1988 (5) TMI 4 - SC - Income Tax

Effect of Retrospective Amendment of Bye-laws - Whether the sum credited during the year of account to the loss equalisation and capital redemption reserve fund by deposits received from producer members of the society under clause 50 of its bye-laws is of revenue nature assessable to tax - Whether, Tribunal was right in holding that the amount was not a revenue receipt liable to tax

Summary

Issues Involved:
1. Whether the amendment to bye-law 50 of the co-operative society could have retrospective effect.
2. Whether the amounts deducted from the price payable to members for the supply of sugarcane under bye-law 50 were revenue receipts liable to tax.

Issue-Wise Detailed Analysis:

1. Retrospective Effect of Bye-law Amendment:
The primary contention was whether the amendment to bye-law 50, which was made with retrospective effect, could legally have such effect. The court examined the relevant statutory provisions and rules under the Co-operative Societies Act, 1912, and the United Provinces Co-operative Societies Rules, 1936.

The court noted that the power to amend bye-laws was derived from Rule 11 of the United Provinces Co-operative Societies Rules, 1936, which did not expressly or impliedly confer any power to make amendments with retrospective effect. Citing precedents, the court emphasized that subordinate legislative functions, such as making bye-laws, could not be given retrospective effect unless expressly authorized by statute. The court referenced the decision in ITO v. M. C. Potions, which held that retrospective operation of rules or regulations required explicit statutory language.

The court concluded that the respondent-society had no authority to amend bye-law 50 with retrospective effect. Consequently, the amounts deducted from the price payable to members for the supply of sugarcane had to be dealt with under the provisions of bye-law 50 as it stood during the relevant accounting period.

2. Nature of Amounts Deducted Under Bye-law 50:
The second issue was whether the amounts deducted from the price payable to members for the supply of sugarcane under bye-law 50 were revenue receipts liable to tax. The court analyzed the nature of these deductions, which were credited to the "Loss Equalisation and Capital Redemption Reserve Fund."

The court observed that the deductions were made in the course of the trading operations of the respondent-society and were part of its trading operations. The court held that these receipts must be regarded as revenue receipts and included in the taxable income of the respondent. The court emphasized that the true nature and quality of the receipt, rather than the label under which it was entered in the account books, was decisive. Citing the decision in Chowringhee Sales Bureau P. Ltd. v. CIT, the court underscored that trading receipts should be treated as such regardless of how they were recorded in the books.

The court also referenced the decision in Punjab Distilling Industries Ltd. v. CIT, where additional amounts described as security deposits were deemed to be part of the consideration for the sale of liquor and thus trading receipts. Applying these principles, the court concluded that the amounts deducted under bye-law 50 were indeed trading receipts and liable to be included in the taxable income.

Conclusion:
The court held that the amendment of bye-law 50 could not have retrospective effect and that the amounts deducted under the original bye-law 50 were revenue receipts liable to tax. The appeals were allowed, and the questions referred were answered in the affirmative and in favor of the Revenue. The respondent was ordered to pay the costs incurred in the Income-tax Reference.