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PETITIONER: COMMISSIONER OF INCOME TAX, U.P.-II, LUCKNOW

       Vs.

RESPONDENT: BAZPUR CO-OPERATIVE SUGAR FACTORY LTD.,BAZPUR, DISTRICTNAINI

DATE OF JUDGMENT06/05/1988

BENCH: KANIA, M.H. BENCH: KANIA, M.H. PATHAK, R.S. (CJ)

CITATION:  1988 AIR 1263            1988 SCR  (3)1034  1988 SCC  (3) 553        JT 1988 (2)   597  1988 SCALE  (1)1016

ACT:      Whether a  Co-operative Society  registered  under  Co- operative Societies  Act, 1912  has power  to amend its bye- laws with  retrospective effect-Whether  the amended bye-law is operative  during period  previous  to  accounting  year- Whether deposits  made by  members of  the society by way of deductions contemplated under bye-law 50 of the Society were in the  nature of  permanent liabilities  and  were  capital receipts not  liable to  be included  in taxable  income  of assessee-Society or  whether  the  deductions  were  revenue receipts liable to tax.

HEADNOTE:      Civil Appeal  No. 563  of 1975  filed in  the Court was directed against  the Judgment  of  the  High  Court  in  an Income-tax Reference.      The respondent (assessee) was a registered co-operative Society, carrying  on business  of manufacture  and sale  of sugar. The  respondent had  established a  fund called "Loss Equalisation and  Capital Redemption  Reserve Fund" to which it added,  during the  relevant accounting  year, a  sum  of Rs.5,15,863 by  deduction from  the  price  payable  by  the respondent to  its  members  for  the  supply  of  sugarcane received from  the members.  The deductions  were made under bye-law 50  of the Byelaws of the society, which was amended later. The  Income-tax Officer  in assessing  the respondent for the  relevant assessment  year held  that the sum above- mentioned represented a revenue receipt and was liable to be included in  the taxable  income of the assessee. On appeal, the Assistant  Commissioner affirmed the view of the Income- tax Officer,  holding that the case had to be decided on the basis of  the  bye-law  as  it  stood  during  the  relevant accounting year.  The respondent-assessee  appealed  to  the Income-tax Appellate  Tribunal, which  held that the amended bye-law was operative even during the relevant previous year in view  of the  retrospective amendment thereof and that in view of the said amended bye-law 50 the deposits made by the members by  way of deductions from the price as contemplated in  the   bye-law  50   were  in  the  nature  of  permanent liabilities and  hence they  were capital  receipts and  not liable to be included in the taxable income of the assessee.

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The Tribunal  directed that  the said amount of Rs. 5,15,863 be deducted 1035 from the  taxable income of the assessee. At the instance of the appellant,  a reference  was made  to the High Court for the determination  of the  question whether  the  Income-tax Appellate Tribunal  was right  in holding that the amount of Rs.5,15,863 was  not a  revenue receipt  liable to  tax. The High Court  answered the  question in the affirmative and in favour of the assessee. The Commissioner of Income-tax moved this Court  by this  appeal against the decision of the High Court.      The appellant  contended that the amendment of the bye- law 50,  which was  purported to  be made with retrospective effect, could have no retrospective effect in law. There was no delegation  of power  to the  respondent society  to make bye-laws with retrospective effect.      Allowing the appeal, the Court, ^      HELD:The respondent  society had no authority in law to amend  its   bye-law  50   with  retrospective  effect.  The amendment of  bye-law 50  could not  have any  retrospective effect and  the amounts deducted from the amounts payable to members for  the supply of sugarcane, would have to be dealt with as  if they  were deducted under the provisions of bye- law 50 as it stood in the relevant accounting period. If the provisions of  the unamended  bye-law were  applied, it  was clear that  the amounts  deducted by the respondent from the price payable  to  its  members  on  account  of  supply  of sugarcane  were  deducted  in  the  course  of  the  trading operations of  the respondent  and these  deductions were  a part of its trading operations. The receipts by way of these deductions must  be regarded  as revenue  receipts and  were liable  to   be  included  in  the  taxable  income  of  the respondent.  Those   receipts  could   not  be  regarded  as deposits. The  receipts constituted  by the  deductions were really trading  receipts of  the assessee  society and  were liable to  be included in its taxable income. The High Court was in  error and  the question referred must be answered in favour of the revenue. [1042A, G-H;1044D-E]      Civil Appeal  No. 564  of 1975  was filed  against  the judgment of  the High  Court in  an income-tax  reference in which the  question referred for determination was whether a sum  credited  during  the  year  of  account  to  the  loss equalisation and capital redemption reserve fund by deposits received from  producer members  of the society under clause 50 of  its bye-laws  was in  the nature of a revenue receipt assessable to tax.      Allowing the appeal, the Court, 1036      HELD:In view of its decision in Civil Appeal No. 563 of 1975, the  Court  answered  the  question  referred  in  the affirmative and in favour of the revenue. [1045A]      Income-tax Officer,  Alleppey  v.  M.C.  Poonnoose  and Ors., [1970]  1 S.C.R.  678; Hukam  Chand etc.  v. Union  of India &  others, [1973]  1 S.C.R.  896; Co-operative Central Bank Ltd.  & Ors.  v. Additional Industrial Tribunal, Andhra Pradesh &  Ors., [1970] 1 S.C.R. 205; Dr. Indramani Pyarelal Gupta v.  W.R.  Nathu  and  others,  [1963]  1  S.C.R.  721; Chowringhee Sales  Bureau P. Ltd. v. Commissioner of Income- tax West  Bengal, [1973] 87 I.T.R. 541 and Punjab Distilling Industries Ltd.  v. Commissioner of Income-tax Simla, [1959] 35 I.T.R. 519, referred to.

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JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal Nos. 563 & 564 of 1975.      From the  Judgment and Orders dated 15.11.71 and 9.5.72 of the Allahabad High Court in I.T.R. No. 67 of 1969 and 724 of 1971.      B.B. Ahuja,  Ms. A  Subhashini and  K.C.  Dua  for  the Appellants.      S.C. Manchanda,  Mrs. A.K. Verma and Joel Pares for the Respondents.      The Judgment of the Court was delivered by      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. The appeal has been filed at the instance of the Commissioner of Income-tax, U.P..      The relevant facts are as follows:-      The respondent  (assessee) is  a  Co-operative  Society registered under  the Co-oprative  Societies Act,  1912.  It carries on the business of manufacture and sale of sugar and runs at  a Mill  situated at Bazpur. The relevant assessment year is  the assessment  year 1961-62,  the 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 1037 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 48  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  share holder shall be issued shares           of the  society of the corresponding value in lieu           thereof."      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

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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 1038           Redemption Reserve  Fund  in  the  Society.  Every           producer share  holder 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 terminated 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."      It may  be mentioned  here that  the respondent society came into  existence in  1958-59 and  the original  bye-laws came into  force from 1st July, 1958. The Income-tax Officer in assessing the respondent for the relevant assessment year held that  the said sum of Rs.5,15,863 represented a revenue receipt and  was liable to be included in the taxable income of  the   assessee.  On   appeal  the   Appellate  Assistant Commissioner affirmed  the view  of the  Income-tax  Officer holding that  the case has to be decided on the basis of the bye-law as it stood during the relevant accounting year. The respondent  assessee   went  in  appeal  to  the  Income-tax Appellate Tribunal  which took  the view  that  the  amended Clause 50  must be  held to  be operative  even  during  the relevant  previous   year  in   view  of  the  retrospective amendment thereof  and that in view of the said amended bye- law 50 the deposits made by the members by way of deductions from the  price as  contemplated in  bye-law 50  were in the nature of  permanent liabilities and hence they were capital receipts and not liable to be included in the taxable income of the  respondent assessee. The tribunal allowed the appeal of the  assessee  and  directed  that  the  said  amount  of Rs.5,15,863 should  be deducted  from the  taxable income of the assessee as determined by the Income-tax Officer. At the instance of  the Commissioner  a reference  was made  to the Allahabad  High   Court  and   the   question   framed   for determination of the High Court was as follows:-           "Whether on  the facts and in the circumstances of           the case,  the Income-tax  Appellate Tribunal  was           right in  holding that  the amount  of Rs.5,15,863           was not a revenue receipt liable to tax?" 1039      The Division  Bench of the High Court which disposed of the said reference agreed with the view of the Tribunal that the bye-law  50 of  the bye-laws  of the society was validly amended with  retrospective effect  and  that  retrospective effect must  be given  to that  bye-law. The  Division Bench took the view that in view of the amended bye-law the amount of Rs.5,15,863  was not  an amount  which the  society could deal with  as its  income or according to its will and hence

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the source  of the  receipt was  diverted.  The  High  Court answered the  question referred  to it in affirmative and in favour of  the assessee.  The  present  appeal  is  directed against the said decision of the High Court.      Before  coming   to  the   contentions  urged   by  the respective counsel,  it will  be useful  to take note of the relevant statutory  provisions and  the relevant  rules. The respondent society  was registered  under  the  Co-operative Societies Act  of 1912.  Clause (a) of Section 2 of the said Act of  1912 defines  "bye-laws" as  registered bye-laws for the time  being in force and includes a registered amendment of the bye-laws. Section 6 deals with the conditions for the registration of  a co-operative  society. Section 43 confers upon the State Government power to make rules for registered societies to  carry out  the purposes  of the  said Act. The relevant portion of clause (c) of sub-Section (2) of Section 43 runs as follows:           "In  particular   and  without  prejudice  to  the           generality of  the foregoing power, such rules may           prescribe  the  matters  in  respect  of  which  a           society  may  or  shall  make  bye-laws,  and  the           procedure to  be followed  in making, altering and           abrogating bye-laws,  and  the  conditions  to  be           satisfied prior  to  such  making,  alteration  or           abrogation."           Clause (e) of Section 43(2) runs as follows:-           "In  particular   and  without  prejudice  to  the           generality of  the foregoing power, such rules may           regulate the  manner in  which funds may be raised           by means of shares or debentures or otherwise;"      Pursuant to  the powers  conferred under  Section 43 of the  Co-operative  Societies  Registration  Act,  1912,  the Government of  U.P. framed  certain rules  known  as  United Provinces Co-operative  Societies Rules, 1936 for registered societies and  these rules  were in  force at  the  relevant time. The relevant portion of Rule 8 under heading "III-Bye- laws" ran as follows:- 1040           "A society shall, subject to the provisions of the           Act and  of the  rules, make bye-law in respect of           the following matters, namely:           (1)  the name of the society;           (2)  its registered address;           (3)  its aims and objects;           (4)   the purposes  for which  its  funds  may  be                applied;"      Rule 10  conferred power  on a society to make bye-laws in respect  of any other matter incidental to the management of its  business. Rule  11 which deals with the amendment of rules runs as follows:           "An amendment  may be made in the bye-laws, i.e. a           bye-law may  be altered or rescinded or a new bye-           law added  by a  resolution passed by the votes of           at least  two-thirds of  the members  present at a           special meeting called for the purpose."      It was  submitted by Mr. Ahuja, learned counsel for the appellant  (revenue)  that  the  amendment  of  bye-law  50, although it  was purported  to be  made  with  retrospective effect could,  in fact, have no retrospective effect in law. It was submitted by him that a co-operative society governed by the  Co-operative Societies  Act, 1912  was  not  a  body constituted by  the said Act nor a statutory body. The power to  make   bye-laws  was   conferred  upon  the  society  by delegation under  rules which  themselves were framed by the Government in  exercise of power delegated to the Government

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by the  legislature under Section 43 of the aforesaid Act of 1912.  It  was  submitted  by  him  that  as  there  was  no delegation of  any power  on the  respondent society to make bye-laws with retrospective effect, it had no power to do so and the  amendment  of  bye-law  50  made  by  the  society, although purporting  to be retrospective, could not be given any such  effect. In  support of  this submission, Mr. Ahuja relied  upon  the  decision  of  this  Court  in  Income-tax Officer, Alleppey  v. M.C. Poonnoose & Ors., [1970] 1 S.C.R. p. 678 in which the Court held as follows:           "Where any  rule or  regulation  is  made  by  any           person or  authority to whom such powers have been           delegated by  the legislature it may or may not be           possible to make the same 1041           so as  to give  retrospective operation.  It  will           depend on  the language  employed in the statutory           provision  which   may  in  express  terms  or  by           necessary  implication   empower   the   authority           concerned  to  make  a  rule  or  regulation  with           retrospective effect.  But where  no such lenguage           is to be found it has been held by the courts that           the person  or  authority  exercising  subordinate           legislative  functions   cannot   make   a   rule,           regulation  or  bye-law  which  can  operate  with           retrospective effect  (see Subba  Rao J.,  in  Dr.           Indramani Pyarelal  Gupta v.  W.R. Nathu & Others.           [1963] SCR  721-the majority  not having expressed           any different  opinion on  the  point;  Modi  Food           Products Ltd.,  v. Commissioner of Sales Tax U.P.,           A.I.R. 1956  All. 356; India Sugar Refineries Ltd.           v. State  of Mysore,  A.I.R.  1960  Mys.  326  and           General S.  Shivedev Singh  & Another v. The State           of Punjab & Others, [1959] P.L.R. 514.")      The  aforesaid   observations  have   been  cited  with approval by this Court in Hukum Chand etc. v. Union of India & Others, [1973] 1 S.C.R. p. 896 where the Central Govenment was held  to have acted in excess of its powers in so far as it gave  retrospective effect  to the Explanation to Rule 49 framed  under   the  Displaced   Persons  (Compensation  and Rehabilitation) Act,  1954, exercising  the powers conferred by Section  40 of  the Act.  We may  also refer  here to the decision of  this Court  in Co-operative Central Bank Ltd. & Ors. v.  Additional Industrial  Tribunal, Andhra  Pradesh  & Ors., [1970] 1 S.C.R.p. 205 where it has been stated by this Court as follows:           "We are  unable to  accept the submission that the           bye-laws  of  a  co-operative  society  framed  in           pursuance of the provisions of the Act can be held           to be  law or  to have the force of law. It has no           doubt been  held that, if a statute gives power to           a Government or other authority to make rules, the           rules so  framed have the force of statute and are           to be  deemed to  be incorporated as a part of the           statute,. That  principle, however, does not apply           to bye-laws  of the  nature  that  a  co-operative           society is  empowered by the Act to make. The bye-           laws that  are contemplated  by  the  Act  can  be           merely those which govern the internal management,           business or administration of a society."      We may  mention that  the Act  under which the bye-laws were framed  was the  Andhra Pradesh  Co-operative Societies Act, 1964. 1042      In the  light of  the decisions  discussed earlier,  it

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appears to  us that  the respondent society had no authority in law  to amend  bye-law 50 with retrospective effect as it purported to  do. We  have already  pointed out the power of the society to amend its bye-laws arises from the provisions of Rule  11 of  the United  Provinces Co-operative Societies Rules, 1936,  which rule  has been  made  under  the  powers conferred by Section 43 of the United Provinces Co-operative Societies Act, 1912. There is nothing expressly or impliedly in Rule  11 which  confers any power on the society to amend its bye-laws with retrospective effect and in the absence of any such  power being  conferred,  either  expressly  or  by implication, it  cannot be  said that  the society  had  any power to  amend its  bye-laws with retrospective effect. Mr. Manchanda, learned counsel for the respondent-society placed strong reliance  on  the  decision  of  this  Court  in  Dr. Indramani Pyarelal  Gupta v. W.R. Nathu and Others, [1963] 1 S.C.R. p. 721 where it was held that the substituted bye-law 52AA of  the East  India  Cotton  Association  made  by  the Central Government  in exercise  of the power conferred upon it under  Section 12  of the  Forward Contracts (Regulation) Act, 1952 and which, very shortly stated, conferred power on the Forward  Markets Commission,  after notifying  with  the Chairman of  the Board of the East India Cotton Association, to close  hedge contracts  in the eventualities mentioned in the said  rule was  not invalid  in law  or ultra  vires the Constitution. On  a  proper  construction,  the  amended  or substituted bye-law  applied not  only to  contracts  to  be entered into  futute but  also to subsisting contracts. This Court pointed out that, in that case, the power to make bye- laws so  as to  affect the  rights in  subsisting  contracts followed as  a  necessary  implication  from  the  terms  of Section 11  of the Forward Contracts (Regulation) Act, 1952. In the  case before us, however, there is nothing in Section 43 of  the U.P.  Co-operative Societies Act, 1912 or Rule 11 of the  United Provinces  Co-operative Societies Rules, 1936 to indicate  that there is any power, express or by implied, in a  co-operative society registered under that Act to make bye-laws  with   retrospective  effect  in  respect  of  its business.      In view  of the  above discussion,  in  our  view,  the amendment of  bye-law 50  of the  respondent society  cannot have any  retrospective effect and the amounts deducted from the amounts  payable to members for the supply of sugarcane, will have  to be  dealt with  as if they were deducted under the provisions  of bye-law  50 as  it stood  in the relevant accounting period.      If the  provisions of  the unamended  bye-law are to be applied, it 1043 is clear  that these  amounts which  were  deducted  by  the respondent from  the price payable to its members on account of supply  of sugarcane were deducted by the respondent from the price  payable to  its members  on account  of supply of sugarcane  were  deducted  in  the  course  of  the  trading operations of  the respondent  and these  deductions were  a part of its trading operations. The receipts by way of these deductions must,  therefore, be regarded as revenue receipts and are  liable to  be included in the taxable income of the respondent.  It  is  urged  by  Mr.  Manchanda,  that  these receipts have  been described in the bye-law 50 as deposits, but we  fail to  see how  they can  really  be  regarded  as deposits. It  was held  by this  Court in  Chowringhee Sales Bureau P.  Ltd. v.  Commissioner of Income-tax, West Bengal, [1973] 87  I.T.R. p.  541 that  it is  the true  nature  and quality of  the receipt  and not  the head under which it is

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entered in  the account  books as would prove decisive. If a receipt is  a trading  receipt, the  fact that  it is not so shown in the account books of the assessee would not prevent the assessing  authority  from  treating  it  as  a  trading receipt. The same principle can be derived from the decision of this  Court  in  Punjab  Distilling  Industries  Ltd.  v. Commissioner of  Income-tax, Simla, [1959] 35 I.T.R. p. 519. In  that  case,  the  assessee  carried  on  business  as  a distiller of  country liquor  and sold  the produce  of  its distiller to licensed wholesalers. Under a scheme devised by the Government,  the distiller  (assessee) was  entitled  to charge the  wholesaler a  price for the bottles in which the liquor was supplied, at rates fixed by the Government, which he was  bound to  repay when  the bottles  were returned. In addition to the price fixed under the Government scheme, the assessee took  from the wholesalers certain further amounts, described as  security  deposits  without  the  Government’s sanction and entirely as a condition imposed by the assessee itself for  the sale  of its liquor. The moneys described as security deposits were also returned as and when the bottles were returned  but in  this case the entire sum taken in one transaction was  refunded when  90 per  cent of  the bottles covered by  it were  returned.  The  price  of  the  bottles received by  the assessee  was entered  by it in its general trading account  while the additional sum was entered in the general ledger  under  the  heading  "empty  bottles  return security deposit  account."   The question  was whether  the assessee could  be assessed  to tax  on the  balance of  the amounts of these additional sums left after the refunds made out of  the same.  It was  held that  the additional  amount described as  security deposit by the assessee was really an extra  price   for  the  bottles  and  was  a  part  of  the consideration for  the sale  of liquor;  it did not make any difference that  the additional  amount  was  entered  in  a separate  ledger   termed  "empty   bottles  return  deposit account". It was held that these additional 1044 amounts, which  remained after  the refunds  were made, were trading receipts of the assessee and liable to tax. Applying these principles  to the  present case,  in our  opinion, it makes no  difference that in the bye-law, these amounts have been referred  to as deposits and the account in which these receipts were entered has been called "Loss Equalisation and Capital Redemption  Reserve Fund".  The essence of a deposit is that  there must be a liability to return it to the party by whom  or on  whose behalf  is made  on the fulfillment of certain conditions.  Under the  amended 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 the discharging 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.  In our view, the learned judges of the High Court were, with respect, in error in answering the question referred in  the negative.  In  our  opinion,  the  question referred must  be answered  in affirmative  and in favour of the revenue.

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    In the  result, the appeal succeeds and is allowed with costs. The  respondent shall  also pay  to the appellant the costs incurred in Income-tax Reference No. 67 of 1979.                 CIVIL APPEAL No.564 OF 1975      This is  an appeal  against the  judgment of a Division Bench of  the Allahabad  High Court  in Income-tax Reference No.  724   of  1971.   The  question   referred  to  us  for determination is as follows:-           "Whether on  the facts and in the circumstances of           the case,  the sum  of Rs.6,11,846 credited during           the year  of account  to the loss equalisation and           capital  redemption   reserve  fund   by  deposits           received from  producer  members  of  the  society           under Clause  50 of  its bye-laws  is  of  revenue           nature assessable to tax"? 1045      In view of our decision, the appeal must be allowed and the question  referred answered  in the  affirmative and  in favour of the revenue. The appeal is allowed. No order as to costs. S.L.                                         Appeal allowed. 1