2004 (9) TMI 6 - SC - Income Tax

Diversion by Overriding Title - whether compulsory deductions made by sugar co-operative societies on account of non-refundable and refundable deposits and other funds are revenue receipts liable to be taxed under the Income-tax Act, 1961. - that the amount collected towards Cane Development Fund shall be treated as the income of the assessees and any claim for deduction shall be entertained and decided by the Tribunal. As regards the Area Development Fund, the matters are remitted to Tribunal

Summary

Issues Involved:
1. Taxability of non-refundable deposits.
2. Taxability of refundable deposits.
3. Taxability of deductions made towards various funds (Chief Minister's Relief Fund, Y.B. Chavan Memorial Fund, Hutment Fund, Area Development Fund, Cane Development Fund, Members' Small Savings Fund).

Detailed Analysis:

Non-Refundable Deposits:
The primary issue was whether non-refundable deposits collected by sugar co-operative societies from cane growers are taxable as revenue receipts under the Income-tax Act, 1961. The Tribunal and High Court had differing views on this.

- Tribunal's Findings: The Tribunal emphasized that the nature and purpose of the collection are crucial. It found that these deposits were meant for repaying term loans and converting deposits into shares, indicating they were not trading receipts but contributions towards share capital. The Tribunal concluded that these funds were treated as liabilities and not as income.
- High Court's Findings: The High Court held that these deposits were part of trading receipts as they were collected during trading operations and used to discharge the society's liabilities. It emphasized that the deposits reached the society as income.
- Supreme Court's Conclusion: The Supreme Court analyzed the bye-laws and found that the deposits were indeed meant to be converted into shares or refunded under certain conditions, indicating an obligation to repay. The Court held that these deposits should not be treated as income as they were liabilities and not the society's own money.

Refundable Deposits:
The issue was whether refundable deposits collected under bye-law No. 61-B are taxable.

- Supreme Court's Conclusion: The Court found that these deposits were fixed deposits repayable with interest and akin to loans. Therefore, they could not be treated as income of the society.

Deductions Towards Various Funds:
The issue was whether deductions made towards various funds are taxable as income.

- Chief Minister's Relief Fund, Y.B. Chavan Memorial Fund, Hutment Fund: The Tribunal and High Court concluded that these funds were not the society's income as they were collected on behalf of the government or trustees and remitted accordingly.
- Area Development Fund: The Tribunal viewed this fund as collected for socio-economic services in the operational area, under the society's control but with government oversight. The High Court agreed, applying the principle of diversion of income by overriding title.
- Cane Development Fund: The Tribunal considered this fund as a compulsory levy collected by the government through the society. The High Court concurred, seeing it as income of the society used for its benefit and that of its members.

- Supreme Court's Conclusion: The Court agreed with the Tribunal and High Court regarding the Chief Minister's Relief Fund, Y.B. Chavan Memorial Fund, and Hutment Fund, treating them as not income. However, it differed on the Area Development Fund, remanding it for fresh determination, and held that the Cane Development Fund should be treated as income of the society, subject to permissible deductions under the Income-tax Act.

Final Judgment:
- Assessees' Appeals: Allowed, declaring non-refundable and refundable deposits as not income.
- Revenue's Appeals: Partly allowed, declaring Cane Development Fund as income and remanding Area Development Fund for fresh determination. Other funds' collections were not treated as income.