Shri Chh. Shahu Sh. Sakhar Karkhana Ltd., Kolhapur V. ITO, Kolhapur

ITA 566/PUN/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3221 (ITAT-PUNE)
• Duration Of Justice: 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 1996-1997
• Appeal Filed On: 16-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A S SINGH
• Keywords: Diversion of income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI I.C. SUDHIR AND SHRI D. KARUNAKARA RAO ITA NO. 566/PN/10 (ASST. YEAR 1996-97) SHRI CHH. SHAHU SAHAKARI SAKHAR KARKHANA LTD., JAYSINGRAO GHATGE BHAVAN, TAL. KAGAL, DIST. KOLHAPUR PAN NO. AAAAS1032M .... APPELLANT VS. ITO, (TDS) KOLHAPUR . RESPONDENT ASSESSEE BY : NONE REVENUE BY : SHRI A.S. SINGH ORDER PER D. KARUNAKARA RAO AM THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER O F THE CIT(A), KOLHAPUR DATED 29/12/2009 FOR A.Y 1996-97. ALL THE FOUR GRO UNDS RELATE TO AN ISSUE OF ALLOWABILITY OF THE AMOUNT OF RS 7,84,377/- OF AREA DEVELOPMENT FUND. DURING THE PROCEEDINGS, LD COUNSEL BROUGHT TO OUR NOTICE THE BINDING JUDGMENT OF THE HONBLE JURISDICTIONAL BOMBAY HIGH COURT IN THE CASE OF CIT V SHRI CHATRAPATI SAHAKARI SAKHAR KARKAHANA LTD (2000) 245 ITR 498, WHERE THE HONBLE HIGH COURT HAS TAKEN A VIEW ON THE ISSUE OF AREA DEVELOPME NT FUND, WHICH WAS REVERSED BY THE HONBLE SUPREME COURT BY SAYING THAT TH E HIGH COURT FELL INTO AN ERROR IN INVOKING THE THEORY OF DIVERSION OF INCOME AT S OURCE. THE HONBLE SUPREME COURT HAS HELD THAT THE CRUX OF THE MATTER IS T HAT THERE HAS NEVER BEEN A DIVERSION OF INCOME TO A THIRD PARTY (GOVERNMENT) BEF ORE IT REACHED THE ASSESSEE. IT WAS FURTHER HELD BY THE HONBLE SUPREME C OURT THAT RECEIPTS IN THE FORM OF AREA DEVELOPMENT FUND ALWAYS REMAINED WITH THE ASSESSEE. THE HONBLE ITA NO. 566/PN/10 A.Y: 1996-97 PAGE 2 OF 5 SUPREME COURT HAS DEALT WITH THE QUESTION OF ASSESSAB ILITY OF THE AREA DEVELOPMENT FUND IN THE HANDS OF THE ASSESSEE BY OB SERVING AND HOLDING AS UNDER : THE AREA DEVELOPMENT FUND, AS WE SEE FROM THE VAR IOUS COMMUNICATIONS PLACED IN THE PAPER BOOK, IS MEANT T O ENABLE THE CO- OPERATIVE SUGAR FACTORIES TO RENDER SOCIO-ECONOMIC SERVICES IN THE AREA OF OPERATION. THE AREA DEVELOPMENT PROGRAMMES MAY COVE R AGRICULTURAL EXTENSION, IRRIGATION FACILITIES, EDUCATIONAL AND M EDICAL SERVICES, DEVELOPMENT OF ANIMAL HUSBANDRY AND POULTRY, DROUGH T RELIEF WORK AND SO ON. BY DOING SO, THE SUGAR CO-OPERATIVES WILL BE SU PPLEMENTING THE EFFORTS OF THE GOVERNMENT IN PROMOTING THE SOCIO-ECONOMIC DEVELOPMENT OF THE AREA. THE BOARD OF DIRECTORS OF THE CO-OPERATIVE SO CIETY ARE REQUIRED TO PASS A RESOLUTION SPECIFYING THE DETAILS OF EXPENDI TURE PROPOSED TO BE INCURRED FROM OUT OF THE AREA DEVELOPMENT FUND. THE Y SHOULD OBTAIN THE SANCTION OF THE DIRECTOR OF SUGAR FOR INCURRING SUC H EXPENDITURE. SUCH INFORMATION IS ALSO REQUIRED TO BE PLACED BEFORE TH E GENERAL BODY OF THE SOCIETY AND THE APPROVAL TO BE OBTAINED FROM THE GE NERAL BODY. ON JUNE 21, 1988, THE AGRICULTURE AND CO-OPERATION DEPARTME NT OF THE GOVERNMENT OF MAHARASHTRA FRAMED CERTAIN DIRECTIVE PRINCIPLES LAYING DOWN THE MODALITIES OF UTI LIZATION OF AREA DEVELOPMENT FUNDS. THE SAID ORDER WAS ISSUED IN EXERCISE OF THE POWER U/S 79A OF THE MAHARASHTRA STATE CO-OP ERATIVE SOCIETIES ACT. THIS ORDER PASSED DURING THE MIDDLE OF THE LAST ASS ESSMENT YEAR RELEVANT TO THESE APPEALS GIVES STATUTORY BASIS FOR THE ALREADY EXISTING PRACTICE. IT IS DIFFICULT TO EQUATE THIS FUND TO THE OTHER CATEGORI ES OF FUNDS, AS HAS BEEN DONE BY THE TRIBUNAL AND AFFIRMED BY THE HIGH COURT . UNLIKE THE OTHER FUNDS LIKE CHIEF MINISTERS RELIEF FUND, THE AMOUNT COLLECTED TOWARDS AREA DEVELOPMENT FUND IS RETAINED BY THE SUGAR FACT ORY ITSELF AND UTILIZED AS PER THE GUIDELINES ISSUED BY THE GOVERNMENT OR T HE NATIONAL CO- OPERATIVES DEVELOPMENT CORPORATION. THE COLLECTIVE BODY OF THE SOCIETY AND ITS ELECTED REPRESENTATIVES TAKE THE DECISION A S TO HOW MUCH AMOUNT HAS TO BE SPENT AND FOR WHAT PURPOSES. THE DIRECTOR OF SUGAR 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 TH E GOVERNMENT OR THE PROPRIETARY INTEREST IN THE FUNDS IS VESTED WITH TH E GOVERNMENT. THE CONCLUSION HAS BEEN REACHED BY THE TRIBUNAL MAINLY ON THE BASIS OF THE REQUIREMENT OF PRIOR SANCTION OF THE DIRECTOR OF SU GAR FOR INCURRING THE EXPENDITURE. SUCH RESTRICTION PRESCRIBED IN THE LAR GER 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 DE AL WITH THAT MONEY SUBJECT OF COURSE TO THE GUIDELINES AND RESTRICTION S EVOLVED BY THE GOVERNMENT. THE TRIBUNAL FAILED TO APPROACH THE QUE STION IN PROPER PERSPECTIVE ON AN ANALYSIS OF THE RELEVANT CIRCULAR S 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 NE VER BEEN A DIVERSION OF INCOME TO A THIRD PARTY (GOVERNMENT) BEFORE IT REAC HED THE ASSESSEE. THE RECEIPTS IN THE FORM OF AREA DEVELOPMENT FUND ALWAY S REMAINED WITH THE ASSESSEE. IT COULD STILL BE CONTENDED, AS HAS BEEN CONTENDED BY LEARNED SENIOR COUNSEL APPEARING FOR THE ASSESSES, THAT THE REALIZATIONS MADE BY THE ASSESSEE TOWARDS AREA DEVELOPMENT FUND ARE IMPR ESSED WITH A SPECIFIC LEGAL OBLIGATION TO SPEND THE MONIES FOR S PECIFIED PURPOSES WHICH ITA NO. 566/PN/10 A.Y: 1996-97 PAGE 3 OF 5 ARE UNRELATED TO THE BUSINESS OF THE SUGAR FACTORY AND THEREFORE SUCH RECEIPTS CANNOT BE TREATED AS INCOME OF THE ASSESSE E. THE ANALOGY OF COLLECTION OF AMOUNTS TOWARDS CHARITY, AS IN THE CA SE OF CIT VS. BIJLEE COTTON MILLS (1979) 116 ITR 60; (1979) 1 SCC 496, H AS BEEN INVOKED TO SUBSTANTIATE THE ARGUMENT. IT IS CONTENDED THAT THE REALIZATIONS TOWARDS AREA DEVELOPMENT FUND WOULD MORE OR LESS STAND ON T HE 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 DETERMINATI ON THEREOF MAY DEPEND ON THE CONSIDERATION OF CERTAIN FACTS. WE THEREFORE , LEAVE THIS POINT OPEN FOR FRESH DETERMINATION BY THE TRIBUNAL. 2. ON READING THE AFORESAID DECISION, IT IS, THUS, CL EAR THAT THE FUND COLLECTED BY THE ASSESSEE TOWARDS AREA DEVELOPMENT FUND BY DEDU CTING THE SAME FROM CANE PRICE IS NOT MADE BY THE ASSESSEE SOCIETY AS AN AGENT OF THE GOVERNMENT OR THE PROPRIETARY INTEREST IN THE FUNDS IS VESTED WITH TH E GOVERNMENT. IT HAS ALSO BEEN HELD BY THE HONBLE SUPREME COURT THAT THE RESTRIC TION OF REQUIREMENT OF PRIOR SANCTION OF THE DIRECTOR OF SUGAR FOR INCURRING THE E XPENDITURE OUT OF THE AREA DEVELOPMENT FUND IS PRESCRIBED ONLY IN THE LARGER I NTERESTS OF THE SOCIETY ITSELF AND 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 GOV ERNMENT. THE HONBLE SUPREME COURT HAS, THUS, TAKEN A VIEW THAT THE THEORY OF DIVERSION OF INCOME AT SOURCE IS NOT APPLICABLE TO THE AREA DEVELOPMENT FUND , WHICH IS ALWAYS REMAINED WITH THE ASSESSEE. IT IS, THUS, CLEAR THAT THE AREA D EVELOPMENT FUND IS TO BE TREATED AS THE RECEIPTS IN THE HANDS OF THE ASSESSEE SOCIETY LIABLE TO BE INCLUDED AS INCOME IN ITS HAND. HOWEVER, THE HONBLE SUPREME C OURT HAS HELD THAT IT IS STILL OPEN TO THE ASSESSEE TO SHOW THAT IF AREA DEV ELOPMENT FUND IS IMPRESSED WITH A SPECIFIC LEGAL OBLIGATION TO SPEND MONIES FO R SPECIFIED PURPOSES WHICH ARE UNRELATED TO THE BUSINESS OF THE SUGAR FACTORY. IN TH E RECENT PAST, THIS ISSUE WAS DISCUSSED AT LENGTH BEFORE THIS BENCH IN THE CASE OF LOKNETE BALASAHEB DESAI SAHAKARI SAKHAR KARKHANA LTD. BEARING ITA NO. 1538 TO 1 541/PN/2007 ORDER DATED 27.02.2009 IT WAS FINALLY CONCLUDED AS UNDER:- ITA NO. 566/PN/10 A.Y: 1996-97 PAGE 4 OF 5 12. THUS THE HONBLE COURT HAS CONCLUDED THAT AS R EGARDS AREA DEVELOPMENT FUND, THE MATTER TO BE REMITTED TO THE ITAT, PUNE BENCH FOR FRESH DETERMINATION SUBJECT TO THE OBSERV ATIONS MADE IN THE JUDGMENT. IN OUR HUMBLE UNDERSTANDING IN THE A BSENCE OF THE RELEVANT FACTS THE HONBLE COURT WAS NOT IN A POSIT ION TO DECIDE THE ISSUE AND CONTROVERSY PRIMARILY BECAUSE OF THE REAS ON THAT THE SAID CONTROVERSIES WERE NOT APPROACHED BY THE LOWER COUR TS IN THE LIGHT OF THE MAIN ARGUMENTS THAT THE REALIZATION OR COLLE CTION WAS NOT AN INCOME AT ALL BEING IMPRESSED WITH A SPECIFIC LEGAL OBLIGATION. THEREFORE, THE LORDSHIPS HAVE SAID THAT IT WAS NOT APPROPRIATE TO EXPRESS THEIR VIEW FOR THE FIRST TIME, ESPECIALLY W HEN THE DETERMINATION MAY DEPEND ON CERTAIN CONSIDERATION O F FACTS NOT SO FAR BROUGHT ON RECORD. DEFINITELY, THE FACTS WERE ABOUT THE SCHEME UNDER WHICH THE AREA DEVELOPMENT FUND WAS COLLECTED AND THE OBLIGATION ATTACHED WITH THE SAID SCHEME EARLIER WH EN THIS ISSUE HAD COME UP BEFORE THE RESPECTED CO-ORDINATE BENCHES EI THER IT WAS REMITTED BACK TO THE FILE OF THE A.O OR IT WAS CONC LUDED WITH FOR WANT OF INFORMATION IN THOSE PARTICULAR CASES, THE AREA DEVELOPMENT FUND WAS AN INCOME OF THE ASSESSEE, SINCE IT WAS NOT PRO VED OTHERWISE IN THE ABSENCE OF AVAILABILITY OF FUNDS. IN ONE OF TH E DECISION AS CITED FROM THE SIDE OF THE REVENUE, IT IS TRUE THAT THE R ESPECTED CO-ORDINATE BENCH HAS TAKEN A VIEW THAT ONCE THE HONBLE SUPREM E COURT HAS PRONOUNCED THAT THERE WAS NO DIVERSION OF INCOME AN D THE RECEIPT REMAINED WITH THE ASSESSEE THEREFORE, THE FUND WAS INCOME IN THE HANDS OF THE ASSESSEE; BUT WE HAVE TO STATE WITH RE STRAIN THAT THE VIEW SO EXPRESSED WAS ONLY ONE PART OF THE DECISION OF THE HONBLE SUPREME COURT AND THE OTHER PART OF THE DECISION OF THE HONBLE SUPREME COURT HAS ESCAPED THE ATTENTION, AS IS EVID ENT FROM THE RELEVANT PARAGRAPHS REPRODUCED ABOVE FROM THE SAID ORDER OF THE HONBLE SUPREME COURT. WHATEVER WAS IMPLICIT IN TH E QUOTED DECISION OF THE HONBLE SUPREME COURT, AN ATTEMPT W AS MADE BY US TO MAKE IT EXPLICIT. OUR ENDEAVOR IN THIS JUDGMENT IS SIMPLY TO GIVE GUIDELINES EXPLICITLY TO THE AUTHORITIES BELOW TO C ORRECTLY FOLLOW THE VERDICT OF THE HONBLE APEX COURT. FOR THAT REASON WE HEREINBELOW SET FEW QUESTIONS SO AS TO FIND THE ANSWER BY THE R EVENUE AUTHORITIES: I. WHAT WAS THE EXACT NATURE OF THE SCHEME PARTICUL ARLY IN THE LIGHT OF SECTION 79A OF MAHARASHTRA CO-OPERATIVE SO CIETIES ACT? II. WHAT WAS THE OBLIGATION OF THE SUGAR FACTORY IM POSED AND ATTACHED WITH THE SAID COLLECTION? III. WHAT WAS THE RESOLUTION IN EACH CASE BY THE BO ARD OF DIRECTORS AND THE MANNER IN WHICH THE RESOLUTION WA S FOLLOWED BY THE SUGAR FACTORY AND FINALLY WHETHER A REA DEVELOPMENT FUND WAS UTILISED BY SUGAR FACTORIES; A ND IV. WHETHER AREA DEVELOPMENT FUND RECEIPTS WERE AT ALL AN INCOME OF THE ASSESSEE SPECIALLY IF IT WAS IMPRESSE D WITH A SPECIFIC LEGAL OBLIGATION TO BE SPEND FOR SPECIFIED PURPOSES. IN THE BACKGROUND OF THE ABOVE ORDER OF THIS VERY B ENCH, IT IS NOW CLEAR THAT THE A.O HAS TO EXAMINE THE POINTS REFERRED SUP RA AND THEREUPON DECIDE THE ISSUE OF ADMISSIBILITY OF EXPENDITURE ON ACCOUNT OF AREA DEVELOPMENT. WITH THESE DIRECTIONS THIS GROUND OF T HE ASSESSEE MAY BE TREATED AS ALLOWED ONLY FOR STATISTICAL PURPOSE. ITA NO. 566/PN/10 A.Y: 1996-97 PAGE 5 OF 5 3. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED ONLY FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH OCTOBER, 2010. SD/- SD/- (I.C. SUDHIR) (D.KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBE R PUNE DATED THE 28 TH OCTOBER, 2010 R COPY OF THE ORDER IS FORWARDED TO : 1. ASSESSEE 2. ITO, (TDS), KOLHAPUR 3. CIT(A), KOLHAPUR 4. CIT-I, KOLHAPUR 5. D.R. ITAT B BENCH BY ORDER ASSISTANT REGISTRAR I.T.A.T PUNE