# SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD v. C.l.T., KOLHAPUR AND ORS

- **Citation:** [2004] Supp. 4 S.C.R. 155
- **Court:** Supreme Court of India
- **Decided:** 2004-09-08
- **Bench:** P. Venkatarama Reddi, Ruma Pal
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/siddheshwar-sahakari-sakhar-karkhana-ltd-v-c-l-t-kolhapur-and-ors-20164
- **Pages:** 34

## Headnote

B
Income Tax Act, 1961-Compulsory deductions from cane growers
made by sugar co-operative societies-repayment on occurrence of specified
event of repayment of govt. loans-Held, is a deposit-Events not uncertainFurther Held, deposits belong to members-Dominion with such members. C
Refundable and Non-Refundable deposits-Payment of interest credited
to individual member's accounts-Refund on the happening of certain
event-Held, such clear deposits liable to be excluded from the income of
the co-operative societies.
Maharashtra Co-operative Societies Act, 1960-Deduction made by
assessee societies from cane growers-Towards various funds such as Chief
Minister's Funds-Money collected for any on behalf of the person to whom
it is payable-Held, such receipts should not be treated as income of the
asses see.
Cane Development Fund-Collected for utilization for benefit of itself
and members-Held, is income taxable in the hands of the assessee societies.
The Appellants are registered Cooperative Societies, governed by
D
E
the provisions of Maharashtra Co-operative Societies Act, 1960, are its F
members are predominantly sugarcane farmers. The sugarcane growing
areas in the State of Maharashtra have been divided into different
territorial units and each area has a factory for manufacturing sugar
and the sugarcane growers within the territory are obliged to sell their
sugarcane only to the said factory. The bye-laws provided for deduction
of amounts towards refundable and non-refundable deposits from the G
cane price payable to the grower members. In addition to that pursuant
to the orders passed or circulars issued by the State Government/Director
of Sugars, amounts were 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 were utilized H
155
156
SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.
A either by the Society directly as per the guidelines 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.
B
After judgment in Bazpur Co-operative's case 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 deduction by exercising power under Section 263 of the Income
Tax Act. As far as the following years were concerned, namely, assessment
C 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
D Appellate Tribunal by the Sugar Co-operative Societies 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. The Tribunal referred 15 questions to the
E High Court at Bombay under Section 256(1) of the Income Tax Ac~. The
High Court decided 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 holding that the non-refundable and refundable deposits are
F 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.
· ,
Before this Court both assessees and Revenue filed ap

## Text

_Characters 0–39,909 of 84,491. This is a partial read: ask again with offset=39909 for what follows._

SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD.
A
v.
C.l.T., KOLHAPUR AND ORS.
SEPTEMBER 8, 2004
[P. VENKATARAMA REDDI AND RUMA PAL, JJ.]
B
Income Tax Act, 1961-Compulsory deductions from cane growers
made by sugar co-operative societies-repayment on occurrence of specified
event of repayment of govt. loans-Held, is a deposit-Events not uncertainFurther Held, deposits belong to members-Dominion with such members. C
Refundable and Non-Refundable deposits-Payment of interest credited
to individual member's accounts-Refund on the happening of certain
event-Held, such clear deposits liable to be excluded from the income of
the co-operative societies.
Maharashtra Co-operative Societies Act, 1960-Deduction made by
assessee societies from cane growers-Towards various funds such as Chief
Minister's Funds-Money collected for any on behalf of the person to whom
it is payable-Held, such receipts should not be treated as income of the
asses see.
Cane Development Fund-Collected for utilization for benefit of itself
and members-Held, is income taxable in the hands of the assessee societies.
The Appellants are registered Cooperative Societies, governed by
D
E
the provisions of Maharashtra Co-operative Societies Act, 1960, are its F
members are predominantly sugarcane farmers. The sugarcane growing
areas in the State of Maharashtra have been divided into different
territorial units and each area has a factory for manufacturing sugar
and the sugarcane growers within the territory are obliged to sell their
sugarcane only to the said factory. The bye-laws provided for deduction
of amounts towards refundable and non-refundable deposits from the G
cane price payable to the grower members. In addition to that pursuant
to the orders passed or circulars issued by the State Government/Director
of Sugars, amounts were 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 were utilized H
155
156
SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.
A either by the Society directly as per the guidelines 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.
B
After judgment in Bazpur Co-operative's case 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 deduction by exercising power under Section 263 of the Income
Tax Act. As far as the following years were concerned, namely, assessment
C 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
D Appellate Tribunal by the Sugar Co-operative Societies 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. The Tribunal referred 15 questions to the
E High Court at Bombay under Section 256(1) of the Income Tax Ac~. The
High Court decided 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 holding that the non-refundable and refundable deposits are
F 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.
· ,
Before this Court both assessees and Revenue filed appeals. The
G appellant-assessee contended that the High Court overlooked certain
important aspects of the case and laid 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; that the assessee Society was always treating
H the deposits as the money belonging to the members (cane growers),
SIDDHESHWAR SAHAKARI SAKHARKARKHANA LTD. v. C.I.T.
157
credited the deducted amounts to the individual accounts of the members A
on which interest at fixed rate was being credited; that the society treated·
the deposits as its liability towards the members/depositors, that under
the bye-laws there is sufficient indicia that the members own the deposits;
that the deposits are not utilized for carrying on the trading operations
by the society, but they are utilized only for the discharge of capital B
liabilities; that if at all, they are capital receipts, but not revenue receipts;
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.
The department contended that the true nature and character of C
receipt has to be taken into account not withstanding the nomenclature
used or the accounting method adopted; it is the origin or genesis of the
receipt that should be taken into account but not the manner in which
the amount is utilized; that the deduction is from out of the price payable _
to the member and as a result thereof the rectipts on account of deposits D
bring about savings in the cost of raw material is a strong indication
that it is a trading receipt; 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; that 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; that 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;
that crediting of interest is not decisive and it practically remains on
paper, that there is practically no difference between the on-amended
bye-law which was considered,. in Bazpur Co-op. Sugar case and the byelaws in the present case; that the Board of Directors may very well
refuse to convert the d~posits into shares in exercise of its discretion on
the ostensible ground that the financial position of the Society does not
permit such conversion and that such discretion negates the existence
E
F
of liability to convert the deposit into shares; and that the possibility of G
return of the deposit (by way of conversion into shares) depends on
uncertain events and the repayment remains to be a remote possibility.
Disposing of the appeals, the Court
HELD : 1. Once the loans of the description mentioned in the bye- H
158
SUPREME.COURT REPORTS [2004] SUPP. 4 S.C.R.
A
laws which were outstanding on the date the deposit was made are
repaid, 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. It would be appropriate to read the expression
B
'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. (177-E, F, G)
C
2. 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 ~nclined to think, that
the separate identity of the deposited amounts should be kept up~ The
D 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 th(!
E
F
depositor. The existence of such liability is an antithesis to the idea of
ownership of the money by the Society. [177-G, H; 178-A, BJ
Corpus Juris Secundum (Vol. 26A) -
Deposits; Words and Phrases
(Permanent Ed'l. Vol. 39-A): Shanti Prasad v. Director of Enforcement,
(1963) 2 SCR 297, referred to.
3. It is wrong to assume that the events giving rise to refund are
uncertain. The repayment of.Joans-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
G accrue to the depositor. The obligation which had been in in~hoate 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
H transferability of the deposit to another member and the provision for
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T.
159
refund of the deposited amount to the member in case of cessation of A
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 B
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. [180-D, E, F, G)
4. The assessee-Society had no absolute dominion over the impugned C
deposits. Firstly, the manner of user of the deposit is limited by the byelaws. 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' D
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 E
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 F
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. [181-D, E, F, G)
G
Commissioner of Internal revenue v. Indianapolis Power & Light
Company, 493 US 203, relied on.
5. Meeting the financial commitments of the Society may be one of H
160
SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
. .
\
A 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
B finding. Though deducted from the cane price, the refundable deposits
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. [182-D, E; 183-E, F]
c
CIT v. Bazpur Co-Op. Sugar Factory Ltd., [1988) 3 SCC 553 and
Explained and Shree Nirmal Commercial Ltd. v. CIT, 193 ITR 694,
distinguished.
D
6. 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. The mere
E 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" arid despite
such compulsion, "in the eye of law, the agreement is freely made",
Therefore the non-refundable and refundable deposits cannot be treated
F as the income of the assessee-Societies. (183-G; H; 184-A, C, D]
Hyderabad Karnatal<a Education Society v. Registrar of Society and
Others, [2000) 1 SCC 566 (Vide paragraph 28); The Cooperative Central
Bank Ltd & Ors. v. The Additional Industrial Tribunal, Andhra Pradesh,
[1969) 2 SCC 43; N.C. Sanyal v. Calcutta Stock Exchange Association Ltd.,
G [1971) t SCC 57 and Andhra Sugars Ltd. v. State of A.P., AIR (1968) SC
599, referred to.
7. As regards the Chief Minister's Relief Fund, Late Y.B. Chavan
Memorial Fund, Hutment Fund the assessee merely acted as an agent
H in collecting the amounts and remitting the same to the Government/
SIDDHESHW AR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T.
161
Trustees. In truth and in substance, the money collected by the assessee A
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". 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 B
landless poor inhabitants within the area of operation of the sugar factory.
The Court agrees with the conclusion reached by the Tribunal and the
High Court that these receipts should not be treated as income of the
assessee. (185-D, E, F)
CIT v. Sheela/ Das, 41 ITR 367, relied on.
c
8. 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. D
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 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 E
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 F
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. [186-E, F, G; 187-A)
G
9. Unlike the Area Development Fund, the monies out of Cane
Development Fund are not spent for purposes unconnected with the H
162
SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
A 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 is wholly
unsustainable and is in the realm of surmise. There is no scope for the
application of principle of diversion of Income at sou~ce in the case of
B 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
C the quality and character of the receipt. Therefore the deductions made
out of cane price towards Cane Development Fund should be treated as
the income of the assessee. [187-G, H; 188-A, BJ
CIVIL APPELLATE WRISDICTION : Civil Appeal Nos. 6973-6975
D of2000.
E
F
From the Judgment and Order dated 4.5.2000 of the Bombay High
Court in LT.A. No. 405, 407 and 411 of 2000.
WITH
C.A. Nos. 6976-7026, 7028-7038, 7461-7465/2000, 177-269, 79237924/2001, 4293, 4878 of 2002 and 1013-1017/2002, 2122, 2544, 27172718, 2958, 3339-3348, 3429-32, 3378-3380, 4008-09, 3996-4002, 35893591, 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, 507377, 7399-7400/2002, 469-470/2003, 5867, 5868, 5869, 5870, 5871-5875,
5876, 5877, 5878, 5879/2004.
Ashok Desai, Uday Lalit, Gupal Jain, R.N. Karanjawala, Ms. Nandini
G Gore, Ashish Jha, Vivek Sharma, Ms. Jasmine Dhamakewala and Ms. Manik
Karanjawala for the Appellant.
R.P. Bhatt, P. Kapur, Ms. Neera Gupta, Ranbir Chandra, Rajiv Tyagi,
B. V. Bairam Das and K.J. John for the Respondents.
H
The Judgment of the Court was delivered by
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDD!, J.] 163
P. VENKATARAMA REDDI, J. : In all these appeals, the question A
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.
B
The appellant in each of the appeals carries on the business of C
manufacturing sugar. Its members are predominantly sugarcane farmers.
According to the policy of the Government, the sugarcane growing areas in
the State of Maharashtra have been divided into different territorial units.
Each unit has a factory for manufacturing sugar and the sugarcane growers
within the territory are obliged to sell their sugarcane only to the said factory. D
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 E
it did. The bye-laws provided for deduction of amounts towards refundable
and non-refundable deposits from the cane price payable to :he 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 F
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 Gow~rnment or
trustees for socio-economic development of the operational area. Till the
assessment year 1984-85, these collections/deposits were not treated as G
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 I 988, the Commissioner of Income Tax revised the
assessments for the assessment years I 984-85 and 1985-86 in respect of nonH
164
SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
A 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 198889, assessment orders were passed by the Income-tax authorities treating the
non-refundable deposits, refundable deposits and other deductions as trading
B receipts. The Commissioner of Income Tax (Appeals) dismissed the appeals
filed by the assessees. All these orders were challenged before the Income
Tax Appellate Trib~nal 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
C 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 So.ciety from the
D 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.
E 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
F
G
H
so far as the decision went against it.
As the assessees' appeals tum much on the 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.
·-
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. [REDDI,J.] 165
Such transporting expenses will differ in the case of every member A
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 B
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
Joans 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 nonmembers 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 nonrefundable deposits at the rate not less than Rs. I 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 Joan 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 Jong term Joans 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 Govemm'lnt share
c
D
E
F
capital and the term loans taken from l.F.C.I. and ·other G
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 H
166
SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
A
capital and long term loans taken from other 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 Karkhani The Karkhana has to collect the
B
deposits until it holds Government share capital and has other
loans outstanding.
(3)
On a member ceasing to be a member as provided in bye-law
No. 22, the amount standing to the credit of his account as a
non-refundable deposit may be transferred to any other
'-
c
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
D
financial position of the society. However, the total amount of
such refund in any year shall not exceed Ill 0th of the total nonrefundable deposits standing at the beginning of the year.
(4)
The amount of deposits so collected shall be utilized for the
repayment of tenn loans taken for the capital expenditure as
E
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
F
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
G
it necessary, they shall have a right to c91lect the time deposits for
a period not exceeding five years, out of the cane price payablfl to
the cane supplier at a prescribed rate per ton of sugarcane supplied
as may be de1cided by them every year. These deposits will be used
by the society only for the purpose of expansion programme and
capital expeno1iture and interest paid on . these deposits will not
H
exceed 12 percent.
SJDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDD!, J.] 167
Now, we shall take up the controversial issues for consideration.
A
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 B
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 frori:i
the customer as part of trading receipts, those receipts would constitute C
income, observed that the nature and object of the collection is equally
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 D
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 E
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 F
accounts of the depositors and they were shown as liability in the balancesheet. It means that the 'deposits' were not regarded as assessee's own
money.
The Tribunal distinguished the case of Bazpur Co-operative Sugars G
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:
H
A
B
168
SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
"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
· C 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".
D
E
F
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
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
G 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:
H
"In our opinion, in a matter of this type, the correct test to be applied
•
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. [REDD!, J.) 169
is whether the amounts sought to be deducted reached the assessee A
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 v. B
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 C
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 app.,,llant-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-Society 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.
D
The society treated the deposits as its liability towards the members/ F
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. G
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 aot 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.
H
A
B
170
SUPREME COURT REPORTS [2004) SUPP. 4 S.C.R.
Justifying the findings of the High Court, it is contended by the learned
senior counsel appearing for the respondent - 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 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 theteofthe 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.
C
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
D 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
E
F
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 v. 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
G relevant point of time, the bye-law read as follows:
.... H
"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 R~!. quiniai"'of''ll'ie-"SUgarcaQe supplied by him to the
·~·----- ·-..,, .. ·~--·-·
.
SIDDHESHWARSAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. [REDD!, J.] 171
society as may be determined by the Board. After ac.ijusting the A
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."
B
(*emphasis supplied) C
The bye-law was amended with retrospective effect from 1.7 .1958.