Case: Siddheshwar Sahakari Sakhar Karkhana Ltd Vs. C.I.T., Kolhapur

funds like Chief Ministers 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 the fact that the Societies concerned do exercise dominion over the fund and deal with that money subject of course to the guidelines and restrictions evolved by the Government. The Tribunal failed to approach the question in proper perspective on an analysis of the relevant circulars and orders. The High Court too fell into an error in invoking the theory of diversion of income at source. The crux of the matter is that there has never been a diversion of income to a third party (Government) before it reached the assessee. The receipts in the form of the Area Development Fund always remained with the assessee. 61. It could still be contended, as has been contended by learned senior counsel appearing for the assessees, that the realizations made by the assessee towards Area Development Fund are impressed with a specific legal obligation to spend the monies for specified purposes which are unrelated to the business of the sugar factory and therefore such receipts cannot be treated as income of the assessee. The analogy of collection of amounts towards charity, as in the case of C.I.T. vs. Bijlee Cotton Mills [(1979) 1 SCC 496] , has been invoked to substantiate the argument. It is contended that the realizations towards Area Development Fund would more or less stand on the same footing as deposits. The controversy has not been approached in the light of the above arguments. We do not consider it appropriate to express our view for the first time, especially when the determination thereof may depend on the consideration of certain facts. We therefore leave this point open for fresh determination by the Tribunal. 62. As far as Sugar Cane Development Fund is concerned, the case of the Revenue seems to stand on a stronger footing. In the paper-book, we find a Circular dated 18th August, 1986 in which certain directive principles have been laid down to regulate the expenditure to be incurred out of Cane Development Fund. The items specified in the directive principles are (1) green manuring, (2) lift 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 Cooperative 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 diversion of income at source in the case of collections made towards Cane Development Fund. The amounts realized on this account undoubtedly reach the assessee as its income and is utilized by the assessee for the benefit of itself and its members. As already observed, the supervisory role of the Directorate of Sugar to ensure that the amount is properly utilized to promote the objectives with which the fund was formed, does not make a material difference on the quality and character of the receipt. We are therefore of the view that the deductions made out of cane price towards Cane Development Fund should be treated as the income of the assessee. We are, of course, not expressing any view whether it is a permissible deduction under the provisions of the Income Tax Act. If any such claim is made, the Tribunal shall examine the same when the matters are taken up by it to consider the issue of tax liability in relation to Area Development Fund.63. Though the item relating to collections towards Members Small Savings Scheme has also been included in the memorandum of appeal, no argument has been advanced on this aspect and therefore we need not deal with this.64. We therefore allow the appeals of the Commissioner of Income Tax partly in respect of the amounts collected by the respondents-Societies towards Cane Development Fund and Area Development Fund. We declare that the amount collected towards Cane Development Fund shall be treated as the income of the assessees and any claim for deduction shall be entertained and decided by the Tribunal. As regards the Area Development Fund, the matters are remitted to the Income Tax Appellate Tribunal, Pune Bench for fresh determination subject to the observations made in this judgment. In respect of other items, the appeals shall stand dismissed.65.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]First, discussion needs to be focused on the first feature, namely, conversion of deposit into shares. The Tribunal rightly pointed out and it is not disputed before us that such conversion is as good as refund. Such conversion into additional shares is however postponed till the events of repayment of loans towards capital expenditure and the repayment of Government share capital happen. In other words, till such time, the member / depositor has no immediate right to demand the payment. Nevertheless, the obligation to repay stood annexed to the deposited amount at the time it was received by the assessee subject of course to the occurrence of the contingency specified in the bye-law itself. It cannot be said, as has been said by the High Court, that under the bye-laws, no event or contingency has been contemplated" under which the members could demand the repayment of the deposit. Nor can it be said that even after the happening of the event specified in the bye-laws, the right to demand repayment becomes illusory in view of the discretion reserved to the Board of Directors of the Society. In this context, much of the argument has been built up on the use of the expression may followed by the words convert such deposits into shares after payment of loans etc." It is contended by the learned counsel appearing for the Revenue that the Board of Directors may very well refuse to convert the deposits into shares in exercise of its discretion on the ostensible ground that the financial position of the Society does not permit such conversion. The very existence of discretion, it is pointed out, negates the existence of liability to convert the deposit into shares. We cannot accede to this contention.In our view, the retention of the deposited money with the Society in order to utilize the same for repayment of term loans etc., does not denude the amount of its character of deposit carrying with it the obligation to repay. Nor is it necessary, as the High Court was inclined to think, that the separate identity of the deposited amounts should be kept up. The absence of the right to secure repayment on demand is again not inconsistent with the receipt being a deposit. Liability to return need not be immediate and unconditional, following a demand by the depositor. Even if such liability gets crystallized on the happening of a specified contingency, it is still a liability which can be legally enforced by the depositor. The existence of such liability is an antithesis to the idea of ownership of the money by the Society.It is the contention of the learned senior counsel appearing for the Revenue that the possibility of return of the deposit (by way of conversion into shares) depends on uncertain events and the repayment remains to be a remote possibility. It is difficult to appreciate this contention. True, the obligation to refund the deposit by way of conversion into shares would arise only on the occurrence of the contingencies specified in the bye-laws. But, in our view, it is wrong to assume that the events giving rise to refund are uncertain. The repayment of loans taken for capital expenditure and the share capital of the Government are the two specified events which are by no means uncertain, though the time of repayment is indefinite. On the occurrence of the said two events, the right to demand refund would accrue to the depositor. The obligation which had been in inchoate form ripened itself into a complete obligation on the occurring of specified events stipulated in the bye laws. Such an obligation may be contingent in nature initially but the right to enforce the obligation inheres in the depositor from the beginning. The existence of other features such as transferability of the deposit to another member and the provision for refund of the deposited amount to the member in case of cessation of membership or to his legal heirs in case of death, are important indicators against the treatment of the deposited amount as the money belonging to the Society. The payment of interest from year to year at a specified rate is another important factor that supports the conclusion of the disputed sum being a deposit. Such payment of interest is only consistent with the fact that the deposited amount still belongs to the member. The fact that the deposited amounts are credited to the individual accounts of the members is a corroborative circumstance to indicate that the deposits belong to the members.Viewed from the point of view of the primary purpose of deposit a test which has been formulated by this Court in Bazpur case though without much of discussion, we are of the view that the answer cannot be the same as in Bazpur case. In this connection the Tribunal recorded the finding that the purpose of collecting non- refundable deposits "was not only to repay term loans taken from financial institutions and to repay the government share capital, but also to convert the so called deposits into shares". The Tribunal expressed the view that the whole idea was to increase the capital base of the assessee in a phased manner by retaining some portion of the money payable to cane-growers, while at the same time compensating the depositors by way of interest. However, the High Court was not inclined to accept the finding of the Tribunal. The High Courtthe contrary the above bye-laws clearly indicate that the primary purpose of collecting the deposits i.e. the deductions was to discharge the liabilities of theare unable to endorse the view taken by the High Court. Meeting the financial commitments of the Society may be one of the purpose for which the deposits were collected but that is not all. The augmentation of the share capital which may be in the overall interests of the members as well as the Society is an equally important purpose which cannot be overlooked. At any rate, the view taken by the Tribunal appears to be a reasonable view and the High Court need not have disturbed thatHigh Court relied on the decision of the same High Court in Shree Nirmal Commercial Ltd vs. C.I.T. [193 in ITR 694] in order to hold that the payment of interest on the deposited amount is not inconsistent with the amounting being a revenue receipt. We are of the view that the ratio of that decision cannot be pressed into service in the present case. On a consideration of the Scheme and Agreement under which non-refundable interest-bearing deposit was collected by the assessee-company, it was found as a matter of fact that "the deposit was the absolute property of the Company and the provision for payment of interest was only a device for showing the amount received in the course of trade as deposit." In the instant case, the plea of device, though raised faintly before the Tribunal, was not accepted. It rejected the argument that the provision in the bye-law 61-A providing for conversion of deposits into share-capital was a make believe affair and that the High Court in answer to question No.12 affirmed this finding.For the aforesaid reasons we conclude that the non-refundable and refundable deposits cannot be treated as the income of the assessee-Societies. The Civil Appeals filed by the assessees/Co-operative Sugar Factories are allowed without costs.As regards the Chief Ministers Relief Fund, Late Y.B. Chavan Memorial Fund and Hutment Fund, no serious attempt has been made to assail the order of the Tribunal/High Court, the obvious reason being that they were required to be and in fact being remitted to the Government or to the Trustees of late Y.B. Chavan Prathisthan. The assessee merely acted as an agent in collecting the amounts and remitting the same to the Government/Trustees. In truth and in substance, the money collected by the assessee was not reaching the assessee as part of its income, but the collection was made "for and on behalf of the person to whom it is payable", to borrow the language in CIT vs. Sheetal Das [41 ITR 367] . It had no manner of right or title over the said monies. The amount collected towards Hutment Fund stands on no different footing. It was meant to be handed over to Collector for the purpose of providing shelter to landless poor inhabitants within the area of operation of the sugar factory. We agree with the conclusion reached by the Tribunal and the High Court that these receipts should not be treated as income of the assessee.As far as Sugar Cane Development Fund is concerned, the case of the Revenue seems to stand on a stronger footing. In the paper-book, we find a Circular dated 18th August, 1986 in which certain directive principles have been laid down to regulate the expenditure to be incurred out of Cane Development Fund. The items specified in the directive principles are (1) green manuring, (2) lift 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 Cooperative 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 diversion of income at source in the case of collections made towards Cane Development Fund. The amounts realized on this account undoubtedly reach the assessee as its income and is utilized by the assessee for the benefit of itself and its members. As already observed, the supervisory role of the Directorate of Sugar to ensure that the amount is properly utilized to promote the objectives with which the fund was formed, does not make a material difference on the quality and character of the receipt. We are therefore of the view that the deductions made out of cane price towards Cane Development Fund should be treated as the income of the assessee. We are, of course, not expressing any view whether it is a permissible deduction under the provisions of the Income Tax Act. If any such claim is made, the Tribunal shall examine the same when the matters are taken up by it to consider the issue of tax liability in relation to Area Development Fund.63. Though the item relating to collections towards Members Small Savings Scheme has also been included in the memorandum of appeal, no argument has been advanced on this aspect and therefore we need not deal with this.64. We therefore allow the appeals of the Commissioner of Income Tax partly in respect of the amounts collected by the respondents-Societies towards Cane Development Fund and Area Development Fund. We declare that the amount collected towards Cane Development Fund shall be treated as the income of the assessees and any claim for deduction shall be entertained and decided by the Tribunal. As regards the Area Development Fund, the matters are remitted to the Income Tax Appellate Tribunal, Pune Bench for fresh determination subject to the observations made in this judgment. In respect of other items, the appeals shall stand dismissed.