2004 (9) TMI 6 - SC - Income Tax

Society compulsory deposits not taxable as income; Cane Development Fund taxable; Area Development Fund sent back for fresh review

Siddheshwar Sahakari Sakhar Karkhana Ltd., Commissioner of Income Tax Versus C.I.T., Kolhapur & Ors., Shri Chatrapati Sahakari Shakar Karkhana Ltd.,

SC held that compulsory non-refundable and refundable deposits collected by co-operative societies under their bye-laws are not revenue receipts taxable ... Taxability of non-refundable deposits - Diversion by Overriding Title - whether compulsory deductions made by sugar co-operative societies on account of non-refundable and refundable deposits and other funds are revenue receipts liable to be taxed under the Income-tax Act, 1961 - HELD THAT:- The compulsory nature of the deposit has been stressed by the Revenue and the High Court too as being obnoxious to the idea of a deposit. It has been pointed out that the member had no option but to agree for deduction on pre-ordained terms and there could not be in law a contract creating deposit. This contention, however, does not appeal to us. A person by becoming a member of a co-operative society, volunteers to abide by the bye-laws of the society, the real object of which is to provide for internal management of the society including rendering assistance to the members. There is an authority for the proposition that the bye-laws of the co-operative society constitute a contract between the society represented by its managing body and its constituents. This legal position has been recognized in Hyderabad Karnataka Education Society v. Registrar of Societies [1999 (12) TMI 863 - SUPREME COURT]. In Co-operative Central Bank Ltd. v. Additional Industrial Tribunal, Andhra Pradesh [1969 (4) TMI 108 - SUPREME COURT], this court held that the bye-laws of the society framed by virtue of the authority conferred by the Co-operative Societies Act were on par with the articles of association of a company, which, it is well settled, establish a contract between the company and its members and between the members inter se. That apart, the mere fact that the contract has to be entered into in conformity with and subject to the restrictions imposed by law does not per se impinge on the consensual element in the contract. 'Compulsion of law is not coercion' and despite such compulsion, 'in the eye of law, the agreement is freely made', as pointed out in Andhra Sugars Ltd. v. State of A.P. [1967 (9) TMI 121 - SUPREME COURT]. Thus, 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. The board of directors of the co-operative society are required to pass a resolution specifying the details of expenditure proposed to be incurred from out of the area development fund. They should obtain the sanction of the Director of Sugar for incurring such expenditure. Such information is also required to be placed before the general body of the society and the approval to be obtained from the general body. On June 21, 1988, the Agriculture and Co-operation Department of the Government of Maharashtra framed certain directive principles laying down the modalities of utilization of Area Development Funds. The said order was issued in exercise of the power under section 79A of the Maharashtra State Co-operative Societies Act. This order passed during the middle of the last assessment year relevant to these appeals gives statutory basis for the already existing practice. It is difficult to equate this fund to the other categories of funds, as has been done by the Tribunal and affirmed by the High Court. Unlike the other funds like Chief Minister's 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 Co-operatives 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 Sugar 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 the requirement of prior sanction of the Director of Sugar 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 Area Development Fund always remained with the assessee. As far as Sugarcane 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 August 18, 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. 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 to 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. 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. We therefore allow the appeals of the Commissioner of Income-tax partly in respect of the amounts collected by the respondent-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. In the ultimate analysis, the assessees' appeals are allowed and the Commissioner's appeals are partly allowed to the extent indicated above. Issues Involved:1. Taxability of non-refundable deposits.2. Taxability of refundable deposits.3. Taxability of deductions made towards various funds (Chief Minister's Relief Fund, Y.B. Chavan Memorial Fund, Hutment Fund, Area Development Fund, Cane Development Fund, Members' Small Savings Fund).Detailed Analysis:Non-Refundable Deposits:The primary issue was whether non-refundable deposits collected by sugar co-operative societies from cane growers are taxable as revenue receipts under the Income-tax Act, 1961. The Tribunal and High Court had differing views on this.- Tribunal's Findings: The Tribunal emphasized that the nature and purpose of the collection are crucial. It found that these deposits were meant for repaying term loans and converting deposits into shares, indicating they were not trading receipts but contributions towards share capital. The Tribunal concluded that these funds were treated as liabilities and not as income.- High Court's Findings: The High Court held that these deposits were part of trading receipts as they were collected during trading operations and used to discharge the society's liabilities. It emphasized that the deposits reached the society as income.- Supreme Court's Conclusion: The Supreme Court analyzed the bye-laws and found that the deposits were indeed meant to be converted into shares or refunded under certain conditions, indicating an obligation to repay. The Court held that these deposits should not be treated as income as they were liabilities and not the society's own money.Refundable Deposits:The issue was whether refundable deposits collected under bye-law No. 61-B are taxable.- Supreme Court's Conclusion: The Court found that these deposits were fixed deposits repayable with interest and akin to loans. Therefore, they could not be treated as income of the society.Deductions Towards Various Funds:The issue was whether deductions made towards various funds are taxable as income.- Chief Minister's Relief Fund, Y.B. Chavan Memorial Fund, Hutment Fund: The Tribunal and High Court concluded that these funds were not the society's income as they were collected on behalf of the government or trustees and remitted accordingly.- Area Development Fund: The Tribunal viewed this fund as collected for socio-economic services in the operational area, under the society's control but with government oversight. The High Court agreed, applying the principle of diversion of income by overriding title.- Cane Development Fund: The Tribunal considered this fund as a compulsory levy collected by the government through the society. The High Court concurred, seeing it as income of the society used for its benefit and that of its members.- Supreme Court's Conclusion: The Court agreed with the Tribunal and High Court regarding the Chief Minister's Relief Fund, Y.B. Chavan Memorial Fund, and Hutment Fund, treating them as not income. However, it differed on the Area Development Fund, remanding it for fresh determination, and held that the Cane Development Fund should be treated as income of the society, subject to permissible deductions under the Income-tax Act.Final Judgment:- Assessees' Appeals: Allowed, declaring non-refundable and refundable deposits as not income.- Revenue's Appeals: Partly allowed, declaring Cane Development Fund as income and remanding Area Development Fund for fresh determination. Other funds' collections were not treated as income.