08 September 2004
Supreme Court
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SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD Vs C.I.T., KOLHAPUR .

Bench: RUMA PAL,P. VENKATARAMA REDDI
Case number: C.A. No.-006973-006975 / 2000
Diary number: 14922 / 2000
Advocates: MANIK KARANJAWALA Vs B. V. BALARAM DAS


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CASE NO.: Appeal (civil)  6973-6975 of 2000

PETITIONER: Siddheshwar Sahakari Sakhar Karkhana Ltd.  

RESPONDENT: C.I.T., Kolhapur & Ors.  

DATE OF JUDGMENT: 08/09/2004

BENCH: RUMA PAL & P. VENKATARAMA REDDI

JUDGMENT: J U D G M E N T With C.A.NOs. 6976-7026, 7028-7038, 7461-7465/2000, 177- 269/2001, 7923-7924/2001, 4293/2002 and 4878/2002

AND

CIVIL APPEAL NOs. 1013-1017 OF 2002

Commissioner of Income Tax, Pune                           \005 Appellant

Versus

Shri Chatrapati Sahakari Shakar Karkhana Ltd. \005 Respondent With C.A.Nos. 2122, 2544, 2717-2718, 2958, 3339-3348, 3429- 32, 3378-3380, 4008-09, 3996-4002, 3589-3591, 3567,  3777-3785, 3790-3796, 3962-64, 4191, 4062-63, 4666- 4671, 4479-80, 4673-4682, 4732-36, 4691-4731, 4737- 4742, 5479-88, 6088-89, 5207, 5489-94, 5496-5502, 6611,  7243, 7454/2001, 466-470, 3475, 5073-77, 7399- 7400/2002, 469-470/2003 and Civil Appeal Nos. 5867, 5868,  5869, 5870, 5871-5875, 5876, 5877, 5878, 5879/2004 @  S.L.P.(C) Nos.5407, 5338, 5882, 17143/2001, 523-527,  18548, 23892/2002, 2747, 4871/2003   

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. 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. 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

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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. 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 the questions by  holding that the non-refundable and refundable deposits are  trading receipts whereas deductions on account of Area  Development Fund, Cane Development Fund, Hutment Fund,  Y.B. Chavan Memorial Fund, The Chief Minister’s Relief Fund,  Education Fund are not trading receipts and therefore not  taxable. Accordingly, the References and appeals were  disposed of by the High Court. The Sugar Co-operative  Societies have impugned the decision of the High Court in so  far as it decided the questions raised against them and the  Revenue has preferred appeals in so far as the decision went  against it. As the assessees’ appeals turn much on the

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interpretation and implications of the bye-laws 60, 61-A and  61-B which relate to the non refundable and refundable  deposits, it is worth quoting them verbatim. Bye-law No. 60: (Regarding Fixation of Cane Price) "The rate of sugarcane supplied by members will  be fixed each year by the Board of Directors. The  same will be of ex-gate cane. It will be the same  for all the members. The Karkhana will also  reimburse to the members their expenses of  harvesting and transporting the cane upto the  factory-gate at the rate fixed by the Board of  Directors. Such transporting expenses will differ  in the case of every member depending upon the  distance of his field from the factory gate. Such  expenditure reimbursed by the Karkhana will be  treated as a part of cost of sugarcane. The Board  of Directors will, each year, fix the rate of  sugarcane to be paid to the members considering  the constitution, objects and bye-laws of the  Karkhana and the financial results of each year.  However, so long as the Karkhana has not fully  repaid the share capital contributed by the State  Govt. and/or the loans taken on block capital  account from IFC and other Central financing  institutions, the Board of Directors will pay the  price as fixed by the State Government.

The rate of cane supplied by the non-members at  the gate will be fixed by the Board of Directors. It  will not be more than the rate fixed for the  Members’ cane. If however, rate of cane for the  non-members has to exceed the members’, the  approval of the State Government is necessary.

BYE-LAW NO.61-A (1)     Every year the society shall collect from the  members non-refundable deposits at the  rate not less than Rs.1 per ton of sugarcane  supplied by them. The rate of deposit will be  decided by the Board of Directors. However,  in determining such rate the board shall  consider the amount required for the  repayment of loan of I.F.C.I. and bank loan  taken towards capital expenditure and the  repayment of time deposits received from  the members. The rate of interest on such  deposit shall not exceed 12 percent so long  as the Government share capital, the long  term loans of IFCI, Maharashtra State Co- operative Bank and other financial agencies  advanced for capital expenditure has not  been repaid. The NRD collected as above  shall not be refunded to the member till the  Government share capital and the term  loans taken from I.F.C.I. and other financial  institutions for capital expenditure 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 towards  capital expenditure from Maharashtra State  Co-operative Bank, Government share  capital and long term loans taken from other

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banks for capital expenditure. The amount  of fixed deposits collected by the society  from members 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  nonrefundable 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 members 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 deposits standing  at the beginning of the year.

(4)     The amount of deposits so collected shall be  utilized for the repayment of term loans  taken for the capital expenditure as  mentioned in sub-clause (2) above.

(5)     The amount of deposit so collected from the  members or part thereof can be transferred  to the name of any other member on an  application by the member. However,  consent of both members in writing shall be  necessary.

Bye-Law No.61-B In addition to the non-refundable deposit from  the member as mentioned in bye-law No.61-A  above, 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 ton of sugarcane supplied as  may be decided by them every year. These  deposits 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 percent.

Now, we shall take up the controversial issues for  consideration. Non-refundable deposits         The taxability of ’non-refundable deposits’ being the  most contentious issue in these appeals, we shall first  concentrate on that issue. At the outset, we would like to  advert to the findings of the Tribunal and the High Court on  this aspect.         First, we would like to setout the findings of the Tribunal  in brief. The Tribunal, having noted the proposition that if a  trader collects money from the customer as part of trading  receipts, those receipts would constitute income, observed  that the nature and object of the collection is equally

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material. The Tribunal observed: "what is relevant to see is  not how the amount was collected but with what obligation it  was collected". After referring to the bye-laws, the Tribunal observed  that the purpose for which the deductions were made in the  name of non-refundable deposits was not only to pay the  term loans and the Government share capital but also to  convert the deposits into shares. The Tribunal pointed out  that the entire amount of deposit was liable to be converted  into shares except that the time at which it could be so  converted was only postponed till the loans were repaid. The  Tribunal pointed out that the expression ’non-refundable’  only means non-refundable in cash. Though, according to the  Tribunal, the collections were in the course of trading  operations, it was only an occasion for the collection of the  deposit and cannot be viewed as consideration for the supply  of cane. The Tribunal stressed on the provision for the  payment of interest and the manner in which the deposits  were treated by the Society. It was stressed that the  retained amounts were credited to the individual accounts of  the depositors and they were shown as liability in the  balance-sheet.  It means that the ’deposits’ were not  regarded as assessee’s own money. The Tribunal distinguished the case of Bazpur Co- operative Sugars inter alia on the ground that the amounts  deducted by the Society and credited to the loss equalization  fund were liable to get depleted or consumed after applying  the funds for various purposes mentioned in the bye-laws  including the working losses, whereas that is not the case in  the present appeal. The Tribunal summed up the position as follows: "To sum up, according to our understanding, the true  nature and purpose of the bye-law 61A is to collect  contribution towards share capital from the cane growers by  deducting the amount 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 the 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 by  treating the retained money as loan in the meantime and  secondly eventual conversion of the same towards share  capital. Thus there is no element of income embedded in it  nor can it be said that these moneys were collected or  received by the assessee as and by way of income". The REASONING OF THE HIGH COURT in support of its  conclusions is summarized as follows: The fixation and payment of the price of sugarcane form  part of the trading operations of the assessee. The deposits  have been recovered by the Society as part of trading  operations and therefore it constitutes "part of trading  receipts". Such deductions provided a periodical return and a  source of income to the Society.     A reading of the bye-laws  clearly indicates that the deposits are trading receipts, the  primary purpose of collecting the ’deposits’ being to  discharge the liabilities of the society but not to issue the  shares at a later point of time as held by the Tribunal.  The  assessee is empowered to hold on to the deposits till the  repayment of the Government share capital and the loans  taken from the financial institutions.  In the case of deposits,  a fixed maturity period is prescribed and on maturity, the

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depositor has a right to repayment. In the present case,  there is no such period nor any such right has been given.   There is no separate contract of fixed deposits between the  Society and the members and no separate fund came to be  created as the sums were credited to the individual accounts.  The refund is within the discretion of the Board of Directors  who may refuse to repay on the ground of weak financial  position of Society. The payment of interest is not a  conclusive factor. The High Court observed: "In our opinion, in a matter of this type, the  correct test to be applied is whether the amounts  sought to be deducted reached the assessee as  his income, if so, it would constitute trading  receipts.  On the facts of this case, it is clear that  the amount reached the assessee as its income."

After referring to the case of Commissioner of  Income Tax Vs. Bazpur Cooperative Sugar Factory Ltd.  [(1988) 3 SCC 553], the High Court held: "In the present case also, under the bye-laws,  the rate of deposits was fixed by the society and  not by the cane growers.  In the present case  also, under the bye-laws, no event or  contingency has been contemplated under which  the share holders could demand repayment of  the deposit.  Hence, merely because the  Karkhana has agreed to pay the interest, will  not be a conclusive test to come to the  conclusion that the liability has accrued to the  society on deduction."

Contentions

       The learned senior counsel for the appellant-assessee  contended that the High Court fell into error in overlooking  certain important aspects of the case and laying undue stress  on the fact that the amount treated as deposit is deducted  from the price payable to the cane growers as part of the  trading operations and, therefore, it was in the nature of  trading receipt.  The assessee\027Society was always treating  the deposits as the money belonging to the members (cane  growers), credited the deducted amounts to the individual  accounts of the members on which interest at fixed rate was  being credited. The society treated the deposits as its liability  towards the members/depositors.  It is contended that under  the bye-laws there is sufficient indicia that the members own  the deposits.  For instance, in the case of resignation, the  deposited amount can be claimed and in the case of death,  the amount is heritable.  The deposits are not utilized for  carrying on the trading operations by the society, but they  are utilized only for the discharge of capital liabilities. If at  all, they are capital receipts, but not revenue receipts.  The  learned counsel further argued that it is not appropriate to  describe the deposit as non-refundable deposit.  It is non- refundable in the sense that it may not be paid in cash to the  member, but it will go to augment the share capital of the  member. With reference to some data prepared, it is pointed  out that instances of refund and transfer are not rare.         Justifying the findings of the High Court, it is contended  by the learned senior counsel appearing for the respondent\027 department that the true nature and character of receipt has  to be taken into account notwithstanding the nomenclature  used or the accounting method adopted. It is the origin or  genesis of the receipt that should be taken into account but

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not the manner in which the amount is utilized.  The fact that  the deduction is from out of the price payable to the member  and as a result thereof the receipts on account of deposits  bring about savings in the cost of raw material is a strong  indication that it is a trading receipt.  It is pointed out that  the members have no volition except to suffer the deduction  and they have no enforceable legal rights which are  otherwise available to the depositors in the ordinary course.   Even in limited contingencies such as resignation and death,  there is no unfettered right to get back the deposited amount  lying in the account of the individual member.  Even  conversion into share capital is a contingency hedged in by  various limitations.  The discretion in this regard is vested  with the Board of Directors.   The Government’s share capital  though nominal is always retained so that the process of  deduction can go on and the so called deposits are utilized  for the purposes of the society.  The right to get refund of  the deposit in cash or by way of conversion into share capital  is, on the whole, a right which is too tenuous and remote.   The learned counsel for the respondent further contended  that crediting of interest is not decisive and it practically    remains on paper. Placing reliance on the case of Bazpur  Cooperative Sugars, it is contended that there is practically  no difference between the un-amended bye-law which was  considered in that case and the bye-laws in the present case. As the sheet anchor of the Department’s case rests on  the decision in CIT Vs. Bazpur Cooperative Sugar  Factory Ltd. [(1988) 3 SCC 553], it becomes necessary to  refer to that decision in detail. During the relevant  assessment year 1961-62, certain amounts were deducted  from the price payable for the sugarcane supplied by the  members and the Society credited the same to the ’Loss  Equalisation and Capital Redemption Reserve Fund’. These  deductions were made under the provisions of bye-law 50. At  the relevant point of time, the bye-law read 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. After adjusting the  losses, if any, in the working year, the deposits  shall be allowed to accumulate and utilized 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."     (*emphasis supplied)

The bye-law was amended with retrospective effect  from 1.7.1958. The gist of the amendment is adverted to a  little later. The question arose whether the amounts received by  the Society from its members by way of deduction from the  price of sugarcane were revenue receipts taxable under the  Income Tax Act. Before answering the question, this Court  had to consider whether the amended or unamended bye- law would apply. The Court having held that the

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respondent-Society had no authority in law to amend the  bye-law with retrospective effect as it purported to do,  proceeded to examine the issue whether in the light of the  unamended bye-law, the deducted amounts credited to the  fund could be regarded as trading receipts liable to tax. The  Court answered the question in favour of the Revenue and  allowed the appeal. It may be noticed that in contrast with the unamended  bye-law, the amended bye-law contained a clear provision  that the deposit into the reserve fund at a prescribed rate  shall be made "until the shares to be subscribed by a  Member are fully paid up". After the amounts standing to  the credit of the fund are used for making partly paid shares  fully paid up, the balance remaining in the account shall be  liable to be refunded to the members concerned "soon after  the present loan from the IFC is repaid". Thereafter, the  fund shall cease to exist. There were no such definite  stipulations in the unamended bye-law. However, we are  not called upon to dilate on the question whether the  amended bye-law would have had a different impact on the  conclusion reached.         The Court reiterated the principle that "it is the true  nature and quality of the receipt and not the head under  which it is entered in the account books as would prove  decisive" and that it makes no difference that the disputed  amounts have been referred to as deposits and proceeded to  consider the crucial issue in that light.         How far the ratio of the decision in Bazpur case could  be applied to the case on hand is the first and foremost  controversy. In the present case, the purchase and payment  of price of sugarcane is undoubtedly part of trading  operations of the assessee.  It is in the course of such  trading operations that the assessee realized the amounts  (treated as deposits) with regularity and utilized the money  so received in its business.  To the extent the full payment  is not made to the farmers, the assessee saved the raw  material cost as well. These factors may broadly satisfy the first test applied  in Bazpur Cooperative Sugar’s case.  The following are  the relevant observations in this regard: "It 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 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."

However, it needs to be clarified that the line of  inquiry, in order to determine the true nature and character  of the receipts, does not stop at ascertaining the mere fact  whether the realization was in the course of trading  operations.  The moment it is found that certain amounts  were deducted by the assessee out of the price payable to  its members who supplied the raw material, the conclusion  does not necessarily follow that all such realizations get  impressed with the character of revenue receipts, giving rise  to taxable income in the hands of the assessee.  It is not  any and every receipt linked to the trading activity that  acquires the quality of revenue receipt.   The tribunal or the  court should go further and delve into the true nature,  character and purpose of the realizations.  If the amounts

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are meant to be held as deposits liable to be returned to the  depositor at a specified point of time or on the happening of  specified contingencies which are by no means uncertain or  is otherwise treated as members’ money\027the depository  having no unfettered dominion over the said funds, then, it  is difficult to characterize them as the income of the  assessee. The realization of monies from the grower- members in the course of trading operations could as well  be construed to be an occasion, mode or convenient point of  time at which the ’deposit’ could be collected. Perhaps  keeping this legal position in view, notwithstanding what has  been stated in the earlier portion of the judgment, the  learned Judges proceeded to address the next question, i.e,  whether the receipts by way of deductions could be  regarded as deposits as described in the bye-laws.  While  answering that question in the negative, the Court pointed  out that it is the true nature and quality of the receipt that is  material but not the head under which it is entered in the  account books\027a principle which is reiterated in a catena of  decisions.  The Court then went on to conclude that the  receipts by way of deductions from the purchase price were  not in the nature of deposits.  In this context, the reasoning  of the Bench may be noticed. "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  fulfillment of certain conditions.   Under the amended (sic  unamended) by-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 Indian 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 of liabilities of the  respondent-society. In these  circumstances, the receipts  constituted by these deductions  were really trading receipts of the  assessee society\005" The Court apparently felt that the event of return of the  amounts by way of conversion into share capital was  remote, if not impossible.  In meeting the point urged by  the assessee that it was a deposit, the Court proceeded to  apply the primary purpose test.  The primary purpose,  according to the learned Judges, was not to issue shares to  the members but it was meant to discharge various  liabilities of the society.  Therefore, it was felt that it would  be a misnomer to call it members’ money or a returnable  deposit.  That is the ratio of the decision. To what extent the principle laid down or the test

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applied in the Bazpur case can be pressed into service in  the present case is the question which needs our close  attention.  There are two distinguishing features which  become apparent on a reading of the bye-laws. The first is  the absence of provision for payment of interest under the  bye-laws of Bazpur Co-operative Sugars Ltd. Secondly,  in Bazpur case the deducted amounts credited to "loss  equalization and capital redemption reserve fund" are liable  to be adjusted against the losses of any working year.  It is  only after adjusting such losses, the deposits are allowed to  accumulate and be utilized for repayment of IFCI loan and  for redeeming the Government’s share contribution.  In the  process of such adjustment, the entire amount collected  from the members and credited to the fund may be  dissipated or consumed, whereas in the instant case, the  amount collected as deposit remains intact, though it could  be utilized from time to time for meeting certain liabilities of  capital nature.  However, there is one qualification in this  behalf.  If the society has not incurred any loss and it  remains a profit-making concern, the situation will be very  similar in both the cases.  The amounts will then be utilized  for repayment of long-term loans due to the financial  institutions and the Government’s share capital and after  such process of repayment is complete, the disputed  amounts could be made available to the grower members in  the form of increased shares.  Yet, in Bazpur case, at the  time the sums were received from the grower-member and  remitted to the loss equalization fund, there was no  knowing whether the ’deposit’ would remain in tact at all.   The claim of the member to the deposited amount at that  stage was too tenuous and slippery to earn the legal  recognition of any proprietory interest over it. It cannot be  said that the member had the right to get back the amount  when it was recovered and credited to the Fund. The  ultimate conclusion reached in Bazpur case can be  explained on this basis.  There is yet another angle from  which the problem can be viewed.  As between the member  and the society, who is having substantial dominion over  the ’deposits’?  In Bazpur case the answer could only be  that it is the assessee-society which had such dominion.   The position is different in the present case, as explained  hereafter. The ratio in Bazpur case not being squarely applicable,  the whole basis on which the revision was initiated  crumbles. Still, we have to examine whether the  assessment of impugned amounts as taxable income is  justified in law.  Keeping in view the bye-laws of the society, the  approach of this Court in Bazpur case and the settled  principles, we must examine the fundamental question, viz.,  what is the true nature and quality of the receipts sought to  be taxed? The question has to be examined from various  angles running in a common direction.  For instance, it  becomes necessary to enquire:  Do the receipts bear the  character of income at the time they reach the hands of the  assessee? Does the title to the money get vested with        the assessee Society once and for all, the assessee  exercising complete dominion over the funds in question?  OR, is it to be regarded as the money of depositors/members  notwithstanding the custody of the Society and the authority  given to the Management of the Society to utilize the money  for the overall advantage of the Society? Does the assessee- Society stand in the position of debtor in relation to these  deposits? Is there in law an obligation to repay the amounts,  i.e, by way of augmentation of share capital of members?

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What is the primary purpose behind the collection of the  amounts as deposits? These are the various questions of  overlapping nature which have been debated before us in  some form or the other, and call for answers in order to  resolve the crucial controversy. Though the manner in which  the sums are treated by the assessee in its accounts is  neither conclusive nor a sure indication of the nature and  character of the receipt, yet, it is not an irrelevant factor. As rightly observed by the High Court, the relevant bye- laws of the Society shall be kept in the forefront in finding an  answer to the issue raised. 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 loans 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. Although the use of the expression ’deposit’ does      not conclude the issue, there are intrinsic indications in the    bye-laws that the expression has been used to mean just  what it says. These are:  (a) conversion of the deposit      into additional shares, (b) transferability / heritability, (c)  refundability and (d) payment of interest on the deposit.   The first three features are no doubt dependent upon  occurrence of certain contingencies or hedged in by certain

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limitations. But the deposited amount is not denuded of its  character of ’deposit’ for that reason alone.  First, discussion needs to be focused on the first  feature, namely, conversion of deposit into shares. The  Tribunal rightly pointed out and it is not disputed before us  that such conversion is as good as refund.  Such conversion  into additional shares is however postponed till the events of  repayment of loans towards capital expenditure and the  repayment of Government share capital happen. In other  words, till such time, the member / depositor has no  immediate right to demand the payment. Nevertheless, the  obligation to repay stood annexed to the deposited amount  at the time it was received by the assessee subject of  course to the occurrence of the contingency specified in the  bye-law itself. It cannot be said, as has been said by the  High Court, that "under the bye-laws, no event or  contingency has been contemplated" under which the  members could demand the repayment of the deposit. Nor  can it be said that even after the happening of the event  specified in the bye-laws, the right to demand repayment  becomes illusory in view of the discretion reserved to the  Board of Directors of the Society. In this context, much of  the argument has been built up on the use of the expression  ’may’ followed by the words "convert such deposits into  shares after repayment of loans etc." It is contended by the  learned counsel appearing for the Revenue that the Board of  Directors may very well refuse to convert the deposits into  shares in exercise of its discretion on the ostensible ground  that the financial position of the Society does not permit  such conversion. The very existence of discretion, it is  pointed out, negates the existence of liability to convert the  deposit into shares.  We cannot accede to this contention.  Once the loans of the description mentioned in the bye-laws  which were outstanding on the date the deposit was made  are repaid, in our view, the Board of Directors is bound to  convert the deposit amount into shares. The discretion is  always coupled with a duty; the discretion cannot be used to  circumvent the obligation cast under the law or contract  governing the parties. In our view, it would be appropriate  to read the expression ’may’ as ’shall’.  On the occurrence of  the specified event, namely, the repayment of the loans  referred to in the bye-law and the Government share  capital, the member/depositor can clutch at a legally  enforceable right to demand repayment, may be, in the  form of conversion into additional shares.  In our view, the retention of the deposited money with  the Society in order to utilize the same for repayment of  term loans etc., does not denude the amount of its  character of ’deposit’ carrying with it the obligation to repay.   Nor is it necessary, as the High Court was inclined to think,  that the separate identity of the deposited amounts should  be kept up.  The absence of the right to secure repayment  on demand is again not inconsistent with the receipt being a  deposit.  Liability to return need not be immediate and  unconditional, following a demand by the depositor. Even if  such liability gets crystallized on the happening of a  specified contingency, it is still a liability which can be  legally enforced by the depositor.  The existence of such  liability is an antithesis to the idea of ownership of the  money by the Society. Deposits are of various types with variations in        their features and incidents. It would be apposite, in this  context to refer to certain passages dealing with deposits  from well known treatises. In Corpus juris secundum  (volume -26A) the following passages occur:

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The deposits are classified as Special Deposits,  General Deposits and other Deposits.

Special Deposit:  A special deposit is one in which the identical subject  matter deposited must be kept and redelivered, or applied  to a particular purpose.  

General Deposit: A general deposit is one in which the identical subject  matter need not be returned and, as distinguished from a  deposit for safe-keeping, this form of deposit has been  termed a deposit for exchange, that is, one in which the  depositary  is only bound to return a thing corresponding in  kind to that which is deposited.  In determining whether or  not a deposit is special, the character of the business of the  depositary is entitled to considerable weight, but is not  controlling.  It is further stated: "An agreement to pay interest is strong evidence that a  deposit is general rather than special". Dealing with duties and liabilities of depository it is  stated: "An obligation to redeliver the subject matter in specie  or in kind, on the demand of the depositor or otherwise in  accordance with the terms of the deposit*, is necessary to  constitute the transaction a deposit, and it is the duty of the  depositary to make delivery in accordance therewith. The  fact that there is not to be a redelivery of the thing  delivered is a strong indication that the transaction is not a  deposit. In the absence of an agreement to the contrary,  the depositary must also return with the thing deposited all  increase which has accrued thereto during the term of the  deposit.  The fact that the depositor has the right to sell or  exchange the deposit and substitute therefor the proceeds  of the sale or exchange does not deprive the deposit of its  character as such". (*emphasis supplied) In words and phrases (Permanent edition,  Volume-39A), the distinction between the special deposit  and the general deposit and the concept of a specific deposit  is clarified as follows:- "The distinction between a ’special deposit’ and a  ’general deposit’ is generally held to be that the subject of a  ’general deposit’ is mingled with the general assets of the  depository, whose property it becomes, and its separate  identity is lost, and the relation between the bank and the  depositor is that of debtor and creditor; while the subject of  a ’special deposit’ is to keep safely, separate and distinct  from the general assets of the   bank, as the title remains in  the depositor, who is entitled to receive back the identical  thing deposited, and the relation assumed between the  depositor and the bank is that of bailor and bailee".  "Money deposited for a definite purpose without any  agreement or understanding that it shall not be used  by the  depositee for its own purposes is a ’general deposit for a  specific purpose’, or, as it is sometimes called, a ’specific  deposit’ and creates the relation of debtor and creditor just  as in the case of a general deposit".      (emphasis supplied) In Shanti Prasad Vs. Director of Enforcement  [(1963) 2 SCR 297] this Court, while dealing with the  deposit in a bank, reiterated the settled law that relationship  between the banker and the customer is one of debtor and  creditor and observed thus: "The banker is entitled to use the monies without

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being called upon to account for such user, his  only liability being to return the amount in  accordance with the terms agreed between him  and the customer."               (emphasis supplied)

The above juristic exposition of the concept of deposit  removes the possible doubts on the impugned amounts  being treated as deposits.  It is the contention of the learned senior counsel  appearing for the Revenue that the possibility of return of  the deposit (by way of conversion into shares) depends on  uncertain events and the repayment remains to be a remote  possibility.  It is difficult to appreciate this contention.  True,  the obligation to refund the deposit by way of conversion  into shares would arise only on the occurrence of the  contingencies specified in the bye-laws.  But, in our view, it  is wrong to assume that the events giving rise to refund are  uncertain. The repayment of loans taken for capital  expenditure and the share capital of the Government are  the two specified events which are by no means uncertain,  though the time of repayment is indefinite. On the  occurrence of the said two events, the right to demand  refund would accrue to the depositor. The obligation which  had been in inchoate form ripened itself into a complete  obligation on the occurring of specified events stipulated in  the bye laws.  Such an obligation may be contingent in  nature initially but the right to enforce the obligation inheres  in the depositor from the beginning. The existence of other  features such as transferability of the deposit to another  member and the provision for refund of the deposited  amount to the member in case of cessation of membership  or to his legal heirs in case of death, are important  indicators against the treatment of the deposited amount as  the money belonging to the Society. The payment of  interest from year to year at a specified rate is another  important factor that supports the conclusion of the  disputed sum being a deposit.  Such payment of interest is  only consistent with the fact that the deposited amount still  belongs to the member. The fact that the deposited  amounts are credited to the individual accounts of the  members is a corroborative circumstance to indicate that  the deposits belong to the members. In Commissioner of Internal Revenue Vs.  Indianapolis Power & Light Company [493 US 203],  the question arose whether the deposit amount was an  advance payment towards electricity charges and therefore  liable to be subjected to income-tax.  While recognizing the  principle that the loan proceeds do not qualify as income  because of the repayment obligation, the US Supreme Court  applied the test whether the assessee enjoyed complete  dominion over the customer deposits entrusted to it and  observed thus: "\005.IPL hardly enjoyed ’complete dominion’ over  the customer deposits entrusted to it.  Rather,  these deposits were acquired subject to an  express ’obligation to repay’, either at the time  service was terminated or at the time a customer  established good credit.  So long as the customer  fulfills his legal obligation to make timely  payments, his deposit ultimately is to be  refunded, and both the timing and method of that  refund are largely within the control of the  customer."

       In that case too, the refund was linked to contingent

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events which were not uncertain.         Applying the above test to the present case, 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. Viewed from the point of view of the primary purpose  of deposit\027a test which has been formulated by this Court  in Bazpur case though without much of discussion, we are  of the view that the answer cannot be the same as in  Bazpur case. In this connection the Tribunal recorded the  finding  that the purpose of collecting non- refundable   deposits "was not only to repay term loans taken from  financial institutions and to repay the government share  capital, but also to convert the so called deposits into  shares". The Tribunal expressed the view that the whole  idea was to increase the capital base of the assessee in a  phased manner by retaining some portion of the money  payable to cane-growers, while at the same time  compensating the depositors by way of interest.  However,  the High Court was not inclined to accept the finding of the  Tribunal.   The High Court commented:

"\005on the contrary the above bye-laws clearly  indicate that the primary purpose of collecting the  deposits i.e. the deductions was to discharge the  liabilities of the Society". We are unable to endorse the view taken by the High Court.    Meeting the financial commitments of the Society may be  one of the purposes for which the deposits were collected  but that is not all.  The augmentation of the share capital  which may be in the overall interests of the members as  well as the Society is an equally important purpose which  cannot be overlooked. At any rate, the view taken by the  Tribunal appears to be a reasonable view and the High Court  need not have disturbed that finding.         The High Court relied on the decision of the same High  Court in  Shree Nirmal Commercial Ltd. Vs. C.I.T. [193  in ITR 694]  in order to hold that the payment of interest  on the deposited amount is not inconsistent with the

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amount being a revenue receipt.   We are of the view that  the ratio of that decision cannot be pressed into service in  the present case.  On a consideration of the Scheme and  Agreement under which non-refundable interest-bearing  deposit was collected by the assessee-company, it was  found as a matter of fact that "the deposit was the absolute  property of the Company and the provision for payment of  interest was only a device for showing the amount received  in the course of trade as deposit."  In the instant case, the  plea of device, though raised faintly before the Tribunal, was  not accepted. It rejected the argument that the provision in  the bye-law 61-A providing for conversion of deposits into  share-capital was a make believe affair and that the High  Court in answer to question No.12 affirmed this finding.         To fortify the argument that the disputed amount  is  not the income of the assessee, the learned Sr. Counsel  appearing for the assessees pointed out that the entire  amount of cane price was treated as agricultural income of  the member and was taxed accordingly under the  Maharashtra Agricultural Income Tax Act. So also, the  interest payable on the deposits was shown as the  member’s income and the deposits were shown in the  wealth tax returns as the member’s wealth. According to the  learned counsel, all this indicated as to how the deposited  amounts were being treated by the members apart from the  assessees. We are not inclined to delve into these aspects  which are being projected for the first time before us.   Though this stand was taken before the Tribunal and a  sample assessment order was filed, evidently the finding of  the Tribunal was not invited on this aspect. The learned counsel for the Revenue tried to invoke  Section 41(1) to fortify his argument that the impugned  receipts constitute income in the hands of the assessee\027 Society. No such question was considered by the High Court  or even by the Tribunal specifically. In fact, the questions  formulated in the reference cases indicate that the decision  of the High Court was not invited on this point. Hence we do  not propose to deal with it.            As regards refundable deposits, the relevant bye-law  is 61-B which has been quoted supra. In the light of what  we have said about non-refundable deposits, it does not  require further elaboration to conclude that these deposits  cannot in any sense be treated as income of the assessee- Society.  Though deducted from the cane price, they are  pure and simple fixed deposits repayable on the expiry of a  definite period of time with interest. The restrictions and  conditions governing the non-refundable deposits are not  incorporated in bye-law 61-B.  These ’deposits’ are akin to  the transaction of loan. They are clearly liable to be  excluded from taxable income. There is one more point to be adverted to. 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. This  legal position has been recognized in Hyderabad

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Karnataka Education Society Vs. Registrar of Societies  and Others [(2000) 1 SCC 566] (vide paragraph 28). In  The Cooperative Central Bank Ltd. & Ors. Vs. The  Additional Industrial Tribunal, Andhra Pradesh  [(1969) 2 SCC 43], this Court held that the bye-laws of  the Society framed by virtue of the authority conferred by  the Co-operative Societies Act were on par with Articles of  Association of a Company, which, it is well settled, establish  a contract between the Company and its members and  between the members inter se (vide paragraph 14 in N.C.  Sanyal Vs. Calcutta Stock Exchange Association Ltd.  [(1971) 1 SCC 57]). That apart, the mere fact that the  contract has to be entered into in conformity with and  subject to restrictions imposed by law does not per se  impinge on the consensual element in the contract.  "Compulsion of law is not coercion" and despite such  compulsion, "in the eye of law, the agreement is freely  made", as pointed out in Andhra Sugars Ltd. Vs. State of  A.P. [AIR 1968 SC 599].          For the aforesaid reasons we conclude that the non- refundable and refundable deposits cannot be treated as the  income of the assessee-Societies.  The Civil Appeals filed by  the assessees/Co-operative Sugar Factories are allowed  without costs.

Revenue’s appeals Re : Other deductions made towards various Funds

Leave granted in Special leave petition (Civil) Nos.  5407, 5338, 5882, 17143 of 2001, 523-527, 18548, 23892  of 2002, 2747 and 4871 of 2003.

Pursuant to the instructions issued and the guidelines  evolved by the Director of Sugars, may be under the  authority of the State Government, the deductions at the  prescribed rate were made out of the cane price for being  credited into (1) Chief Minister’s Relief Fund, (2) Late Shri  Y.B. Chavan Memorial Fund, (3) Hutment Fund, (4) Area  Development Fund, (5) Cane Development Fund and (6)  Members’ Small Savings Fund. It is common ground that the  identity of such deducted amounts was being preserved and  separate accounts were being maintained in relation thereto.  In regard to Area Development Fund, the Tribunal was of the  view that the assessee had no control over these funds and  they were collected on behalf of and as an agent of the State  Government. In regard to other funds, the Tribunal held that  the deducted amounts were only retained with the assessee  in order to make them over to the Government which  ultimately spent the same for certain purposes. The High  Court, while pointing out that "a trading receipt means the  assessee’s own money which can be put to any use", applied  the principle of diversion of income by overriding title. The  High Court concurred with the conclusion of the Tribunal.

Unfortunately, in none of the orders of the Income Tax  authorities or the Tribunal, the details relating to the nature  and purpose of the funds and the manner of disbursement of  the amounts have been set out though there is only a  skeletal reference here and there. That is why perhaps the  High Court too could not give these factual details in its  order. Even in the appeal memorandum or the written  submissions filed on behalf of the Revenue we do not find  these details. Despite this handicap, we have looked into  some of the orders and circulars issued by the Director of

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Sugars and other authorities contained in the paper book  submitted to the Income Tax Appellate Tribunal.

As regards the Chief Minister’s Relief Fund, Late Y.B.  Chavan Memorial Fund and Hutment Fund, no serious  attempt has been made to assail the order of the  Tribunal/High Court, the obvious reason being that they were  required to be and in fact being remitted to the Government  or to the Trustees of late Y.B. Chavan Prathisthan. The  assessee merely acted as an agent in collecting the amounts  and remitting the same to the Government/Trustees.  In  truth and in substance, the money collected by the assessee  was not reaching the assessee as part of its income, but the  collection was made "for and on behalf of the person to  whom it is payable", to borrow the language in CIT Vs.  Sheetal Das [41 ITR 367].  It had no manner of right or  title over the said monies. The amount collected towards  Hutment Fund stands on no different footing. It was meant  to be handed over to Collector for the purpose of providing  shelter to landless poor inhabitants within the area of  operation of the sugar factory. We agree with the conclusion  reached by the Tribunal and the High Court that these  receipts should not be treated as income of the assessee.

The main contest by the Department has been in  respect of Area Development Fund and Cane Development  Fund. The Tribunal has also dealt with these items separately  at paragraphs 28 & 29.

The Area Development Fund, as we see from the  various communications placed in the paper-book, is meant  to enable the co-operative sugar factories to render socio- economic services in the area of operation. The area  development programmes may cover agricultural extension,  irrigation facilities, educational and medical services,  development of animal husbandry and poultry, drought relief  work and so on. By doing so, the sugar cooperatives will be  supplementing the efforts of the Government in promoting  the socio-economic development of the area. The Board of  Directors of the cooperative society are required to pass a  resolution specifying the details of expenditure proposed to  be incurred from out of the Area Development Fund. They  should obtain the sanction of the Director of Sugars for  incurring such expenditure. Such information is also required  to be placed before the General Body of the society and the  approval to be obtained from the General Body. On 21st  June, 1988, the Agriculture and Co-operation department of  the Government of Maharashtra framed certain directive  principles laying down the modalities of utilization of Area  Development Funds. The said order was issued in exercise of  the power under Section 79-A of the Maharashtra State  Cooperative Societies Act. This order passed during the  middle of the last assessment year relevant to these appeals  gives statutory basis for the already existing practice. It is  difficult to equate this fund to the other categories of funds,  as has been done by the Tribunal and affirmed by the High  Court. Unlike the other funds like Chief Minister’s Relief Fund,  the amount collected towards Area Development Fund is  retained by the sugar factory itself and utilized as per the  guidelines issued by the Government or the National  Cooperatives Development Corporation. The collective Body  of the Society and its elected representatives take the  decision as to how much amount has to be spent and for  what purposes. The Director of Sugars or other designated  official, no doubt acts in a supervisory capacity to oversee

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that the funds are properly utilized. On that account, it  cannot be said that the collection is made by the Society as  an agent of the Government or the proprietary interest in the  funds is vested with the Government. The conclusion has  been reached by the Tribunal mainly on the basis of  requirement of prior sanction of the Director of Sugars for  incurring the expenditure. Such restriction prescribed in the  larger interest of the Society itself does not in any way  detract from the fact that the Societies concerned do  exercise dominion over the fund and deal with that money  subject of course to the guidelines and restrictions evolved  by the Government. The Tribunal failed to approach the  question in proper perspective on an analysis of the relevant  circulars and orders. The High Court too fell into an error in  invoking the theory of diversion of income at source. The  crux of the matter is that there has never been a diversion of  income to a third party (Government) before it reached the  assessee. The receipts in the form of Area Development Fund  always remained with the assessee.

It could still be contended, as has been contended by  learned senior counsel appearing for the assessees, that the  realizations made by the assessee towards Area  Development Fund are impressed with a specific legal  obligation to spend the monies for specified purposes which  are unrelated to the business of the sugar factory and  therefore such receipts cannot be treated as income of the  assessee. The analogy of collection of amounts towards  charity, as in the case of C.I.T. Vs. Bijlee Cotton Mills  [(1979) 1 SCC 496], has been invoked to substantiate the  argument. It is contended that the realizations towards Area  Development Fund would more or less stand on the same  footing as deposits. The controversy has not been  approached in the light of the above arguments. We do not  consider it appropriate to express our view for the first time,  especially when the determination thereof may depend on  the consideration of certain facts. We therefore leave this  point open for fresh determination by the Tribunal.

       As far as Sugar Cane Development Fund is  concerned, the case of the Revenue seems to stand on a  stronger footing. In the paper-book, we find a Circular dated  18th August, 1986 in which certain directive principles have  been laid down to regulate the expenditure to be incurred  out of Cane Development Fund. The items specified in the  directive principles are (1) green manuring, (2) lift irrigation  schemes, (3) distribution of cane seeds and (4) construction  of new wells or deepening of old wells. The sugar factory is  required to make sure that any project which they want to  undertake out of the Cane Development Fund is technically  and financially sound and to send the proposals in advance  to the Directorate of Sugar for requisite sanction. The  projects will directly benefit the members and augment the  sugarcane production which will incidentally help the Society  in its manufacturing operations. The beneficiaries under the  scheme are no other than the members of the Sugar  Cooperative Society concerned and the advantage of  enhanced production of sugarcane will ultimately be felt by  the Society itself. Unlike the Area Development Fund, the  monies out of Cane Development Fund are not spent for  purposes unconnected with the growth and functioning of the  sugar factory. The Tribunal was inclined to view it as a  ’compulsory levy’ on the depositors collected by the  Government through the agency of sugar factory. This  approach in our view is wholly unsustainable and is in the

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realm of surmise. We do not also see any scope for the  application of principle of diversion of income at source in the  case of collections made towards Cane Development Fund.  The amounts realized on this account undoubtedly reach the  assessee as its income and is utilized by the assessee for the  benefit of itself and its members. As already observed, the  supervisory role of the Directorate of Sugar to ensure that  the amount is properly utilized to promote the objectives  with which the fund was formed, does not make a material  difference on the quality and character of the receipt. We are  therefore of the view that the deductions made out of cane  price towards Cane Development Fund should be treated as  the income of the assessee. We are, of course, not  expressing any view whether it is a permissible deduction  under the provisions of the Income Tax Act. If any such  claim is made, the Tribunal shall examine the same when the  matters are taken up by it to consider the issue of tax  liability in relation to Area Development Fund. Though the item relating to collections towards  Members’ Small Savings Scheme has also been included in  the memorandum of appeal, no argument has been  advanced on this aspect and therefore we need not deal with  this. 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. In the ultimate analysis, the assessees’ appeals are  allowed and the Commissioner’s appeals are partly allowed  to the extent indicated above.