TMI Blog1996 (9) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... e of molasses, a by-product obtained in the process of refining sugar, is fixed by the Molasses Control (Amendment) Order, dated February 6, 1972. This order provides that a portion of the sale price should be accounted for and funded separately for providing adequate storage facilities in accordance with the guidelines prescribed in this behalf by the Government. The schedule to the order has specified varying rates per quintal for different grades of molasses, for determining the quantum to be transferred from the sale proceeds to the storage fund. The transfer made by the assessee in conformity with the statutory obligation cast by the above order during the accounting year amounted to Rs. 91,476, which the assessee claimed as deduction in the computation of its total income. The Income-tax Officer, however, rejected this claim without assigning any reason, but presumably on the ground that the sum in question was only an appropriation of a reserve and not expenditure incurred by the assessee wholly for the purpose of its business. On appeal, before the Commissioner of Income-tax (Appeals), the assessee relied on the order, dated August 31, 1977, of the Madras "B" Bench (Camp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding counsel the decision of the Bombay High Court in Somaiya Orgeno-Chemicals Ltd. v. CIT [1995] 216 ITR 291, will no longer be good law in view of the later decision of the Supreme Court in Associated Power Co. Ltd. v. CIT [1996] 218 ITR 195. According to learned standing counsel, in the abovesaid decision of the Bombay High Court, the Bombay High Court was not correct in stating that they are not concerned with the question of ownership of the fund, especially when the Supreme Court in the above-cited decision categorically held that ownership of the fund is important in deciding the question whether there is any diversion by overriding title. So also learned standing counsel submitted that the decision of the Karnataka High Court in CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd., [1992] 198 ITR 690, would no longer be good law in view of the later decision of the Supreme Court in Associated Power Co. Ltd. v. CIT [1996] 218 ITR 195, wherein the Supreme Court held that even if under a statutory obligation cast on the assessee, the molasses storage fund was created, that would not render the income collected for the construction of molasses storage tank would amount to diversio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso cannot be said that the tank constructed out of the molasses storage fund absolutely belongs to the assessee. Therefore, learned counsel appearing for the assessee submitted that when the amount for the molasses storage fund was collected along with the sale price, it never reaches the hands of the assessee, since the assessee is collecting the same as the agent of the Central Government. Therefore, there is diversion of title even at the source before the amount is reaching the hands of the assessee. In order to support his submission, learned counsel appearing for the assessee heavily relied upon the decision of the Bombay High Court in Somaiya Orgeno-Chemicals Ltd. v. CIT [1995] 216 ITR 291. So also learned counsel for the assessee placed reliance on the decision of the Karnataka High Court in CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd. [1992] 198 ITR 690 and pointed out that the special leave petition filed as against the decision of the Karnataka High Court in CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd. [1992] 198 ITR 690, was dismissed by the Supreme Court. In the abovesaid decision, it was submitted that the Supreme Court was concerned with contingent liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge facilities, in accordance with the orders that may be issued by the Government from time to time. The relevant portion of the Schedule reads as under : " Grade of molasses Price Grade I Re. 1.00 per 100 kilograms Grade II Re. 0.80 per 100 kilograms Grade III Re. 0.60 per 100 kilograms Note : For quality of molasses below Grade III, the price will be Re. 0.60 for every 40 kilograms of reducing sugar content therein." (ii) From the price fixed under the abovesaid schedule for different grades of molasses, the below mentioned amounts shall be accounted for and funded separately and shall be utilised for erection of adequate storage facilities in accordance with the orders that may be issued by the Central Government for the regulation of such funds : Grade I Re. 0.33 per 100 kilograms Grade II Re. 0.27 per 100 kilograms Grade III Re. 0.20 per 100 kilograms Below Grade III Re. 0.20 for every 40 kilograms of reducing molasses sugar content therein. A similar question came up for consideration before the Bombay High Court in Somaiya Orgeno-Chemicals Ltd. v. CIT [1995] 216 ITR 291. According to the facts arising in that case under the Ethyl Alcohol (Price Contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge facilities for molasses and alcohol. It further provides under sub-clause (2) that when any amount is intended to be withdrawn from the said account, the management of the distillery shall submit proposals to the Commissioner who shall, after satisfying himself about the proposals, permit withdrawal. Under clause 6, the storage tanks for molasses are required to be as per the specification formulated by the Indian Standards Institution and made of pucca covered masonry as may be decided by the Commissioner. The storage tanks for alcohol are required to be as per specifications laid down by the Commissioner. Under clause 7, the Commissioner in consultation with the distillery, is required to fix a time schedule within which storage tanks both for molasses and for alcohol shall be constructed by the distillery. Sub-clause (2) provides that in the event of failure of the distillery to construct storage tanks within the prescribed time schedule, the Commissioner shall have the work executed through the Public Works Department of the Central Government or the State Government or a private agency and the management of the distillery shall place at the disposal of the Commissioner the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 182 (MP) dissented from ; and (8) CIT v. Calcutta Electric Supply Corporation Ltd. [1982] 138 ITR 111 (Cal) distinguished. The Karnataka High Court had an occasion to consider a question of similar nature in CIT v. Pandavapura Sahakara Sakkare Kharkana Ltd. [1992] 198 ITR 690, wherein the Karnataka High Court held : that the utilisation of the amount in question could be only as per the directions that might be issued by the Government from time to time. The right to the fund got diverted from the hands of the assessee by virtue of the Molasses Control Order. The amount was not assessable. As against the decision of the Karnataka High Court cited supra, the Supreme Court had dismissed the special leave petition filed by the Department. In CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, the Supreme Court, while considering diversion of income by overriding title, held that : " The true test for the application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as a deduction in the computation of its total income for the purposes of income-tax. The Income-tax Officer rejected the claim. The Appellate Assistant Commissioner allowed the assessee's appeal, relying upon the decision of the Kerala High Court in Cochin State Power and Light Corporation Ltd. v. CIT [1974] 93 ITR 582 and the Bombay High Court in the case of Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334. The Revenue filed an appeal before the Tribunal and cited the judgment of the Madras High Court in Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454. The Tribunal relied on the decision of the Madras High Court, which had disagreed with the view taken by the Kerala and Bombay High Courts. It set aside the order of the Appellate Assistant Commissioner, but referred the following question to the court : " Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the sum of Rs. 46,460 transferred to the contingencies reserve account is not allow able as a deduction in arriving at the taxable business income of the assessee-company ?" While answering this question, the Supreme Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it must be taken into account. The amount appropriated to the contingencies reserve is set apart to meet possible exigencies. It is not a provision for known, existing liabilities. It is not deductible as business expenditure." In the abovesaid decision, the Supreme Court pointed out that the application of the doctrine of diversion of income by reason of an overriding title is quite inappropriate. The doctrine applies when by reason of the overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed. In the present case, the statute requires the electricity company to create certain reserves if its clear profit exceeds a reasonable return (clause II, Sixth Schedule). Again, the contingencies reserve is to be created from existing reserves or from "the revenues of the undertaking". This clearly indicates that the monies which have to be put in the contingencies reserve reach the electricity company and are not diverted away from it, The Supreme Court further pointed out that the amount standing to the credit of the contingencies reserve could not be said to be an amount which had gone out of the hands or control of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese are all expenses, which the electricity company has to incur. Reservation is made so that money is always available for meeting these expenses and the supply of electricity is not interrupted. For the same reason, payments out of the contingencies reserve can be made only with the State Government's approval. It is particularly noteworthy that the electricity company can make good from out of the contingencies reserve even a loss of profit arising out of strikes, accidents and other circumstances over which it has no control. There can be no doubt, in the circumstances, that the monies in the contingencies reserve belong to the electricity company. But according to the facts arising in the present case, the assessee was directed to collect a certain amount along with the price fixed for alcohol under the Molasses Control (Amendment) Order. Therefore, even before collection of the amount as directed by the Central Government under the Molasses Control (Amendment) Order, the assessee was directed to keep this amount under a separate account under the head "Molasses storage fund". Though the assessee collects this amount under the statutory obligation, it does not belong to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95. In the present case also, after the amounts were collected as per the directions given by the Molasses Control (Amendment) Order, it goes to the molasses storage fund over which the assessee has no control and domain. Inasmuch as the assessee cannot utilise the same for its own business purpose, we have also here to hold that there is diversion by overriding title at the source itself. Even before the amount reached the hands of the assessee, the assessee was directed to transfer the same towards the molasses storage fund. Therefore, the collection made by the assessee belongs to the molasses storage fund. Reliance was placed upon the decision of the Madhya Pradesh High Court in Jiwajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182, wherein the Madhya Pradesh High Court held that where a part of the price of molasses received by the assessee was credited by the assessee to a separate fund to discharge an obligation imposed upon the assessee by the Molasses Control Order, there is no diversion of income, but of application of income. While considering this decision the Bombay High Court in Somaiya Orgeno Chemicals Ltd. v. CIT [1995] 216 ITR 291, held as under : "With respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision reported in Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454 (Mad). Therefore, this decision also would render no assistance to the Department to contend that there is no diversion of income by overriding title, but only there is application of income. The decision in CIT v. South Arcot District Co-operative Society [1981] 127 ITR 467, of this court, would also be not applicable to the facts of this case, for the reasons stated above, since the contingency reserve was created in accordance with section 62 of the Tamil Nadu Co-operative Societies Act, 1961. Thus, on a careful consideration of the facts arising in this case, in the light of the judicial pronouncements cited supra, we hold that the Tribunal was correct in coming to the conclusion that there is diversion of income by overriding title at the source when the assessee collected a certain amount along with the sale price of alcohol as per the obligation imposed by the Molasses Control (Amendment) Order. However, learned counsel appearing for the assessee submitted that the amount collected as per the direction given in the Molasses Control (Amendment) Order, is also entitled to be deducted as reven ..... X X X X Extracts X X X X X X X X Extracts X X X X
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