1993 (12) TMI 3 - HC - Income Tax

Court rules transferred amount not taxable; disallowance deleted under Income-tax Act.

The court held that the amount of Rs. 43,633, transferred to the storage fund for molasses and alcohol, did not form part of the assessee's income for the ... Business Expenditure, Diversion Of Income, Income By Overriding Title, Income Tax Act, Sale Proceeds, Statutory Order Issues Involved:1. Whether the Income-tax Appellate Tribunal rightly disallowed Rs. 43,633 being the amount deducted from the sale proceeds of alcohol and spirit and transferred to the storage fund for molasses and alcohol account under the Ethyl Alcohol (Price Control) Amendment Order, 1971.2. Whether the Tribunal rightly deleted the disallowance of Rs. 16,041 made by the Department under section 40A(5) of the Income-tax Act, 1961.Issue 1: Disallowance of Rs. 43,633 Transferred to Storage FundThe assessee, engaged in manufacturing rectified spirit and other chemicals, was required by the Ethyl Alcohol (Price Control) Amendment Order, 1971, to transfer Rs. 6 per kilolitre from the sale proceeds of rectified spirit to a storage fund for molasses and alcohol. This amount was to be used exclusively for constructing storage facilities as per statutory directions. The assessee argued that this amount should not be included in its total income as it was statutorily diverted at source.The court noted that the selling price of rectified spirit was statutorily fixed and included Rs. 6 per kilolitre for the storage fund, which was a statutory diversion at source. This amount did not reach the assessee as income but was earmarked for the storage fund. The court held that the assessee lost domain over this amount, which had to be used as per statutory directions, and therefore, it could not be considered part of the assessee's real income.The court referenced the Karnataka High Court's decision in CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd. [1992] 198 ITR 690, where a similar statutory diversion under the Molasses Control Order was held not to be part of the assessee's income. The court agreed with this view, emphasizing that the statutory compulsion and the lack of control over the amount by the assessee indicated a clear diversion at source.The court disagreed with the Madhya Pradesh High Court's decision in Jiwajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182, which held that the amount directed to the storage fund was part of the assessee's income. The court emphasized that the ownership of the fund was not relevant; what mattered was the statutory compulsion and the lack of domain over the amount.The court also referenced decisions from the Kerala High Court in Cochin State Power and Light Corporation Ltd. v. CIT [1974] 93 ITR 582 and the Bombay High Court in Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334, which supported the view that statutory diversions at source do not form part of the assessee's real income.The court concluded that the amount of Rs. 43,633 did not form part of the assessee's income for the assessment year 1974-75 and answered the question in favor of the assessee.Issue 2: Deletion of Disallowance of Rs. 16,041 under Section 40A(5)The court noted that both parties agreed that the answer to this question should be in the affirmative and in favor of the assessee, based on the decisions in CIT v. Hico Products (P.) Ltd. (No. 2) [1993] 201 ITR 575 and CIT v. Hico Products Pvt. Ltd. (No. 1) [1993] 201 ITR 567. Consequently, the court answered this question in the affirmative and in favor of the assessee.ConclusionThe court held that the amount of Rs. 43,633 did not form part of the assessee's income for the assessment year 1974-75 and answered the first question in favor of the assessee. The court also answered the second question in the affirmative and in favor of the assessee. No order as to costs was made.