Indian Kanoon - Search engine for Indian Law

(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) Memers 'Non-refundable Deposits,

(viii) Members' Refundable Deposits,

(ix) Non-members Refundable Deposits, and

(x) Voluntary Deposits of Members Fund.

Accordingly, various amounts are collected by the Karkhana from the cane-growers out of the cane purchase price payable to the cane-growers at various rates fixed by the Government.

7. The short point, therefore, which arises for consideration is: whether, the above deposits are taxable as income of the assessee-Karkhana (Society) ?

8. For the sake of convenience and clarity, we have discussed each of the deductions, i.e., deposits separately to facilitate giving answers to the questions referred to us:

(A) Members' Non-refundable Deposits and Members' Refundable Deposits - Before coming to the arguments, it would be relevant to quote the concerned bye-laws regarding fixation of cane-price and deductions to be made by the Karkhana from the cane-price towards Non-refundable Deposits and Refundable Deposits (hereinafter referred to, for the sake of brevity, as 'Deposits').

(2) The deposits collected as above shall not be. refundable to members. However, the Board may convert Such deposits into shares after repayment of loans taken from IM, loan from Maharashtra State Co-op. 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 provided in bye-law No. 22, the amount standing to the credit of his account as a non-refundable deposits may be transferred to any other member's account at his option deposits may be transfer and approval of the board of directors or shall be refunded to such member 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 deposit standing at the beginning of the year.

Reasons :

Bye-law Nos. 60,6 IA and 61B deal with fixation of cane price. Under bye law No. 60, it is, inter alia, provided that so long as the Karkhana has not fully repaid the share capital contributed by the Government and/or the loans taken on block capital amount from financial institutions, the board of directors will pay the price as fixed by the State Government. In other words, on discharging the above liabilities, the board of directors are free to fix the price. 1n the present case, the above liabilities of- the financial institutions and Government have not been discharged and, therefore, the cane-price is being fixed by the Government. Bye-law No. 61A provides, inter alia, that every year the society shall collect from the members non refundable deposits at the rate not less than Re. 1 per ton of sugarcane supplied by them. However, in deciding such rate, the shall consider the amount required for repayment of loans of financial institutions. Bye-law No. 61A further provides for rate of interest on non refundable deposits which shall riot exceed 12 per cent until redemption of the Government share capital by the society and repayments of the loans of the financial institutions fully. Clause 2 of bye-law No. 61A categorically states that the deposits shall not be refunded to members. These are non-refundable deposits covered by bye-law No. 61A. However, under clause 2, the Board is given discretion to convert such deposits into shares only after repayment of loans taken from the financial institutions. Under the said clause, it is further provided that the amount of fixed deposits collected by the society from a member shall not exceed three times the shares held by the members. Under the said clause, it is provided that the Karkhana shall collect the deposits until the Karkhana holds Government share capital and other loans outstanding. In other words, till all liabilities are discharged, the Karkhana shall collect deposits from the members. Under clause 3 of bye-law No. 61A, it is provided that on a member ceasing to be a member, the amounts standing to the credit of his account as a non-refundable deposit may be transferred to any other member's account at his option but subject to approval of the board of' directors or shall be refunded to such member or his legal heirs subject to approval of the board of directors and after considering the financial position of the society. Under clause 4 of bye-law No. 61A, the amount of deposits so collected shall be utilised for the repayment of term loans taken for capital expenditure. Bye-law No. 61B lays down that in addition to the non-refundable deposits mentioned in bye-law No. 6 1 A, the board of directors may, if they find it necessary, have a right to collect time deposits for a period not exceeding five years out of the cane-price payable to the cane-supplier at a prescribed rate which deposit will be used by the society only for the purposes of expansion programme and capital expenditure and the interest paid on these deposits will not exceed 12 per cent. In other words, bye-law No. 61B deals with refundable deposits referred to above. On detailed examination of the above byelaws, it is clear that till the loans taken by the society are repaid and till the share capital contributed by the Government is fully repaid, the Karkhana will pay the price of sugarcane as fixed by the State Government. However, on repayment, the Karkhana would be free to fix the price to be paid to the cane-grower. This clause shows that the right to fix cane price is given to the Government only till the repayment of the loans to the financial institutions and till the Government share capital is redeemed and not thereafter. It is not in dispute that till today the loans have remained outstanding. It is not in dispute that, till today the Government share capital has not been redeemed. However, the purport of bye-law No. 60 is very clear that the society has a right to fix the price of sugar-cane on the above contingency being fulfilled. In fact, till share capital is repaid, the Government is authorised by society to fix price - (See Orders of Director of Sugar dated 13-3-1984 and 24-3-1986 to Karkhana). Therefore, fixation and payment of the price of sugarcane certainly forms part of the trading operations of the assessee. The directions of the Government to deduct certain amounts from the cane bill would not come into picture on the repayment of loans to the financial institutions and on repayment of Government share capital by the society. Under bye-law No. 61A, the society is given the discretion to determine the rate at which the deductions would be made from the price payable to the growers after considering certain parameters mentioned in the said bye-law. Clause 1 of bye-law No. 6 1 A prescribes that the rate of interest shall not exceed 12 per cent. The said clause clearly mentions, once again, that the non-refundable deposits shall not be refunded till repayment of Government share capital and till repayment of loans taken from financial institutions. However, under clause 2 of bye-law No. 61A, it is provided that the Karkhana shall collect the deposits until it holds the Government share capital and other loans outstanding. In other words, the right to collect the deposits has been given to the assessee till the assessee discharges its liabilities to the Government and financial institutions. Therefore, the assessee is empowered to hold on to the deposits till repayment of Government share capital and the loans to financial institutions. As stated above, the rate of deduction shall be decided by the Board. This aspect clearly indicates that the right to collect the deposits, the rate of which is determined by the board of directors, has been given to the society. The rate of deposit is not decided by the Government. The period to repay the share capital to the Government is not prescribed. The period to repay loans to the financial institutions is not prescribed. The only embargo placed on the society, under the bye-laws is that the deposits shall not exceed three times the shares held by the members. This is only to maintain the debt-equity ratio. Therefore, a reading of the bye-laws clearly indicates that the deposits are trading receipts made available to the society to carry on trading operations. Clause 2 of bye-law No. 61 A categorically mandates that the deposits shall not be refundable to members. It further provides that the board of directors may convert such deposits into shares. In other words, they may not convert such deposits into shares. This clause also indicates clearly that the deductions from the cane price constitute a source of income to the society. The provision for debt-equity ratio in the bye-laws, as stated above, is only to see that servicing of the loans do not become cumbersome and to protect the company from liquidation. It has nothing to do with deduction which is a trading receipt as stated above. Under clause 3 of bye-law No. 61A also, one finds that the amounts shall not be refunded without the approval of the board of directors. In the case of a deposit on maturity, the depositor has a right to repayment. In the present case, no such right has been given. In the present case, the board of directors may refuse to repay the deposit on the ground of weak financial position of the society. Further, in the case of a deposit in the real sense a fixed maturity period is prescribed. Generally, deposits are invited by the companies to meet working capital requirements. Therefore, the said deposits are for a fixed period. In the present matter, no such period is prescribed except for deposit covered under bye-law No. 61 B. Reading of the above bye-laws, therefore, clearly shows that the primary purpose of the said deposits is to provide an important source of return on periodical basis to the Karkhana to carry out trading operations of manufacture and sale of sugar. In a matter of this type, there cannot be any strait-jacket formula. It will depend on facts of each case. It will depend on bye-laws of society. There is one more aspect which needs to be mentioned. A cane-grower whose lands fall within the area of the Karkhana has no option but to sell the sugar-cane to that Karkhana. He has no bargaining power in the matter of price fixation. The price is fixed by the Government. The grower cannot sell his produce to any other Karkhana. The Karkhana pays the price of the sugar-cane fixed by the Government under the above bye-laws. As stated above, the Government is empowered by the society to fix the price of sugar-cane till redemption of the Government share capital. Therefore, price fixation is also a matter of trading operations. This clearly shows that the above deposits have been recovered by the society as a part of trading operations and, therefore, it constitutes part of trading receipts. None of the above facts have been considered by the Tribunal in the impugned judgment. The Tribunal has erred in coming to the conclusion that the primary purpose of collecting the deposits, i.e., deductions is to issue shares not immediately but after the time taken to repay the loans. On the contrary, the above bye-laws clearly indicate that the primary purpose of collecting the deposits, i.e., deductions was to discharge the liabilities of the Society. We do not find merit in the contention of the assessee that, in the present matter, there is substitution of one set of creditors by another set of creditors which argument found favour with the Tribunal. The deposits form part of the price paid to the cane-grower. Fixation and payment of the price of sugar-cane constituted an integral part of the trading operations of the society. The business of the society was to manufacture and sell sugar. There was no separate contract of fixed deposits between the society and the member. Nothing prevented the society from inviting fixed deposits from its members de hors the price. No separate fund came to be created. In the circumstances, it cannot be said that there was substitution of one set of creditors by -another set of creditors. The deductions were from the price. It provided a periodical return. Therefore, the deposits were trading receipts in substance. In our opinion, in a matter of this type, the true test to be applied is whether the amounts sought to be deducted reached the assessee as his income. If the amounts sought to be deducted reached the assessee as his income, then it would constitute a trading receipt. The above discussion clearly shows, on facts of this case, that the amount reached the assessee as its income. Ultimately, there is no dispute regarding the principle of law. The question is only regarding application of law to the facts of this case. We have examined the bye-laws de hors the judgment of the Supreme Court in the case of Bazpur Co-operalive Sugar Factory Ltd. (supra). However, since detailed arguments have been advanced on both sides, we may point out that in the said judgment, the Supreme Court has laid down on examination of the bye-laws in that case that the primary purpose for which the deposits was liable to be used were not to issue shares to the members for discharging liabilities of the society. In the present case, we have examined the bye-laws which, as stated above, clearly provided that the price fixation is with the society; that the society empowered the Government to fix the price of the sugarcane under its bye-laws till redemption of the Government share capital; that the deductions were made from the price paid to the growers which constituted the part of the trading operations: that by this mode the society got the benefit of periodical return and, lastly, the said deductions constitute consideration for the supply of sugar-cane. As stated hereinabove, in each case, the court has to examine the nature of the receipt. Therefore, we have examined this matter oil the bye-laws of the Karkhana. However, it has been urged that, in the present matter, the society has agreed to pay interest to the cane-grower which was not the fact in the case of Bazpur Co-operalive Sugar Factory Ltd. (supra). In the case of Shree Nirmal Commercial Ltd, v. CIT(I 992) 193 ITR 694 (Born.) the facts were as follows : The assessee was originally registered as a private limited company which was latter converted into a public limited company. Its objects were to build and construct houses. The company obtained a lease of land belonging to the Government of Maharashtra. After securing possession of the land, the company devised a scheme for raising finances by incorporation of article 4A in its articles of association. Under the scheme, the shareholders were to enter into a standard form of agreement with the assessee which conferred on them the right of occupation of specified floor space. In consideration of the agreements, the members who purchased the shares were also required to make a deposit on which the company agreed to pay interest to the shareholders. Accordingly, those members who purchased the shares and made the deposits were allotted specified floor area in the building on a proportionate basis. The assessing officer found the deposits to be non-refundable deposits. The assessing officer found that the interest payable on Such deposits was to be fixed by the company and not by the depositors. Hence, he contended on above facts that the deposit was the absolute property of the company and the provisions for payment of interest was only a devise for showing the amount received in the course of trade as deposit. The appellate authority agreed with the assessing officer and came to the conclusion that notwithstanding the nomenclature of deposit and the apparent grant of interest the so-called deposit partook of the character of the trading receipt. The Tribunal also agreed with the view of the department. Accordingly, the matter came by way of reference to This Court. Considering the transaction in its entirety this court agreed with the view of the Tribunal that the above transaction was a business transaction and the deposits received by the builder, therefore, ought to be treated as revenue receipts in the hands of the assessee. This was in view of the following facts, namely, that the deposits were to be held by the assessee-company as long as the member continued to occupy the floor area allotted to him and in the event of the member transferring his occupancy right to another with the approval of the board of directors the amount standing to the credit of the member was to be transferred in the books to the credit of the new transferee. The court found that there was no contingency or event contemplated in which the shareholder could demand repayment of the deposit. Therefore, this court concluded that even if the amount is shown as liability in the balance sheet of the company, it did not partake of the character of a loan. Mr. Inamdar, however, submitted that in the above case, the court found that in consideration of the agreements the members who made the requisite deposits were allotted a specified floor area in the building and, therefore, he contended that it was a business transaction and the amount received by the builders constituted trading receipts. He, therefore, contended that the said judgment did not apply to the facts of this case. We do not find any merit in the said contention. This judgment lays down that if a deposit in question partook of the character of trading receipt, then merely because interest is paid to the deposit holder will not change the nature and the character/quality of the receipt. In the present case also, under the byelaw the rate of deposit was fixed by the society and not by the canegrower. 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 interest will not be a conclusive test to come to the conclusion that a liability has accrued to the society on deduction.