2005 (3) TMI 82 - HC - Income Tax

Non refundable deposits taken from the members - respondent had received a sum of Rs. 4, 32, 685 from the cane growers on account of the loss equalisation fund as per details mentioned above which was shown in the balance-sheet as non-refundable deposit. The Assessing Officer however held that this was a revenue receipt and consequentially he added a sum of Rs. 4, 32, 685 in the total income of the respondent-assessee - it was a clear case of collection of amount towards issuance of shares in future and cannot by any stretch of imagination be termed as trading receipts - Tribunal was legally correct to delete the addition of Rs. 4, 32, 685 holding that the Revenue has failed to prove that these deposits were in the nature of revenue receipts

Summary

Issues:
- Whether the deletion of an addition of Rs. 4,32,685 by the Income-tax Appellate Tribunal was legally correct?
- Whether the deposits collected by the respondent-assessee were in the nature of revenue receipts?
- Whether the deposits collected were to be converted into shares and could not be considered trading receipts?

Analysis:
The High Court of Allahabad was presented with a question of law under the Income-tax Act, 1961 regarding the deletion of an addition of Rs. 4,32,685 by the Income-tax Appellate Tribunal. The respondent-assessee, a cooperative sugar mill, collected deposits from cane growers on account of the loss equalization fund. The Assessing Officer considered these deposits as revenue receipts and added the amount to the total income of the respondent-assessee. The Commissioner of Income-tax (Appeals) and the Tribunal were involved in subsequent appeals.

The Tribunal emphasized that the Revenue needed to prove that the deposits were of a trading or revenue nature, stating that the mere nomenclature of the deposit was not determinative. The Tribunal noted that the deposits were termed as "non-refundable deposits" for the assessment year in question and as "unsecured loans" in subsequent years. It was highlighted that the deposits had not been converted into share capital or paid to the growers in cash due to outstanding loans from the U.P. Government. The Tribunal upheld the Commissioner's decision, considering the explanation for the non-conversion of deposits plausible.

The High Court analyzed the facts and found that the deposits collected were towards the issuance of shares in the future, as per the bye-laws, and were to be adjusted upon conversion. The excess amount was to be refunded, indicating a clear intention for share issuance rather than trading receipts. Citing a relevant apex court decision, the High Court concluded that deposits from members do not qualify as trading receipts. Therefore, the High Court ruled in favor of the assessee, upholding the decision of the Tribunal and answering the question referred in the affirmative.

In conclusion, the judgment highlighted the distinction between revenue receipts and deposits for share issuance, emphasizing the importance of proving the nature of receipts in tax assessments. The decision provided clarity on the treatment of such deposits and set a precedent based on established legal principles and relevant case law.