Bombay High Court
Somaiya Orgeno-Chemicals Ltd.
Commissioner Of Income-Tax
Date- 3 December, 1993
Equivalent citations: 1995 216 ITR 291 Bom
Author: S S Manohar
Bench: D Dhanuka, S V Manohar
JUDGMENT Smt. Sujata Manohar, J.
1. This income-tax reference under section 256(1) of the Income-tax Act, 1961, arises from two reference applications one at the instance of the assessee and one at the instance of the Revenue, which have been consolidated for the sake of convenience and in respect of which a common statement of the case has been filed. The relevant assessment year is 1974-75. The assessee, at the material time, carried on the business of producing rectified spirit out of molasses from sugarcane. After selling a portion of the rectified spirit manufactured by it, the balance was utilised by the assessee for in manufacturing acetic acid, acetaldehyde and acetic anhydride. In the course of manufacturing operations, these products have to be securely stored. Looking to the nature of these products, they have to be stored in special containers of high grade metallic content. Such storage tanks and vats are a part and parcel of the assessee’s plant used in the business of manufacturing these chemicals.
2. Under the Ethyl Alcohol (Price Control) Amendment Order, 1971, issued by the Government of India, Ministry of Petroleum and Chemicals and Mines and Metals, dated January 30, 1971, in exercise of the powers conferred by section 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 clause 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 kilolitre : There is a note at the bottom of this table which is relevant. It is as follows :
“Note : These prices include six rupees (Rs. 6.00) per kilolitre 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.”
3. As per this Note, the amount which is so to be funded separately has to be utilised in accordance with the orders that may be issued. Such an order has been issued by the Government of India, Ministry of Petroleum and Chemicals, and is dated March 26, 1973. The order states that it is in pursuance of the note to clause 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 returns 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, the 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 accountants of the distillery and the total amount so funded.
4. 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 construction or erection of storage facilities for molasses and alcohol. It further provides, under sub-clause (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 clause 6, the storage tanks for molasses are required to be as per the specifications formulated by the Indian Standards Institution and made of pucca covered masonry as may be decided by the Commissioner. The storage tanks for alcohol are required to be as per the specifications laid down by the Commissioner. Under clause 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-clause (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.
5. In the assessment year 1974-75, the assessees have transferred a sum of Rs. 43,633 from the sale proceeds of rectified spirit to the storage fund for molasses and alcohol account as required under the said order. Accordingly, the sales which were shown by the assessee in the profit and loss account were reduced to that extent. According to the assessee, the said amount of Rs. 43,633 had to be statutorily set aside under the Ethyl Alcohol (Price Control) Amendment Order, dated January 30, 1971, for the creation of storage facilities for molasses and alcohol. It could not be included in its total income. This contention of the assessee has not been accepted by the Income-tax Officer and by the appellate authorities. Hence, the following question has been referred to us at the instance of the assessee under section 256(1) of the Income-tax Act, 1961 :
“(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly disallowed Rs. 43,633 being 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 ?”
6. There is also a second question which is referred to us at the instance of the Revenue under section 256(1) of the Income-tax Act, 1961 :
“(2) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly deleted the disallowance of Rs. 16,041 made by the Department under section 40A(5) of the Income-tax Act, 1961 ?”
7. We are not examining the facts pertaining to the second question because it is an accepted position on both the sides that the answer to this question is required to be in the affirmative and in favour of the assessee in view of the decisions of the Bombay High Court in the case of CIT v. Hico Products (P.) Ltd. (No. 2)  201 ITR 575 and in the case of CIT v. Hico Products Pvt. Ltd. (No. 1)  201 ITR 567. The second question is accordingly answered in the affirmative and in favour of the assessee.
8. We are, therefore, required to consider only the first question. The Ethyl Alcohol (Price Control) Order, 1971, is issued in public interest since it controls the maximum ex-distillery prices of ethyl alcohol. The note to the table in clause 2, reproduced earlier, is to ensure that a fund is set apart for putting up adequate storage facilities for molasses and alcohol. The selling price of rectified spirit is fixed statutorily at Rs. 227.75 per kilolitre. There is further a statutory direction that this price covers Rs. 6 per kilolitre which is to be set apart for a storage fund for molasses and alcohol. 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 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 kilolitre for the said fund at the inception. There is, therefore, a clear diversion at the source of this amount.
9. In any event, the assessee has lost domain over this amount of Rs. 6 per kilolitre. It has to be utilised in the manner statutorily laid down. Even the storage facilities have to be constructed as per the directions of the Commissioner and the 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 domain, cannot be considered as a part of its real income or its profit. It is, therefore, required to be excluded under section 28 of the Income-tax Act, 1961, for the purpose of calculation of income.
10. In this connection, a reference may be made to a decision of the Karnataka High Court in the case of CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd.  198 ITR 690. The Division Bench of the Karnataka High Court considered in that case the Molasses Control Order of the Government of India under which the selling price of molasses was fixed by the Government of India. While determining the price to be charged by the assessee, the Government had stipulated that one-third of the price charged should be transferred to a fund called “Molasses Storage Fund”. This amount could be utilised only according to the instructions issued by the Government from time to time. The amount thus transferred had to be kept separately from other business funds in a separate bank account and it was not possible to withdraw the same without the prior approval of the Excise Department. The Karnataka High Court held that the right to the fund got diverted from the hands of the assessee by virtue of the Molasses Control Order because the utilisation of the amount in question could be only as per the directions that may be issued by the Government from time to time. Hence, the amount was not assessable as a part of the assessee’s income.
11. The facts of the case before us are on all fours with the facts which were before the Karnataka High Court in that case. Therefore, the ratio of this judgment would directly apply to our case also.
12. In the case of CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd.  174 ITR 475 (Kar), the assessee which was a co-operative society was required to set apart a certain amount towards the Co-operative Education Fund under the Karnataka Co-operative Societies Act, 1957. The rate of contribution was dependent upon the rate of dividend. The Karnataka High Court held that the language of section 57(4)(a) of the Karnataka Cooperative Societies Act made it clear that though the contribution was to be made with reference to the profits, it was not out of profits, and the rate of contribution was with reference to the rate of dividend. It held that this was a statutory liability which was an overriding charge on to income or profits of the society. Hence, the amount paid by the assessee to the Co-operative Education Fund was a diversion of profits at source on account of the overriding charge created under the said Act. It was, therefore, an allowable deduction. The ratio of this case which has been applied by the Karnataka High Court in the subsequent case in CIT v. Pandavapura, Sahakara Sakkare Kharkane Ltd.  198 ITR 690 is clearly to the effect that when there is a statutory overriding charge created on any portion of the income, that portion is diverted at source and should not be considered as a part of the real income of the assessee. From the decision of the Karnataka High Court reported in CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd.  198 ITR 690, a special leave petition was also rejected (see  195 ITR (St.) 136) :
In its earlier case CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd.  174 ITR 475, the Karnataka High Court also relied upon a decision of the Madhya Pradesh High Court in the case of Keshkal Cooperative Marketing Society Ltd. v. CIT  165 ITR 437. The Madhya Pradesh High Court in that case considered the provisions of the Madhya Pradesh Co-operative Societies Act, 1960, under which the assessee which was a co-operative marketing society was statutorily required to divert a part of its income as set out in the said Act for the creation of a statutory deposit (reserve) fund which, after its creation, came within the domain of the Registrar and was to be invested and utilised only in such manner and on such terms and conditions as might be laid down by the Registrar. The Madhya Pradesh High Court said that this was a statutory diversion of income. The creation of the reserve fund and control over it remained with the Registrar. Hence, the amount which was so deposited in the reserve fund by the assessee did not comprise the income of the assessee. It was an amount diverted by overriding title under the statutory provision of section 43(2). The amount was not available for the use of the assessee-society at its option.
It is, however, the contention of the Revenue before us that unless the fund which is set apart as a result of statutory diversion of a portion of income is a fund which is not of the ownership of the assessee, it cannot be said that there is a diversion of income at source. The Revenue has emphasised the fact that the storage fund for molasses and alcohol which is kept in a separate account is to be used for the creation of storage facilities which would form part of the assessee’s assets. The Revenue contends that, therefore, it cannot be said that there is any diversion of income of the assessee at source.
13. The Department relied upon another decision of the Madhya Pradesh High Court in the case of Jiwajirao Sugar Co. Ltd. v. CIT  176 ITR 182. Unfortunately, this subsequent judgment of the Madhya Pradesh High Court has not referred to its own earlier judgment in the case of Keshkal Co-operative Marketing Society Ltd. v. CIT  165 ITR 437. In the case of Jiwajirao Sugar Co. Ltd.  176 ITR 182 (MP), the assessee ran a sugar factory. It credited certain amounts out of the sale price of molasses to a specific account for molasses storage fund to be utilised for the erection of adequate storage facilities in accordance with the Molasses Control Order. The Madhya Pradesh High Court rejected the claim of the assessee that the sum was diverted by overriding title. The Madhya Pradesh High Court appears to have emphasised the fact that as the Molasses Storage Fund vests in the assessee, the assessee cannot claim that the amount directed to that fund in any assessment year is not a part of its income although the assessee is not free to utilised that fund in any manner.
14. 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 CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd.  198 ITR 690. 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 context is not relevant.
15. In this connection, we would also like to refer to a decision of the Kerala High Court in the case of Cochin State Power and Light Corporation. Ltd. v. CIT  93 ITR 582. The assessee in that case was an electric supply undertaking. Under the statutory obligation imposed on the assessee under the Electricity (Supply) Act, the assessee had, inter alia, created a contingencies reserve. This reserve was created out of revenue and not out of the profits of the assessee. It could be utilised only for certain purposes indicated in Paragraph IV of the Sixth Schedule to the Electricity (Supply) Act, 1948, and was not at the disposal of the assessee in relation to the manner of its application. The Kerala High Court held that the amount which was so deposited in the contingencies reserve was a diversion by reason of the overriding obligation created by the statute. Therefore, for determining the commercial profits of the assessee, the amount of this reserve had to be deducted. In this case, obviously the assessee did not lose the ownership of the contingencies reserve. But its application was not under the control of the assessee at all. The Kerala High Court held that this was a diversion at source and the amount did not form a part of the real income of the assessee :
Our High Court has also taken a similar view in the case of Amalgamated Electricity Co. Ltd. v. CIT  97 ITR 334. In this case also the contingency reserve was required to be compulsorily created under the Electricity (Supply) Act, 1948. The court said that the appropriation to this fund was not made voluntarily by the licensee and the reserves were not available to the licensee for any purpose of its own. It had to be utilised as per the statutory provisions. These provisions were ultimately for the benefit of the consumers. The court said that there was a diversion of this amount at source and the amount credited to these reserves in the accounting year would have to be deducted under section 10(1) of the Indian Income-tax Act, 1922, in computing the profits of the electricity undertaking. Here also, it is clear from the facts that the ownership of the fund remained with the assessee. The court, nevertheless, considered the amount credited to the reserve fund during the accounting year as a diversion at source and said that this amount could not form a part of the real income of the assessee. The Bombay High Court in this case followed the Kerala High Court’s decision in the case of Cochin State Power and Light Corporation Ltd.  93 ITR 582.
16. Therefore, for the purpose of answering the question which is before us, it is not relevant whether the amount which is credited to the storage fund for molasses and alcohol account in the accounting year ceases to be the property of the assessee or not. What is important in this connection is to notice the statutory compulsions under which such deposit is made by the assessee and the absence of domain of the assessee over this amount. We also derive support in this connection from another decision of our High Court in the case of CWT v. Bombay Suburban Electric Supply Ltd.  103 ITR 384. In this case, the court was required to consider whether in the assessment to wealth-tax of the assessee-company which was also an undertaking for the supply of electricity, the amount, inter alia, of contingency reserve was liable to be included in determining the net wealth of the assessee. One of the arguments which was advanced before the Division Bench was that the amount which had been credited to the contingency reserve was treated as a diversion at source of the amount in question and was not a part of the assessee’s income. Hence, it should not be considered as a part of the net wealth of the assessee. The court negatived this contention and held that income-tax is a tax on the real income, i.e., profits arrived at on commercial principles subject to the provisions of the Income-tax Act. In contrast, under the wealth-tax Act, “net wealth” means the amount by which the aggregate value of all the assets belonging to the assessee on the valuation date is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than the items which are specifically enumerated. The existing contingencies reserves form part of the assets of the assessee-company and would be includible in its net wealth although the income which is an income during any accounting year would not include the amount which is deposited in the contingencies reserve fund for that accounting year.
17. The court has, therefore, made a clear distinction between the nature of income and the nature of wealth for the purposes of the Wealth-tax Act. The title to the fund, therefore, is not conclusive in deciding whether the amount which is deposited in that fund constitutes a diversion of the amount deposited in that account at source or not. What is necessary is to see whether there is a diversion at source and whether the assessee has lost domain and control over the amount so diverted.
18. Mr. Khatri, learned advocate for the Commissioner, also sought to rely upon the decision of the Calcutta High Court in the case of CIT v. Calcutta Electric Supply Corporation Ltd.  138 ITR 111. This case deals with the Super Profits Tax Act, 1963, and whether certain reserves can be included in the computation of capital for the purpose of calculation of the super profits tax. This judgment, in our view, is not of any direct relevance to the question which is before us which deals with the determination of the real income or commercial profits of the assessee for the purpose of payment of income-tax. In view of these findings, we are not considering the alternative argument advanced by the assessee to the effect that the amount so deposited should be considered as expenditure and hence, deductible from the income of the assessee for the purposes of Income-tax Act.
19. In the premises, question No. 1 which is referred to us is answered in the negative and in favour of the assessee. We hold that the amount of Rs. 43,633 did not form a part of the income of the assessee for the assessment year 1974-75.
20. No order as to costs.