TMI Blog2000 (5) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... xability of the trading receipt is income. but the nature, object and obligation of the receipt' ; in the facts of the decision in CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC) and Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 (SC) in such reconciliation ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that 'what is relevant to see is not how the amount was collected and when it was collected, but with what obligation it was collected', [in total disregard of the Supreme Court's decisions in Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 and Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 and CIT v. Punjab Distilling Industries Ltd. [1964] 53 ITR 75] ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the purpose of collecting the deposit, i.e., deduction is to issue shares (but not immediately but after a certain time, i.e., the time taken to repay the loans) ; when the Tribunal itself held in para. 7 of its order that the main purpose of collecting the deposits from the cane growers by way of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as being paid on the deposits brings out the relationship of a creditor and debtor ? (12) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in rejecting the argument that the provisions in bye-law No. 61A was only a make-believe affair, in spite of the fact that loans and other liabilities were nil and the State Government's share capital was insignificant and could have been easily redeemed ? (13) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in treating the non-refundable and refundable deposits as loans, and not as income ? (14) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding, in respect of various funds like Chief Minister's Fund, hutment fund, small savings scheme, Late Y. B. Chavan Memorial Fund, etc., (a) that the assessee acted as an agent and collections were made as per the directions of the State Government (b) for spending them on the purposes specified by the State Government and (c) that the collections were made by way of retaining amount of cane price payable to the sugarcane growers and hence are not trading receipts li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determining the cane price to be given by the Karkhana, the Government is required to consider the amount of actual sugar sold during the sugar year which is, generally, between October of a particular year to next September. The committee is also required to take into account the value of the closing stock of controlled sugar and free sugar prevailing on the last date of the previous sugar year, viz., September 30. A sugar year is also declared by the Commissioner of Co-operation and Registrar of Co-operative Societies. It is generally for the period October 1 to September 30. Under the byelaws, the Karkhana is required to make deductions from the cane price mentioned in the sale memo (bill). These deductions are as under: (i) Area development fund ; (ii) Cane development fund ; (iii) Hutments fund ; (iv) Chief Minister's Relief Fund ; (v) Members small savings fund ; (vi) Late Y. B. Chavan Memorial Fund ; (vii) Members' non-refundable deposits ; (viii) Members' refundable deposits ; (ix) Non-members refundable deposits ; and (x) Voluntary deposits of members' fund. Accordingly, various amounts are collected by the Karkhana from the cane-growers out of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate the board shall consider the amount required for the repayment of loan of I. F. C. I., 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 Government share capital, the loan of I.F.C.I., Maharashtra State Co-operative Bank on long-term loan advanced for capital expenditure and by any other financial agencies has been refunded. The N. R. D. collected as above shall not be refunded to the member till the repayment of Government share capital and term loans taken from I.F.C.I. and other financial institutions are repaid fully. (2) The deposits collected as above shall not be refundable to the members. However, the board may convert such deposits into shares after repayment of loans taken from I. F. C. I., loan from Maharashtra State Co-operative Bank, Government share capital and long-term loans, taken from other banks for capital expenditure. The amount of fixed deposits collected by the society from a member shall not exceed three times the shares held by the members. Thereafter such fixed deposits shall not be accepted by the Karkhana. The Ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bye-laws, it is clear that the primary purpose for which the above deductions are made is to discharge the assessee's liabilities to the financial institutions and to the State Government. He placed heavy reliance on the judgment of the Supreme Court in the above case of Bazpur Co-operative Sugar Factory Limited [1988] 172 ITR 321. He further contended that the word "deposit" is a misnomer. He contended that there was no relationship of creditor and debtor. He contended that the amounts were not refundable. He contended that the society was free to appropriate the amounts to reduce its trading losses. He contended that the amounts could be used by the society for trading operations. He contended that the cane-grower had no option but to sell sugarcane to the Karkhana within whose area the land of the grower fell. He contended that none of the criteria to constitute such deductions as deposits are fulfilled in this case. He contended that the deposits, so-called, are collected from the cane price paid to the cane grower in the course of trading operations and, therefore, such deposits constituted trading receipts. He contended that the Tribunal erred in coming to the conclusion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the character of a trading receipt then it would be taxable as income ; however, if the amounts are initially not taxable as income they cannot be taxed on the ground of their appropriation by the assessee to his own credit subsequently. He contended that the proposition is well settled, namely, that an amount which is not initially received as a trading receipt cannot become a trading receipt on account of subsequent appropriation by the assessee or by subsequent application thereof by the assessee. Applying the above test, he contended that the court is required to examine the true nature and character of the transaction. He contended that for the last several years, the Department accepted the deductions as deposit. He contended that it is only after the judgment of the apex court in the case of Bazpur Co-operative Sugar Factory Limited [1988] 172 ITR 321 that the Department has now sought to reverse its stand by contending that the said deposit is a trading receipt. He contended that the judgment of the Supreme Court in Bazpur Co-operative Sugar Factory Limited's case [1988] 172 ITR 321 has no application to the facts of this case as the bye-laws of Bazpur Co-operative Sugar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court in the case of Punjab Distilling Indutstries Limited v. CIT [1959] 35 ITR 519 is also not correct. He contended that, in that matter, the assessee carried on business as a distiller of country liquor and sold the produce of its distillery to wholesalers. In that matter, the Government devised a scheme whereby the distiller was entitled to charge the wholesalers a price for the bottles in which the liquor was supplied, at rates fixed by the Government, which the distiller (assessee) was bound to repay as and when the bottles came to be returned. However, in addition to the price fixed under the Government scheme, the distiller-assessee took from the wholesalers certain further amounts, described as security deposits without the Government's sanction and as a condition imposed by the assessee itself for the sale of its liquor. This additional amount imposed by the assessee itself was not a condition prescribed by the Government. The moneys described as security deposits were also returned when the bottles were returned but the entire sum was refunded only when 90 per cent. of the bottles were returned. In other words, the assessee was free to use the additional a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate contract of sale. Therefore, the assessee was held to be a seller. Even in the cash memos issued by the assessee to the auction purchasers, the assessee was shown as the seller and the amount realised from the purchasers included sales tax which the assessee did not pay to the actual owner of the goods auctioned because the statutory liability for payment of that sale was that of the assessee. At this stage, Mr. Inamdar pointed out that in the case of Punjab Distilling Industries Ltd. [1959] 35 ITR 519 (SC) it was the statutory liability of the assessee to pay the sales tax collected. Under the circumstances, on the facts of that case, the Supreme Court held that as the amount of sales tax was received by the assessee, as an auctioneer, the amount formed part of its trading or business receipt. Mr. Inamdar, accordingly, contended that the judgment in the case of Chowringhee Sales Bureau P. Ltd. [1973] 87 ITR 542 (SC) has no application to this case. He contended that in the case of Chowringhee Sales Bureau P. Ltd. [1973] 87 ITR 542 (SC), it was found on the facts that the sum of sales tax collected by the auctioneer was, in reality, a portion of the sale price itself becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Government. In other words, on discharging the above liabilities, the board of directors are free to fix the price. In the present case, the above liabilities of the financial institutions and the Government have not been discharged and, therefore, the cane price is being fixed by the Government. Bye-law No. 61A provides, inter alia, that every year the society shall collect from the members non-refundable deposits at the rate not less than Re. 1 per tonne of sugarcane supplied by them. However, in deciding such rate, the board shall consider the amount required for repayment of loans of the financial institutions. Bye-law No. 61-A further provides for rate of interest on non-refundable deposits which shall not exceed 12 per cent. until redemption of the Government share capital by the society and repayments of the loans of the financial institutions fully. Clause 2 of bye-law No. 61-A categorically states that the deposits shall not be refunded to members. These ate nonrefundable deposits covered by bye-law No. 61-A. However, under clause 2, the board is given discretion to convert such deposits into shares only after repayment of loans taken from the financial institutions. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 is very clear that the society has a right to fix the price of sugarcane on the above contingency being fulfilled. In fact, till the share capital is repaid the Government is authorised by the society to fix the price (see orders of Director of Sugar dated March 13, 1984 and March 24, 1986, to Karkhana). Therefore, fixation and payment of the price of sugarcane certainly forms part of the trading operations of the assessee. The directions of the Government to deduct certain amounts from the cane bill would not come into the picture on the repayment of loans to the financial institutions and on the repayment of Government share capital by the society. Under bye-law No. 61-A, the society is given the discretion to determine the rate at which the deductions would be made from the price payable to the growers after considering certain parameters mentioned in the said bye-law. Clause I of bye-law No. 61-A prescribes that the rate of interest shall not exceed 12 per cent. The said clause clearly mentions, once again, that the non-refundable deposits shall not be refunded till the repayment of the Government share capital and till the repayment of the loans taken from the financial ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse a fixed maturity period is prescribed. Generally, deposits are invited by companies to meet working capital requirements. Therefore, the said deposits are for a fixed period. In the present matter, no such period is prescribed except for deposit covered under bye-law No. 61-B. A reading of the above bye-laws, therefore, clearly shows that the primary purpose of the said deposits is to provide an important source of return on periodical basis to the Karkhana to carry out trading operations of manufacture and sale of sugar. In a matter of this type, there cannot be any straitjacket formula. It will depend on the facts of each case. It will depend on the bye-laws of the society. There is one more aspect which needs to be mentioned. A cane-grower whose lands fall within the area of the Karkhana has no option but to sell the sugarcane to that Karkhana. He has no bargaining power in the matter of price fixation. The price is fixed by the Government. The grower cannot sell his produce to any other Karkhana. The Karkhana pays the price of the sugarcane fixed by the Government under the above bye-laws. As stated above, the Government is empowered by the society to fix the price of sugar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may point out that in the said judgment the Supreme Court has laid down on the examination of the bye-laws in that case that the primary purpose for which the deposits were liable to be used were not to issue shares to the members for discharging liabilities of the society. In the present case, we have examined the bye-laws which, as stated above, clearly provided that the price fixation is with the society ; that the society empowered the Government to fix the price of the sugarcane under its bye-laws till the redemption of the Government share capital ; that the deductions were made from the price paid to the growers which constituted the part of the trading operations ; that by this mode the society got the benefit of periodical return and, lastly, the said deductions constitute consideration for the supply of sugarcane. As stated hereinabove, in each case, the court has to examine the nature of the receipt. Therefore, we have examined this matter on the bye-laws of the Karkhana. However, it has been urged that, in the present matter, the society has agreed to pay interest to the canegrower which was not the fact in the case of Bazpur Co-operative Sugar, Factory Ltd. [1988] 172 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding to the credit of the member was to be transferred in the books to the credit of the new transferee. The court found that there was no contingency or event contemplated in which the shareholder could demand repayment of the deposit. Therefore, this court concluded that even if the amount is shown as liability in the balance-sheet of the company, it did not partake of the character of a loan. Mr. Inamdar, however, submitted that in the above case, the court found that in consideration of the agreements the members who made the requisite deposits were allotted a specified floor area in the building and, therefore, he contended that it was a business transaction and the amount received by the builders constituted trading receipts. He therefore contended that the said judgment did not apply to the facts of this case. We do not find any merit in the said contention. This judgment lays down that if a deposit in question partook of the character of trading receipt then merely because interest is paid to the deposit holder will not change the nature and the character/quality of the receipt. In the present case also, under the bye-law the rate of deposit was fixed by the society and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f each case. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by obligation, income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation which is self-imposed, after such income reaches the assessee, then, such income is taxable. Diversion of income by overriding title can be created by a contract between two parties before the income reaches the hands of the assessee. These are the basic principles which are required to be kept in mind. In the case of CIT v. Madras Race Club [1996] 219 ITR 39 (Mad), the assessee was a company carrying on the business of horse racing. At the instance of the Government, the assessee was asked to conduct races for two days on behalf of the Chief Minister's Relief Fund and for one day on behalf of the Beggars' Rehabilitation Fund. The assessee claimed that the net collections for the above three days were not assessable as income in its hands as the assessee had no power to deal with the said collections. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above judgment of the Madhya Pradesh High Court has been expressly dissented from by this court in the case of Somaiya Orgeno-Chemicals Ltd. v. CIT [1995] 216 ITR 291, in which this court has laid down that what was necessary was to see whether there was diversion at source and whether the assessee had lost domain and control over the amount so diverted. Hence, the judgment of the Madhya Pradesh High Court was expressly dissented from by this court in Somaiya Orgeno-Chemicals Ltd.'s case [1995] 216 ITR 291. In the present case, the test laid down by this court in Somaiya Orgeno-Chenticals Ltd. [1995] 216 ITR 291 is applicable with regard to the cane development fund, area development fund and hutment fund as there is diversion of income at source and on deduction of the amount towards the said funds, the assessee lost domain and control over the amounts so diverted. (C) Late Shri Y. B. Chavan Memorial Fund, Chief Minister's Relief Fund and Education Fund : For the reasons given hereinabove while dealing with the question of deductions, i.e., deposits on account of area development fund, cane development fund and hutment fund, we hold that all deductions made from the cane p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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