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TMI Blog2004 (9) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of non-refundable and refundable deposits and other funds are revenue receipts liable to be taxed under the Income-tax Act, 1961. The appellants in the first batch of appeals are registered co-operative societies governed by the provisions of the Maharashtra Co-operative Societies Act, 1960, and which is referred hereafter as "the Act". The affairs of these societies are regulated by the bye-laws framed or adopted by the societies in accordance with the procedure laid down under the Act. The appellant in each of the appeals carries on the business of manufacturing sugar. Its members are predominantly sugarcane farmers. According to the policy of the Government, the sugarcane growing areas in the State of Maharashtra have been divided into different territorial units. Each unit has a factory for manufacturing sugar and the sugarcane growers within the territory are obliged to sell their sugarcane only to the said factory. The project cost of the appellant was met partly by share capital and partly by way of capital subsidy provided by either the Central Government (Ministry of Industrial Development) or financial institutions such as IDBI, IFCI, etc. The share capital was co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act. The Division Bench of the High Court addressed itself to the question whether the various amounts collected by the society from the cane growers out of the sugarcane purchase price in the name of deposits are taxable as income of the assessee-society. The learned judges of the High Court answered the questions by holding that the non-refundable and refundable deposits are trading receipts whereas deductions on account of area development fund, cane development fund, hutment fund, Y.B. Chavan Memorial Fund, The Chief Minister's Relief Fund, Education Fund are not trading receipts and therefore not taxable. Accordingly, the references and appeals were disposed of by the High Court. The sugar co-operative societies have impugned the decision of the High Court in so far as it decided the questions raised against them and the Revenue has preferred appeals in so far as the decision went against it. As the assessee's appeals rum much on the interpretation and implications of bye-laws Nos. 60, 61A and 61B which relate to the non-refundable and refundable deposits, it is worth quoting them verbatim. Bye-law No. 60: (regarding fixation of cane price) "The rate of sugarcane s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares after repayment of loans taken towards capital expenditure from Maharashtra State Co-operative Bank, Government share capital and long-term loans taken from other banks for capital expenditure. The amount of fixed deposits collected by the society from members shall not exceed three times the shares held by the members. Thereafter, such fixed deposits shall not be accepted by the Karkhana. The Karkhana has to collect the deposits until it holds Government share capital and has other loans outstanding. (3) On a member ceasing to be a member as provided in bye-law No. 22, the amount standing to the credit of his account as a non-refundable deposit may be transferred to any other member's account at his option and approval of the board of directors or shall be refunded to such members or his legal heirs with the approval of the board of directors after the lapse of one year from ceasing to be members, on recovery of all amounts due from him if any, and after considering the financial position of the society. However, the total amount of such refund in any year shall not exceed 1/10th of the total non-refundable deposits standing at the beginning of the year. (4) The amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the collection of the deposit and cannot be viewed as consideration for the supply of cane. The Tribunal stressed on the provision for the payment of interest and the manner in which the deposits were treated by the society. It was stressed that the retained amounts were credited to the individual accounts of the depositors and they were shown as liability in the balance sheet. It means that the "deposits" were not regarded as the assessees' own money. The Tribunal distinguished the case of Bazpur Co-operative Sugar [1988] 172 ITR 321 (SC), inter alia, on the ground that the amounts deducted by the society and credited to the loss equalisation fund were liable to get depleted or consumed after applying the funds for various purposes mentioned in the bye-laws including the working losses, whereas that is not the case in the present appeal. The Tribunal summed up the position as follows: "To sum up, according to our understanding, the true nature and purpose of bye-law No. 61A is to collect contribution towards share capital from the cane growers by deducting the amount from the sugarcane purchase price payable to them in a slow and graduated manner so that the funds s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that the amount reached the assessee as its income." After referring to the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321; [1988] 3 SCC 553, the High Court held: "In the present case also, under the bye-law, the rate of deposit was fixed by the society and not by the cane grower. In the present case also, under the bye-law, no event or contingency has been contemplated under which the shareholder could demand repayment of the deposit. Hence, merely because the Karkhana has agreed to pay the interest, will not be a conclusive test to come to the conclusion that a liability has accrued to the society on deduction." Contentions: Learned senior counsel for the appellant-assessee contended that the High Court fell into error in overlooking certain important aspects of the case and laying undue stress on the fact that the amount treated as deposit is deducted from the price payable to the cane growers as part of the trading operations and, therefore, it was in the nature of trading receipt. The assessee-society was always treating the deposits as money belonging to the members (cane growers), credited the deducted amounts to the individual acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whole, a right which is too tenuous and remote. Learned counsel for the respondent further contended that crediting of interest is not decisive and it practically remains on paper. Placing reliance on the case of Bazpur Co-operative Sugar [1988] 172 ITR 321(SC), it is contended that there is practically no difference between the un-amended bye-law which was considered in that case and the bye-laws in the present case. As the sheet anchor of the Department's case rests on the decision in CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321; [1988] 3 SCC 553, it becomes necessary to refer to that decision in detail. During the relevant assessment year 1961-62, certain amounts were deducted from the price payable for the sugarcane supplied by the members and the society credited the same to the "loss equalisation and capital redemption reserve fund". These deductions were made under the provisions of bye-law 50. At the relevant point of time, the bye-law read as follows: "'There shall be established a loss equalisation and capital redemption reserve fund in the society. Every producer-shareholder shall deposit every year a sum not less than 32 paise and not more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference that the disputed amounts have been referred to as deposits and proceeded to consider the crucial issue in that light. How far the ratio of the decision in the Bazpur case [1988] 172 ITR 321 (SC) could be applied to the case on hand is the first and foremost controversy. In the present case, the purchase and payment of the price of sugarcane is undoubtedly part of the trading operations of the assessee. It is in the course of such trading operations that the assessee realised the amounts (treated as deposits) with regularity and utilised the money so received in its business. To the extent the full payment is not made to the farmers, the assessee saved raw material cost as well. These factors may broadly satisfy the first test applied in Bazpur Co-operative Sugar's case [1988] 172 ITR 321 (SC). The following are the relevant observations in this regard: "It is clear that these amounts which were deducted by the respondent from the price payable to its members on account of supply of sugarcane were deducted in the course of the trading operations of the respondent and these deductions were a part of its trading operations. The receipts by way of these deductions must, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions. Under the unamended bye-law, the amounts deducted from the price and credited to the said fund were first liable to be used in adjusting the losses of the respondent-society in the working year; thereafter in the repayment of initial loan from the Industrial Finance Corporation of India and then for redeeming the Government share and only in the event of any balance being left, it was liable to be converted to share capital. The primary purpose for which the deposits were liable to be used were not to issue shares to the members from whose amounts the deductions were made but for discharging of liabilities of the respondent-society. In these circumstances, the receipts constituted by these deductions were really trading receipts of the assessee-society. . ." The court apparently felt that the event of return of the amounts by way of conversion into share capital was remote, if not impossible. In meeting the point urged by the assessee that it was a deposit, the court proceeded to apply the primary purpose test. The primary purpose, according to the learned judges, was not to issue shares to the members but it was meant to discharge various liabilities of the society. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viewed. As between the member and the society, who is having substantial dominion over the "deposits"? In the Bazpur case [1988] 172 ITR 321 (SC), the answer could only be that it is the assessee-society which had such dominion. The position is different in the present case, as explained hereafter. The ratio in the Bazpur case [1988] 172 ITR 321 (SC) not being squarely applicable, the whole basis on which the revision was initiated crumbles Still, G we have to examine whether the assessment of the impugned amounts as taxable income is justified in law. Keeping in view the bye-laws of the society, the approach of this court in the Bazpur case [1988] 172 ITR 321 and the settled principles, we must examine the fundamental question, viz., what is the true nature and quality of the receipts sought to be taxed? The question has to be examined from various angles running in a common direction. For instance, it becomes necessary to enquire: Do the receipts bear the character of income at the time they reach the hands of the assessee? Does the title to the money get vested with the assessee-society once and for all, the assessee exercising complete dominion over the funds in question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken from IFCI, etc., towards capital expenditure are repaid fully. On such repayment, the management of the society may convert such deposits into shares, 7. The amount of deposits collected shall be utilized for the repayment of term loans taken for the purpose of capital expenditure. 8. The amount collected as deposit can be transferred to the name of any other member on an application submitted in this behalf. 9. On ceasing to be a member for whatsoever reason, the non-refundable deposit standing to his credit may be transferred to any other member's account subject to the approval of the board of directors or can be refunded to such member or his legal heirs with the approval of the board of directors, but such refund can only be granted after the lapse of one year, that too after considering the financial position of the society. Although the use of the expression "deposit" does not conclude the issue, there are intrinsic indications in the bye-laws that the expression has been used to mean just what it says. These are: (a) conversion of the deposit into additional shares, (b) transferability/heritability, (c) refundability and (d) payment of interest on the deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall". On the occurrence of the specified event, namely, the repayment of the loans referred to in the bye-law and the Government share capital, the member/depositor can clutch at a legally enforceable a right to demand repayment, may be, in the form of conversion into additional shares. In our view, the retention of the deposited money with the society in order to utilize the same for repayment of term loans, etc., does not denude the amount of its character of "deposit" carrying with it the obligation to repay. Nor is it necessary, as the High Court was inclined to think, that the separate identity of the deposited amounts should be kept up. The absence of the right to secure repayment on demand is again not inconsistent with the receipt being a deposit. Liability to return need not be immediate and unconditional, following a demand by the depositor. Even if such liability gets crystallized c on the happening of a specified contingency, it is still a liability which can be legally enforced by the depositor. The existence of such liability is an antithesis to the idea of ownership of the money by the society. Deposits are of various types with variations in their features and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the depositor is that of debtor and creditor; while the subject of a 'special deposit' is to keep safely, separate and distinct from the general assets of the bank, as the title remains in the depositor, who is entitled to receive back the identical thing deposited, and the relation assumed between the depositor and the bank is that of bailor and bailee. Money deposited for a definite purpose without any agreement or understanding that it shall not be used by the depositee for its own purposes is a 'general deposit for a specific purpose', or, as it is sometimes called, a 'specific deposit' and creates the relation of debtor and creditor just as in the case of a general deposit." In Shanti Prasad Jain v. Director of Enforcement [1963] 33 Comp Cas 231; [1963] 2 SCR 297 this court, while dealing with the deposit in a bank, reiterated the settled law that the relationship between the banker and the customer is one of debtor and creditor and observed thus: "The banker is entitled to use the monies without being called upon to account for such user, his only liability being to return the amount in accordance with the terms agreed between him and the customer." The above juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court applied the test whether the assessee enjoyed complete dominion over the customer deposits entrusted to it and observed thus: ". . . IPL hardly enjoyed 'complete dominion' over the customer deposits entrusted to it. Rather, these deposits were acquired subject to an express 'obligation to repay', either at the time service was terminated or at the time a customer established good credit. So long as the customer fulfils his legal obligation to make timely payments, his deposit ultimately is to be refunded, and both the timing and method of that refund are largely within the control of the customer." In that case too, the refund was linked to contingent events which were not uncertain. Applying the above test to the present case, we cannot hold that the assessee society had absolute dominion over the impugned deposits. Firstly, the manner of user of the deposit is limited by the bye-laws. Para. (4) of bye-law No. 61A makes it clear that the amount of deposits shall be utilized for the repayment of term loans taken for the capital expenditure from the banks and financial institutions. Unlike the case of Bazpur Co-operative Society [1988] 172 ITR 321 (SC), the deposited amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the society may be one of the purposes for which the deposits were collected but that is not all. The augmentation of the share capital which may be in the overall interests of the members as well as the society is an equally important purpose which cannot be overlooked. At any rate, the view taken by the Tribunal appears to be a reasonable view and the High Court need not have disturbed that finding. The High Court relied on the decision of the same High Court in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 in order to hold that the payment of interest on the deposited amount is not inconsistent with the amount being a revenue receipt. We are of the view that the ratio of that decision cannot be pressed into service in the present case. On a consideration of the scheme and agreement under which non-refundable interest-bearing deposit was collected by the assessee-company, it was found as a matter of fact that "the deposit was the absolute property of the company and the provision for payment of interest was only a device for showing the amount received in the course of trade as deposit." In the instant case, the plea of device, though raised faintly before the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It has been pointed out that the member had no option but to agree for deduction on pre-ordained terms and there could not be in law a contract creating deposit. This contention, however, does not appeal to us. A person by becoming a member of a co-operative society, volunteers to abide by the bye-laws of the society, the real object of which is to provide for internal management of the society including rendering assistance to the members. There is an authority for the proposition that the bye-laws of the co-operative society constitute a contract between the society represented by its managing body and its constituents. This legal position has been recognized in Hyderabad Karnataka Education Society v. Registrar of Societies, AIR 2000 SC 301; [2000] 1 SCC 566. In Co-operative Central Bank Ltd. v. Additional Industrial Tribunal, Andhra Pradesh [1969] 2 SCC 43; [1970] 40 Comp Cas 206; [1970] 37 FJR 118, this court held that the bye-laws of the society framed by virtue of the authority conferred by the Co-operative Societies Act were on par with the articles of association of a company, which, it is well settled, establish a contract between the company and its members and between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court too could not give these factual details in its order. Even in the appeal memorandum or the written submissions filed on behalf of the Revenue we do not find these details. Despite this handicap, we have looked into some of the orders and circulars issued by the Director of Sugar and other authorities contained in the paper book submitted to the Income-tax Appellate Tribunal. As regards the Chief Minister's Relief Fund, Late Y.B. Chavan Memorial Fund and Hutment Fund, no serious attempt has been made to assail the order of the Tribunal/High Court, the obvious reason being that they were required to be and in fact were being remitted to the Government or to the trustees of the late Y.B. Chavan Prathisthan. The assessee merely acted as an agent in collecting the amounts and remitting the same to the Government/ Trustees. In truth and in substance, the money collected by the assessee was not reaching the assessee as part of its income, but the collection was made "for and on behalf of the person to whom it is payable", to borrow the language in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC). It had no manner of right or title over the said monies. The amount collected towar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the society and its elected representatives take the decision as to how much amount has to be spent and for what purposes. The Director of Sugar or other designated official, no doubt acts in a supervisory capacity to oversee that the funds are properly utilized. On that account, it cannot be said that the collection is made by the society as an agent of the Government or the proprietary interest in the funds is vested with the Government. The conclusion has been reached by the Tribunal mainly on the basis of the requirement of prior sanction of the Director of Sugar for incurring the expenditure. Such restriction prescribed in the larger interest of the society itself does not in any way detract from the fact that the societies concerned do exercise dominion over the fund and deal with that money subject of course to the guidelines and restrictions evolved by the Government. The Tribunal failed to approach the question in proper perspective on an analysis of the relevant circulars and orders. The High Court too fell into an error in invoking the theory of diversion of income at source. The crux of the matter is that there has never been a diversion of income to a third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wth and functioning of the sugar factory. The Tribunal was inclined to view it as a "compulsory levy" on the depositors collected by the Government through the agency of sugar factory. This approach in our view is wholly unsustainable and is in the realm of surmise. We do not also see any scope for the application of the principle of diversion of income at source in the case of collections made towards Cane Development Fund. The amounts realized on this account undoubtedly reach the assessee as its income and are utilized by the assessee for the benefit of itself and its members. As already observed, the supervisory role of the Directorate of Sugar to ensure that the amount is properly utilized to promote the objectives with which the fund was formed, does not make a material difference to the quality and character of the receipt. We are therefore of the view that the deductions made out of cane price towards Cane Development Fund should be treated as the income of the assessee. We are, of course, not expressing any view whether it is a permissible deduction under the provisions of the Income-tax Act. If any such claim is made, the Tribunal shall examine the same when the matters a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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