazpur Co-operative Sugar Factory Ltd. based upon which the Supreme Court laid down that these deposits were taxable. To that extent two cases are not dissimilar. In other words the similarity was established. These deposits had become integral part of the assessee's resources and merely because some interest was paid that does not render these deposits as refundable deposits' while the facts available on record were that they were never intended to be refunded nor in fact were refunded. Thus the depositors did not have any right over any profit generated through these deposits. No fund was earmarked for the repayment of these deposits. These deposits were collected' as a percentage of the cane price payable to the suppliers and therefore they are like the sales-tax collections, which was held to be taxable by the Supreme Court as trading r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d parallels between the bye-laws and the facts of that case with the bye laws and the facts of the case before us, the attempt on behalf of the assessee was to distinguish the Supreme Court decision, Ultimately it appeared to us that we should first discern the ratio decidendi of the Supreme Court decision and see whether it applies to the facts of the case before us, It is, therefore, necessary to closely examine the decision of the Supreme Court and then go to the various directions given by the Government of Maharashtra for the collections of these deposits, the bye-laws under which these collections were made and the purpose for which these collections were put to. 5. Before deposit could be taken as the income of a person collecting the deposit, the common sense approach would be to see whether the assessee has received it as a part of his own funds having full ownership of the funds without any legal obligation either present or future express or contingent to return the money with or without interest. The Supreme Court has repeatedly laid down the principle that if a trader collects money from the customers as a part of the trading receipts, then those receipts would parta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt. Therefore what is relevant to see is not how the amount was collected and when it was collected but with what obligation it was collected. 6. Now before we go to the bye-laws of the assessee, let us at this juncture examine the Supreme Court decision in the case of Bazpur Co-operative Sugar Factory Ltd. In this case bye-law 50 of the bye-laws of the sugar factory, which carried on the same business of manufacture and sale of sugar provided that a loss equalisation and capital redemption fund should be established and that every producer-shareholder should deposit every year towards the fund a sum not less than 32 paise and not more than 48 paise per quintal of the sugarcane supplied by him to the society to be determined by the Board. The deposits were to be adjusted towards the losses of the society and the balance utilised for repayment of the initial loan from the IFCI and thereafter for redeeming the Government share and any balance left to be used towards issue of shares. After the relevant accounting period the bye-laws were amended with retrospective effect from the date of the original bye-law providing that the amount shall be deposited until the shares to be sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down the meaning of the word 'deposit' by enunciating that "the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilment of certain conditions". So far we have extracted from the head-note but when we go into the body of the judgment we find that the Supreme Court was applying the rule laid down by the Apex Court in the earlier decision in the case of Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519. After referring to the facts of that case the Supreme Court observed that what was received by Punjab Distilling Industries Ltd. by way of security deposit was only an extra price received subject to the condition of returning and therefore a consideration for the sale of liquor and therefore it did hot make any difference as to how the additional amounts collected was treated in the account books. It was applying that principle to the facts of Bazpur Co-operative Sugar Factory Ltd.'s case the Supreme Court held that it made no difference as to how these amounts were referred to in the bye-law or the treatment given to it in the accounts. Further down of page 330, the Supreme Court gave the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areful consideration of the bye-law it appeared to us that there is a total difference and dissimilarity. 7. Now is the appropriate occasion to refer to the bye-law under which the non-refundable deposits were collected. "61A (1) Every year the society shall collect from the members Non-refundable deposit at the rate not less than Re. 1 per ton of sugarcane supplied by them. However in determining such rate the board shall consider the amount required for the repayment of loan of IFCI, repayment of bank loan on Block Capital Account and the repayment of time deposit received from the members. The rate of interest on such deposit shall not exceed 12 per cent until the Govt. share capital, the loan of EFCI, Maharashtra State Coop. Bank on long term loan advanced for capital expenditure and by any other financial agencies has been refunded. The NRD collected as above shall not be refunded to the member till the repayment of Govt. Share Capital and Term loans taken from IFCI and other Financial institutions are repaid fully. (2) The deposits collected as above shall not be refundable to members. However the board may convert such deposits into shares after repayment of loans ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the deposit amount belongs not to the depositor but to the assessee. If the amount of the deposit does not belong to the assessee, no adjustments could be made out of it because the entire amount of the deposit becomes refundable in tact and therefore a debt owed by the assessee to the depositor. The debt so owed will be the full amount,, of the deposit, and not a part of it. When only a part of it is available for conversion to share capital, that part which was adjusted for the repayment of the loans and for adjustment of losses would naturally have to become the money belonging to the assessee. But in the case before its the entire amount of deposit is to be converted into shares except that the time at which they could be converted into shares was only postponed till the loans were repaid. Thus the purpose of collecting the deposit, i.e., deduction is to issue shares but not immediately but after certain of time, i.e., the time taken to repay the loans. During the period the deposits remained with the assessee, they are not regarded as assessee's own money but as only a liability and therefore a provision was made for payment of interest. The interest is payable only til ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chief of which is that the fixed deposits collected shall not exceed three times the shares held by the members. This will show that the primary purpose of collecting the deposits is ultimately to adjust towards the shares of the members, though not immediately but at the same time providing for recompense to the depositors by way of interest. It is also to be noted that though the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilment of certain conditions, the deposits in this case are not refundable in that sense to the depositors but they are to be adjusted against share capital, which is as good as returning it to the depositors. In this context it may also be noted that the bye-laws provided for the payment of interest on the deposits during the period they remain unadjusted towards share capital. Interest is a compensation as held by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 and Ganesh Dass Sreeram v. ITO [1988] 169 ITR 221 for deprivation of the user of money i.e. to say the depositors are being compensated for the loss of user of money by paying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as a deposit and it gets diminished and deiminuted by the adjustment of losses etc. and the likelihood of any balance remaining for conversion into share capital is remote whereas in the case of the assessee before us, no part of the deposit is to be adjusted towards losses nor towards repayment of the loans nor for redeeming of the Government share capital but only the amount may be used for that purpose. Utilisation of the deposited amount for a specified purpose is different from utilisation of the deposit itself for those purposes. While in the former case the deposit remains intact, in the latter case deposit gets consumed. It is the latter deposit that was considered by the Supreme Court as amounting to a trading receipt. Trading receipt means assessee's own money, which can be put to any use. This distinction has therefore to be home in mind. The distinctions between the bye-laws of the Bazpur Co-operative Sugar Factory Ltd. and the assessee are given in pages 63 and 64 of the paper book and the salient features are that while in the case of Bazpur Co-operative Sugar Factory Ltd. a fund called loss equalisation and capital redemption reserve fund is to be created to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined from the amounts payable to the cane growers were utilised only for the payment to the creditors in the first instance though later on the retained amounts were to be converted towards share capital. In that sense there was a substitution of one creditor by another. 11. The learned Departmental Representative further vehemently put forward the argument that the primary purpose was to repay the loans and relied upon the language of the bye-law. As we have endeavoured to show the primary purpose does not seen to be to repay the loans although that was the immediate and proximate purpose but the purpose of the deposits is to collect money towards share capital. The whole idea is to increase the capital base of the assessee in a phased manner by retaining some portion of the money payable to the cane growers. There is no collection of the money involved in these transactions as in the Gase of Chowringhee Sales Bureau (P.) Ltd. or Sinclair Murray Co. (P.) Ltd. as sales-tax collections. These are moneys retained out of the moneys payable to the cane growers. The character of the money so retained attached with the obligation of conversion into share capital continues to be a lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. 13. The Departmental Representative then referring us to the balance sheet pointed out that loans and other liabilities were nil and therefore the deposits should have been converted into share capital and since they were not so converted, the provision in the bye-laws was only a make belief affair and therefore no great store should be set by it to determine the-issue. It is true that the balance sheet shows that the loans and other liabilities were reduced to nil but yet there is a Government capital though of a small amount of Rs 1 lac. The bye-laws provided that the deposit should be converted into share capital only on the redemption of the Government capital. Why the Government capital was not redeemed, what were the circumstances that prevented the assessee from repaying the Government capital and what were the obstacles in its way and what were the points made by the Government against receiving the money back are not discussed before us nor are they germane to the issue before us because the bye-laws provided that so long as the Government capital was not redeemed, the deposits are not to be converted into share capital. Therefore the presence of the Government capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt would allow the income of the assessee to be frittered away by paying interest to the depositors when it is easy to avoid the payment of interest by converting it into share capital by withdrawing the measly sum of Government capital. The intention of the Government in allowing the deposits to remain as deposits may be to retain the capital for the purpose of business but at the same time it is to be borne in mind whether the deposits continue as deposits or converted as share capital, in neither case there is any outgo of cash. Therefore there is no depletion of the liquid resources. Therefore there must be very strong reason for the amounts not to be converted into share capital. That may be to provide minimal interference in the conduct of the affairs of the assessee. If so many cane growers become the shareholders, the conduct of the affairs of the assessee would become wellnigh impossible. May be with a view to reduce the interference and participation by a large body which might become unvieldy to cater to. The body of management is kept to the minimum and to the manageable limits. We are only hazarding a guess about the Government intention in this behalf. It may be so or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r intended to be acted upon nor the argument advanced by the learned Commissioner of Income-tax that the principle of Mc Dowell Co. Ltd. would apply as if it is a tax planning would all become irrelevant and should fade into insignificance. 16. The learned Departmental Representative then drew our attention to a judgment given in the case filed by one of the depositors where the assessee had refused to return the deposit taking a plea that it was not obliged under the bye laws to return the money. Relying upon this stand taken by the assessee in that case, it was pleaded that that was the real intention and therefore the argument of the department should be accepted. But the final outcome of the judgment was against the assessee. The learned Judge after going through the bye-laws had clearly decreed against the assessee and that decree was accepted. Therefore when we are considering a case of this nature, we are to be governed by the final outcome of the case rather than allow ourselves to be carried away by the stands thaken in the intermediate stages. This argument also in our opinion does not help the department's contention for the reason that the final judgment was against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that these decisions were considered by the Supreme Court in the case of Bazpur Co-operative Sugar Factory Ltd. and it was applying those principles that decision was given that the deposits in that case were taxable. The Supreme Court pointed out that in the case of Punjab Distilling Industries Ltd. the extra amount collected was a part of the selling price and the liability to return it is only a condition attached to the sale price. In this case we have already shown how the amounts in this case were retained by the assessee out of the moneys payable to the cane growers and the conditions attached to the retention and eventual utilisation of that retained money. Therefore we do not think that much will turn on the case of the Supreme Court nor on the principle laid down therein once we bear in mind that the amounts retained in this case are not collections as sale price but as moneys retained as liabilities. To repeat even at the cost of repetition, the question before us is whether the moneys retained is a liability or not because the question of receipt is absent. We are of the view that on the facts of this case the moneys retained out of the moneys payable to the sugarcane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Supreme Court found that the Rules in that case did not create a right in the distiller to the return of the bottles and the Rules only empowered the distiller to take a deposit. The deposit was under a contract. Therefore the amount so taken under a contract were held to be trading receipts in the absence of a right in the distiller to return the bottles. Here there is a right inhering in the depositors to demand the conversion of the deposits into share capital and a legal liability on the assessee to convert it into share capital. Therefore the amount retained in exercise of the rules cannot be said to be amount collected under a contract as and by way of income as contended for by the learned Departmental Representative. It may also be pointed out that at page 83 of the report the Supreme Court had clearly stated: "Whether if the deposits had been made without a contract and directly under the rules and in respect of a trading transaction made by a contract they would have been trading receipts or not, is not a question that arises in the present appeals and on that question we express no opinion now." Thus the Supreme Court did not express any opinion on the salient que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome embedded in it nor can-we say that these moneys were collected by it or received by it as and by way of income. 23. For these reasons we are of the opinion that the non-refundable deposits are not to be treated as trading receipts and should not have been brought to tax as in the earlier years. 24. Now we go to the refundable deposits from members. It is un-understandable how the refundable deposits as distinguished from non-refundable deposits could ever be treated as income. Bye-law 61-B authorises retention of money by way of refundable deposits. It provides: "In addition to the non-refundable deposit from member as mentioned in bye-law No. 61-A, if the Board of Directors find it necessary they shall have a right to collect the time deposits for a period not exceeding five years, out of the cane price payable to the cane supplier, at a prescribed rate per ton of sugarcane supplied as may be decided by them every year. This deposit will be used by society only for the purpose of expansion programme and capital expenditure and interest paid on these deposits will not exceed 12 per cent." Here again the source for the deposit is retention of money out of the cane price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment to be spent for the purpose for which they were collected, which means the assessee was used only as a collecting agent of these moneys from the cane growers. We do not wish to dwell into those aspects of the matter except to state that these deductions were made from the cane price payable only as per directions of the Government. In other words the assessee had only implemented a directive of the government subject to which control it has to function indicating thereby that there is neither volunlariness nor any mutual understanding or a contract between the assessee and the cane growers to retain these moneys as income of the assessee. The assessee had no ownership except for temporary possession of those amounts. 25. We may state here that an argument was addressed by the learned Departmental Representative that adjustment of losses was also permitted here as in the case of Bazpur Co-operative Sugar Factory Ltd. and therefore the similarity of the assessee's case with that case was established. But this does not seem to be a correct reading of the instructions issued by the Sugar Directorate. In paragraph 2.3 of the directions there was a detailed reference to 'Sampat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Directors and the Chief Executive would be liable for penalties and legal actions. This order would amply indicate that the assessee when it collected the money for any purpose including non-refundable deposits as well as refundable deposits and other funds was only acting as an agent and implementing the instructions given to it by the Government from time to time and it has no option except to obey. Therefore there is nothing like collecting of these amounts from the cane growers as part of the trading operations so as to call them as separate collections having the income character in them. The rule laid down by Supreme Court in the case of Bijli Cotton Mills (P.) Ltd. reapplied by the Supreme Court in the case of Bazpur Co-operative Sugar Factory Ltd. would squarely and amply apply to these amounts. By whatever name they were called they were all impressed with the legal obligation of spending them for a particular purpose or making them over to the Government as the case may be and do not bear the character of income. 27. We are therefore unable to see as to how any of these funds mentioned above, be it refundable deposits or voluntary deposits from members or hutment f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting under section 263 directed its exclusion. When the matter came on reference to the High Court, the High Court found as a fact that there was nothing to show that the tide to the fund did not vest in the assessee. It was only a part of the moneys received by it as its income and was credited to a separate fund to discharge an obligation imposed upon it by the Molasses Control Order. This did not amount to a case of diversion of income but of application of income. The ratio laid down in that decision does not apply to the facts of this case because the assessee was not the owner or have any control over the Area Development Fund because it was retained out of the purchase price of cane at the behest of the Government as its agent, the control over it being exclusively with the Government and spent by the assessee again as per the directions given by the Government. We are therefore of the opinion that the rule laid down by the Madhya Pradesh High Court is not applicable to the facts of the case before us and according to the facts of this case, the amount retained for the purpose of Area Development Fund is of the same category and nature as any other fund. It is also seer from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase price payable for sugarcane, the question should have been whether the entire amount determined as purchase price of the sugarcane should be allowed as a deduction or should the deductions be confined only to the amounts actually paid to the cane growers treating the retained amount as not forming part of the purchase price. The case has not been examined by the department from that angle and it could not be so examined for the simple reason that the full purchase price payable to the sugarcane growers is a revenue expenditure in its entirety. The amount retained with the acceptance of the cane suppliers is no other than the amount agreed by them to be kept as a deposit for them or contributed by them towards a compulsory levy made by the Government under the Act for various developmental purposes. The contributors for this levy are only the cane suppliers, the collecting agents being the sugar factories. This is how we understand the scheme of the Government of' Maharashtra in directing these deductions. If this is so, there is no income at all and therefore the treatment given to these deductions in the earlier years was the correct way of treatment and assessment to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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