Judgment

KANIA, J. :- This is an appeal against the judgment of a Division Bench of the Allahabad High Court in Income-tax Reference No. 67 of 1969 (reported in 1971 UPTC 813). The appeal has been filed at the instance of the Commissioner of Income-tax, U. P.

2. The relevant facts are as follows :-

The respondent (assessee) is a Co-operative Society registered under the Co-operative Societies Act, 1912. It carries on the business of manufacture and sale of sugar and runs a Mill situated at Bazpur. The relevant assessment year is the assessment year 1961-62, corresponding to the accounting year 1st July, 1959 to 30th June, 1960, which was the relevant co-operative year. The assessee had established a fund called "Loss Equalization and Capital Redemption Reserve Fund". On the opening day of the year of account, namely, 1st July, 1959, a sum of Rs. 1,30,196/-stood to the credit of this fund. During the relevant accounting year, the respondent society added a sum of Rs. 5,15,863/- to this fund by deduction from the price payable by the respondent to its members for the supply of sugarcane received from its members. These deductions were made under the provisions of bye-law 50 of the Bye-laws of the respondent society, to which we shall presently come. Bye-law 50 under which the said amount was deducted from the price payable by the respondent to its members for the supply of sugarcane at the relevant time ran as follows :-

"There shall be established a Loss Equalisation and Capital Redemption Reserve Fund in the Society. Every producer shareholder shall deposit every year a sum not less than 32 np and not more than np 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 Government share.

The balance of the said deposit after meeting losses shall be used in being converted into share capital in accordance with bye-law 44(xix) and each producer shareholder shall be issued shares of the society of the corresponding value in lieu thereof."

3. During the accounting year, the respondent debited a sum of Rs. 2,34,354/- to the said fund by adjusting this amount against the loss brought forward from the previous year, with the result that at the close of the said year on 30th June, 1960, the account showed a credit balance of Rs. 4,11,705/-. A meeting of the Sub-Committee of the respondent society which was held on August 26, 1964 took the view that bye-law 50 was not clear as to whether the fund in question was perpetual or terminable and also that it was not clear as to how the liability for the loss of the respondent society can be fastened on the said fund. The Sub-Committee recommended an amendment of the bye-law 50 and pursuant to this recommendation, at a general meeting of the respondent held on 30th June, 1965, bye-law 50 was amended to run as follows :-

"There shall be established a Loss Equalisation and Capital Redemption Reserve Fund in the Society. Every producer shareholder shall deposit every year a sum not less than 32 paise and not more than 48 paise per quintal of the, sugarcane supplied by him to the society as may be determined by the Board, until the shares to be subscribed by a member are fully paid up. The amounts standing to the credit of this fund presently or to be credited in future shall be used for making the partly paid shares fully paid up. The balance of the said account shall be refunded to the members concerned soon after the present loan from the Industrial Finance Corporation of India is repaid, whereafter the fund shall cease to exist."

This amended bye-law shall be deemed to have come into force from 1st July, 1958."

4. It may be mentioned here that the respondent society came into existence in 1958-59 and the original bye-laws came into force from