G. Krishnamurthy, President - (1.) THESE appeals were heard by a Special Bench at the instance of the Pune Bench before whom these appeals had come up for hearing in the first instance. The Pune Bench stated that these appeals involve complex points and substantial questions of law involving a large amount of revenue and that there were 91 appeals at various stages involving similar issues and it would, therefore, be proper and fair and also desirable if these appeals are heard by a Special Bench. This suggestion was accepted and the Special Bench was constituted.
(2.) The assessees in these appeals as also in the other appeals who have joined as interveners, as the name suggests, are co-operative sugar factories. The functioning of these sugar factories is regulated by the Government of Maharashtra in the Department of Agriculture and Cooperation. Under an Act called " Maharashtra Co-operative Societies Act, 1960", the Government have taken powers to issue directions to these co-operative societies in public interest and more particularly in the matter of fixation of sugarcane price to be paid to the cultivators. The control of sugar factories is kept under an officer called " Director of Sugar ", who conveys to the sugar factories from time to time the decisions of the Government on matters like collection of money for various purposes and also for the initiation and implementation of various schemes and programmes for the improvement of agriculture and irrigation which will ultimately benefit cane development and, therefore, the cane growers and thus ensure all round development of the economy of the State. The State Government also provided certain share capital with a view to meet the financial requirements of the sugar factories at the initial stages and also helped the sugar factories to obtain term loans from financial institutions like the LIC, IFCI, etc. Thus, socio-economic development schemes also are sought to be initiated and implemented through these co-operative sugar factories. For the internal management of these co-operative societies, they made several bye-laws all of which have to be in accordance with the policy laid down by the State Government through the Ministry of Agriculture and Co-operation. Bye-law No. 60 of the assessee before us governs the fixation of cane price and bye-law No. 61-A deals with collection of what is known and what is mainly in dispute before us, viz., non-refundable deposits from cane-growers along with the sugarcane price. Bye-law No. 61-B provided for the collection of time deposits which are called refundable deposits. As we have mentioned earlier, under the powers taken by the Government, the Director of Sugar issued instructions to these sugar factories to collect funds for what is called (i) area development fund, (ii) cane development fund, (iii) hutments fund, (iv) Chief Minister's Relief Fund, (v) Members' small savings fund, (vi) Late Y. B. Chavan Memorial fund, (vii) Members' non-refundable deposits, (viii) Members' refundable deposits, (ix) Non-members' refundable deposits, and (x) Voluntary deposits of members' fund. Various amounts were collected from cane growers out of the cane purchase price payable to them at various rates fixed by the Government under the instructions given by the Director of Sugar. For the collection of these funds, there is the authority of the Director of Sugar. A question then arose as to whether these deposits are taxable as income of the assessee. In all the previous years other than the assessment years 1984-85, these deposits were not treated as income of the assessee, i.e., trading receipts though collected from the cane growers. But, in the assessment years 1984-85 and 1985-86, which are appeals in I. T. A. Nos. 714 and 715/PN of 1989, respectively, the Commissioner of Income-tax, acting under Section 263 of the Income-tax Act, 1961, set aside the assessments made and directed the Income-tax Officer to make fresh assessments by including these sums as trading receipts of the assessee. The reason that prevailed with the Commissioner of Income-tax for initiating action under Section 263 of the Income-tax Act was the judgment of the Supreme Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd, [1988] 172 ITR 321, wherein the Supreme Court held that the deposits received from cane growers were to be treated as trading receipts. This decision was rendered on the basis of the bye-laws obtaining in that case and the facts of that case. The Commissioner of Income-tax felt that the principle laid down therein was a principle of law of universal application and, applying that principle to the facts of this case, initiated action under Section 263 and, rejecting the arguments advanced by the assessee that the facts of this case were totally distinguishable from the facts in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321, held that these deposits were all taxable. The common reason adduced by the Commissioner of Income-tax to bring to tax these deposits as trading receipts was that these deposits were made by way of deductions in the course of the assessee's trading operations. Since the business of the assessee was of manufacture and sale of sugar from the sugarcane purchased by it, the deductions made by the assessee in the course of the assessee's trading operations became part of the assessee's trading operations. That was the reason to tax all these deposits as trading receipts, that is to say, the deductions made by the assessee from the cane price payable to the cane growers and credit towards these deposits accounts as per the directions of the Director of Sugar and also as per the bye-laws of the assessee. These deductions were regarded as trading receipts irrespective of the purpose for which they were deducted and irrespective of the treatment given to those deposits in the accounts. Since the Commissioner of Income-tax gave the above as a common reason, we are not referring to each individual deposit. He, therefore, set aside the assessments and directed the Income-tax Officer to make fresh assessments by adding these receipts other than the members' voluntary receipts and small savings fund and molasses fund. For the other years, i.e., the assessment years 1986-87, 1987-88 and 1988-89 which are in appeal in I. T. A. Nos. 17, 18 and 19/PN of 1990, the Deputy Commissioner of Income-tax, following the reasons given by the Commissioner of Income-tax for the earlier years, brought to tax these deposits of varying amounts (we are not in this case referring to the amounts of the deposits because that is not necessary for our present purpose). On appeal, the Commissioner (Appeals), Pune, confirmed the inclusion of these deposits as income of the assessee relying upon the orders passed by the Commissioner of Income-tax and also supplemented them by additional reasons which are that the distinction sought to be drawn between the case of the assessee and the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321, before the Supreme Court was more in language than on facts. Recourse was taken to another decision of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, according to which, it was open to the Department to penetrate the tax avoidance scheme, if it was not a genuine tax planning scheme. There was no possibility for refunding the non-refundable deposits as stated in the bye-laws of the appellant itself. The refund of those deposits was almost non-existent over the years, even though the bye-laws provided that the amounts should be refunded under certain stated circumstances, namely, on the resignation of the member or on his death. These deposits were also not saleable or encashable in the market and, therefore, they belonged exclusively to assessee. These deposits were utilised as provided for in the bye-laws for repayment" by the assessee of the term loans taken from financial institutions and also the refund of the share capital provided by the State Government. According to the Commissioner (Appeals), these circumstances strongly proved that these deposits were not refundable at all although they were so nomenclatured. He also referred to a letter issued by the Director of Sugar dated March 13, 1984, which authorised the sugar factories to utilise these deposits for set off of losses incurred by the sugar factories which was exactly similar to the condition prevailing in the case of Bazpur Co-operative Sugar Factory Ltd, [1988] 172 ITR 321, based upon which the Supreme Court laid down that these deposits were taxable. To that extent, the two cases are not dissimilar. In other words, the similarity was established. These deposits had become an integral part of the assessee's resources and, merely because some interest was paid, that does not render these deposits refundable deposits while the facts available on record showed that they were never intended to be refunded nor were they in fact refunded. Thus the depositors did not have any right over any profit generated through these deposits; No fund was earmarked for the repayment of these deposits. These deposits were collected as a percentage of the cane price payable to the suppliers and, therefore, they are like sales tax collections which were held to be taxable by the Supreme Court as trading receipts in the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542. Only the net amount of the deposit was brought to tax, i.e., excess of receipts over payments and this did not put the assessee at any disadvantage and lastly the investments made out of these deposits were the properties of the assessee and therefore the assessee had full domain and control and ownership over these deposits. In regard to the other deposits, namely, area development fund, cane development fund, hutments fund, Chief Minister's fund, Late Y. B. Chavan Memorial fund, the Commissioner (Appeals) held that, in the absence of any earmarked trust fund for their redemption and as these collections were made as an integral part of trading receipts by way of a percentage deduction from the cane price payable to the suppliers, they became trading receipts like sales tax collections. He also invoked Section 43B of the Income-tax Act, 1961, to support the view that they are taxable. For the same reasons, he held that the refundable deposits of non-members were also taxable. For these reasons, the assessments made by the Deputy Commissioner of Income-tax were confirmed. Aggrieved by these orders passed by the Commissioner of Income-tax under Section 263 for the assessment years 1984-85 and 1985-86 and by the Commissioner (Appeals) for the other three years on appeal, the assessee preferred these appeals before the Pune Bench and, on the recommendations of the Pune Bench, these appeals have come up for consideration before us.
(3.) WE have heard the arguments addressed to us by S/Shri S. N. Inamdar, M. M. Parulekar and K. A. Sathe on behalf of the assessee and by S/Shri S. U. Pathak and A. K. Khaladkar on behalf of the Department. WE have had the advantage of a comprehensive and full-dressed discussion and assistance on these points for which we compliment both the advocates appearing on behalf of the assessee and also the Departmental representative who, standing alone on behalf of the Department, faced these legal luminaries in the field. WE shall first deal with the nature of the non-refundable deposits because the taxability of other deposits would depend upon the taxability of these deposits. The attempt on behalf of the Department was to bring the taxability of these deposits within the Rule laid down by the Supreme Court in the case of Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 by drawing similarities and parallels between the bye-laws and the facts of that case with the bye-laws and the facts of the case before us, the attempt on behalf of the assesses being to distinguish the Supreme Court decision. Ultimately, it appeared to us that we should first discern the ratio decidendi of the Supreme Court decision and see whether it applies to the facts of the case before us. It is, therefore, necessary to closely examine the decision of the Supreme Court and then go to the various directions given by the Government of Maharashtra for the collection of these deposits, the bye-laws under which these collections were made and the purpose for which these collections were put off.;