TaxTMI 
TaxTMI 
2001 (9) TMI 62
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....in the circumstances of the case, the Appellate Tribunal was correct in allowing the deduction of a sum of Rs.13,670 and Rs.4,401 towards interest credited to the molasses fund account for the assessment years 1977-78 and 1976-77, respectively?" R. C. No. 169 of 1991: Similarly, at the instance of the Revenue, the Income-tax Appellate Tribunal referred the following question under section 256(2) of the Act, arising out of its order dated June 27, 1984, in I. T. A. No. 1163 of 1983 for the assessment year 1978-79: 'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in allowing the deduction of Rs.5,07,148 being a reserve created as molasses storage fund account and Rs.34,148 being interest thereon for the assessment year 1978-79 in the manner indicated by the Appellate Tribunal in para. 7 of its order?" R. C. No. 98 of 1991: At the instance of the Revenue, the Income-tax Appellate Tribunal referred the following question under section 256(2) of the Act arising out of its order dated March 13, 1989, in I.T.A. Nos. 1917 and 1918 of 1986 for the assessment years 1980-81 and 1981-82: 'Whether, on the facts and in the circumstan....
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....lar view was taken by the Assessing Officer for all the assessment years and he included the said amount credited to the molasses storage fund account. The Assessing Officer also referred to the judgment of Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454 (Mad) and even as per the said judgment as the assessee's dominion over the fund has not ceased, the said amount was includible in the total income of the assessee. This was contested by the assessee before the Commissioner (Appeals), unsuccessfully. Therefore, the assessee preferred appeals before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal, after elaborately considering the claim of the assessee-company in the light of the provisions contained in the said Control Order, finally held that there is a diversion of income at the source itself and therefore the amount credited to the molasses storage fund account should not be treated as income of the assessee-company. The Tribunal also relied upon and followed the decisions of the Calcutta and Madras Bench decisions of the Tribunal. Aggrieved by the said orders of the Tribunal, the Revenue sought the references to this court for its opinion. ....
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....o the storage tank, the as sessee is entitled to claim depreciation by treating the said storage tank as its asset. Therefore, it was contended that the assessee continues to be having control over the fund, even after crediting a part of the sale consideration to the said account and even during the utilisation and after utilisation of the said fund for the purpose of which it was created and the asset created with the said fund continues to be that of the assessee. Therefore, the said amount does not cease to be that of the assessee. Hence, the Tribunal was not justified in excluding the said income while computing the assessee's in come for the respective assessment years. Learned counsel relied upon the judgment of the Madhya Pradesh High Court in the case of Jiwajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182, the decisions of the Madras High Court in Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454; Associated Power Co. Ltd. v. CIT [1996] 218 ITR 195 (SC) and CIT v. Sitaldas Tirathdas[1961] 41 ITR 367 (SC) and contended that the decision rendered by the Income-tax Appellate Tribunal is contrary to the judgments rendered in the above decisions. Hence, the questions r....
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....ura Sahakara Sakkare Karkhane Ltd. [1992] 198 ITR 690 (Kar); (2) CIT v. Salem Co-operative Sugar Mills Ltd. [1998] 229 ITR 285 (Mad); (3) Somaiya Orgeno-Chemicals Ltd. v. CIT [1995] 216 ITR 291 (Bom); and (4) CIT v. New India Sugar Mills Ltd. [1994] 206 ITR 212 (Cal). From the above rival contentions, the issue to be considered is whether the amounts that were credited to the molasses storage fund account are includible in the total income of the assessee-company? Before considering the rival contentions, it would be appropriate to refer to the relevant portions of the Control Order. The molasses, which come as a by-product in the manufacturing process of sugar, have to be stored and sold in accordance with the provisions of this Control Order. The prices are also being fixed by the Central Government under the said Control Order. The molasses that were produced by the various industries are also classified into various grades and their prices are also fixed at varying rates depending upon their grade. The prices fixed under the 1961 Control Order are fixed as per the Schedule, which reads as under: -----------------------------------------------------------------....
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....ade K-V Rs.3.60 per 100 kilograms As per specification of Grade III cane molasses Below grade K-V Rs.3.60 for every 40 kilograms reducing sugar content therein ------------------------------------------------------------------------------------- Note: From the price fixed under the above Schedule, 33-1/3 per cent. ther....
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....he purpose referred to in sub-paragraph (5) the assessment made by the executing agency shall be final and binding on the management of the sugar factory or khandasari unit. 7. The Molasses Controller or any other officer nominated by him shall inspect the storage facility erected by the sugar factory or khandasari unit to satisfy himself that it has been put up in accordance with the specification referred to in sub-paragraph (3). 8. The amount available in the account shall be maintained as a separate account in the bank of the sugar factory or khandasari unit concerned. Though the Control Orders are being amended from time to time in so far as the provisions relating to the creation and the maintenance of the storage fund account remains unchanged. Therefore, even while withdrawing the fund from the said storage fund account, the assessee is not free to utilise the said fund except with the approval and in accordance with the regulations. The amount to be credited to the fund account is clearly provided in the Schedule itself. Therefore, automatically 1/3rd of the sale price of molasses fixed by the Central Government under the Control Order is to be credited to the sto....
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....f storage facilities for molasses and alcohol. It further provides under sub-clause (2) that when any amount is intended to be withdrawn from the said account, the management of the distillery shall submit proposals to the Commissioner who shall, after satisfying himself about the proposals, permit withdrawal. Under clause 6, the storage tanks for molasses are required to be as per the specification formulated by the Indian Standards Institution and made of pucca covered masonry as may be decided by the Commissioner. The storage tanks for alcohol are required to be as per the specifications laid down by the Commissioner. Under clause 7, the Commissioner in consultation with the distillery, is required to fix a time schedule within which the storage tanks both for molasses and for alcohol shall be constructed by the distillery. Sub-clause (2) provides that in the event of failure of the distillery to construct storage tanks within the prescribed time schedule, the Commissioner shall have the work executed through the Public Works Department of the Central Government or the State Government or a private agency and the management of the distillery shall place at the disposal of the Co....
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....wajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182 (MP) dissented from; and (8) CIT v. Calcutta Electric Supply Corporation Ltd. [1982] 138 ITR 111 (Cal) distinguished. The Karnataka High Court in the case of CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd. [1992] 198 ITR 690 had an occasion to consider almost an identical issue under the Molasses Control Order and held: "that the utilisation of the amount in question could be only as per the directions that might be issued by the Government from time to time. The right to the fund got diverted from the hands of the assessee by virtue of the Molasses Control Order. The amount was not assessable in the hands of the assessee". Against the said decision of the Karnataka High Court, the Department filed special leave petition before the Supreme Court and the same was dismissed. The apex court while considering the issue of diversion of income by overriding title in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 held that: 'The true test for the application of the rule of diversion of income by an overriding charge is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations,....
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....nt to the assessment year 1973-74. This amount was claimed by the assessee as a deduction in the computation of its total income for the purposes of the income-tax. The Income-tax Officer rejected the claim. The Appellate Assistant Commissioner allowed the assessee's claim, relying upon the decision of the Kerala High Court in the case of Cochin State Power and Light Corporation Ltd. v. CIT [1974] 93 ITR 582, and of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334. The Revenue filed an appeal before the Tribunal and cited the judgment of the Madras High Court in the case of Vellore Electric Corporation Ltd. v. CIT [1977] 109 ITR 454. The Tribunal relied on the decision of the Madras High Court, which had disagreed with the view taken by the Kerala and Bombay High Courts. Accordingly, it is set aside the order of the Appellate Assistant Commissioner and referred the following question directly to the apex court under section 257 of the Income-tax Act, 1961: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the sum of Rs.46,460 transferred to the contingencies res....
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....r to the Board or the State Government, as the case may be." The apex court noted the divergent views taken by the Kerala High Court and the Bombay High Court on the one hand and the Madras High Court and the Calcutta High Court on the other. The apex court also noted that the Kerala High Court relied upon the decision of the apex court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 while accepting the contention of the assessee that the reserves should not be included in the total income of the assessee. The apex court also considered the facts under which the judgment in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 was rendered. This was a case that related to the Consumers' Rebate Reserve. The Poona Electric Supply Company Ltd., the assessee in that case, claimed deduction of the amount credited to this reserve from its taxable income. The apex court noted the provisions of the Electricity (Supply) Act and the Sixth Schedule and observed that their object was to statutorily rationalise and regulate the rates chargeable for energy supplied in the interest of the public and for electrical development. Under the rules embodied in th....
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....nciples of commercial accountancy. As a licensee governed by the statute its clear profit was to be ascertained in terms of the statute and its Schedule. The two profits were for different purposes-- one was for commercial and tax purposes and the other was for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Electricity (Sup-ply) Act, during the accounting years, the assessee credited an amount to the Consumers' Rebate Reserve. It was a part of the excess amount paid to it and it was reserved to be returned to the consumers. It did not form a part of the assessee's real profit. So, to arrive at the taxable income of the assessee from business that amount had to be deducted from its total income. Thereafter, the apex court considered the facts in the case of Cochin State Power and Light Corporation Ltd. v. CIT [1974] 93 ITR 582 rendered by the Kerala High Court, while relying relied upon the judgment of the apex court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521. It was held by the Kerala High Court that the amount covered by the contingencies reserve is a diversion by reason of the overriding obligation creat....
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....ctible. But, this decision was specifically referred to and dissented from by the Bombay, Karnataka and Madras High Courts. If we examine the facts of the present case and the mode of creation of the molasses storage fund account, it is clear that the Central Government while fixing the rates of molasses included in it a part, which is to be set apart and credited to the molasses storage fund account. It is not part of the revenues of the assessee or profits of the assessee. A specified portion of the price fixed by the Central Government under the Molasses Control Order has to be set apart. It is a statutory obligation on the part of the assessee to set apart that portion of the amount fixed under the Molasses Control Order as a separate fund by crediting the same to a separate account. The assessee has absolutely no control over the fund for its being utilised for any purpose. The assessee is holding and maintaining that account only as a trustee. If the assessee wants to withdraw the amount even for spending the same for the purpose for which the fund was created, it is not free to withdraw the amount without the approval of the appropriate authority or the Central Government....