TaxTMI 
TaxTMI 
2004 (9) TMI 6
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....ocieties in accordance with the procedure laid down under the Act. The appellant in each of the appeals carries on the business of manufacturing sugar. Its members are predominantly sugarcane farmers. According to the policy of the Government, the sugarcane growing areas in the State of Maharashtra have been divided into different territorial units. Each unit has a factory for manufacturing sugar and the sugarcane growers within the territory are obliged to sell their sugarcane only to the said factory. The project cost of the appellant was met partly by share capital and partly by way of capital subsidy provided by either the Central Government (Ministry of Industrial Development) or financial institutions such as IDBI, IFCI, etc. The share capital was contributed not only by the members but also by the State Government. So long as the State Government held share capital in the society, the Government was entitled to fix the sugarcane price which it did. The bye-laws provided for deduction of amounts towards refundable and non-refundable deposits from the cane price payable to the grower members. There were also instructions of the Director of Sugars to this effect. Apart from ....
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.... of area development fund, cane development fund, hutment fund, Y.B. Chavan Memorial Fund, The Chief Minister's Relief Fund, Education Fund are not trading receipts and therefore not taxable. Accordingly, the references and appeals were disposed of by the High Court. The sugar co-operative societies have impugned the decision of the High Court in so far as it decided the questions raised against them and the Revenue has preferred appeals in so far as the decision went against it. As the assessee's appeals rum much on the interpretation and implications of bye-laws Nos. 60, 61A and 61B which relate to the non-refundable and refundable deposits, it is worth quoting them verbatim. Bye-law No. 60: (regarding fixation of cane price) "The rate of sugarcane supplied by members will be fixed each year by the board of directors. The same will be of ex-gate cane. It will be the same for all the members. The Karkhana will also reimburse to the members their expenses of harvesting and transporting the cane up to the factory gate at the rate fixed by the board of directors. Such transporting expenses will differ in the case of every member depending upon the distance of his field from ....
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....the deposits until it holds Government share capital and has other loans outstanding. (3) On a member ceasing to be a member as provided in bye-law No. 22, the amount standing to the credit of his account as a non-refundable deposit may be transferred to any other member's account at his option and approval of the board of directors or shall be refunded to such members or his legal heirs with the approval of the board of directors after the lapse of one year from ceasing to be members, on recovery of all amounts due from him if any, and after considering the financial position of the society. However, the total amount of such refund in any year shall not exceed 1/10th of the total non-refundable deposits standing at the beginning of the year. (4) The amount of deposits so collected shall be utilized for the repayment of term loans taken for the capital expenditure as mentioned in sub-clause (2) above. (5) The amount of deposit so collected from the members or part thereof can be transferred to the name of any other member on an application by the member. However, consent of both members in writing; shall be necessary. Bye-Law No. 61-B: In addition to the non-refundab....
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.... not regarded as the assessees' own money. The Tribunal distinguished the case of Bazpur Co-operative Sugar [1988] 172 ITR 321 (SC), inter alia, on the ground that the amounts deducted by the society and credited to the loss equalisation fund were liable to get depleted or consumed after applying the funds for various purposes mentioned in the bye-laws including the working losses, whereas that is not the case in the present appeal. The Tribunal summed up the position as follows: "To sum up, according to our understanding, the true nature and purpose of bye-law No. 61A is to collect contribution towards share capital from the cane growers by deducting the amount from the sugarcane purchase price payable to them in a slow and graduated manner so that the funds so retained by the assessee could in the meantime be used for repaying the term loans taken from the financial institutions. This is a process and a method devised and adopted in such a way that the cane growers will ultimately become the shareholders contributing the necessary capital not at one time but by degrees without causing to themselves, any kind of financial strain. The incentives provided in devising the sc....
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....which the shareholder could demand repayment of the deposit. Hence, merely because the Karkhana has agreed to pay the interest, will not be a conclusive test to come to the conclusion that a liability has accrued to the society on deduction." Contentions: Learned senior counsel for the appellant-assessee contended that the High Court fell into error in overlooking certain important aspects of the case and laying undue stress on the fact that the amount treated as deposit is deducted from the price payable to the cane growers as part of the trading operations and, therefore, it was in the nature of trading receipt. The assessee-society was always treating the deposits as money belonging to the members (cane growers), credited the deducted amounts to the individual accounts of the members on which interest at fixed rate was being credited. The society treated the deposits as its liability towards the members/depositors. It is contended that under the bye-laws there are sufficient indicia that the members own the deposits. For instance, in the case of resignation, the deposited amount can be claimed and in the case of death, the amount is heritable. The deposits are not utilised....
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....t case. As the sheet anchor of the Department's case rests on the decision in CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321; [1988] 3 SCC 553, it becomes necessary to refer to that decision in detail. During the relevant assessment year 1961-62, certain amounts were deducted from the price payable for the sugarcane supplied by the members and the society credited the same to the "loss equalisation and capital redemption reserve fund". These deductions were made under the provisions of bye-law 50. At the relevant point of time, the bye-law read as follows: "'There shall be established a loss equalisation and capital redemption reserve fund in the society. Every producer-shareholder shall deposit every year a sum not less than 32 paise and not more than 48 paise per quintal of the sugarcane supplied by him to the society as may be determined by the Board. After adjusting the losses, if any, in the working year, the deposits shall be allowed to accumulate and utilised for repayment of the initial loan from the Industrial Finance Corporation of India and thereafter for redeeming Government share. The balance of the said deposit after meeting losses shall be ....
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....assessee. It is in the course of such trading operations that the assessee realised the amounts (treated as deposits) with regularity and utilised the money so received in its business. To the extent the full payment is not made to the farmers, the assessee saved raw material cost as well. These factors may broadly satisfy the first test applied in Bazpur Co-operative Sugar's case [1988] 172 ITR 321 (SC). The following are the relevant observations in this regard: "It is clear that these amounts which were deducted by the respondent from the price payable to its members on account of supply of sugarcane were deducted in the course of the trading operations of the respondent and these deductions were a part of its trading operations. The receipts by way of these deductions must, therefore, be regarded as revenue receipts and are liable to be included in the taxable income of the respondent." However, it needs to be clarified that the line of inquiry, in order to determine the true nature and character of the receipts, does not stop at ascertaining the mere fact whether the realisation was in the course of trading operations. The moment it is found that certain amounts were ....
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....le 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 of liabilities of the respondent-society. In these circumstances, the receipts constituted by these deductions were really trading receipts of the assessee-society. . ." The court apparently felt that the event of return of the amounts by way of conversion into share capital was remote, if not impossible. In meeting the point urged by the assessee that it was a deposit, the court proceeded to apply the primary purpose test. The primary purpose, according to the learned judges, was not to issue shares to the members but it was meant to discharge various liabilities of the society. Therefore, it was felt that it would be a misnomer to call it members' money or a returnable deposit. That is the ratio of the decision. To what extent the principle laid down or the test applied in Bazpur case [1988] 172 ITR 321 (SC) can be pressed into service in the present case is the question which needs our close attention. There are two distinguishing features which become apparent on a rea....
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....s on which the revision was initiated crumbles Still, G we have to examine whether the assessment of the impugned amounts as taxable income is justified in law. Keeping in view the bye-laws of the society, the approach of this court in the Bazpur case [1988] 172 ITR 321 and the settled principles, we must examine the fundamental question, viz., what is the true nature and quality of the receipts sought to be taxed? The question has to be examined from various angles running in a common direction. For instance, it becomes necessary to enquire: Do the receipts bear the character of income at the time they reach the hands of the assessee? Does the title to the money get vested with the assessee-society once and for all, the assessee exercising complete dominion over the funds in question? or, is it to be regarded as the money of depositors/ members notwithstanding the custody of the society and the authority given to the management of the society to utilise the money for the overall advantage of the society? Does the assessee-society stand in the position of debtor in relation to these deposits? Is there in law an obligation to repay the amounts, i.e., by way of augmentation of ....
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....ication submitted in this behalf. 9. On ceasing to be a member for whatsoever reason, the non-refundable deposit standing to his credit may be transferred to any other member's account subject to the approval of the board of directors or can be refunded to such member or his legal heirs with the approval of the board of directors, but such refund can only be granted after the lapse of one year, that too after considering the financial position of the society. Although the use of the expression "deposit" does not conclude the issue, there are intrinsic indications in the bye-laws that the expression has been used to mean just what it says. These are: (a) conversion of the deposit into additional shares, (b) transferability/heritability, (c) refundability and (d) payment of interest on the deposit. The first three features are no doubt dependent upon occurrence of certain contingencies or hedged in by certain limitations. But the deposited amount is not denuded of its character of "deposit" for that reason alone. First, discussion needs to be focussed on the first feature, namely, conversion of deposit into shares. The Tribunal rightly pointed out and it is not disputed befo....
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.... 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 c 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. Deposits are of various types with variations in their features and incidents. It would be apposite, in this context, to refer to certain passages dealing with deposits from well-known treatises. In Corpus Juris Secundum (volume 26A) the following passages occur: "Deposits are classified as special deposits, general deposits and other deposits. Special deposit: A special deposit is one in which the identical subject matter deposited must be....
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....a definite purpose without any agreement or understanding that it shall not be used by the depositee for its own purposes is a 'general deposit for a specific purpose', or, as it is sometimes called, a 'specific deposit' and creates the relation of debtor and creditor just as in the case of a general deposit." In Shanti Prasad Jain v. Director of Enforcement [1963] 33 Comp Cas 231; [1963] 2 SCR 297 this court, while dealing with the deposit in a bank, reiterated the settled law that the relationship between the banker and the customer is one of debtor and creditor and observed thus: "The banker is entitled to use the monies without being called upon to account for such user, his only liability being to return the amount in accordance with the terms agreed between him and the customer." The above juristic exposition of the concept of deposit removes the possible doubts on the impugned amounts being treated as deposits. It is the contention of 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 a....
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....established good credit. So long as the customer fulfils his legal obligation to make timely payments, his deposit ultimately is to be refunded, and both the timing and method of that refund are largely within the control of the customer." In that case too, the refund was linked to contingent events which were not uncertain. Applying the above test to the present case, we cannot hold that the assessee society had absolute dominion over the impugned deposits. Firstly, the manner of user of the deposit is limited by the bye-laws. Para. (4) of bye-law No. 61A makes it clear that the amount of deposits shall be utilized for the repayment of term loans taken for the capital expenditure from the banks and financial institutions. Unlike the case of Bazpur Co-operative Society [1988] 172 ITR 321 (SC), the deposited amount cannot be "adjusted" against the term loans much less the losses though it can be temporarily utilized by the assessee to clear the loans. The fact that the depositor can seek transfer of the deposit to another member by filing an application for that purpose again highlights the fact that the power of disposal of the deposit lies with the member. The obligation to con....
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....eed not have disturbed that finding. The High Court relied on the decision of the same High Court in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 in order to hold that the payment of interest on the deposited amount is not inconsistent with the amount 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 bye-law No. 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. To fortify the argument that the disputed amount is not the income of the assessee, learned senior counsel appearing for t....
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....ternal 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, AIR 2000 SC 301; [2000] 1 SCC 566. In Co-operative Central Bank Ltd. v. Additional Industrial Tribunal, Andhra Pradesh [1969] 2 SCC 43; [1970] 40 Comp Cas 206; [1970] 37 FJR 118, 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 Sug....
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....ax Appellate Tribunal. As regards the Chief Minister's 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 were being remitted to the Government or to the trustees of the 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 v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC). 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 the 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. The m....
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....f 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. 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 t....