Commissioner Of Income Tax, U.p.-Ii, Lucknow v. Bazpur Co-Operative Sugar Factory Ltd., Bazpur, District Nainital

COMMISSIONER OF INCOME TAX, U.P.-II, LUCKNOW v. BAZPUR CO-OPERATIVE SUGAR FACTORY LTD., BAZPUR, DISTRICT NAINITAL. MAY 6, 1988 B [R.S. PATHAK, C.J. AND M.H. KANIA, J.] Whether a Co-operative Society registered under Co-operative Societies Act, 1912 has power to amend its bye-laws with retrospective effect-Whether the amended bye-law is operative during period previ-ous to accounting year-Whether deposits made by members of the society by way of deductions contemplated under bye-law 50 of the Society were in the nature of permanent liabilities and were capital receipts not liable to be included in taxable income of assessee-Society or whether the deductions were revenue receipts liable to tax. Civil Appeal No. 563 of 1975 filed in the Court was directed against the Judgment of the High Court in an Income-tax Reference. The respondent (assessee) was a registered co-operative Society, carrying on business of manufacture and sale of sugar. The respondent had established a fund called "Loss Equalisation and Capital Redemp-tion Reserve Fund" to which it added, during the relevant acconnting year, a snm of Rs.5,15,863 by deduction from the price payable by the respondent to its members for the supply of sugarcane received from the members. The deductions were made nnder bye-law 50 of the Bye-laws of the society, which was amended later. The Income-tax Officer in assessing the respondent for the relevant assessment year held that the sum above-mentioned represented a revenue receipt and was liable to be included in the taxable income of the assessee. On appeal, the Assistant Commissioner aff'mned the view of the Income-tax Officer, holding that the case had to be decided on the basis of the bye-law as it stood during the relevant acconnting year. The respondent-assessee appealed to the Income-tax Appellate Tribunal, which held that the amended bye-law was operative even during the relevant previous year in view of the retrospective amendment thereof and that in view of the said amended bye-law 50 the deposits made by the members by way of deductions from the price as contemplated in the bye-law 50 were in the nature of permanent liabilities and hence they were capital receipts and not liable to be included in the taxable income of the assessee. The Tribunal directed that the said amonnt of Rs. 5,15,863 be deducted C.I.T. v. BAZPUR SUGAR FACTORY from the taxable income of the assessee. At the instance of the appel-lant, a reference was made to the High Court for the determination of the question whether the Income-tax Appellate Tribunal was right in holding that the amount of Rs.5,15,863 was not a revenue receipt liable to tax. The High Court answered the question in the affirmative and in favour of the assessee. The Commissioner of Income-tax moved this Court by this appeal against the decision of the High Court. The appellant contended that the· amendment of the bye-law 50, which was purported to be made with retrospective effect, could have. no retrospective effect in law. There was ito delegation of power to the respondent society to make bye-laws with retrospective effect. Allowing the appeal, the Court, ਮਈ 6, 1988 Section: CONCLUSION HELD: The respondent society had no authority in law to amend its bye-law 50 with retrospective effect. The amendment of bye-law 50 could not have any retrospective effect and the amounts deducted from the amounts payable to members for the supply of sugarcane, would have to be dealt with as if they were deducted under the provisions of bye-law 50 as it stood in the relevant accounting period. If the provi-sions of the unamended bye-law were applied, it was clear that the amounts deducted by the respondent from the price payable to its mem-hers 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 deduc-tions must be regarded as revenue receiptS and were liable to he included in the taxable income of the respondent. Those receipts could not be regarded as deposits. The receipts -constituted by the deductions were really trading receipts of the assessee society and were liable to be included in !_ts taxable income. The High Courf was in error and the question referred must be answered in favour of the revenm,, [1042A, G-H0044D-E) Civil Appeal No. 564 of 1975 was filed against the judgment of the High Court in an income-tax reference in which the question refer-red for determination was whether a sum credited during ·the year of account to the loss equalisation and capital· redemption reserve fund by deposits received from producer members of the society under clause 50 of its l>ye-laws was in the nature of a revenue receipt assess-able to tax. 1036 SUPREME COURT REPORTS A HELD: In view of its decision in Civil Appeal No. 563 of 1975, the Court answered the question referred in the affirmative aild in favour of the revenue. [1045A) Income-tax Officer, Alleppey v. M.C. Poonnoose and Ors., [1970] 1 S.C.R. 678; Hukam Chand etc. v. Union of India & others, B [ 1973] 1 S.C.R. 896; Co-operative Central Bank Ltd. & Ors. v. Addi-tional Industrial Tribunal, Andhra Pradesh & Ors., [1970] 1 S.C.R. 205; Dr. Indramani Pyarelal Gupta v. W.R. Nathu and others, [1963) 1 S.C.R. 721; Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax West Bengal, [1973) 87 I.T.R. 541 and Punjab Distilling Industries Ltd. v. Commissioner of Income-tax Simla, 11959) 35 I.T.R. 519, referred to. c CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 563 & 564of1975. From the Judgment and Orders dated 15.11.71and9.5.72 of the D Allahabad Higb Court in I.T.R. No. 67 of 1969 and 724 of 1971. B.B. Ahuja, Ms. A Subhashini and K.C. Dua for the Appellants. S.C. Manchanda, Mrs. A.K. Verma and Joel Pares for the Respondents. The Judgment of the Court was delivered by KANIA, J. This is an appeal against the judgment of a Division Bench of the Allahabad Higb Court in Income-tax Reference No. 67 of 1969. The appeal has been filed at the.instance of the Commissioner -f' F ofIncome-tax, U.P .. The relevant facts are as follows:- The respondent ( assessee) is a Co-operative Society registered under the Co-oprative Societies Act, 1912. It carries on the business G of manufacture and sale of sugar and runs at a Mill situated at Bazpur. The relevant assessment year is the assessment year 1961-62, the corresponding to the accounting year 1st July, 1959 to 30th June, 1960, which was the relevant co-operative year. The assessee had established a fund called "Loss Equalization and Capital Redemp-tion Reserve Fund". On the opening day of the year of account, H name)y, 1st July, 1959, a sum of Rs.1,30,196 stood to the credit of 1037 this fund. During the relevant accounting year, the respondent soci-A ety added a sum of Rs.5,15.863 to this fund by deduction from the price payable by the respondent to its members for the supply of sugarcane received from its members. These deductions were made under the provisions of bye-law 50 of the Bye-laws of the respondent society, to which we shall presently come. Bye-law 50 under which B the said amount was deducted from the price payable by the respon-dent to its members for the supply of sugarcane at the relevant time ran as follows:- "There shall be established a Loss Equalisation and Capital Redemption Reserve Fund in the Society. Every producer shareholder shall deposit every year a sum not less than 32 np and not more than 48 np per quintal of the sugarcane supplied by him to the society as may be determined by the Board. After adjusting the losses, if any, in the working year the deposits shall be allowed to accumulate and utilised for repayment of.the initial loan from the Industrial Finance Corporation of India and thereafter for redeeming Government share. The balance of the said deposit after meeting losses shall be used in being converted into share capital in accordance with bye-law 44(xix) and each producer share holder shall be issued shares of the society of the corres-ponding value in lieu thereof." · . During the accounting year, the respondent debited a sum of k_. Rs.2,34,354 to the said fund by adjusting this amount against the loss ' brought forward from the previous year, with the result that at the F close of the said year on 30th June, 1960, the account showed a credit balance of Rs.4,11,705. A meeting of the Sub Committee of the respondent society which was held on August 26, 1964 took the view that bye-law 50 was not clear as to whether the fund in question was perpetual or terminable and also that it was not clear as to how the liability for the loss of the respondent society can be fastened on the G ~ said fund. The Sub Committee recommended an amendment of the bye-law 50 and pursuant to this recommendation, at a general meeting of the respondent held on 30th June, 1965, bye-law 50 was amended to run as follows:- Redemption Reserve Fund in the Society. Every producer A share holder shall deposit every year a sum not less than 32 paise and not more than 48 paise per quintal of the sugarcane supplied by him to the society as may be de-termined by the Board, until the shares to be subscribed by a member are fully paid up. The amounts standing to the B credit of this fund presently or to be credited in future shall \ be used for making the partly paid shares fully paid up. The balance of the said account shall be refunded to the mem-bers concerned soon after the present Joan from the Indust-rial Finance Corporation of India is repaid, whereafter the fund shall cease to exist. This amended bye-Jaw shall be deemed to have come into force from 1st July, 1958." It may be mentioned here that the respondent society came into existence in 1958-59 and the original bye-Jaws came into force from 1st D July, 1958. The Income-tax Officer in assessing the respondent for the relevant assessment year held that the said sum of Rs.5,15,863 rep-resented a revenue receipt and was liable to be included in the taxable income of the assessee. On appeal the Appellate Assistant Commis-.gioner affirmed the view of the Income-tax Officer holding that the case has to be decided on the basis of the bye-law as it stood during the E relevant accounting year. The respondent assessee went in appeal to the Income-tax Appellate Tribunal which took the view that the amended Clause 50 must be held to be operative even during the relevant previous year in view of the retrospective amendment thereof and that in view of the said amended bye-law 50 the deposits made by the members by way of deductions from the price as contemplated in F bye-law 50 were in the nature of permanent liabilities and hence they were capital receipts and not liable to be included in the taxable income of the respondent assessee. The tribunal allowed the appeal of the assessee and directed that the said amount of Rs.5, 15 ,863 should be deducted from the taxable income of the assessee as determined by the Income-tax Officer. At the instance of the Commissioner a refer-G ence was made to the Allahabad High Court and the question framed for determination of the High Conrt was as follows:- "Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the amount of Rs.5,15,863 was not a revenue receipt liable to tax?" The Division Bench of the High Court which disposed of the said A reference agreed with the view of the Tribunal that the bye-law 50 of the bye-laws of the society was validly amended with retrospective effect and that retrospective effect must be given to that bye-law. The Division Beuch took the view that in view of the amended bye-law the amount of Rs.5,15,863 was not an amount which the society could deal with as its income or according to its will and hence the source of the B receipt was diverted. The High Court answered the question referred to it in affirmative and in favour of the assessee. The present appeal is directed against the said decision of the High Court. Before coming to the contentions urged by the respective counsel, it will be useful to take note of the relevant statutory provi-C sions and the relevant rules. The respondent society was registered under the Co-operative Societies Act-of 1912. Qause (a) of Section 2 of the said Act of 1912 defines "bye-laws" as registered bye-laws for the time being in force and includes a registered amendment of the bye-laws. Section 6 deals with the conditions for the registration of a co-operative society. Section 43 confers upon the State Government D power to make rules for registered societies to carry out the purposes of the said Act. The relevant portion of clause (c) of sub-Section (2) of Section 43 runs as follows: "In particular and without prejudice to the generality of the foregoing power, such rules may prescribe the matters E in respect of which a society may or shall make bye-laws, and the procedure to be followed in making; altering and abrogating bye-laws, and the conditions to be satisfied prior t_o such making, alteration or abrogation." Clause (e) of Section 43(2) runs as follows:- "In particular and without prejudice to the generality of the foregoing power, such rules may regulate the manner in which funds may be raised by means of shares or deben-tures or otherwise;''