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 ... Effect of Retrospective Amendment of Bye-laws - Nature of Amounts Deducted Under Bye-law - revenue receipts Or not - price payable to members for the supply of sugarcane - business of manufacture and sale of sugar and runs a mill - HELD THAT:- It appears to us that the respondent-society had no authority in law to amend bye-law 50 with retrospective effect as it purported to do. We have already pointed out that the power of the society to amend its bye-laws arises from the provisions of rule 11 of the United Provinces Co-operative Societies Rules, 1936, which rule has been made under the powers conferred by section 43 of the Co-operative Societies Act, 1912. There is nothing expressly or impliedly in rule 11 which confers any power on the society to amend its bye-laws with retrospective effect and in the absence, of any such power being conferred, either expressly or by implication, it cannot be said that the society had any power to amend its bye-laws with retrospective effect. In the case before us, however, there is nothing in section 43 of the Co-operative Societies Act, 1912, or rule 11 of the United Provinces Co-operative Societies Rules, 1936, to indicate that there is any power, express or implied, in a co-operative society registered under that Act to make bye-laws with retrospective effect in respect of its business. In our view, the amendment of bye-law 50 of the respondent-society cannot have any retrospective effect and the amounts deducted from the amounts payable to members for the supply of sugarcane will have to be dealt with as if they were deducted under the provisions of bye-law 50 as it stood in the relevant accounting period. Under the unamended bye-law, the amounts deducted from the price and credited to the said fund were first liable to be used in adjusting the losses of the respondent-society in the working year ; thereafter in the repayment of initial loan from the Industrial Finance Corporation of India and then for redeeming the Government share and only in the event of any balance being left, it was liable to be converted to share capital. The primary purpose for which the deposits were liable to be used were not to issue shares to the members from whose amounts the deductions were made but for discharging the liabilities of the respondent-society. In these circumstances, the receipts constituted by these deductions were really trading receipts of the assessee-society and are liable to be included in its taxable income. In our view, the learned judges of the High Court were, with respect, in error in answering the question referred in the negative. In our opinion, the question referred must be answered in the affirmative and in favour of the Revenue. In the result, the appeal succeeds and is allowed with costs. 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.