TMI Blog2014 (9) TMI 264X X X X Extracts X X X X X X X X Extracts X X X X ..... and this fund is distinct from the Cane Development Fund. Whether the collection made towards "ADF" by the assessee sugar factory is impressed with the specific obligation or assessee hold this money as a trustee – Held that:- Even if initially it was by way of discretion the Sugar Co-operative factories were collecting the fund and spending the same on the different projects undertaken in the area of operation but subsequently the collection and use of fund was regulated by the intervention of the Govt. by issuing the order u/s. 79A of the Maharashtra Co-operative Society Act - The assessee has maintained the separate account in respect of this fund and as per the statement filed it is seen that the assessee sugar factory is utilizing the ADF on different projects as per the approval given in the annual general meeting (AGM) - Merely because the amount collected is not kept separately in the bank account, the character of the amount will not change as decided in Commissioner of Income-Tax (Central), New Delhi Versus Bijli Cotton Mills Pvt. Limited [1978 (11) TMI 1 - SUPREME Court] - the assessee is required to submit the Auditor's Report to the Director of Sugar, Govt. of Mahar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant's business. 4. It may be held that during the period the appellant continued to hold the collections towards Area Development Fund in its custody, it was legally liable and obliged to spend these collections for the purposes they were collected and this liability did not get extinguished due to postponement of the spending of the said funds. 3. The briefly stated facts which emerge from the records are as under. The assessee, a Co-operative sugar factory which is engaged in the business of manufacturing and sale of sugar. The assessee is deducted certain amount from the bills payable to the members and non-members towards the supply of sugarcane and the said deduction is made and shown under the head Area Development Fund (in short ADF ). The Assessing Officer in the original assessment order brought to tax the collection made by the assessee under the head Area Development Fund (ADF). In the first round of appeal the assessee succeeded in getting the relief from the ITAT as well as the Hon'ble jurisdictional High Court as it was held that the amount collected by the assessee under the head ADF have never reached to the assessee but the same was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals gives statutory basis for the already existing practice. It is difficult to equate this fund to the other categories of funds, as has been done by the Tribunal and affirmed by the High Court. Unlike the other funds like Chief Minister's Relief Fund, the amount collected towards Area Development Fund is retained by the sugar factory itself and utilized as per the guidelines issued by the Government or the National Cooperatives Development Corporation. The collective Body of the Society and its elected representatives take the decision as to how much amount has to be spent and for what purposes. The Director of Sugars or other designated official, no doubt acts in a supervisory capacity to oversee that the funds are properly utilized. On that account, it cannot be said that the collection is made by the Society as an agent of the Government or the proprietary interest in the funds is vested with the Government. The conclusion has been reached by the Tribunal mainly on the basis of requirement of prior sanction of the Director of Sugars for incurring the expenditure. Such restriction prescribed in the larger interest of the Society itself does not in any way detract from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t irrigation schemes, (3) distribution of cane seeds and (4) construction of new wells or deepening of old wells. The sugar factory is required to make sure that any project which they want to undertake out of the Cane Development Fund is technically and financially sound and to send the proposals in advance to the Directorate of Sugar for requisite sanction. The projects will directly benefit the members and augment the sugarcane production which will incidentally help the Society in its manufacturing operations. The beneficiaries under the scheme are no other than the members of the Sugar Co-operative Society concerned and the advantage of enhanced production of sugarcane will ultimately be felt by the Society itself. Unlike the Area Development Fund, the monies out of Cane Development Fund are not spent for purposes unconnected with the growth and functioning of the sugar factory. The Tribunal was inclined to view it as a 'compulsory levy' on the depositors collected by the Government through the agency of sugar factory. This approach in our view is wholly unsustainable and is in the realm of surmise. We do not also see any scope for the application of principle of diver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can express our opinion that the receipt by way of deduction was regarded as revenue receipt and held to be included in the taxable income of the assessee was mainly because of the peculiarity of the facts that the impugned fund called loss equalization and capital redemption fund was meant for the purpose of meeting the losses of the sugar factory. After adjusting the losses, if any, in the working year, the deposit shall be allowed to accumulate and utilize for repayment of the initial loan from the Industrial Finance Corporation of India and finally redeeming the Government shares. The facts of the case have also revealed that the amount outstanding to the credit of this fund was to be used for making the partly paid shares fully paid up. Lastly the balance of the said account was to be refunded to the members concerned after the liquidity of the loan and thereafter the fund shall cease to exits. The facts are thus fully distinguishable mainly because of the reason that the receipts were meant for the purpose of the business of the assessee and the domain over the fund was exclusively within the rights of the sugar factory. Since the facts of the appeal in hand are distingui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) The Apex court has held that the Hon'ble High Court fell into an error in invoking the theory of diversion of income at source and it was further held that the crux of the matter was that it never had been a diversion of income of a third party before it reached the assessee. The court has also made an observation that the impugned receipt in the form of Area Development fund always remained with the assessee. Second observation: (ii) That the question about the realization of fund being impressed with a specific legal obligation to spend the monies for specified purpose which are unrelated to the business of the sugar factory could still be contended. The Hon'bie Court has said that such contention that the impugned receipts could not be treated as income of the assessee can be argued on the basis of the analogy of collection of amounts towards charity as in the case of CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60. 11.1. To remove any ambiguity and for the sake of ready reference we hereinbelow reproduce the relevant paragraph pertained to the second observation: It could still be contended, as has been contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... once the Hon'ble Supreme Court has pronounced that there was no diversion of income and the receipt remained with the assessee therefore, the fund was income in the hands of the assessee; but we have to state with restrain that the view so expressed was only one part of the decision of the Hon'ble Supreme Court and the other part of the decision of the Hon'ble Supreme Court has escaped the attention, as is evident from the relevant paragraphs reproduced above from the said order of the Hon'ble Supreme Court. Whatever was implicit in the quoted decision of the Hon'ble Supreme Court, an attempt was made by us to make it explicit. Our endeavor in this judgment is simply to give guidelines explicitly to the authorities below to correctly follow the verdict of the Hon'ble Apex Court. For that reason we hereinbelow set few questions so as to find the answer by the revenue authorities: (i) What was the exact nature of the scheme particularly in the light of section 79A of Maharashtra Co-operative Societies Act? (ii) What was the obligation of the sugar factory imposed and attached with the said collection? (iii) What was the resolution in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, New Delhi, and by the State Government for certain specified purposes as per priority to be decided by the Board of Directors of a sugar factory. The order also provides that the fund can also be utilized for a purpose not specified in the Bye Laws after obtaining sanction from Director of Sugar [clause 3(g) of the order]. It is thus clear from the order of the State Govt., the sugar factories can utilize the fund for any purposes with the approval of the Director of Sugar and therefore it cannot be said that the receipts are to be earmarked for any specific purpose. When the objects on which the receipts are to be spent are to be decided by the appellant itself and such objects are only to be reported to the Government; it is difficult to infer that the said fund is impressed with a specific legal obligation to be spent for specified purposes. Further, it is obligatory on the part of the appellant that it should spend the money collected towards the Fund within one year and if that is not done within the next year. But, as pointed out by the Assessing Officer, there was inordinate and consistent delay on the part of the appellant in utilizing the funds for the purposes for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chart showing that the amounts from the ADF are spent on the Hospitals, Schools, incentive to the Wrestlers, help to the persons affected by the fire, incentive for digging wells etc. It is argued that entire fund is utilised on Socio-economic programmes/projects. He submits that the order passed u/s. 79A of the MCS Act has put obligation on the assessee and it is the statutory duty of the assessee to utilise the funds for the specified purposes only in the area of operation of the sugar factory. He submits that the amount collected by the assessee cannot be treated as income under the charging provision of the Income-tax Act. He finally submits that even though the amounts collected by the assessee towards the ADF is treated as income in the hands of the assessee, at the same time the Assessing Officer has allowed the expenditure whenever the amount has been spent on specified purposes treating the same as business expenditure. 9. Ld. Counsel Shri N. Srinivasan in his supporting argument submits that even if the Hon'ble Supreme Court has held that the doctrine of diversion of the income overriding the title is not applicable to the amounts collected under the ADF but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC). In sum and substance their lordships concurred with the view taken by the High Court that the assessee was merely acting an agent of the Government. 12. Same way while deciding the issue of Sugarcane Development Fund after considering the purpose for which the fund is to be used, their Lordships held that even if to some extent there was a control of the Director of Sugar but at the end result the projects on which the fund would be spent there is a direct benefit to the members and augment the sugarcane production will help the society in his manufacturing operations. In sum and substance their Lordships held that the said collection for Sugar Development Fund by the assessee sugar factory is an income and the principles of diversion of income at source cannot be applied to the said fund. We are taking the note of the important observations of their Lordships that Unlike the ADF, the money out of Cane Development Fund are not spent for purpose unconnected with the growth and functioning of the sugar factory . In sum and substance their Lordships held that the projects on which ADF is utilised not connected wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mda account, and the same was not treated as a trading receipts. Subsequently, the trust was also constituted and the said levy was treated as a trust fund which was to be utilised for the religious and charitable purposes. The said assessee claimed that the amounts levied and collected under the head Dharmada were held for the trust by it which were earmarked for charity and as such the said receipts were not its income from business. The Assessing Officer and the AAC rejected the claim of the assessee but the High Court decided the issue in favour of the assessee by observing that the Dharmada was a customary levy prevailing in certain parts of the country and where it was paid by the customers to a trading concern, the amount was not paid as a price for the commodity sold to the customer. The Revenue carried the issue before the Hon'ble Supreme Court. The Revenue challenged the nature of levy itself by taking the contention that the object was very vague and the money was lying with the said assessee and there was no time limit for spending the amount. The Hon'ble Supreme Court held that the purpose for which the amount was levied i.e. Dharmada cannot be regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state that the ratio of these decisions cannot apply to the instant case. Since the realisations in question in the present case are not a part of the price or surcharge on the price but payments for the specific purpose of being spent on charitable purposes, they cannot be regarded as trading receipts of the assessee. Dealing with the factual aspects on the basis of which counsel for the revenue sought to support the Tribunal's finding that no trust could be said to have been created by the customers it will be apparent from the above discussion that none of the aspects are such as would lend support to the inference drawn by the Tribunal. We have already dealt with the alleged_ compulsory nature of the levy and have pointed out that the dharmada amounts cannot be said to have been paid involuntarily by the customers and in any the compulsory nature of the payments, if there be any, cannot impress receipts with the character of being trading receipts. Further, it is not possible to accept the submission that the customers being illiterate did not appreciate that they were paying the amounts with a view to create a trust, especially when it has been found that such pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said letter the view of the Sugar Factories were also called for. So this is a beginning when the Govt. machinery started to have the controlled and the collections made by the Sugar Factories towards ADF. The National Co-operative Development Corporation (Sugarcane Division), New Delhi vide letter dated 28-04-1977 issued to all the Co-operative Sugar Factories had made a difference in respect of Area Development Programme. It is impressed in the said letter that the Sugar Co-operatives are involved in Cane Development Programme in the area of operation but at the same time the other major crops in the area also should be supported. It was also impressed that the funds can be utilized for the irrigation facilities, educational and medical service, animal husbandry and poultry programmes and general services like contribution towards housing to the homeless poor people, providing relief for different national calamities etc. Department of Co-operation and Textile, Govt. of Maharashtra issued order dated 18-09-1989 u/s. 79A of the MCS Act and gave the directions in respect of the modality of the collection of the fund and its uses. The Sugar Co-operatives were directed that the dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose not approved by the General Meeting, prior permission of Director of Sugar should be obtained. (g) If the fund is to be utilized for a purpose not specified in the By Laws, permission of Director of Sugar should be obtained. 17. In sum and substance the Director of Sugar, Govt. of Maharashtra was the supervising authority on the collection and use of ADF. We have perused the annual statements of the account and we find that the assessee has transferred the fund in the balance sheet under specific head i.e. Area Development Fund. We also find that the assessee sugar factory has to get the approval of the members of the assessee society in the annual general meeting and then only the ADF can be utilized. The assessee has filed some of the resolution in the compilation from which it is seen that the ADF is used for giving incentive for primary school, incentive for wrestlers, help to persons affected by fire, incentive for wage, road developments, medical assistance, subsidiary for digging wells, assistance for group marriages etc. In this case, the assessee has not kept the amount deducted from the bills payable to the members and non-members in separate Bank Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction is made that for what purpose the assessee Co-operative Factory is collecting the said fund and where the fund will be utilized. In our humble opinion the assessee's role is like a trustee of the Area Development Fund . We, accordingly, decide this issue in favour of the assessee. It was submitted before us that the Department has allowed the expenditure incurred by the assessee out of the ADF on the actual basis treating the same as a business expenses. As we have held that the amount collected under the ADF is not a trading receipt in the hands of the assessee hence, the deduction given by the Assessing Officer in the respective assessment years towards ADF is to be withdrawn. The Assessing Officer is accordingly direct to exclude fully the amount included towards Area Development Fund in the income of the assessee and also to withdraw the amount allowed as a business expenditure towards ADF. Accordingly the assessee succeeds on this issue. 19. In other appeals i.e. ITA Nos. 2060, 2061, 2062, 2063, 2064, 2066, 2067, 2068, 2069, 2070, 2071, 2072, 2073 2074, 2075/PN/2012 and ITA Nos. 05 to 11/PN/2013, following our decision in ITA No. 2065/PN/2012 for the A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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