IMPORTANT POINT
Compulsory deductions made by sugar co-operative societies on account of the non refundable and refundable deposits cannot be treated as the income of the assessee-Societies for the purpose of the Income Tax Act.

Headnote:Income Tax Act, 1961-Section 263-Maharashtra Co-operative Societies Act, 1960-Revenue Receipts-Compulsory deductions made by sugar cooperative societies on account of non refundable and refundable deposits and other funds-Nature of-Appellants carry on business of manufacturing sugar-Bye laws provided for deduction of amounts towards refundable and non refundable deposits from the cane price payable to grower members-Amounts were being deducted for being credited into various funds-Till assessment year 1984-85, these collections/deposits were not treated as income of assessee on ground that they were not trading receipts-For assessment years 1986-87, 1987-88 and 1988-89, assessment orders were passed by Income Tax authorities treating these deposits as trading receipts order challenged-Commissioner of Income Tax dismissed appeals filed by assessees-High Court held that non refundable and refundable deposits are trading receipts whereas deductions on account of funds are not taxable-Taxability of non-refundable deposits -Whether non-refundable and refundable deposits can be treated as income of assessee societies-(No).
       Held : On an analysis of the relevant bye-laws regarding sugarcane price and non-refundable deposits, the following salient features are discernible:
        1. The price of sugarcane is fixed every year by the Board of Directors, on a consideration of relevant factors.
        2. However, so long as the share capital contribution of the State Government and/or the loans taken on capital account from IFCI and other Central Financial Institutions remain outstanding, the price as fixed by the State Government is liable to be paid by the society.
        3. Every year the society shall collect from the members supplying sugarcane a non-refundable deposit at the minimum rate of Re.1/- per ton. In fixing the rate, the Board of Directors has to take into account the liabilities towards the loan due to IFCI and other loans borrowed for capital expenditure and the repayment of time deposits received from the members.
        4. The Society should continue to collect the deposits so long as it holds Government share capital and other loans (on capital account) are outstanding. However, the deposits collected by the Society shall not exceed three times the shares held by the members.
        5. The rate of interest on the deposits collected shall not exceed 12 .
        6. The non-refundable deposit shall not be refunded to the members till the Government share capital and term loans taken from IFCI etc. towards capital expenditure are repaid fully. On such repayment, the Management of the Society may convert such deposits into shares.
        7. The amount of deposits collected shall be utilized for the repayment of term loan taken for the purpose of capital expenditure.
        8. The amount collected as deposit can be transferred to the name of any other member on an application submitted in this behalf.
        9. On ceasing to be a member for whatsoever reason, the non-refundable deposit standing to his credit may be transferred to any other member s account subject to the approval of the Board of Directors or can be refunded to such member or his legal-heirs with the approval of the Board of Directors, but, such refund can only be granted after the lapse of one year, that too after considering the financial position of the Society. (Para 29)
       We cannot hold that the assessee-Society had absolute dominion over the impugned deposits. Firstly, the manner of user of the deposit is limited by the bye-laws. Para (4) of bye-law 61-A makes it clear that the amount of deposits shall be utilized for the repayment of term loans taken for the capital expenditure from the banks and financial institutions. Unlike the case of Bazpur Co-operative Society the deposited amount cannot be adjusted against the term loans much less the losses though it can be temporarily utilized by the assessee to clear the loans. The fact that the depositor can seek transfer of the deposit to another member by filing an application for that purpose again highlights the fact that the power of disposal of the deposit lies with the member. The obligation to convert the deposits into shares subsequent to the repayment of certain types of loans coupled with the right given to the member to seek transfer of the amount lying to his credit and the obligation to refund the deposit to the depositor on cessation of his membership or to his legal heirs in case of death subject of course to certain restrictions, are all pointers that the assessee can exercise dominion over the deposits only in a limited sphere. On a consideration of the bye-laws as a whole, it is difficult to hold that either the assessee or the depositor exercises complete dominion over the deposited amounts. If so, it is not possible to countenance the plea that the title to the deposits will throughout remain in the hands of the Society and the depositor has no stake or interest therein, once it reaches the assessee s hands. (Para 43)
       Compulsory nature of the deposit has been stressed by the Revenue and the High Court too as being obnoxious to the idea of a deposit. It has been pointed out that the member had no option but to agree for deduction on pre-ordained terms and there could not be in law a contract creating deposit. This contention, however, does not appeal to us. A person by becoming the member of a Co-operative Society, volunteers to abide by the bye-laws of the Society, the real object of which is to provide for internal management of the Society including rendering assistance to the members. There is an authority for the proposition that the bye-laws of the Co-operative Society constitute a contract between the Society represented by its managing body and its constituents. (Para 49)
       We therefore allow the appeals of the Commissioner of Income Tax partly in respect of the amounts collected by the respondent-Societies towards Cane Development Fund and Area Development Fund. We declare that the amount collected towards Cane Development Fund shall be treated as the income of the assessees and any claim for deduction shall be entertained and decided by the Tribunal. As regards the Area Development Fund, the matters are remitted to the Income Tax Appellate Tribunal, Pune Bench for fresh determination subject to the observations made in this judgment. In respect of other items, the appeals shall stand dismissed. (Para 60)

JUDGMENT

P. Venkatarama Reddi, J.-In all these appeals, the question for decision is whether compulsory deductions made by sugar cooperative societies on account of non-refundable and refundable deposits and other Funds are revenue receipts liable to be taxed under the Income Tax Act.

2. The appellants in the first batch of appeals are registered Cooperative Societies governed by the provisions of Maharashtra Co-operative Societies Act, 1960 and which is referred hereafter as the Act . The affairs of these Societies are regulated by the bye-laws framed or adopted by the Societies in accordance with the procedure laid down under the Act.

3. The appellant in each of the appeals carries on the business of manufacturing sugar. Its members are predominantly sugarcane farmers. According to the policy of the Government, the sugarcane growing areas in the State of Maharashtra have been divided into different territorial units. Each unit has a factory for manufacturing sugar and the sugarcane growers within the territory are obliged to sell their sugarcane only to the said factory. The project cost of the appellant was met partly by share capital and partly by way of capital subsidy provided by either the Central Government (Ministry of Industrial Development) or financial institutions such as IDBI, IFCI etc. The share capital was contributed not only by the members but also by the State Government. So long as the State Government held share capital in the Society, the Government was entitled to fix the sugarcane price which it did. The bye-laws provided for deduction of amounts towards refundable and non-refundable deposits from the cane price payable to the grower members. There were also instructions of the Director of Sugars to this effect. Apart from that, pursuant to the orders passed or circulars issued by the State Government/Director of Sugars, amounts were being deducted for being credited into various Funds such as Chief Minister s Relief Fund, Y.B. Chavan Memorial Fund, Area Development Fund etc. The amounts credited to these Funds are meant to be utilized either by the Society directly as per the guidelines issued by the Director or remitted to the Government or trustees for socio-economic development of the operational area. Till the assessment year 1984-85, these collections/deposits were not treated as income of the assessee on the footing that they were not trading receipts.

4. However, on the basis of the judgment in Bazpur Co-operative s case rendered in the year 1988, the Commissioner of Income Tax revised the assessments for the assessment years 1984-85 and 1985-86 in respect of non-refundable deposits and refundable deposits and other deductions, by exercising the power under Section 263 of the Income Tax Act. As far as the following years were concerned, namely, assessment years 1986-87, 1987-88 and 1988-89, assessment orders were passed by the Income-tax authorities treating the non-refundable deposits, refundable deposits and other deductions as trading receipts. The Commissioner of Income Tax (Appeals) dismissed the appeals filed by the assessees. All these orders were challenged before the Income Tax Appellate Tribunal by the Sugar Co-operative Societies. The matter was heard and disposed of by a special Bench of the Tribunal which decided the question in favour of the Sugar Cooperatives holding that the bye-laws in Bazpur Co-operative s case and the character of deductions made were substantially different from those in the case of Sugar Co-operatives in the State of Maharashtra. At the instance of the Revenue, the Tribunal referred 15 questions to the High Court at Bombay under Section 256(1) of the Income Tax Act. The Division Bench of the High Court addressed itself to the question whether the various amounts collected by the Society from the cane growers out of the Sugarcane Purchase Price in the name of deposits are taxable as income of the assessee Society. The learned Judges of the High Court answered th

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2004 Supreme(SC) 1037

IMPORTANT POINTCompulsory deductions made by sugar co-operative societies on account of the non refundable and refundable deposits cannot be treated as the income of the assessee-Societies for the purpose of the Income Tax Act.

Cases Referred (6)

IMPORTANT POINT
Compulsory deductions made by sugar co-operative societies on account of the non refundable and refundable deposits cannot be treated as the income of the assessee-Societies for the purpose of the Income Tax Act.