Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 91,476 being a portion of the sale proceeds of molasses, which was accounted for and kept separately for the construction of storage tanks, cannot be included in the assessee’s income?

High Court Of Madras

CIT vs. Salem Co-Operative Sugar Mills Ltd

Section 4

Asst. Year 1975-76

Thanikkachalam & N.V. Balasubramanian, JJ.

Tax Case No. 1196 of 1984

10th September, 1996

Counsel Appeared

C.V. Rajan, for the Applicant : P.P.S. Janarthana Raja, for the Respondent

THANIKKACHALAM, J.:

Pursuant to the direction given by this Court, dt. 1st Nov., 1982, in T.C. P. No. 106 of 1982, the Tribunal referred the following question for the opinion of this Court, under s. 256(2) of the IT Act, 1961, hereinafter referred to as the Act : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 91,476 being a portion of the sale proceeds of molasses, which was accounted for and kept separately for the construction of storage tanks, cannot be included in the assessee’s income?”

The assessee is A co-operative society, carrying on business in manufacture and sale of sugar, the relevant accounting year ending on 30th Sept., 1974, for the asst. yr. 1975-76. The selling price of molasses, a bye-product obtained in the process of refining sugar, is fixed by the Molasses Control (Amendment) Order, dt. 6th Feb., 1972. This Order provides that a portion of the sale price should be accounted for and funded separately for providing adequate storage facilities in accordance with the guidelines prescribed in this behalf by the Government. The Schedule to the Order has specified varying rate per quintal for different grades of molasses, for determining the quantum to be transferred from the sale proceeds to the storage fund. The transfer made by the assessee in conformity with the statutory obligation cast by the above order during the accounting year amounted to Rs. 91,476, which the assessee claimed as deduction in the computation of its total income. The ITO, however, rejected this claim without assigning any reason, but presumably on the ground that the sum in question was only an appropriation of a reserve and not expenditure incurred by the assessee wholly for the purpose of its business.

On appeal, before the CIT(A), the assessee relied on the order dt. 31st Aug., 1977, of the Madras `B’ Bench (Camp Madurai) of the Tribunal in ITA No. 1675/Mad/1976-77 and in the case of Madura Sugars Ltd. for the asst. yr. 1973-74. In this order, a similar deduction was held to be allowable in the view that although the storage fund is to be used for the purpose of constructing storage tanks, which may ultimately become the assessee’s property, the ratio of the Supreme Court in CIT vs. Tollygunge Club Ltd. 1977 CTR (SC) 195 : (1977) 107 ITR 776 (SC) : TC 38R.506, would apply to the amounts transferred to the fund inasmuch as the assessee vis-a-vis these amounts was in the position of a trustee under a legal obligation to utilise them for the specific purpose as stated in the Ordinance. In determining the actual cost under s. 43(1) of the storage tank, the portion of the cost met directly or indirectly by utilisation of such funds would have to be deducted as far as the assessee is concerned, but the deduction claimed was admissible. However the CIT(A) was of the view that the ratio of the decision of the Supreme Court cited supra would not apply to the facts of this case. Accordingly, he confirmed the view taken by the ITO. Aggrieved, the assessee filed a second appeal before the Tribunal. The Tribunal, following the earlier order of the Tribunal, in the case of Madura Sugars Ltd. (supra) held the assessee’s claim for deduction should be allowed.

4. Before us, the learned standing counsel appearing for the Department submitted that while the assessee collecting the amount for Molasses storage fund and construction of molasses storage tank would amount to application of income, there is no diversion of fund. After the assessee received the amount, thereafter the said amount was utilised for the construction of the tank. Hence, it cannot be said that the income was diverted before reaching the hands of the assessee. According to the learned standing counsel, the ownership over the tank vests with the assessee, even though the tank was constructed in accordance with the instructions given under the Molasses Control (Amendment) Order. Even if the molasses storage fund was collected under an obligation as per the Molasses Control (Amendment) Order, the amount collected cannot be said to be not reaching the hands of the assessee and the assessee has no ownership over such collection. According to the learned standing counsel the decision of the Bombay High Court in Somaiya Organo Chemicals Ltd. vs. CIT (1994) 117 CTR (Bom) 1 : TC 38R.697, will no longer be the good law in view of the later decision of the Supreme Court in Associated Power Co. Ltd. vs. CIT (1996) 130 CTR (SC) 393 : (1996) 218 ITR 195 (SC) : TC 38R.675. According to the learned standing counsel in the abovesaid decision of the Bombay High Court, the Bombay High Court was not correct in stating that they are not concerned with the question of ownership of the fund, especially when the Supreme Court in the above cited decision categorically held that ownership of the fund is important in deciding the question whether there is any diversion by overriding title. So also the learned standing counsel submitted that the decision of the Karnataka High Court in CIT vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690 (Kar) : TC 38R.694, would no longer be the good law in view of the later decision of the Supreme Court in (1996) 130 CTR (SC) 393 : (1996) 218 ITR 195 (SC) cited supra, wherein the Supreme Court held that even if under a statutory obligation cast on the assessee; the molasses storage fund was created, that would not render the income collected for the construction of molasses storage tank would amount to diversion of income by overriding title. According to the learned standing counsel after the molasses storage tank was constructed, that would go to add to the capital structure of the assessee. The learned standing counsel also relied upon the decision reported in CIT vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) : TC 38R.619, Vellore Electric Corporation Ltd. vs. CIT 1977 CTR (Mad) 380 : (1977) 109 ITR 454 (Mad) : TC 38R.686, Jiwajirao Sugar Co. Ltd. vs. CIT (1988) 73 CTR (MP) 51 : (1989) 176 ITR 182 (MP) : TC 38R.696, CIT vs. South Arcot District Co-operative Society (1981) 127 ITR 467 (Mad) : TC 38R.689 and Moti Lal Chhadami Lal Jain vs. CIT (1991) 94 CTR (SC) 195 : (1991) 190 ITR 1 (SC) : TC 38R.630 in order to support his contention that the assessee is not entitled to the deduction of the amount claimed under the head `molasses storage fund’ on the ground that at the source there is no diversion of income by overriding title.

5. On the other hand, the learned counsel appearing for the assessee submitted that when the assessee created the molasses storage fund, in order to fulfil the legal obligation cast upon it under the provisions of the Molasses Control (Amendment) Order, there is diversion of income by overriding title. Under the Molasses Control (Amendment) Order, the Central Government fixed the price for the spirit and alcohol sold by the assessee and along with the price, the Central Government also directed the assessee to collect a particular amount for the purpose of creating a molasses storage fund in order to construct a molasses storage tank. Out of the amount belonging to the fund, the assessee was directed to construct a molasses storage tank for the purpose of controlling the sale of alcohol and the denatured spirit. If the assessee failed to collect the amount as instructed by the Central Government and if the assessee failed to construct the tank, the Central Government itself would construct the tank with the help of the Public Works Department and collect the charges for such construction from the assessee. After the tank was constructed, it has got to be operated only under the instructions from the Central Excise Department. Therefore, the assessee has no right to make use of either the molasses storage fund or the tank constructed for its own purpose. Everything has got to be done after the permission is obtained from the Central Government. Therefore, according to the learned counsel appearing for the assessee, the assessee has no domain over the molasses storage fund and it also cannot be said that the tank constructed out of the molasses storage fund absolutely belong to the assessee. Therefore, the learned counsel appearing for the assessee submitted that when the amount for molasses storage fund was collected along with the sale price, it never reaches the hands of the assessee, since the assessee is collecting the same as the agent of the Central Government. Therefore, there is diversion of title even at the source before the amount has reached the hands of the assessee. In order to support his submissions, the learned counsel appearing for the assessee heavily relied upon the decision of the Bombay High Court in (1994) 117 CTR (Bom) 1 cited supra. So also the learned counsel for the assessee placed reliance on the decision of the Karnataka High Court in (1992) 198 ITR 690(Kar) (supra) and pointed out that the special leave petition filed as against the decision of the Karnataka High Court in (1992) 198 ITR 690 (Kar) cited supra was dismissed by the Supreme Court. In the abovesaid decision, it was submitted that the Supreme Court was concerned with contingent liabilities. According to the learned counsel appearing for the assessee, the decision rendered by the Supreme Court in (1996) 130 CTR (SC) 293 : (1996) 218 ITR 195 (SC) cited supra, will not be applicable to the facts arising in the present case. The learned counsel further pointed out that the special leave petition filed as against the decision of the Karnataka High Court in (1992) 198 ITR 690 (Kar) cited supra, was rejected by the Supreme Court. Therefore, in view of the decision of the Karnataka High Court as well as the Bombay High Court cited supra, the assessee is entitled to deduction of the amount contributed towards molasses storage fund, since there is diversion of title even when the amount was collected for the molasses storage fund along with the price fixed by the Central Government.

6. We have heard both the learned standing counsel appearing for the Department as well as the learned counsel appearing for the assessee. The assessee, a Co-operative Society, carrying on business, in manufacture and sale of sugar, collected amounts along with the sale price of alcohol for creating molasses storage fund in accordance with the Molasses Control (Amendment) Order, 1972, dt. 6th Feb., 1972. The selling price of molasses, a by-product, obtained in the process of refining sugar, is fixed by the Molasses Control (Amendment) Order of 6th Feb., 1972. Such amount, during the accounting year, amounted to Rs. 91,476. According to the assessee, since the amount collected for molasses storage fund was diverted even at the source by overriding title, the molasses storage fund is deductible while computing the total income of the assessee. According to the assessee, the molasses storage fund was created in accordance with the statutory obligation created by the Molasses Control (Amendment) Order of 6th Feb., 1972. While granting relief to the assessee, the Tribunal followed an earlier order of its own in the case of Madura Sugars Ltd. (supra), whereunder it is stated as under. The Molasses Control (Amendment) Order, 1972 is dt. 6th Feb., 1972. Under the abovesaid Order, the sale price of molasses is fixed in the Schedule. Thereafter, it was provided that a part of the price should be accounted for and funded separately and to be utilised for erection of adequate storage facilities, in accordance with the orders that may be issued by the Government from time to time. The relevant portion of the Schedule reads as under : Grade of Molasses Price Grade I Re. 1.00 per 100 kilograms. Note: For quality of molasses below Grade III, the price will be Re. 0.60 for every 40 Kilograms reducing sugar content thereof. (ii) From the price fixed under the abovesaid Schedule for different grades of molasses, the belowmentioned amounts shall be accounted for and funded separately and shall be utilised for erection of adequate storage facilities in accordance with the orders that may be issued by the Central Government for the regulation of such funds: Grade I Molasses Rs. 0.33 per 100 kilograms. Grade II Molasses Rs. 0.27 per 100 kilograms. Grade III Molasses Rs. 0.20 per 100 kilograms. Below Grade III Molasses Rs. 0.20 for every 40 kilograms of reducing sugar content therein.

7. A similar question came up for consideration before the Bombay High Court in Somaiya Organo Chemicals Ltd. vs. CIT (supra). According to the facts arising in that case under the Ethyl Alcohol (Price Control) Amendment Order, 1971, issued by the Government of India, Ministry of Petroleum and Chemicals and Mines and Metals, dt. 30th Jan., 1971 in exercise of the powers conferred by s. 18G of the Industries (Development and Regulation) Act, 1951, the Central Government prescribed certain maximum ex-distillery prices of ethyl alcohol as set out therein. Under Cl. (2) of this order a table is provided which prescribes such maximum ex-distillery prices of ethyl alcohol. Item 2 of this table deals with rectified spirit conforming to ISI. Standard No. 323 – 1959 naked, for equivalent volume at 100 per cent V/V strength. The maximum price prescribed is Rs. 227.75 per kilo litre. There is a note at the bottom of this table which is relevant. It is as follows: Note : These prices include six rupees (Rs. 6) per kilo litre for putting up adequate storage facilities. This amount shall be separately funded and shall be utilised in accordance with the orders that may be issued for the regulation of such funds’.As per this note, the amount which is to be funded separately has to be utilised in accordance with orders that may be issued. Such an order has been issued by the Government of India, Ministry of Petroleum & Chemicals and is dt. 26th March, 1973. The order states that it is in pursuance of the note to cl. 2 of the Ethyl Alcohol (Price Control) Order and that the order is for the utilisation of the separate fund set up for erection of storage facilities for molasses and alcohol. The order, inter alia, requires every distillery to set aside the amount specified in the said note under a separate head of account called `Storage Fund for Molasses and Alcohol Account’. The order provides for return being submitted to the Excise Commissioner by the management of the distillery showing, inter alia, the amount funded in terms of the

said order during the period as specified therein. There is also a provision for a monthly return and an annual return showing, inter alia total production of alcohol, the total sale of alcohol and the amount credited to the said account during the year certified as correct by the chartered accountant of the distillery and the total amount so funded. Clause 5 of the Order provides that the amount credited to the said account shall not be used by the distillery for any purpose other than for the construction or erection of storage facilities for molasses and alcohol. It further provides under sub-cl. (2) that when any amount is intended to be withdrawn from the said account, the management of the distillery shall submit proposals to the Commissioner who shall, after satisfying himself about the proposals, permit withdrawal. Under cl. 6, the storage tanks for molasses are required to be as per the specifications formulated by the Indian Standard Institution and made of pucca covered masonary as may be decided by the Commissioner. The storage tanks for alcohol are required to be as per specifications laid down by the Commissioner. Under cl. 7, the Commissioner in consultation with the distillery is required to fix a time schedule within which storage tanks both for molasses and for alcohol shall be constructed by the distillery. Sub-cl. (2) provides that in the event of failure of the distillery to construct storage tanks within the prescribed time schedule, the Commissioner shall have the work executed through the public works department of the Central Government, or the State Government or a private agency and the management of the distillery shall place at the disposal of the Commissioner the amount required for executing the work. Clause 9 provides that the amount available in the account shall be maintained as a separate account in the bank of the distillery.

8. On these facts, a question arose whether the amount deducted from the sale proceeds of alcohol and spirit and transferred to storage fund for molasses and alcohol account under the Ethyl Alcohol (Price Control) Amendment Order, 1971, is an admissible deduction. While answering this question, the Bombay High Court held as under : “There is, therefore, a statutory diversion at source of Rs. 6. This amount of Rs. 6 does not reach the hands of the assessee as income at all from the sale of rectified spirit. It is collected as a part of the price, but is earmarked for the storage fund. It cannot, therefore, be considered as a part of the income of the assessee. The assessee is under a statutory obligation to set aside this amount of Rs. 6, per kilo litre for the said fund at the inception. There is, therefore, a clear diversion at source of this amount. In any event, the assessee has lost dominion over this amount of Rs. 6 per kilo litre. It has to be utilised in the manner statutorily laid down; even the storage facilities have to be constructed as per the direction of the Excise Commissioner and the Excise Commissioner has the power if the assessee fails to construct storage tanks in the prescribed time schedule, to do the work and obtain the said amount from the assessee. Hence, this amount over which the assessee has lost its dominion cannot be considered as a part of its real income or its profit. It is, therefore, required to be excluded under s. 28 of the IT Act, 1961, for the purpose of calculation of income.” This decision was arrived at by the Bombay High Court after taking into consideration the decisions rendered in the following cases: (1) CIT vs. Pandavapua Sahakara Sakkare Karkhane Ltd. (1992) 198 ITR 690 (Kar) : TC 38R.694 and (2) Pandavapura Sahakara Sakkare Karkane Ltd. vs. CIT (1988) 74 CTR (Kar) 54 : (1988) 174 ITR 475 (Kar) : TC 38R.690 applied; (3) Keshkal Co-operative Marketing Society Ltd. vs. CIT (1986) 55 CTR (MP) 229 : (1987) 165 ITR 437 (MP) : TC 38R.690; (4) Cochin State Power & Light Corporation Ltd. vs. CIT (1974) 93 ITR 582 (Ker) : TC 16R.184; (5) Amalgamated Electricity Co. Ltd. vs. CIT (1974) 97 ITR 334 (Bom) : TC 38R.684 and (6) CWT vs. Bombay Suburban Electricity Supply Ltd. (1976) 103 ITR 384 (Bom) relied on; (7) Jiwajirao Sugar Co. Ltd. vs. CIT (1988) 73 CTR (MP) 51 : (1989) 176 ITR 182 (MP) : TC 38R.696 dissented from; (8) CIT vs. Calcutta Electric Supply Corporation Ltd. (1982) 138 ITR 111 (Cal) distinguished.

9. The Karnataka High Court had an occasion to consider a question of similar nature in CIT vs. P. Sahakara Sakkare Kharkane Ltd. (supra) wherein the Karnataka High Court held that the utilisation of the amount in question would be only as per the directions that might be issued by the Government from time to time. The right to the fund got diverted from the hands of the assessee by virtue of the Molasses Control Order. The amount was not assessable. As against the decision of the Karnataka High Court cited supra, the Supreme Court has dismissed the special leave petition filed by the Department [vide (1992) 195 ITR (St.) 136].

10. In CIT vs. Sitldas Tirathdas (supra) the Supreme Court, while considering diversion by overriding title, held that : “The true test for the application of the rule of diversion of income by an overriding charge is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation

cannot be said to be a part of the income of the assessee. Where the obligation income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied”.

11. While explaining the decision rendered in (1961) 41 ITR 367 (SC) cited supra, the Supreme Court in Moti Lal Chhadami Lal Jain (supra) held as under : “The expressions `reaches the assessee’ and `has been received’ have been used by the Supreme Court in the case of Sitaldas Tirathdas (1961) 41 ITR 367 (SC) not in the sense of the income being received in cash by one person or another. What the Court exphasised is the nature of the obligation by reason of which the income becomes payable to a person other than the one entitled to it. Where the obligation flows out of an antecedent and independent title in the former (such as, for example, the rights of dependants to maintenance or of coparceners on partition, or rights under a statutory provision or an obligation by a third party and the like), it effectively slices away a part of the corpus of the right of the latter to receive the entire income and so it would be a case of diversion. On the other hand, where the obligation is self-imposed or gratuitous, it is only a case of application of income”.

12. However, the learned standing counsel appearing for the Department submitted that all the decisions cited by the learned counsel appearing for the assessee were rendered before rendering of the decision of the Supreme Court in Associated Power Co. Ltd. vs. CIT (supra). According to the facts arising in that case, by reason of the provisions of the Electricity (Supply) Act, 1948 and the Sixth Schedule thereto, the assessee appropriated a sum of Rs. 46,460 out of its Revenues to a contingent reserve account during the previous year, relevant to the asst. yr.

1973-74. This amount was claimed by the assessee as a deduction in the computation of its total income or the purpose of the income-tax. The ITO rejected the claim. The AAC allowed the assessee’s appeal, relying upon the decision of the Kerala High Court in the case of Cochin State Power & Light Corporation Ltd. vs. CIT (supra) and of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd. vs. CIT (supra). The Revenue filed an appeal before the Tribunal and cited the judgment of the Madras High Court in Vellore Electric Corporation Ltd. vs. CIT (supra). The Tribunal relied on the decision of the Madras High Court, which had disagreed with the view taken by the Kerala and Bombay High Courts. It set aside the order of the AAC, but referred the following question to the Court. “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 46,460 transferred to the contingencies reserve account is not allowable as a deduction in arriving at the taxable business income of the assessee-company ?” While answering this question, the Supreme Court held as under : “Clause II of the Sixth Schedule to the Electricity (Supply) Act, 1948, requires the electricity company to create certain reserves if its clear profit exceeds a reasonable return. Monies standing to the credit of the contingencies reserve which are set apart to be utilised by the electricity company for the purpose set out in cl. V of the Sixth Schedule are to meet expenses or recoup loss of profits arising out of accidents, strikes or other circumstances which the electricity company could not have prevented; to meet expenses on replacement or renewal of plant or works; and for payment of compensation required by law for which no other provision has been made. These are all expenses which the electricity company has to incur. The reservation is made so that money is always available for meeting these expenses and the supply of electricity is not interrupted. For the same reason, payments out of the contingencies reserve can be made only with the State Government’s approval. It is particularly noteworthy that the electricity company can make good from out of the contingencies reserve even a loss of profit arising out of strikes, accidents and other circumstances over which it has no control. There can be no doubt, in the circumstances, that the monies in the contingencies reserve belong to the electricity company, and are not diverted away from it. It is the electricity company which has to invest the same appropriated to the contingencies reserve. The investment would be in its name and it would be the owner thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position. The fact that on the purchase of the undertaking the contingencies reserve has to be handed over to the purchaser and maintained as such is only to make explicit the obvious, for the reserve is for the purposes of the undertaking that is being transferred. There is nothing in the statute to suggest that the amount standing to its credit cannot be taken into consideration in arriving at the purchase price, for the purposes of sale to a State, Board or Government, a different statute lays down how the price is to be fixed. The amount credited to the contingencies reserve is not diverted by reason of an overriding obligation or title and, in determining the business profits of the assessee, it must be taken into account. The amount appropriated to the contingencies reserve is set apart to meet

possible exigencies. It is not a provision for known, existing liabilities. It is not deductible as business expenditure.”

In the abovesaid decision, the Supreme Court pointed out that the application of the doctrine of diversion of income by reason of a overriding title is quite inappropriate. The doctrine applies when by reason of the overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed. In the present case, the statute requires the electricity company to create certain reserves if its clear profit exceeds a reasonable return (clause II, Sixth Schedule). Again, the contingencies reserve is to be created from existing reserves or from `the Revenues of the undertaking’. This clearly indicates that the monies which have to be put in the contingencies reserve reach the electricity company and are not diverted away from it. The Supreme Court further pointed out that the amount standing to the credit of the contingencies reserve could not be said to be an amount which has gone out of the hands or control of the assessee and become the subject-matter of ownership of somebody else. The statute had imposed certain restrictions over the disposal of that amount by the assessee but that did not mean that the amount had ceased to be money belonging to the assessee. What was meant by diversion of profits by overriding title was that a part of the profits earned by an assessee was not really his profit, but it belonged to somebody else and the assessee had no title. As far as the contingencies reserve was concerned, the statute had clearly indicated the purposes for which it could be spent and those purposes clearly showed that they were connected with the business of the assessee and it was the assessee, which would have to utilise it. Equally the fact that the assessee was required to invest the amount standing to the credit of the contingencies reserve in securities authorised under the Indian Trusts Act, 1882, did not in any way affect this position. The assessee continued to be the owner of the investment and, however limited be the benefit the assessee might derive from such an investment it could not be held that the investment was not the assessee’s investment, but somebody else’s investment.

Before the Supreme Court, the assessee contended that there was no distinction between the `consumers’ benefit reserve, which has been considered by the Supreme Court in the case of Poona Electric Supply Co. Ltd. (1965) 57

ITR 521 (SC) : TC 13R. 287, and the `contingencies reserve’. The Supreme Court pointed out that the argument is fallacious. The emphasis is on the fact that the amount paid into the consumers’ benefit reserve has to be returned to the consumers. Therefore, it is as if the Electricity company had not received the amount, which it was obliged to return. The amount that it was obliged to return was not a part of its income. This is altogether different from the case of monies standing to the credit of the contingencies reserve, which are set apart to be utilised by the electricity company for the purposes set out in cl. V of the Sixth Schedule. These are to meet the expenses or recoup loss of profits arising out of accidents, strikes or other circumstances, which the electricity company could not have prevented, to meet expenses on replacement or renewal of plant or works and for payment of compensation required by law for which no other provision has been made. These are all expenses, which the Electricity company has to incur. Reservation is made so that money is always available for meeting these expenses and the supply of electricity is not interrupted. For the same reason, payments out of the contingencies reserve can be made only with the State Government’s approval. It is particularly noteworthy that the electricity company can make good from out of contingencies reserve even a loss of profit arising out of strikes, accidents and other circumstances over which it has no control. There can be no doubt, in the circumstances, that the monies in the contingencies reserve belong to the Electricity company. But according to the facts arising in the present case, the assessee was directed to collect certain amount along with the price fixed for alcohol under the Molasses Control (Amendment) Order. Therefore, even before collection of the amount as directed by the Central Government under Molasses Control (Amendment) Order, the assessee was directed to keep this amount under a separate account under the head molasses storage fund’. Though the assessee collects this amount under the statutory obligation, it does not belong to the assessee, but it belongs to the molasses storage fund. The assessee cannot utilise the amount in the said fund for other purposes. Fund has got to be utilised for the purpose of constructing a storage tank as per the specifications given by the Central Government. If the assessee fails to collect such amount as directed by the Molasses Control (Amendment) Order, the Central Government will construct a molasses storage tank and recoup the construction charges from the assessee. Therefore, there is diversion of title even at the source of the income collected as per the directions given under the Molasses Control (Amendment) Order. But according to the facts arising in the decision of the Supreme Court cited supra, the amount will be standing to the credit of the contingency reserve. The reserve is only for the utilisation by the assessee at a later stage when such contingency arises. Therefore, the assessee is having control and domain over

the contingency reserve created according to the statute. After the amount was realised, the assessee was asked to create a contingency reserve as against the facts arising in the present case where the assessee was directed to collect separately amount for molasses storage fund, over which the assessee has no control or domain. Further since it is not a provision for loan or existing liabilities, the amount appropriated to the contingency reserve is not deductible as business expenditure according to the Supreme Court. For the foregoing reasons, we are of the opinion that the judgment of the Supreme Court rendered in (1996) 130 CTR (SC) 393 : (1996) 218 ITR 195 (SC) cited supra, will not be applicable to the facts arising in this case.

According to the learned Standing counsel, the Bombay High Court was not correct in stating in (1994) 117 CTR (Bom) 1 (supra) that the question of ownership of the fund is not relevant. What the Bombay High Court said was that inasmuch as the assessee was not having any right over the amount in the molasses storage fund and the assessee has lost all the domain over such amount, it was held that the amount collected by way of molasses storage fund had gone out of the hands of the assessee, which is not available for its utilisation, unlike the contingencies reserve occurring in the decision of the Supreme Court in (1996) 130 CTR (SC) 393 : (1996) 218

ITR 195 (SC) cited supra. In the present case also, after the amounts were collected as per the directions given by the Molasses Control (Amendment) Order, it goes to the molasses storage fund over which the assessee has no control and domain. Inasmuch as the assessee cannot utilise the same for its own business purpose, we have also here to hold that there is diversion by overriding title at the source itself. Even before the amount reaching the hands of the assessee was directed to transfer the same towards the molasses storage fund. Therefore, the collection made by the assessee belongs to the molasses storage fund.

16. Reliance was placed upon the decision of the Madhya Pradesh High Court in Jiwajirao Sugar & Co. Ltd. vs. CIT (supra), wherein the Madhya Pradesh High Court held that where the assessee received a part of the price of molasses and was credited by the assessee to a separate fund to discharge an obligation imposed upon the assessee by the Molasses Control Order, there is no diversion of income, but of application of income. While considering this decision, the Bombay High Court in (1994) 117 CTR (Bom) 1, cited supra, held as under: “With respect to the Madhya Pradesh High Court we do not agree with the above view taken by the Madhya Pradesh High Court; and we respectfully agree with the view taken by the Karnataka High Court in the case of (1992) 198 ITR 690 (Kar) (supra). In order to decide whether the amount forms a part of the income of the assessee or not, we have to see whether it can be considered as a part of its real income or a part of its commercial profits. When the price is statutorily controlled and a fixed portion of that price is statutorily earmarked for the creation of a fund it has to be kept in a separate account for the utilisation of which the assessee has to abide by the directions which may be given to the assessee by the Registrar. There is, in our view in such a situation a clear diversion of a portion of the amount so earmarked at source. It does not at any time form a part of the assessee’s real income which it can utilise at will. The question of ownership of the fund in this contest is not relevant.”

17. It also remains to be seen that the Madhya Pradesh High Court was not correct in stating that the molasses storage fund vests with the assessee. But it is not so. After the amount was collected along with the sale price of the alcohol, the assessee was directed to transfer that collection to the credit of molasses storage fund. Thereafter the assessee cannot utilise the amount from the molasses storage fund for any other business purpose of his own. Once the amount collected by the assessee is credited to the molasses storage fund, then the molasses storage fund would come under the control of the Central Government. The assessee cannot meddle with the same. Under such circumstances, it is not correct to state that the molasses storage fund vests with the assessee.

18. The decision of the Madras High Court in Vellore Electric Corporation Ltd. vs. CIT (supra) also relates to the contingency reserve created by the assessee pursuant to the obligation imposed on the assessee by the Electricity (Supply) Act, 1948. This decision was approved by the Supreme Court in (1996) 130 CTR (SC) 393 : (1996) 218 ITR 195 (SC) cited supra. The reasons given by us hereinabove to state that the judgment of the Supreme Court in (1996) 130 CTR (SC) 393 : (1996) 218 ITR 195 (SC) (supra) would not be applicable to the facts of this case; would equally apply to this decision reported in 1977 CTR (Mad) 380 : (1977) 109 ITR 454 (Cal), cited supra. Therefore, this decision also would render no assistance to the Department to contend that there is no diversion of income by overriding title, but only there is application of income.

19. The decision reported in CIT vs. South Arcot District Co-op. Society (supra) of this Court, would also be not applicable to the facts of this case, for the reasons stated above, since the contingency reserve was created in accordance with s. 62 of the Tamil Nadu Co-operative Societies Act, 1961. Thus, on a careful consideration of the facts arising in this case, in the light of the judicial pronouncements cited supra, we hold that the Tribunal was correct in coming to the conclusion that there is diversion of income by overriding title at the source when the assessee collected certain amount along with the sale price of alcohol as per the obligation imposed by the Molasses Control (Amendment) Order.

20. However, the learned counsel appearing for the assessee submitted that the amount collected as per the direction given in the Molasses Control (Amendment) Order, is also entitled to be deducted as revenue expenditure, while computing the total income of the assessee. In order to support this contention, the learned counsel appearing for the assessee, relying upon the decision reported in (1996) 130 CTR (SC) 393 : (1996) 218 ITR 195 (SC) cited supra, submitted that inasmuch as the Supreme Court pointed out that deduction cannot be given as revenue expenditure, since the provision is not for loan and existing liabilities and inasmuch as in the present case the expenditure for constructing a molasses storage tank is for loan and existing liabilities, which should be allowed as revenue expenditure under s. 37 of the Act. Reliance was also placed upon the decision of the Calcutta High Court in CIT vs. New India Sugar Mills Ltd. (1992) 107 CTR (Cal) 280 : (1994) 206 ITR 212 (Cal) : TC 17R.874, wherein the Calcutta High Court held that contribution to molasses storage reserve fund for the purpose of constructing a storage tank would be revenue in nature and accordingly allowable as such under s. 37 of the Act. So also, relying upon the decision of the Calcutta High Court in CIT vs. Sijua (Jharriah) Electric Supply Co. Ltd. (1983) 37 CTR (Cal) 319 : (1984) 145 ITR 740 (Cal) : TC 38R.687, the learned counsel appearing for the assessee submitted that inasmuch as the expenditure incurred for constructing the storage tank is wholly and exclusively laid down for the purpose of the business, it should be allowed as revenue expenditure. On the other hand, the learned standing counsel appearing for the Department, by placing reliance upon the passage occurring at page 2451 in the Text Book of Sampath Iyengar’s Law of Income-tax, submitted that inasmuch as the storage tank would ultimately come to the assessee, it would go to increase the capital asset and hence the expenditure incurred for constructing the storage tank cannot be allowed as revenue expenditure. The fact remains that no specific question was referred by the Tribunal on this aspect. The counsel for the assessee submitted that inasmuch as the question postulates that the expenditure incurred by the assessee for constructing the storage tank is allowable as a deduction, it is open to the assessee to claim deduction under s. 37 of the Act. It also remains to be seen that while rendering its order, the Tribunal followed an earlier order of its own in ITA No. 1675/Mad/1976-77, dt 31st Aug., 1977 in the case of Madura Sugars Ltd., Pandiarajapuram (supra). In the decision rendered by the Tribunal in the abovesaid case, the Tribunal has not considered the allowability of the claim as revenue expenditure under s. 37 of the Act. The Tribunal was concerned only with regard to the question whether there is any diversion of income by overriding title. Therefore, the Tribunal while deciding the present case has not applied its mind for allowing the expenditure claimed for constructing the storage tank as revenue expenditure under s. 37 of the Act. In the absence of an order by the Tribunal on this aspect and in the absence of the specific question raised in this regard it is not possible for us to consider the assessee’s submission that the amount incurred for construing the molasses storage tank should be allowed as a revenue expenditure, since it is laid out wholly and exclusively for the purpose of the business. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs. Counsel’s fee is fixed at Rs. 2,000 (Rupees two thousand only).

[Citation : 229 ITR 285]

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