TMI Blog2001 (9) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Rs.13,670 and Rs.4,401 towards interest credited to the molasses fund account for the assessment years 1977-78 and 1976-77, respectively?" R. C. No. 169 of 1991: Similarly, at the instance of the Revenue, the Income-tax Appellate Tribunal referred the following question under section 256(2) of the Act, arising out of its order dated June 27, 1984, in I. T. A. No. 1163 of 1983 for the assessment year 1978-79: 'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in allowing the deduction of Rs.5,07,148 being a reserve created as molasses storage fund account and Rs.34,148 being interest thereon for the assessment year 1978-79 in the manner indicated by the Appellate Tribunal in para. 7 of its order?" R. C. No. 98 of 1991: At the instance of the Revenue, the Income-tax Appellate Tribunal referred the following question under section 256(2) of the Act arising out of its order dated March 13, 1989, in I.T.A. Nos. 1917 and 1918 of 1986 for the assessment years 1980-81 and 1981-82: 'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the contributions made by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credited to the molasses storage fund account. The Assessing Officer also referred to the judgment of Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454 (Mad) and even as per the said judgment as the assessee's dominion over the fund has not ceased, the said amount was includible in the total income of the assessee. This was contested by the assessee before the Commissioner (Appeals), unsuccessfully. Therefore, the assessee preferred appeals before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal, after elaborately considering the claim of the assessee-company in the light of the provisions contained in the said Control Order, finally held that there is a diversion of income at the source itself and therefore the amount credited to the molasses storage fund account should not be treated as income of the assessee-company. The Tribunal also relied upon and followed the decisions of the Calcutta and Madras Bench decisions of the Tribunal. Aggrieved by the said orders of the Tribunal, the Revenue sought the references to this court for its opinion. Learned standing counsel appearing for the Revenue contended that the Tribunal was not justified in hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its asset. Therefore, it was contended that the assessee continues to be having control over the fund, even after crediting a part of the sale consideration to the said account and even during the utilisation and after utilisation of the said fund for the purpose of which it was created and the asset created with the said fund continues to be that of the assessee. Therefore, the said amount does not cease to be that of the assessee. Hence, the Tribunal was not justified in excluding the said income while computing the assessee's in come for the respective assessment years. Learned counsel relied upon the judgment of the Madhya Pradesh High Court in the case of Jiwajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182, the decisions of the Madras High Court in Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454; Associated Power Co. Ltd. v. CIT [1996] 218 ITR 195 (SC) and CIT v. Sitaldas Tirathdas[1961] 41 ITR 367 (SC) and contended that the decision rendered by the Income-tax Appellate Tribunal is contrary to the judgments rendered in the above decisions. Hence, the questions referred to this court are to be answered in favour of the Revenue and against the assessee. Learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [1998] 229 ITR 285 (Mad); (3) Somaiya Orgeno-Chemicals Ltd. v. CIT [1995] 216 ITR 291 (Bom); and (4) CIT v. New India Sugar Mills Ltd. [1994] 206 ITR 212 (Cal). From the above rival contentions, the issue to be considered is whether the amounts that were credited to the molasses storage fund account are includible in the total income of the assessee-company? Before considering the rival contentions, it would be appropriate to refer to the relevant portions of the Control Order. The molasses, which come as a by-product in the manufacturing process of sugar, have to be stored and sold in accordance with the provisions of this Control Order. The prices are also being fixed by the Central Government under the said Control Order. The molasses that were produced by the various industries are also classified into various grades and their prices are also fixed at varying rates depending upon their grade. The prices fixed under the 1961 Control Order are fixed as per the Schedule, which reads as under: ------------------------------------------------------------------------------------- "The Schedule ------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... himself about the proposals, permit the withdrawal. 2. The Commissioner shall fix the storage facility for molasses required by each sugar factory or khandasari unit at a level equivalent to 50 per cent. Of its average production of molasses during the calendar years 1970 and 1971. 3. The storage tanks for molasses will be as per the specifications formulated by the Indian Standards Institution in is: 5521-1969 or made of pucca covered masonry, as may be decided by the Commissioner. 4. The Controller, in consultation with each sugar-factory or khandasari unit, shall fix a time schedule within which the particular quantum of storage facilities for molasses shall be constructed by the sugar factory or khandasari unit. 5. In the event of failure to construct the quantum of storage facilities within the time schedule referred to in sub-paragraph (4), the Controller shall have the work executed through the public works department of the Central Government or the State Government or the building construction organisation of the Central Government or the State Government or a private agency and the management of the sugar factory or khandasari unit, shall place such amount, as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded and shall be utilised in accordance with the orders that may be issued for the regulation of such funds." As per this note, the amount which is to be funded separately has to be utilised in accordance with the orders that may be issued by the Government of India, Ministry of Petroleum and Chemicals and Mines and Metals. As per the Control Order, the fund that was set apart has to be utilised for the erection of storage facilities for molasses and alcohol. The Control Order requires every distillery to set aside the amount specified in the said note under a separate head of account called 'Storage fund for molasses and alcohol account". The order also provides for returns being submitted to the Excise Commissioner by the management of the distillery showing, inter alia, the amount funded in terms of the said order during the period as specified therein. There is also a provision for monthly return and an annual return showing the total production of alcohol and the total sale of alcohol and the amount credited to the said account during the year certified as correct by the chartered accountants of the distillery and the total amount so funded. Clause 5 of the order provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource of this amount. In any event, the assessee has lost domain over this amount of Rs.6 per kilolitre. It has to be utilised in the manner statutorily laid down. Even the storage facilities have to be constructed as per the directions of the Commissioner and the Commissioner has the power, if the assessee fails to construct the storage tanks in the prescribed time schedule, to do the work and obtain the said amount from the assessee. Hence, this amount over which the assessee has lost its domain cannot be considered as a part of its real income or its profit. It is, therefore, required to be excluded under section 28 of the Income tax Act, 1961, for the purpose of calculation of income." The Bombay High Court while arriving at the above decision, considered the following decisions rendered by various courts: (1) CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd. [1992] 198 ITR 690(Kar); (2) CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd. [1988] 174 ITR 475 (Kar) applied; (3) Keshkal Co-operative Marketing Society Ltd. v. CIT [1987] 165 ITR 437 (MP); (4) Cochin State Power and Light Corporation Ltd. v. CIT [1974] 93 ITR 582(Ker); (5) Amalgamated Electricity Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the income being received in cash by one person or another. What the court emphasized is the nature of the obligation by reason of which the income becomes payable to a person other than the one entitled to it. Where the obligation flows out of an antecedent and independent title in the former (such as, for example, the rights of dependants to maintenance or of coparceners on partition, or rights under a statutory provision or an obligation by a third party and the like), it effectively slices away a part of the corpus of the right of the latter to receive the entire income and so it would be a case of diversion. On the other hand, where the obligation is self-imposed or gratuitous, it is only a case of application of income." However, strong reliance was placed by learned standing counsel appearing for the Department on the decision of the apex court in the case of Associated Power Co. Ltd. v. CIT [1996] 218 ITR 195. The said judgment was rendered by the apex court under the provisions of the Electricity (Supply) Act, 1948. The facts as set out in the said judgment are thus: By reason of the provisions of the Electricity (Supply) Act, 1948, and the Sixth Schedule thereto, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriated to the contingencies reserve shall be invested in securities authorised under the Indian Trusts Act, 1882 (2 of 1882), and such investment shall be made within a period of -six months of the close of the year of account in which such appropriation is made. V. (1) The contingencies reserve shall not be drawn upon during the currency of the licence except to meet such charges as the State Government may approve as being (a) expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented; (b) expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal; (c) compensation payable under any law for the time being in force and for which no other provision is made. (2) On the purchase of the undertaking, the contingencies reserve, after the deduction of the amounts drawn under sub-paragraph (1) shall be handed over to the purchaser and maintained as such contingencies reserve: Provided that where the undertaking is purchased by the Board or State Government, the amount of the reserve computed as above shall, after further deduction of the amount of compen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there cannot be any difference between a businessman collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs. Y to them and another businessman collecting Rs. X alone. The amount returned is not a part of the profits at all." After considering various judgments, the apex court observed that the income-tax was a tax on the real income, i. e., the profit arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit could be ascertained only by making the permissible deductions. There was a dear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case, whether the outgoings fell in one or the other of the heads was a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that had to be borne in mind was that between the real profits and the statutory profits, that is, between the commercial profits and the statutory profits, the latter was statutorily fixed for a special purpose. The assessee was a commercial undertaking. It did the business of supply of electricity, subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isting reserves or from 'the revenues of the undertaking'. This clearly indicates that the monies which have to be put into the contingencies reserve reach the electricity company and are not diverted away from it." The above decision rendered by the apex court in terms of the provisions of the Electricity (Supply) Act, 1948, which contemplates the creation of reserve from out of the profits when its clear profits exceeds a reasonable return and those reserves are to be utilised by the assessee-company therein may be under certain contingencies. Therefore, the contingencies reserve created by the assessee in that case always continued to be with the assessee-company, might be subject to certain restrictions. Therefore, the decision of the apex court rendered in the above case may not be of any assistance to the Department. Similarly, learned counsel also relied upon the judgment of the Madhya Pradesh High Court in the case of Jiwajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182. In this judgment, the Madhya Pradesh High Court had taken a view that the assessee's sugar company never parted with the fund that was collected and credited to the molasses storage fund though kept separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him, the fund would go to the assessee's company. No doubt, there are no specific provisions under the Control Order. But, once the assessee-company is not free to withdraw any part of the fund from the fund account even to spend it for the purpose of construction of the molasses storage tanks, then how could the amount be taken away by the assessee even in the case of discontinuance of its business by the assessee. In such case also if the assessee-company wants to withdraw the amount, the Central Government has to approve it. In fact under the provisions of the Income-tax Act also appropriate provisions are there, if it is paid to the assessee to tax the same as its income. Another contention advanced by learned standing counsel was that after the construction of the storage tanks, the storage tanks would be treated as the asset of the company in respect of which it is entitled for depreciation. All these things are outside the question referred for the opinion of this court. Even in that case also appropriate provisions are there in the Income-tax Act; if an asset was acquired by the assessee not out of its own fund but out of the funds borne by some others, the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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