SHRI KAMREJ VIBHAG SAHAKARI KHAND UDHYOG MANDLI LTD.,,SURAT vs. THE INCOME TAX OFFICER, WARD-5(4),, SURAT

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM आयकरअपीलसं./ITA No.1735 & 1740/AHD/2015 (�नधा�रणवष� / Assessment Years: (2008-09) (Virtual Court Hearing) Shri Sayan Vibhag Sahakari Khand Vs. The ITO, Ward-5(4), Udyog Mandli Ltd., Surat. At & Post Sayan, Tal: Olpad, Dist: Surat-395003. �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AAAAS4058F (Assessee) (Respondent) Shri Kamrej Vibhag Sahakari Khand Vs. The ITO, Ward-5(4), Udyog Khand Mandli Ltd., Surat. N.H. No.8, Navi Pardi, Tal: Kamrej, Dist: Surat, Surat-395003. �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AAAAS4817N (Assessee) (Respondent) Assessee by : Shri Mehul K. Patel, AR Revenue by : Shri Sita Ram Meena, Sr. DR सुनवाईक�तार�ख/ Date of Hearing : 25/02/2022 घोषणाक�तार�ख/Date of Pronouncement : 17/05/2022 आदेश / O R D E R PER DR. A. L. SAINI, ACCOUNTANT MEMBER: Captioned two appeals filed by different assessees, pertaining to Assessment Year (AY) 2008-09, are directed against the separate orders passed by the Learned Commissioner of Income Tax (Appeals), which in turn arise out of separate penalty orders passed by the Assessing Officer under section 271(1)(C) of the Income Tax Act, 1961 [hereinafter referred to as the “Act”].

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog on this preliminary issue. Having regard to the reasons given in the petitions, we condone the delay and admit both these appeals for hearing. 3. Since, the issues involved in all the appeals are common and identical; therefore, these appeals have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as the facts narrated in No.1735/AHD/2015, for assessment Year 2008-09, have been taken into consideration for deciding the above appeals en masse.

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog The total amount credited to these above funds was Rs.50,33,133/-. The assessing officer treated Rs.50,33,133/- as income of the assessee and added to the total income of the assessee. The assessing officer also held that assessee has consciously and deliberately furnished inaccurate particulars of income of Rs.50,33,133/- therefore, the assessee has become liable for penalty u/s 271(1)(c) of the Income Tax Act, 1961, hence the assessing officer imposed penalty under section 271(1) (c ) of the Act, to the tune of Rs.15,37,079/-, on account of furnishing inaccurate particulars/concealment of income.

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog 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 Sugar Factory Ltd.'s case (supra) 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. 36. Viewed from the point of view of the primary purpose of deposit—a test which has been formulated by this Court in Bazpur Co-operative Sugar Factory Ltd.'s case (supra) though without much of discussion, we are of the view that the answer cannot be the same as in Bazpur Co-operative Sugar Factory Ltd.'s case (supra). 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: "...on 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. 37. The High Court relied on the decision of the same High Court in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694(Bom.) in order to hold that the payment of interest on the deposited amount is not inconsistent with the 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, Page | 4

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog 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. 38. 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. 39. 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- 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. 40. 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. 41. 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 Karnataka Education Society v. Registrar of Societies [2000] 1 SCC 566 (vide paragraph 28). In Co-operative Central Bank Ltd. v. Additional Industrial Tribunal [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 members inter se (vide paragraph 14 in Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. [1971] 1 SCC 50. That apart, the mere fact that the contract has to be entered into in Page | 5

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog 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. v. State of Andhra Pradesh 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. 42. 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. 43. 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 Sugars and other authorities contained in the paper book submitted to the Income-tax Appellate Tribunal. 44. 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 v. Sheetaldas Tirathdas [1961] 41 ITR 367 (SC). 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

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog 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. 45. 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. 46. 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 co-operatives will be supplementing the efforts of the Government in promoting the socio-economic development of the area. The Board of Directors of the co-operative 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 Directors of Sugar 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 79A of the Maharashtra State Co-operative 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 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. 47. 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

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog 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 CIT v. Bijlee Cotton Mills (P.) Ltd. [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. 48. 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 Co-operative 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 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. 49. We therefore allow the appeals of the Commissioner of Income-tax partly in respect of the amounts collected by the respondent-Societies towards Cane Development Fund and Area Development Fund. We declare that the amount collected towards Cane Development Fund shall be treated as the income of the

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog 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. 50. In the ultimate analysis, the assessees' appeals are allowed and the Commissioner's appeals are partly allowed to the extent indicated above.”

1735 & 1740/AHD/2015/AY.2008-09 Kamrej Vibhag Sahakari & Sayan Vibhag Khand Udyog deal with other arguments (regarding initiation of penalty on both limbs/no definite charge) of ld Counsel.

Registry is directed to place one copy of this order in all appeals folder / case files.

Order is pronounced in the open court on 17/05/2022 by placing the result on the Notice Board as per Rule 34(5) of the Income Tax (Appellate Tribunal) Rule 1963.

Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat / �दनांक/ Date: 17/05/2022 SAMANTA Copy of the Order forwarded to: 1. The Assessee 2. The Respondent 3. The CIT(A) 4. Pr.CIT 5. DR/AR, ITAT, Surat 6. Guard File

By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat