Income Tax Appellate Tribunal - Pune
Shri Chatrapati Sahakari Sakhar ... vs Deputy Commissioner Of Income-Tax on 16 January, 1992
ORDER
G. Krishnamurthy, President
1. These appeals were heard by a Special Bench at the instance of the Pune Bench before whom these appeals had come up for hearing in the first instance. The Pune Bench stated that these appeals involve complex points and substantial questions of law involving a large amount of revenue and that there were 91 appeals at various stages involving similar issues and it would, therefore, be proper and fair and also desirable if these appeals are heard by a Special Bench. This suggestion was accepted and the Special Bench was constituted.
2. The assessees in these appeals as also in the other appeals who have joined as interveners, as the name suggests, are co-operative sugar factories. The functioning of these sugar factories is regulated by the Government of Maharashtra in the Department of Agriculture and Cooperation. Under an Act called " Maharashtra Co-operative Societies Act, 1960", the Government have taken powers to issue directions to these co-operative societies in public interest and more particularly in the matter of fixation of sugarcane price to be paid to the cultivators. The control of sugar factories is kept under an officer called " Director of Sugar ", who conveys to the sugar factories from time to time the decisions of the Government on matters like collection of money for various purposes and also for the initiation and implementation of various schemes and programmes for the improvement of agriculture and irrigation which will ultimately benefit cane development and, therefore, the cane growers and thus ensure all round development of the economy of the State. The State Government also provided certain share capital with a view to meet the financial requirements of the sugar factories at the initial stages and also helped the sugar factories to obtain term loans from financial institutions like the LIC, IFCI, etc. Thus, socio-economic development schemes also are sought to be initiated and implemented through these co-operative sugar factories. For the internal management of these co-operative societies, they made several bye-laws all of which have to be in accordance with the policy laid down by the State Government through the Ministry of Agriculture and Co-operation. Bye-law No. 60 of the assessee before us governs the fixation of cane price and bye-law No. 61-A deals with collection of what is known and what is mainly in dispute before us, viz., non-refundable deposits from cane-growers along with the sugarcane price. Bye-law No. 61-B provided for the collection of time deposits which are called refundable deposits. As we have mentioned earlier, under the powers taken by the Government, the Director of Sugar issued instructions to these sugar factories to collect funds for what is called (i) area development fund, (ii) cane development fund, (iii) hutments fund, (iv) Chief Minister's Relief Fund, (v) Members' small savings fund, (vi) Late Y. B. Chavan Memorial fund, (vii) Members' non-refundable deposits, (viii) Members' refundable deposits, (ix) Non-members' refundable deposits, and (x) Voluntary deposits of members' fund. Various amounts were collected from cane growers out of the cane purchase price payable to them at various rates fixed by the Government under the instructions given by the Director of Sugar. For the collection of these funds, there is the authority of the Director of Sugar. A question then arose as to whether these deposits are taxable as income of the assessee. In all the previous years other than the assessment years 1984-85, these deposits were not treated as income of the assessee, i.e., trading receipts though collected from the cane growers. But, in the assessment years 1984-85 and 1985-86, which are appeals in I. T. A. Nos. 714 and 715/PN of 1989, respectively, the Commissioner of Income-tax, acting under Section 263 of the Income-tax Act, 1961, set aside the assessments made and directed the Income-tax Officer to make fresh assessments by including these sums as trading receipts of the assessee. The reason that prevailed with the Commissioner of Income-tax for initiating action under Section 263 of the Income-tax Act was the judgment of the Supreme Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd, [1988] 172 ITR 321, wherein the Supreme Court held that the deposits received from cane growers were to be treated as trading receipts. This decision was rendered on the basis of the bye-laws obtaining in that case and the facts of that case. The Commissioner of Income-tax felt that the principle laid down therein was a principle of law of universal application and, applying that principle to the facts of this case, initiated action under Section 263 and, rejecting the arguments advanced by the assessee that the facts of this case were totally distinguishable from the facts in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321, held that these deposits were all taxable. The common reason adduced by the Commissioner of Income-tax to bring to tax these deposits as trading receipts was that these deposits were made by way of deductions in the course of the assessee's trading operations. Since the business of the assessee was of manufacture and sale of sugar from the sugarcane purchased by it, the deductions made by the assessee in the course of the assessee's trading operations became part of the assessee's trading operations. That was the reason to tax all these deposits as trading receipts, that is to say, the deductions made by the assessee from the cane price payable to the cane growers and credit towards these deposits accounts as per the directions of the Director of Sugar and also as per the bye-laws of the assessee. These deductions were regarded as trading receipts irrespective of the purpose for which they were deducted and irrespective of the treatment given to those deposits in the accounts. Since the Commissioner of Income-tax gave the above as a common reason, we are not referring to each individual deposit. He, therefore, set aside the assessments and directed the Income-tax Officer to make fresh assessments by adding these receipts other than the members' voluntary receipts and small savings fund and molasses fund. For the other years, i.e., the assessment years 1986-87, 1987-88 and 1988-89 which are in appeal in I. T. A. Nos. 17, 18 and 19/PN of 1990, the Deputy Commissioner of Income-tax, following the reasons given by the Commissioner of Income-tax for the earlier years, brought to tax these deposits of varying amounts (we are not in this case referring to the amounts of the deposits because that is not necessary for our present purpose).
3. On appeal, the Commissioner (Appeals), Pune, confirmed the inclusion of these deposits as income of the assessee relying upon the orders passed by the Commissioner of Income-tax and also supplemented them by additional reasons which are that the distinction sought to be drawn between the case of the assessee and the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321, before the Supreme Court was more in language than on facts. Recourse was taken to another decision of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, according to which, it was open to the Department to penetrate the tax avoidance scheme, if it was not a genuine tax planning scheme. There was no possibility for refunding the non-refundable deposits as stated in the bye-laws of the appellant itself. The refund of those deposits was almost non-existent over the years, even though the bye-laws provided that the amounts should be refunded under certain stated circumstances, namely, on the resignation of the member or on his death. These deposits were also not saleable or encashable in the market and, therefore, they belonged exclusively to assessee. These deposits were utilised as provided for in the bye-laws for repayment" by the assessee of the term loans taken from financial institutions and also the refund of the share capital provided by the State Government. According to the Commissioner (Appeals), these circumstances strongly proved that these deposits were not refundable at all although they were so nomenclatured. He also referred to a letter issued by the Director of Sugar dated March 13, 1984, which authorised the sugar factories to utilise these deposits for set off of losses incurred by the sugar factories which was exactly similar to the condition prevailing in the case of Bazpur Co-operative Sugar Factory Ltd, [1988] 172 ITR 321, based upon which the Supreme Court laid down that these deposits were taxable. To that extent, the two cases are not dissimilar. In other words, the similarity was established. These deposits had become an integral part of the assessee's resources and, merely because some interest was paid, that does not render these deposits refundable deposits while the facts available on record showed that they were never intended to be refunded nor were they in fact refunded. Thus the depositors did not have any right over any profit generated through these deposits; No fund was earmarked for the repayment of these deposits.
These deposits were collected as a percentage of the cane price payable to the suppliers and, therefore, they are like sales tax collections which were held to be taxable by the Supreme Court as trading receipts in the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542. Only the net amount of the deposit was brought to tax, i.e., excess of receipts over payments and this did not put the assessee at any disadvantage and lastly the investments made out of these deposits were the properties of the assessee and therefore the assessee had full domain and control and ownership over these deposits. In regard to the other deposits, namely, area development fund, cane development fund, hutments fund, Chief Minister's fund, Late Y. B. Chavan Memorial fund, the Commissioner (Appeals) held that, in the absence of any earmarked trust fund for their redemption and as these collections were made as an integral part of trading receipts by way of a percentage deduction from the cane price payable to the suppliers, they became trading receipts like sales tax collections. He also invoked Section 43B of the Income-tax Act, 1961, to support the view that they are taxable. For the same reasons, he held that the refundable deposits of non-members were also taxable. For these reasons, the assessments made by the Deputy Commissioner of Income-tax were confirmed. Aggrieved by these orders passed by the Commissioner of Income-tax under Section 263 for the assessment years 1984-85 and 1985-86 and by the Commissioner (Appeals) for the other three years on appeal, the assessee preferred these appeals before the Pune Bench and, on the recommendations of the Pune Bench, these appeals have come up for consideration before us.
4. We have heard the arguments addressed to us by S/Shri S. N. Inamdar, M. M. Parulekar and K. A. Sathe on behalf of the assessee and by S/Shri S. U. Pathak and A. K. Khaladkar on behalf of the Department. We have had the advantage of a comprehensive and full-dressed discussion and assistance on these points for which we compliment both the advocates appearing on behalf of the assessee and also the Departmental representative who, standing alone on behalf of the Department, faced these legal luminaries in the field. We shall first deal with the nature of the non-refundable deposits because the taxability of other deposits would depend upon the taxability of these deposits. The attempt on behalf of the Department was to bring the taxability of these deposits within the Rule laid down by the Supreme Court in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 by drawing similarities and parallels between the bye-laws and the facts of that case with the bye-laws and the facts of the case before us, the attempt on behalf of the assesses being to distinguish the Supreme Court decision. Ultimately, it appeared to us that we should first discern the ratio decidendi of the Supreme Court decision and see whether it applies to the facts of the case before us. It is, therefore, necessary to closely examine the decision of the Supreme Court and then go to the various directions given by the Government of Maharashtra for the collection of these deposits, the bye-laws under which these collections were made and the purpose for which these collections were put off.
5. Before a deposit can be taken as the income of a person collecting the deposit, the common sense approach would be to see whether the assessee has received it as a part of his own funds having full ownership of the funds without any legal obligation either present or future, express or contingent, to return the money with or without interest. The Supreme Court has repeatedly laid down the principle that, if a trader collects money from the customers as a part of his trading receipts, then those receipts would partake of the character of income of the year in which those collections were made and the payments made there from would constitute expenditure in the year the payments were made or in the year of outgo. (See Chowringhee Sales Bureau P. Ltd. [1973] 87 ITR 542 (SC) and Sinclair Murray and Co. P. Ltd. v. CIT [1974] 97 ITR 615 (SC)). The Supreme Court also laid down the Rule that, if amounts were collected even as a part of the trading receipts but with an express legal obligation to make over those amounts to a fund or to be utilised for a particular purpose or to spend for a particular purpose, then those amounts would not constitute trading receipts notwithstanding the fact that they were collected as part of trading receipts. In other words, emphasis in this kind of receipt was on the nature, object and obligation of the receipt (see CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR GO (SC), where dharmada receipts collected as part of the sale bills was held to be not the income of the assessee). Now, reconciling these two views expressed by the Supreme Court, the principle that emerges is that it is not the point at which or the method by which a receipt was collected by a trader that would determine the taxability of the trading receipt as income but the nature, object and obligation of the receipt. If the nature and object is such that it becomes a part of the trading operations of the assessee, then the receipt would be a taxable receipt. In the case of CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 (SC), the question was about the amounts collected by way of dharmada from customers on sales of yarn and cotton by including it in the bills issued to the customers but by showing it as dharmada in a separate column. The Supreme Court held that the amount so collected was under an obligation to be spent for a charitable purpose and could not be regarded as a part of the purchase price or a surcharge on the price of the goods purchased by the customers though the customer was required to pay it in addition to the price of the goods in order to obtain the goods. The purchase of the goods by the customer was only an occasion and not a consideration for the payment of the dharmada taken from the customer. So the principle laid down here is, as we have mentioned a short while ago, that, if the amount was received subject to an obligation to be spent for a charitable purpose, then the amount would not be a trading receipt. Therefore, what is relevant to be seen is not how the amount was collected and when it was collected but with what obligation it was collected.
6. Now, before we go to the bye-laws of the assessee, let us, at this juncture, examine the Supreme Court decision in the case of Bazpur Cooperative Sugar Factory Ltd. [1988] 172 ITR 321. In this case, bye-law 50 of the bye-laws of the sugar factory which carried on the same business of manufacture and sale of sugar provided that a loss equalisation and capital redemption fund should be established and that every producer-shareholder should deposit every year towards the fund a sum not less than 32 paise and not more than 48 paise per quintal of the sugarcane supplied by him to the society to be determined by the board. The deposits were to be adjusted towards the losses of the society and the balance utilised for repayment of the initial loan from the Industrial Finance Corporation of India and thereafter for redeeming the Government share and any balance left to be used towards issue of shares. After the relevant accounting period, the bye-laws were amended with retrospective effect from the date of the original bye-law providing that the amount shall be deposited until the shares to be subscribed by a member were fully paid up and the balance should be refunded after the loan from the Industrial Financial Corporation of India was repaid. The question was whether the amounts recovered by the society from its members by deduction from the price of sugarcane was of a revenue nature or a capital receipt. The Tribunal held that the amended bye-law applied and, in the light of that, the deposits made by the members by way of deduction from the price was in the nature of a permanent liability and hence a capital receipt in the hands of the society. The High Court affirmed the view of the Tribunal. On appeal to the Supreme Court, the Supreme Court reversed the decision of the High Court and held that the powers of the society to amend its bye-law arose from the provisions of Rule 11 of the U. P. Co-operative Societies Rules, 1936, which had been made under the powers conferred by Section 43 of the Indian Co-operative Societies Act, 1912. There was nothing express or implied in Rule 11 which conferred any power on the society to amend its bye-law with retrospective effect. The society had, therefore, no power to amend its bye-law with retrospective effect. Therefore, the nature of the amounts deducted from the price payable to the members during the relevant periods had to be decided on the basis of the unamended bye-law. Applying the unamended bye-law, the Supreme Court held that it was clear that the amounts which were deducted by the respondent from the cane price payable to its members on account of supply of sugarcane were deducted in the course of its trading operations and were part of its trading operations. The amounts were deducted primarily for discharging the liabilities of the society and were, therefore, revenue receipts. It made no difference whether, in the bye-law, the amounts deducted had been referred to as deposits and the account in which the receipts were entered was called " loss equalisation and capital redemption reserve fund ". The Supreme Court, therefore, held that, if a receipt is a trading receipt, the fact that it is not so shown in the accounts would not prevent the Assessing Officer from treating it as a trading receipt. The Supreme Court reiterated and emphasised the principle earlier laid down that it is the true nature and quality of the receipt and not the head under which it is entered in the account books that would prove decisive and determinate. The Supreme Court also laid down the meaning of the word " deposit " by enunciating that " the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilment of certain conditions ". So far, we have extracted from the head note but when we go into the body of the judgment, we find that the Supreme Court was applying the Rule laid down by the apex court in its earlier decision in the case of Punjab Distilling Industries Ltd. v. CIT[1959] 35 ITR 519. After referring to the facts of that case, the Supreme Court observed that what was received by the Punjab Distilling Industries Ltd. by way of security deposit was only an extra price received subject to the condition of returning and therefore a consideration for the sale of liquor and, therefore, it did not make any difference as to how the additional amounts collected were treated in the account books. It was by applying that principle to the facts of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321, that the Supreme Court held that it made no difference as to how these amounts were referred to in the bye-law or the treatment given to it in the accounts. Further down on page 330 of 172 ITR, the Supreme Court gave the reasons as to why it was persuaded to hold that the deposits collected were trading receipts on the principle of law laid down in the case of Chowringhee Sales Bureau P. Ltd, [1973] 87 ITR 542. The primary purpose of collection of these deposits was not to issue shares but to adjust them against losses and repayment of loans. Since the primary purpose of collecting the deposits was not to issue shares, these deposits could be taken only as trading receipts. In other words, had the primary purpose been to issue shares and not to adjust the losses or/and repaying the loans, then these deposits could not partake of the character of trading receipts. This, according to us, is the principle laid down by the Supreme Court in this case both directly as well as impliedly. Now, we quote the relevant observations from page 330 of 172 ITR ;
" The essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilment of certain 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 the liabilities of the respondent-society. In these circumstances, the receipts constituted by these deductions were really trading receipts of the assessee-society and are liable to be included in its taxable income."
7. The manner in which the deposits were to be used was stated, in which the conversion to share capital came last, that too as a residuary item of the residual amount. Therefore, the Supreme Court said that the primary purpose for which the deposits were liable to be used were for discharging the liabilities but not to issue shares. If the facts of the present case were also the same as in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC), then we must certainly hold, in obedience to the law laid down by the Supreme Court, that these deposits were also to be treated as trading receipts. On a careful consideration of the bye-law, it appears to us that there is a total difference and dissimilarity.
8. Now is the appropriate occasion to refer to the bye-law under which the non-refundable deposits were collected :
" 61 A, -- (1) Every year the society shall collect from the members non-refundable deposit at the rate of not less than Re. 1 per tonne of sugarcane supplied by them. However, in determining such rate the board shall consider the amount required for the repayment of loan of IFCI, repayment of bank loan on block capital account and the repayment of time-deposit received from the members. The rate of interest on such deposit shall not exceed 12 per cent, until the Government share capital, the loan of IFCI, Maharashtra State Co-operative Bank long-term loans advanced for capital expenditure and by any other financial agencies has been refunded. The N. R. D. collected as above shall not be refunded to the member till the repayment of Government share capital and term loans taken from IFCI and other financial institutions are repaid fully.
(2) The deposits collected as above shall not be refundable to the members. However, the board may convert such deposits into shares after repayment of loans taken from IFCI, loan 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 a member 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 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 member or his legal heirs with 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 one-tenth of the total non-refundable deposit standing at the beginning of the year.
(4) The amount of deposits so collected shall be utilised for the repayment of term loans taken for the capital expenditure as mentioned in sub-Clause (2) above.
(5) The amount of deposits so collected of the members or part thereof can be transferred to the name of any other member on an application by the member. However, the consent of both members in writing shall be necessary."
9. This will show that the purpose for which these deductions were made called as non-refundable deposits was not only to repay the term loans taken from financial institutions and to repay the Government share capital but also to convert the so-called deposits into shares. This would show that, while the main purpose of collecting the deposits from cane growers by way of deduction from the cane price was to secure funds to repay the loans to the financial institutions, to return the capital provided by the Government and then to convert the deposits into share capital unlike in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 1TR 321 (SC), where the deposit amount was to be utilised first for adjusting losses, and then only for repayment of loans, etc., and if any balance is left, to convert that balance to share capital. The question of any balance remaining in the account of the depositor will arise only in a case where the deposit amount belongs not to the depositor but to the assessee. If the amount of the deposit does not belong to the assessee, no adjustments could be made out of it because the entire amount of the deposit becomes refundable intact and, is, therefore, a debt owed by the assessee to the depositor. The debt so owed will be the full amount of the deposit and not a part of it. When only a part of it is available for conversion into share capital, that part which was adjusted for the repayment of the loans and for adjustment of losses would naturally have to become the money belonging to the assessee. But, in the case before us, the entire amount of deposit is to be converted into shares except that the time at which they could be converted into shares was only postponed till the loans were repaid. Thus, the purpose of collecting the deposit, i.e., deduction, is to issue shares but not immediately but after certain time, i.e., the time taken to repay the loans. During the period the deposits remained with the assessee, they are not regarded as the assessee's own money but only as a liability and, therefore, a provision was made for payment of interest. The interest is payable only till the period the loans were not repaid and Government share capital was not returned. In other words, once the loans were repaid and Government share capital was returned, these deposits become the share capital of the assessee-company, the only requirement being that the directors have to pass a resolution to convert these deposits into shares. It will also be very distinctly clear that these deposits are not available for adjustment against losses unlike in the case of Bazpwr Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC). Therefore, the purpose of deducting these amounts and designating them as collection of the deposit, according to our understanding of bye-law 61A, is towards share capital though not immediately. Nor can it be said that the conversion of the deposits into share capital is contingent nor can it be only a part of the deposit and not the full amount. Merely on the ground that- there is a time lag between the date of collection of the deposit and conversion into share capital, it is difficult to ignore the purpose and the nature of the collection of these deposits. If, therefore, the purpose of the collection of these deposits is towards share capital, then that character is retained and continues to be retained all throughout. Once the character of the receipt is known, its character continues to exist according to the Rule laid down by the Supreme Court in the case of Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 and again reiterated in the very case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321, so strongly relied on by the Departmental Representative. We are not able to read bye-law 61A as affording a clue or a suggestion to say that the primary purpose of collecting these deposits was to repay the loan or adjust the losses or refund the share capital as in the case of Bazpur Cooperative Sugar Factory Ltd. [1988] 172 ITR 321 (SC). This view becomes more clear if one reads that portion of the bye-law which says that the amount of fixed deposit collected by the society from a member shall not exceed three times the shares held by the member and, thereafter, the fixed deposits shall not be accepted by the Karkhana and the Karkhana has to collect the deposits until it holds Government share capital and other outstanding loans. These are the self-imposed restrictions placed upon the power of the assessee to collect deposits. It is not an unlimited or unabridged or unrestricted power but it is a power circumscribed by limitations the chief of which is that the fixed deposits collected shall not exceed three times the shares held by the members. This will show that the primary purpose of collecting the deposits is ultimately to adjust them towards the shares of the members, though not immediately but at the same time providing for recompense to the depositors by way of interest. It is also to be noted that though the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilment of certain conditions, the deposits in this case are not refundable in that sense to the depositors but they are to be adjusted against share capital which is as good as returning it to the depositors. In this context, it may also be noted that the bye-laws provided for the payment of interest on the deposits during the period they remain unadjusted towards share capital. Interest is compensation as held by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 and repeated in the case of Ganesh Dass Sreeram v. ITO [1988] 169 ITR 221 (SC) for deprivation of the user of money, that is to say, the depositors are being compensated for the loss of user of money by being paid interest which also means that the depositors continue to be the persons entitled to use money, that is, the owners thereof. The depositors as well as the assessee cannot, therefore, simultaneously be the owners of the money because, in case the deposits are held to be the trading receipts of the assessee, the assessee becomes the owner. Since it is not possible for both to become owners simultaneously, the payment of interest clearly shows that the depositors were the lenders of money. So, when the depositors are the lenders of the money, the assessee is entitled only to the use of the money and cannot became the owner of the money and the borrowed money cannot be the income of the borrower.
10. The bye-law of the Bazpur Co operative Sugar Factory Ltd. may now be extracted to show its essential differences in character, nature and obligations from the bye-law of the assessee :
"Bye-law No. 50. --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 48 paise per quintal of the sugarcane supplied by him to the society as may be determined by the Board. After adjusting the losses, if any, in the working year, the deposits shall be allowed to accumulate and utilised for repayment of the initial loan from the Industrial Finance Corporation of India and thereafter for redeeming the Government share.
The balance of the said deposit after meeting the losses shall be used for being converted into share capital in accordance with bye-law 44 and each producer shareholder shall be issued shares of the society of corresponding value in lieu thereof."
11. This bye-law did not provide for payment of interest whereas the bye-law of the assessee provided for the payment of interest. There is a marked distinction which shows that the deposits were to be treated not as a loaned money or loan capital till it is adjusted towards capital and, secondly, the deposits are to be adjusted against losses and then towards repayment of the loans and then for the redeeming of the Government share and then, if any balance remains after meeting the losses, it is to be converted into share capital. The entire amount is to be credited to a fund account unlike in the case of the assessee where it is credited to individual accounts. In other words, the deposits will not remain as a deposit and it gets diminished and diminuted by the adjustment of losses, etc., and the likelihood of any balance remaining for conversion into share capital is remote whereas, in the case of the assessee before us, no part of the deposit is to be adjusted towards losses nor towards repayment of the loans nor for redeeming of the Government share capital but only that the amount may be used for that purpose. Utilisation of the deposited amount for a specified purpose is different from utilisation of the deposit itself for those purposes. While, in the former case, the deposit remains intact, in the latter case, the deposit gets consumed. It is the latter deposit that was considered by the Supreme Court as amounting to a trading receipt. "Trading receipt" means assessee's own money-which can be put to any use. This distinction has, therefore, to be borne in mind. The distinction between the bye laws of the Bazpur Co-operative Sugar Factory Ltd. and the assessee are given on pages 63 and 64 of the paper book and the salient features are that while in the case of CIT v. Bazpur Cooperative Sugar Factory Ltd. [1988] 172 ITR 321 (SC), a fund called loss equalisation and capital redemption reserve fund is to be created to which every member shall deposit every year an amount at a rate to be fixed, in the case of the assessee before us, the non-refundable deposits are to be collected from each member ; while in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC), the amount to the credit of the above-referred to fund is to be adjusted towards losses and no interest is payable, the deposits in the case of the assessee are to be credited to the individual accounts of the depositors and interest is payable at 12 per cent, thereon ; while in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC), the deposits are not to be refunded at all to the members, in the case of the assessee before us, during the tenure of the membership, these deposits are not refundable to the members but a member can transfer them to any other member and also obtain the refund of the deposit on ceasing to be a member. The other distinguishing features have already been noticed. These distinguishing features which are very material, relevant and also significant, distinguish the Bazpur Co-operative Sugar Factory Ltd.'s case [1988] 172 ITR 321 (SC) from the case of the assessee.
12. The argument of the learned Departmental Representative that the society was collecting the deposits linked to the purchase price does not, therefore, for the reasons stated above, make the deposits part of the trading receipts and in fact except that the linkage with the purchase price was only a mode or a measure for the collection of the deposit, nothing else is available to make the deposits so collected a part of its trading receipts. What the bye-law provided for is that instead of paying the full amount to the cane growers for the cane supplied, a part of it is retained to be adjusted towards the share capital at a future date, paying to him, in the meantime, interest for the deprivation of the use of the money. The amount retained, therefore, assumes the character of a loan rather than of a trading receipt. So, the mere linkage to the purchase price is not, therefore, determinative of the character of the deposit.
13. The learned Departmental Representative next argued that these deposits are not to be regarded as substituting one creditor by another. Again, on the premise that deposits are to be regarded as trading receipts, this argument also cannot be accepted for the reason that what in practice happened was that the amount collected or, to put it very correctly, the amount retained from the amounts payable to the cane growers was utilised only for payment to the creditors in the first instance, though, later on, the retained amounts were to be converted towards share capital. In that sense, there was a substitution of one creditor by another.
14. The learned Departmental Representative further vehemently put forward the argument that the primary purpose was to repay the loans and relied upon the language of the bye-law. As we have endeavoured to show, the primary purpose does not seem to be to repay the loans although that was the immediate and proximate purpose and the purpose of the deposits is to collect money towards share capital. The whole idea is to increase the capital base of the assessee in a phased manner by retaining some portion of the money payable to the cane growers. There is no collection of the money involved in these transactions as sales tax collections as in the case of Chowringhee Sales Bureau P. Ltd. [1973] 87 ITR 542 (SC) or Sindair Murray and Co. P. Ltd. [1974] 97 ITR 615 (SC). These are moneys retained out of the moneys payable to the cane growers. The character of the money so retained attached with the obligation of conversion into share capital continues to be a liability of the assessee and is not a trading receipt. The amount so retained plus the amount paid to the cane growers will constitute the total purchase price, the whole of which has to be allowed as a deduction in computing the income. The amount so retained and credited to the individual accounts of the depositors remains in the accounts of the company as a liability and it was so exhibited in the balance-sheet also. This is also an important feature which distinguishes this case from the other cases relied upon. So, the liability to repay the amounts retained continues to subsist till it is adjusted towards share capital and once it is adjusted towards share capital, that amount becomes the money of the depositors and the depositor will then acquire a right to receive the share capital as a shareholder, according to the Rules and regulations of the asses see-society and also the Maharashtra Co-operative Societies Act, 1960. When the depositor becomes the owner of the money on conversion into share capital, as we have mentioned earlier, it is as good as refund of the money. It is, therefore, not appropriate to call it non-refundable in the circumstances although the expression "non-refundable" is used. It may mean non-refundable in cash. It is no doubt true that the collections are in the course of trading operations but, in spite of it, there are no collections involved except moneys retained and the trading operation being only an occasion for the retention of the money and not consideration for the supply of cane.
15. The Departmental Representative then laid emphasis upon the non-refundable nature of the money, neither before nor after. We have already shown how, under the bye-laws, conversion of these retained moneys called deposits into share capital will amount to refunding the money because the depositors will then become the owners of the money and the obligation of the assessee to pay interest ceases, i.e., the loan capital is then converted into equity. The fact that there is no exchange or security is neither here nor there inasmuch as, apart from not being a relevant consideration, the fact that interest was also being paid on the deposits brings out the relationship of a creditor and a debtor. Therefore, the argument of the learned Departmental Representative that lack of security points to the fact that these deposits were the income of the assessee is incorrect.
16. The Departmental Representative then, referring us to the balance-sheet, pointed out that loans and other liabilities were nil and, therefore, the deposits should have been converted into share capital and since they were not so converted, the provision in the bye-laws was only a make-believe affair and, therefore, no great store should be set by it to determine the issue. It is true that the balance-sheet shows that the loans and other liabilities were reduced to nil but yet there is a Government capital though of a small amount of Rs. 1 lakh. The bye-laws provided that the deposit should be converted into share capital only on the redemption of the Government capital. Why the Government capital was not redeemed, what were the circumstances that prevented the assessee from repaying the Government capital, what were the obstacles in its way and what were the points made by the Government against receiving the money back are not all discussed before us nor are they germane to the issue before us because the bye-laws provided that so long as the Government capital was not redeemed, the deposits are not to be converted into share capital. Therefore, the presence of the Government capital ostensibly is a reason against the conversion of the deposits into share capital. Therefore, the mere smallness of the amount cannot determine the issue nor can it efface the legal obligations nor can it detract from the effect of the bye-laws nor can we say that the bye-laws are only a make-believe affair. We have got to go by the bye-laws in good faith as they stand and taking them to be made bona fide, because the protection of the Government supervision and control by the Government under Section 79A of the Maharashtra State Co-operative Societies Act, 1960, cannot be overlooked. The Government has got sweeping powers reserved to it under this Section to remove a member from the committee and appoint any other member as a member of the committee, disqualify a member from being a member for violation of the instructions given by the Government. Section 79A also provides that if it comes to the notice of the State Government that a society conducted its affairs in a manner detrimental to the interests of the members or the depositors thereof, the Government can issue such directions as it thinks fit and all the societies shall be bound to comply with those directions. Thus, when there is such a strict control over the performance of the sugar factories by reason of the fact that they are governed by the Maharashtra State Co-operative Societies Act, 1960, the Government as a supervising agency would not allow an assessee like this to continue to pay interest to the depositors at 12 per cent, per annum unless it was for a good purpose. Therefore, we have to assume that what was being done under the supervision of the Government is for a bona fide purpose and we are not to overlook the provisions of the bye-laws as was sought to be urged before us.
17. The Departmental Representative then argued that the deposit fund is Rs. 5 crores while own capital was much less and that, therefore, these deposits were ostensibly collected for the purpose of business and this fact, seen in the light of the method in which the amount was collected by making it a part of the trading operations, proves that these deposits were only trading operations. We are unable to accept this view as supporting the Department's contention because we have got to see the totality of the circumstances. As we have pointed out above, when there is a strict Government control, it cannot be assumed that a responsible Government would allow the income of the assessee to be frittered away by paying interest to the depositors when it is easy to avoid the payment of interest by converting it into share capital by withdrawing the measly sum of Government capital. The intention of the Government in allowing the deposits to remain as deposits may be to retain the capital for the purpose of the business but, at the same time, it is to be borne in mind whether the deposits continue as deposits or converted as share capital, in neither case, is there any outgoing of cash. Therefore, there is no depletion of liquid resources. Therefore, there must be a very strong reason for the amounts not to be converted into share capital. That may be to provide minimal interference in the conduct of the affairs of the assessee. If so many cane growers become shareholders, the conduct of the affairs of the assessee would become well-nigh impossible, may be with a view to reduce the interference and participation by a large body which might become unwieldy to cater to. The body of management is kept to the minimum and to manageable limits. We are only hazarding a guess about the Government's intention in this behalf. It may be so or there may be another reason. Here, we may add that learned counsel for the assessee stated that the assessee has been expanding and, for its expansion, it needed money and if Government capital is repaid, the assessee could not have any more deposits and since it had still a margin of two crores to raise, the Government capital was not repaid. This also appears to us to be a good reason as to why Government capital was not repaid. In any case, as we have mentioned above, the non-conversion of the deposits will not determine the character of the deposits. But the mere fact that the deposits were not converted into share capital cannot efface or obliterate the legal obligation attached to it under the bye-laws.
18. The learned Departmental Representative then argued that instances of repayments being very few, not amounting to more than Rs. 65,000, it must be construed that these deposits were only non-refundable. Again, this argument will not carry the case of the Revenue any further because the matter has to be judged not from the fact of repayments or from the quantum of repayments or from how these deposits were treated by the depositors in their income-tax or wealth-tax assessments but what are the legal obligations that govern the collection of these deposits, the retention of these deposits and their ultimate destination. If these essential legal features are borne in mind, the other accounting exhibitions will fade into less important positions and even fade into oblivion putting forth at the front the legal obligations which only are material. We cannot at that stage say that the legal obligations imposed by the bye-laws or by the instructions issued by the Government are only a facade or a passage to cover up the tax liability. Had it been so, we fail to understand why these deposits were not construed as trading receipts and held taxable in all the earlier years covering over two decades. These bye-laws continue to be in existence right from the beginning. No one would have anticipated that a day would come when the Supreme Court would deliver a judgment in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 holding that these receipts would be taxable and to cover it up, the bye-law should be made in such a way as to enmesh it with a legal cover. Therefore, this argument of the Departmental Representative that the bye-laws were meant only as a cover and never intended to be acted upon nor the argument advanced by the learned Commissioner of Income-tax that the principle of McDowell and Co. Ltd. [1985] 154 ITR 148 (SC) would apply as if it is a tax planning, would all become irrelevant and should fade into insignificance.
19. The learned Departmental Representative then drew our attention to a judgment given in the case filed by one of the depositors where the assessee had refused to return the deposit taking the plea that it was not obliged under the bye-laws to return the money. Relying upon this stand taken by the assessee in that case, it was pleaded that that was the real intention and, therefore, the argument of the department should be accepted. But the final outcome of the judgment was against the assessee. The learned judge, after going through the bye-laws, had clearly decreed against the assessee and that decree was accepted. Therefore, when we are considering a case of this nature, we are to be governed by the final outcome of the case rather than allow ourselves to be carried away by the stand taken in the intermediate stages. This argument also, in our opinion, does not help the Department's contention for the reason that the final judgment was against the assessee repelling this very argument.
20. The Departmental Representative then submitted that the deposit should be voluntary in order to be called a loan and since in this case, it was not voluntary, the amount retained by the assessee should not be or could not be regarded as a loan. We may point out here that the bye-laws of the assessee and the supply of sugarcane by the cane-growers subject to these bye-laws together operate as a valid enforceable contract. The contract that finally emerged was that the assessee would purchase sugarcane from the growers subject to the condition that it would retain a minor portion of the amount payable to him to be ultimately converted into share capital. When sugarcane was supplied by the growers, they had accepted this condition. Thus, there was voluntariness or free consent in this transaction and there was no force exerted and, therefore, the argument that the deposit was not voluntary cannot be accepted. On the other hand, a contribution even under duress or coercion does not cease to be a loan nor would the amount so collected become the money of the Collector in the sense that he becomes the owner thereof. Apart from the legal action that is open to the person from whom the money was so collected under duress and coercion, the collector of such money has to refund it in law. He cannot retain it. Therefore, this argument is, in our opinion, not tenable.
21. The Departmental Representative then argued that if the money is refundable under a contract, then the money, till refunded, will become the income of the assessee. We are unable to subscribe to this view for the reasons mentioned above. Now, the absence of any independent contract or a collateral contract is of significance in this case in view of the presence of the bye-laws.
22. The learned Departmental Representative, then drawing our attention to the decision of the Supreme Court in the case of CIT v. Punjab Distilling industries Ltd. [1964] 53 ITR 75 and also on another decision in the case of Hoshiarpur Electric Supply Co. v. CIT [1961] 41 ITR 608 (SC) submitted that those principles do apply to the facts of this case and, therefore, the deposits must be taken as trading receipts. Several arguments were raised on the basis of these Supreme Court decisions. We do not think we have to advert to these decisions in any great detail for the simple reason that these decisions were considered by the Supreme Court in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 122 ITR 321 and it was by applying those principles that a decision was given that the deposits in that case were taxable. The Supreme Court pointed out in the case of Punjab Distilling Industries Ltd. [1959] 35 ITR 519, that the extra amount collected was a part of the selling price and the liability to return it was only a condition attached to the sale price. In this case, we have already shown how the amounts in this case were retained by the assessee out of the moneys payable to the cane-growers and the conditions attached to the retention and eventual utilisation of the retained money. Therefore, we do not think that much will turn on the case of the Supreme Court nor on the principle laid down therein once we bear in mind the fact that the amounts retained in this case are not collections as sale price but as moneys retained as liabilities. To repeat even at the cost of repetition, the question before us is whether the money retained is a liability or not because the question of receipt is absent. We are of the view that, on the facts of this case, the moneys retained out of the moneys payable to the sugarcane growers is a Mobility and all the indicia to regard it as a liability are present. The Income-tax Act provided for the taxation of a liability which was allowed as a deduction as income only in cases where the liability ceased to exist. In this case, the liability not only did not cease to exist but continued to exist because the assessee was paying interest thereon which amount was being allowed as a deduction. The liability on conversion into share capital ceases to be a liability. That liability, in our opinion, cannot be taken as income on any of the principles laid down by the Supreme Court in the case of Punjab Distilling Industries Ltd. [1959] 35 ITR 519.
23. In the case of Punjab Distilling Industries Ltd. [1964] 53 ITR 75 (SC) relied upon very heavily by the learned Departmental Representative, to recapitulate, the facts are (headnote) :
" The assessee-company, a distiller of country liquor, in selling its liquor in bottles, collected from wholesalers, in addition to the price of bottles fixed under the buy-back scheme, certain amounts at varying rates per bottle, known as ' empty' bottles return security deposit'. These amounts were to be refunded in full when 90 per cent, of the bottles covered by them were returned. By an amendment which came into effect from April 1, 1948, the Punjab Excise Rules made it compulsory for the wholesaler to return at least 90 per cent, of the bottles issued to him by the distiller and also recognised that the distiller might demand security at certain rates ' up to 10 per cent, of the bottles issued by (the distiller) and confiscate the security to the extent falling short of the 90 per cent. limit'. The question was whether the collections by way of empty bottles return security deposit' were income assessable under Section 10 of the Indian Income-tax Act, 1922."
24. It was held by the Supreme Court :
" that the amounts collected by the assessee company by way of "empty bottles return security deposit" both before and after the amendment of the Punjab Excise Rules were trade receipts. The Rules did not create a right in the distiller to the return of the bottles. Further, all that the Rules did was to empower the distiller to take a deposit, but the deposit had to be taken under a contract. The amounts deposited by the wholesalers were actually taken under a trading contract and constituted trading receipts of the assessee."
25. It will be seen from the decision of the Supreme Court that the Supreme Court found that the Rules in that case did not create a right in the distiller to the return of the bottles and the Rules only empowered the distiller to take a deposit. The deposit was under a contract. Therefore, the amounts so taken under a contract were held to be trading receipts in the absence of a right in the distiller to the return of the bottles. Here, there is a right inhering in the depositors to demand the conversion of the deposits into share capital and a legal liability on the assessee to convert it into share capital. Therefore, the amount retained in exercise of the rules cannot be said to be an amount collected under a contract as and by way of income as contended for by the learned Departmental Representative. It may also be pointed out that at page 83 of the Report, the Supreme Court had clearly stated :
" Whether, if the deposits had been made without a contract and directly under the rules and in respect of a trading transaction made by a contract, they would have been trading receipts or not, is not a question that arises in the present appeals and on that question we express no opinion now."
26. Thus; the Supreme Court did not express any opinion on the salient questions that arise now in this case. This is also the reason why these rulings of the Supreme Court do not, in our opinion, advance the Revenue's case any further.
27. We have sufficiently dealt with the arguments addressed to us by the learned Departmental Representative and we have endeavoured to show how the ruling of the Supreme Court in Bijli Cotton Mills (P.) Ltd., [1979] 116 ITR 60 (SC) does apply to the facts of this case and we have also shown how, under the bye-laws, the amount retained by the assessee is not a collection of money but only a liability towards purchase price to be adjusted in a particular way. The argument of the learned Commissioner of Income-tax which mainly turned upon the Supreme Court decision in the case of Bazpur Co-operative Sugar Factory Ltd., [1988] 172 ITR 321, which was shown to be totally inapplicable to this case should, therefore, fail in so far as the assessment years 1984-85 and 1985-86 are concerned. For the other three assessment years 1986-87, 1987-88 and 1988-89, the Commissioner (Appeals) has given some additional reasons all of which were pegged to the principle that they were like sales tax collections in the case of Chowringhee Sales Bureau P. Ltd., [1973] 87 ITR 542 (SC) collected during the course of trading operations. We have shown how this argument is not applicable and tenable and also fallacious. We are not particularly dealing with the reasons given by the learned Commissioner (Appeals), in asmuch as, in our opinion, none of them stand to reason to treat these retained moneys as trading receipts.
28. To sum up, according to our understanding, the true nature and purpose, of bye-law 61A is to collect contributions towards share capital from cane-growers by deducting the amounts from the sugarcane purchase price payable to them in a slow and graduated manner so that the funds so retained by the assessee could, in the meantime, be used for repaying the term loans taken from the financial institutions. This is a process and a method devised and adopted in such a way that the cane-growers will ultimately become shareholders contributing the necessary capital not at one time but by degrees without causing to themselves any kind of financial strain. The incentives provided in devising the scheme are payment of interest, treating the retained money as loan in the meantime and secondly, eventual conversion of the same into share capital. Thus, there is no element of income embedded in it nor can we say that these moneys were collected by it or received by it as and by way of income.
29. For these reasons, we are of the opinion that the non-refundable deposits are not to be treated as trading receipts and should not have been brought to tax as in the earlier years.
30. Now we go to the refundable deposits obtained from members. It is not understandable as to how the refundable deposits as distinguished from non-refundable deposits could ever be treated as income. Bye-law 61B authorises retention of money by way of refundable deposits. It provides :
" In addition to the non-refundable deposit from members as mentioned in bye-law No. 61A, if the board of directors find it necessary they shall have a right to collect the time deposits for a period not exceeding five years, out of the cane price payable to the cane supplier, at a prescribed rate per tonne of sugarcane supplied as may be decided by them every year. This deposit will be used by the society only for the purpose of expansion programme and capital expenditure and interest paid on these deposits will not exceed 12 per cent."
31. Here again, the source for the deposit is retention of money out of the cane price payable to the cane supplier, that is to say, again, retention of a part of the purchase price of the sugarcane supplied. These deposits are to be returned after a period of five years carrying interest at the rate of 12 per cent, and the purpose is to utilise them for expansion programmes and capital expenditure. When these deposits are refundable after a period of five years, there is an obligation cast upon the assessee to return them with interest and the meaning of the deposit as explained by the Supreme Court in the case of Bazpur Co-operative Sugar Factory Ltd., [1988] 172 ITR 321 is fully satisfied here. These deposits cannot be treated as income in any sense of the term because they have come to the assessee by way of retained moneys only as loans. These amounts were transferred to the respective cane-growers' accounts designating them as deposits but there is no actual collection of money. For the reason that they are refundable and that they were loans in character bearing interest at 12 per cent, and also for the reason as to how even non-refundable deposits could be treated as income, we hold that these refundable deposits are not the income of the assessee at all. The only ground on which the department brought these deposits to tax is that they were collected from the cane-growers as part of the trading operations. That is no ground at all to treat these retained amounts as income. Again, the time for the payment of the purchase price of sugar-cane is only an occasion and nothing beyond that. It is also common ground that they were refundable unlike in the case of dispute about the non-refundable nature. These refundable deposits also were eventually subjected to the directions given by the Director of Sugar as in the case of non-refundable deposits. This becomes very clear from the letter dated March 24, 1986, issued by the Sugar Directorate to the managing director of the assessee and the relevant directions are to be found at pages 98 and 99 of the paper book. From the above letter, it is also seen that various instructions were given by the Sugar Directorate to make deduction from the cane price payable to the cane growers under various heads including audit fee and to make over the amounts deducted towards funds to the Government. In this sense, these amounts collected are not only by way of loans so far as the assessee is concerned but they are to be made over to the Government to be spent for the purpose for which they were collected, which means that the assessee was used only as a collecting agent of these moneys from the cane growers. We do not wish to dwell on these aspects of the matter except to state that these deductions were made from the cane price payable only as per directions of the Government. In other words, the assessee had only implemented a directive of the Government subject to which control it has to function, indicating thereby that there is neither any voluntariness nor any mutual understanding or contract between the assessee and the cane-growers to retain these moneys as income of the assessee. The assessee had no ownership except for temporary possession of those amounts.
32. We may state here that an argument was addressed by the learned Departmental Representative that adjustment of losses was also permitted here as in the case of Bazpur Co-operative Sugar Factory Ltd., [1988] 172 ITR 321 (SC) and, therefore, the similarity of the assessee's case with that case was-established. But this does not seem to be a correct reading of the instructions issued by the Sugar Directorate. In paragraph 2.3 of the directions, there was a detailed reference to the "Sampath Committee Incentive" and its implementation. Under this paragraph, it was stated that the extra receipts received by availing of the Sampath Committee Incentives are to be used for the repayment of long-term loans taken for capital expenditure. Then the instructions go on to say that the assessee should repay the term loan in time after considering the recommendations made by the Maharashtra Rajya Sahakari Karkhana Sangh Ltd. according to the method devised by the State Government regarding extra receipts on account of implementing the Sampath Committee Incentives. The utilisation of the extra receipts received due to the Sampath Committee Incentives is also spelt out in the instructions. Then it provided that those extra receipts could be utilised also for reducing past losses. The adjustment of past losses has, therefore, no reference, relevance, connection or link with the non-refundable deposits or refundable deposits retained from the cane price payable to the cane-growers except to the Sampath Committee Incentives. This is, therefore, a misreading of the instructions issued. It is also to be noted that the extra receipts due on account of the Sampath Committee Incentives was to be included as income even as per the instructions and were so included as we are told at the Bar. Once the receipts were taken as income, that income is always available to be adjusted against past losses also. Therefore, this argument of the learned Departmental Representative which was a reiteration of a point mentioned by the Commissioner of Income-tax in his order has no bearing on the issue and the dissimilarity of the facts of this case from the facts of Bazpur Co-operative Sugar Factory Ltd., [1988] 172 ITR 321 (SC) continue to subsist.
33. Another important thing to be noted here is that by the circulars issued by the Department of Co-operation, Government of Maharashtra, the assessee is stated only as an agent to collect the various funds from the amounts payable to cane growers and make those sums over to the State Government for the purposes for which those deductions were made. This covers the Chief Minister's fund, Hutments Fund for the landless, small savings schemes, late Y.B. Chavan Memorial Fund, etc. This order clearly provided that if there is any non-compliance with that order, that would be construed as an infringement of the provisions of Section 79A of the Maharashtra State Co-operative Societies Act, 1960, and the respective board of directors and the chief executive would be liable for penalties and legal actions. This order would amply indicate that the assessee, when it collected the money for any purpose including non-refundable deposits as well as refundable deposits and other funds, was only acting as an agent and implementing the instructions given to it by the Government from time to time and it has no option except to obey. Therefore, there is nothing like collecting of these amounts from the cane-growers as part of the trading operations so as to call them separate collections having the income character in them. The rule laid down by the Supreme Court in the case of Bijli Cotton Mills (P.) Ltd., [1979] 116 ITR 60 reapplied by the Supreme Court in the case of Bazpur Co-operative Sugar factory Ltd. [1988] 172 ITR 321 would squarely and amply apply to these amounts. By whatever name they were called, they were all impressed with the legal obligation of spending them for a particular purpose or making them over to the Government, as the case may be, and do not bear the character of income.
34. We are, therefore, unable to see as to how any of these funds mentioned above, be they refundable deposits or voluntary deposits from members or Hutments Fund or the Chief Minister's relief fund or non-members refundable deposits or members small savings or late Y.B. Chavan Memorial Fund or Cane Development Fund could ever be regarded as the income of the assessee because in none of these cases, is there any collection involved except retaining a part of the purchase price payable to cane growers, that too under the compulsive instructions given by the Government to be made over to the Government to be utilised by the Government for the purposes for which they were directed to be deducted. The argument advanced by the learned Commissioner of Income-tax to tax these sums as income is, as we have mentioned earlier, only that they were collected as trading operations in the same manner as sales tax collections in the case of Chowringee Sales Bureau P. Ltd., [1973] 87 ITR 542 (SC) but factually it is found to be incorrect. They are not collections made but they are deductions made from the purchase price payable to the cane growers and continue to be a liability till they are adjusted as provided for. The rule laid down by the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd., [1973] 87 ITR 542 is totally inapplicable. Therefore, these sums could not be regarded as income of the assessee in any sense of the term.
35. Now, the Departmental Representative submitted that, in the case of the area development fund, though the assessee collected it, it has spent it for its own benefit and, therefore, it is of the character of income and the rule laid down by the Madhya Pradesh High Court in the case of Jiwajirao Sugar Co. Ltd. v. CIT, [1989] 176 ITR 182 applied. This does not seem to be a correct reading of the issue. The amount was collected by the assessee as per directions of the Government and it is also spent by the assessee again as per the directions of the Government, acting as an agent of the Government in both the cases. In the case before the Madhya Pradesh High Court (Jiwajirao Sugar Co. Ltd., [1989] 176 ITR 182), the assessee ran a sugar factory and, out of the sale proceeds of the molasses, a certain sum was credited to a specific account to be utilised for erection of adequate storage facilities in accordance with the Molasses Control Order. The assessee claimed that this sum was diverted by an overriding title and, therefore, should not be included as the income of the assessee. The Income-tax Officer accepted the claim but the Commissioner of Income-tax, acting under Section 263, directed its inclusion. When the matter came on reference to the High Court, the High Court found as a fact that there was nothing to show that the title to the fund did not vest in the assessee. It was only a part of the moneys received by it as its income and was credited to a separate fund to discharge an obligation imposed upon it by the Molasses Control Order. This did not amount to a case of diversion of income but of application of income. The ratio laid down in that decision does not apply to the facts of this case because the assessee was not the owner nor did it have any control over the area development fund because it was retained out of the purchase price of cane at the behest of the Government as its agent, the control over it being exclusively with the Government and spent by the assessee again as per the directions given by the Government. We are, therefore, of the opinion that the rule laid down by the Madhya Pradesh High Court is not applicable to the facts of the case before us and, according to the facts of this case, the amount retained for the purpose of the Area Development Fund is of the same category and nature as any other fund. It is also seen from the correspondence and instructions given by the Government that it was decided by the Committee of Ministers to permit the sugar factories to deduct amounts towards the area development fund for the development of the area of operation of a particular sugar factory from the final payment of sugarcane payable to cane growers. The Government also was actively considering as to how best the amounts so retained could be utilised with a view to safeguard the interests of members, etc. It ultimately authorised the sugar factories to spend the money in a particular way laying down certain guidelines by it and making it explicit that the amount should be spent only for the purposes of area development and not for any other purpose except with the prior sanction of the Director of Sugar and under the peril of penalty.
36. In so far as the Cane Development Fund is concerned, the position is again no different. These are the two funds which the learned Departmental Representative had taken out for separate argument but we found that the nature, aim, purpose and object of all the deductions from the sugarcane purchase price payable to the cane growers was just the same and not different.
37. What is to be noted in this case is that certain amount of confusion has crept in because of the nomenclature of "deposits" given to these amounts. As we have mentioned above repeatedly and are again repeating over here, these amounts were deductions made from the sugarcane purchase price payable to the suppliers as per the specific directions given by the Government for which the Government has taken power through the Maharashtra State Co-operative Societies Act, 1960. These deductions were credited to different accounts for the purpose of identification and utilisation and to keep track as to how these moneys were spent. These amounts so retained will have to be credited to some account and, since the purpose for which they were to be deducted was given, they were credited to such accounts designating them by the purpose given to them and adding the word "deposit" at the end. It is that word "deposit" according to us that has caused all this confusion. These are not the sums collected by way of sales tax as in the case of Chowringhee Sales Bureau P. Ltd., [1973] 87 ITR 542 (SC) or as molasses fund as in the case of Jiwajirao Sugar Co. Ltd. v. CIT, [1989] 176 ITR 182 before the Madhya Pradesh High Court. Since these amounts were deducted from the purchase price payable for sugarcane, the question should have been as to whether the entire amount determined as purchase price of the sugarcane should be allowed as a deduction or should the deduction be confined only to the amounts actually paid to the cane growers treating the retained amount as not forming part of the purchase price. The case has not been examined by the department from that angle and it could not be so examined for the simple reason that the full purchase price payable to the sugarcane growers is a revenue expenditure in its entirety. The amount retained with the acceptance of the cane suppliers is none other than the amount agreed by them to be kept as a deposit for them or contributed by them towards a compulsory levy made by the Government under the Act for various developmental purposes. The contributors for this levy are only the cane suppliers, the collecting agents being the sugar factories. This is how we understand the scheme of the Government of Maharashtra in directing these deductions. If this is so, there is no income at all and, therefore, the treatment given to these deductions in the earlier years was the correct way of treatment and assessment to tax. The deviation sought for these years based upon the Supreme Court decision in the case of Bazpur Cooperative Sugar Factory Ltd., [1988] 172 ITR 321 does not seem to be right because there the deductions were made with the obvious purpose of setting them off against losses, their conversion into share capital being remote. The Supreme Court, therefore, regarded those amounts as the assessee's own trading receipts.
38. For these reasons, we allow the assessee's appeals on all these points. There being no other point, these appeals are allowed.
39. Before we part with this case, we once again wish to place our profound sense of appreciation and alertness for the assistance rendered to us both by learned counsel for the assessee, the intervener and the Departmental Representative.