1988 (5) TMI 4 - SC - Income Tax

Retrospective amendment of bye-law invalid; sugarcane payment deductions are trading revenue and taxable, appeal allowed to Revenue

SC held the society lacked power to amend its bye-law retrospectively; the retrospective alteration of bye-law 50 was ineffective. Deductions made from ... Retrospective amendment of bye-law - delegated legislative power and limits on retrospective operation - nature of receipt - revenue receipt versus capital receipt - characterisation of accounting entries cannot alter true nature of receiptRetrospective amendment of bye-law - delegated legislative power and limits on retrospective operation - Validity and retrospective effect of the amendment to bye-law 50 of the society - HELD THAT: - The Court held that the society had no power to amend bye-law 50 with retrospective effect. The power to make and amend bye-laws derived from rule 11 of the United Provinces Co-operative Societies Rules, 1936, framed under section 43 of the Co-operative Societies Act, 1912, and there was nothing in rule 11 or section 43 either expressly or by necessary implication empowering the society to give retrospective effect to an amendment. Authorities were applied to the effect that a subordinate authority cannot confer retrospective operation unless the enabling provision permits it. Accordingly the purported retrospective amendment was ineffective and the unamended bye-law must be applied to the relevant accounting year.The purported retrospective amendment of bye-law 50 is not effective; the unamended bye-law governs the relevant period.Nature of receipt - revenue receipt versus capital receipt - characterisation of accounting entries cannot alter true nature of receipt - Whether amounts deducted under bye-law 50 are revenue receipts assessable to tax or capital in nature - HELD THAT: - Applying the unamended bye-law to the relevant accounting year, the Court concluded that the amounts deducted from payments to producer-members in the course of trading operations were part of the society's trading operations and therefore constituted revenue receipts. The fact that the sums were described as 'deposits' and entered in a separate fund account did not change their true character. The primary uses under the unamended bye-law were to meet losses, repay institutional loans and redeem Government share, with conversion to share capital only incidentally; hence the receipts were not monies the society could treat as its own capital at will. The Court followed precedent that the real nature of a receipt, not its ledger heading, determines taxability.The amounts credited to the Loss Equalisation and Capital Redemption Reserve Fund under bye-law 50 are revenue receipts and are assessable to tax.Final Conclusion: The appeals are allowed: the retrospective amendment of bye-law 50 is ineffective and, applying the unamended bye-law to assessment year 1961-62 (accounting year July 1, 1959 to June 30, 1960), the deductions made under bye-law 50 are revenue receipts liable to be included in the society's taxable income. Issues Involved:1. Whether the amendment to bye-law 50 of the co-operative society could have retrospective effect.2. Whether the amounts deducted from the price payable to members for the supply of sugarcane under bye-law 50 were revenue receipts liable to tax.Issue-Wise Detailed Analysis:1. Retrospective Effect of Bye-law Amendment:The primary contention was whether the amendment to bye-law 50, which was made with retrospective effect, could legally have such effect. The court examined the relevant statutory provisions and rules under the Co-operative Societies Act, 1912, and the United Provinces Co-operative Societies Rules, 1936.The court noted that the power to amend bye-laws was derived from Rule 11 of the United Provinces Co-operative Societies Rules, 1936, which did not expressly or impliedly confer any power to make amendments with retrospective effect. Citing precedents, the court emphasized that subordinate legislative functions, such as making bye-laws, could not be given retrospective effect unless expressly authorized by statute. The court referenced the decision in ITO v. M. C. Potions, which held that retrospective operation of rules or regulations required explicit statutory language.The court concluded that the respondent-society had no authority to amend bye-law 50 with retrospective effect. Consequently, the amounts deducted from the price payable to members for the supply of sugarcane had to be dealt with under the provisions of bye-law 50 as it stood during the relevant accounting period.2. Nature of Amounts Deducted Under Bye-law 50:The second issue was whether the amounts deducted from the price payable to members for the supply of sugarcane under bye-law 50 were revenue receipts liable to tax. The court analyzed the nature of these deductions, which were credited to the 'Loss Equalisation and Capital Redemption Reserve Fund.'The court observed that the deductions were made in the course of the trading operations of the respondent-society and were part of its trading operations. The court held that these receipts must be regarded as revenue receipts and included in the taxable income of the respondent. The court emphasized that the true nature and quality of the receipt, rather than the label under which it was entered in the account books, was decisive. Citing the decision in Chowringhee Sales Bureau P. Ltd. v. CIT, the court underscored that trading receipts should be treated as such regardless of how they were recorded in the books.The court also referenced the decision in Punjab Distilling Industries Ltd. v. CIT, where additional amounts described as security deposits were deemed to be part of the consideration for the sale of liquor and thus trading receipts. Applying these principles, the court concluded that the amounts deducted under bye-law 50 were indeed trading receipts and liable to be included in the taxable income.Conclusion:The court held that the amendment of bye-law 50 could not have retrospective effect and that the amounts deducted under the original bye-law 50 were revenue receipts liable to tax. The appeals were allowed, and the questions referred were answered in the affirmative and in favor of the Revenue. The respondent was ordered to pay the costs incurred in the Income-tax Reference.