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 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. , 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. , 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.
Madras High Court
Commissioner Of Income Tax
vs
Salem Co-Operative Sugar Mills Ltd.
Date – 10 September, 1996
Equivalent citations: 1998 229 ITR 285 Mad
Author: Thanikkachalam
ORDER Thanikkachalam, J.
1. 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?”
2. 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.
3. 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. , 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, will no longer be the good law in view of the later decision of the Supreme Court in Associated Power Co. Ltd. vs. CIT . 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), would no longer be the good law in view of the later decision of the Supreme Court in 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 , Vellore Electric Corporation Ltd. vs. CIT (1977) 109 ITR 454 (Mad), Jiwajirao Sugar Co. Ltd. vs. CIT , CIT vs. South Arcot District Co-operative Society and Moti Lal Chhadami Lal Jain vs. CIT 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 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 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 :
