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2014 (9) TMI 264 - AT - Income TaxReceipts towards Area Development Fund (ADF) Money collected towards Area Development Activities used for business purposes or not Held that - The assessee sugar factory has to get the approval of the members of the assessee society in the annual general meeting and then only the ADF can be utilized - The assessee has filed some of the resolution in the compilation from which it is seen that the ADF is used for giving incentive for primary school, incentive for wrestlers, help to persons affected by fire, incentive for wage, road developments, medical assistance, subsidiary for digging wells, assistance for group marriages etc. - the assessee has not kept the amount deducted from the bills payable to the members and non-members in separate Bank Account but separate account is maintained in the books - in respect of the nature of this fund it has been already held that purposes for which this fund is utilized i.e. ADF is unconnected with the growth of sugar factory and this fund is promoted for Socio-economic Development in the area of operation and this fund is distinct from the Cane Development Fund. Whether the collection made towards ADF by the assessee sugar factory is impressed with the specific obligation or assessee hold this money as a trustee Held that - Even if initially it was by way of discretion the Sugar Co-operative factories were collecting the fund and spending the same on the different projects undertaken in the area of operation but subsequently the collection and use of fund was regulated by the intervention of the Govt. by issuing the order u/s. 79A of the Maharashtra Co-operative Society Act - The assessee has maintained the separate account in respect of this fund and as per the statement filed it is seen that the assessee sugar factory is utilizing the ADF on different projects as per the approval given in the annual general meeting (AGM) - Merely because the amount collected is not kept separately in the bank account, the character of the amount will not change as decided in Commissioner of Income-Tax (Central), New Delhi Versus Bijli Cotton Mills Pvt. Limited 1978 (11) TMI 1 - SUPREME Court - the assessee is required to submit the Auditor s Report to the Director of Sugar, Govt. of Maharashtra each year showing the opening balance of the ADF, amount collected during the year and utilized during the year. The collection made by the assessee towards the ADF by way of deduction made from the sugarcane bills payable to the members and non-members is impressed with an obligation to spend the same for the specified purposes and the persons/Members paying contribution to ADF are aware before the deduction is made that for what purpose the assessee Co-operative Factory is collecting the said fund and where the fund will be utilized - the assessee s role is like a trustee of the Area Development Fund - the amount collected under the ADF is not a trading receipt in the hands of the assessee, the deduction given by the AO in the respective assessment years towards ADF is to be withdrawn - The AO is direct to exclude fully the amount included towards Area Development Fund in the income of the assessee and also to withdraw the amount allowed as a business expenditure towards ADF Decided in favour of Assessee.
Issues Involved:
1. Whether receipts towards Area Development Fund (ADF) constituted the appellant's trading receipts. 2. Whether the appellant used the money collected towards Area Development Activities for its business purposes during the period of delay in utilization of the money. 3. Whether collections towards Area Development Fund were impressed with a specific legal obligation to spend them for purposes unrelated to the appellant's business. 4. Whether the appellant was legally liable and obliged to spend the collections towards Area Development Fund for the purposes they were collected. Detailed Analysis: Issue 1: Whether receipts towards Area Development Fund (ADF) constituted the appellant's trading receipts. The Tribunal examined whether the amounts collected under ADF by the assessee, a Co-operative sugar factory, should be treated as trading receipts. The Assessing Officer initially taxed these collections, but the ITAT and the High Court had previously ruled that these amounts were diverted at source and not income in the hands of the assessee. The Supreme Court, however, remitted the matter back to the ITAT, stating that the collections always remained with the assessee and were not diverted to a third party before reaching the assessee. The Tribunal, upon re-examination, concluded that the collections were not trading receipts as they were impressed with a specific legal obligation to be used for socio-economic activities unrelated to the business of the sugar factory. Issue 2: Whether the appellant used the money collected towards Area Development Activities for its business purposes during the period of delay in utilization of the money. The CIT(A) contended that the appellant had used the ADF for business purposes during periods of delay in utilizing the funds. However, the Tribunal found that the funds were indeed used for socio-economic projects as specified in the Government's guidelines, and the delay in utilization did not alter the nature of the funds. The Tribunal noted that the funds were earmarked for specific purposes and were not used for the business operations of the sugar factory. Issue 3: Whether collections towards Area Development Fund were impressed with a specific legal obligation to spend them for purposes unrelated to the appellant's business. The Tribunal analyzed the nature of the ADF and found that the collections were indeed impressed with a specific legal obligation. The funds were to be used for socio-economic development in the area of operation, such as agricultural extension, irrigation facilities, educational and medical services, and other community welfare projects. The Tribunal referenced the Supreme Court's observations and the guidelines issued by the Government, which mandated the specific use of these funds, thereby establishing a legal obligation. Issue 4: Whether the appellant was legally liable and obliged to spend the collections towards Area Development Fund for the purposes they were collected. The Tribunal confirmed that the appellant was legally liable and obliged to spend the ADF collections for the specified purposes. The funds were collected and utilized under the supervision and guidelines of the Government of Maharashtra, and the assessee acted in the capacity of a trustee. The Tribunal noted that the funds were maintained in a separate account, and the utilization was reported to the Government annually. The obligation to spend the funds on socio-economic projects was clear and legally binding. Conclusion: The Tribunal concluded that the collections towards the ADF were not trading receipts and were impressed with a specific legal obligation. The funds were to be used for socio-economic development projects, and the assessee acted as a trustee of these funds. Consequently, the amounts collected under the ADF were not considered income in the hands of the assessee, and any deductions allowed as business expenses towards ADF were to be withdrawn. All appeals were allowed in favor of the assessee. Pronounced in the open Court on 28-02-2014.
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