1. These five appeals by the department and two by the assessee are being disposed of by this common order.
2. We shall first deal with the appeals filed by the department. They relate to assessment years 1977-78 to 1979-80 and 1981-82 to 1982-83.
The assessee society is a manufacturer of sugar which is a controlled commodity. 65% of the products is required to be sold as levy sugar to the Government or their nominee at rates notified by the Govt. from time to time and the balance 35% of production is allowed to be sold to the assessee society in markets as per orders of the Central Govt. The Central Govt. had fixed the price of levy sugar for the season 1974-75 by order dated 28-11-74 at Rs. 156.99 per bag of one quintal. However, by subsequent notification this price was modified by the Govt. for succeeding season as under:--------------------------------------------------------------------------------Asst.
year Season Notifica- Price fixed for tion date levy sugar D-291982-83 1979-80 17.12.79 212.58-------------------------------------------------------------------------------- The assessee considered the deduction in prices to be unjustified in view of the fact that the cost of production every year had increased.
The assessee accordingly filed writ petitions in Bombay High Court against each of the said notifications. The High Court admitted the writ petitions and by interim order stayed operation of the subsequent notifications till the final disposal of the writ petitions and allowed the assessee to receive from the purchaser (Govt. of India or nominees) price for levy sugar sold as under:--------------------------------------------------------------------------------Season Asst.Year Price allowed by Hon. High Court to be received from1978-79 1980-81 No order, Rs. 173.29 received as per notification1979-80 1982-83 251.00-------------------------------------------------------------------------------- The High Court also ordered the assessee to furnish bank guarantee for excess amount over the notified prices received from the purchasers also stipulated that in case the final price that may be fixed by the Court was less than the amount received, the assessee would be liable to repay such excess over finally decided price to the purchasers Govt.
with interest at 12% p.a. from the date of receipt to the date of payment. The writ petitions for all those years were then transferred for decision to the Supreme Court. The assessee in pursuance of such interim orders of the High Court received during the various assessment years amounts in excess of notified prices as mentioned below:--------------------------------------------------------------------------------Asst. Year Amounts received as excess price over notified price1982-83 41,60,002.00-------------------------------------------------------------------------------- and credited such amount to levy sugar suspense account and shown them in the balance sheet as liability in the respective years. The I.T.O.in assessing the income of each year, however, treated the said amounts as income of the assessee and included the same in the total income of the assessee. The assessee had pleaded that as the High Court had yet to decide whether the assessee was entitled to get higher price as mentioned in the petitions, the excess amounts received in pursuance of the interim order did not partake the character of the price or income of the assessee particularly when there was condition of payment in case the price was decided less than what was allowed to be received provisionally and also when there was further condition of furnishing bank guarantee for the excess amount and liability to pay interest at 12% p.a. According to the assessee the said amounts were deposits received pending final decision of the Court and as such did not constitute trading receipts.
3. It may be noted that the above prices have been fixed by the Central Govt. for all the sugar factories in the State of Maharashtra and as such almost all the sugar factories in the State have filed similar writ petitions in Bombay High Court and similar interim orders have been passed by the High Court in those cases. The question of taxability of such excess price received by the sugar factories had been considered by the Special Bench of the Tribunal in the case of Shri Someshwar Sahakari Sakhar Karkhana Ltd. v. ITO [1985] 11 ITD 335 (Pune) and it was held that such excess amounts were mere deposits till the final disposal of the writ petitions and that they did not constitute income of the assessee society in the year of receipt. AS the facts were identical with the facts in said decision given by the Special Bench of the Tribunal, the CIT(A) has allowed the appeals of the assessee and directed the ITO not to include the said amount in the total income of the assessee. The department has now come in appeals before us.
4. After hearing the parties, we find that the point in controversy has been covered in favour of the assessee and against the department by the said decision of the Special Bench of the Tribunal. We respectfully follow the said decision and reject the grounds raised by the department 5. We now come to two appeals filed by the assessee. The first appeal relates to the assessment year 1978-79. The ground raised is that the ITO and the CIT (A) had erred in not allowing the deduction of Rs. 27,65,005 on account of part of the cost of cane purchased from Maharashtra State Farming Corporation as claimed in the return.
6. The assessee had purchased sugarcane for their crushing season 1976-77 from the Maharashtra State Farming Corporation. The rate as agreed between the assessee and the said corporation was Rs. 165 per M.T. The cane weighing 62931.937 M.T. was purchased by the assessee from the said corporation at the said rate. After the close of the crushing season the State Govt. fixed the rate of cane to be paid to the members of the assessee society at Rs. 121 P.M.T. The assessee paid the said corporation the price at Rs. 121 per M.T. amounting to Rs. 76,14,764.38 and debited the same in its accounts and completed the accounts. However, the said corporation claimed the balance of Rs. 27,69,005 from the assessee as cost of sugarcane on the basis of the agreed price of Rs. 165 per M.T. The assessee did not make any provision for the said amount in the account books. The said corporation filed a suit for recovery of said balance of Rs. 27,69,005 along with interest amounting to Rs. 8,63,508. That suit was filed in the Court of Civil Judge, Ahmednagar on 4-6-79. In the return of income of the assessee claimed deduction of Rs. 27,69,005 on the ground that the said amount represented liability although not debited in the books of accounts. The assessee relied on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363.
The ITO rejected the claim. He observed that no provision in respect of this amount had been made in the account books. Secondly the dispute had not yet been finally decided and was pending in the Court. He also observed that it was not known why the assessee insisted on making payment at the rate of Rs. 121 P.M.T., if his liability was to pay at the rate of Rs. 165 P.M.T. He also observed that the assessee had not furnished any details indicating the circumstances under which the assessee was refusing to pay higher price to said corporation. It was not known, according to the ITO, whether the sugarcane purchased was poor in quality or whether there were any other factors which justified payment at lower rate. In any case it was not disputed before him that the amount had not been finally settled. Consequently according to him the amount did not represent allowable deduction. He held that the principle laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) was not applicable. He observed that the proper course for the assessee was to claim allowance of this amount only in the year when the matter is finally decided by the Court. According to him the claim was premature in the circumstances of the case.
7. The assessee filed appeal before the CIT(A). The CIT(A) held that the principle laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) was applicable when there was existence of statutory liability. In the present case there was no statutory liability. On the other hand there was a disputed liability which had not crystallised. He referred to the fact that no provision had been made in the account books in respect of this liability. He accordingly confirmed the rejection of the claim in respect of this liability. He observed that the assessee was at Liberty to claim this amount as and when the dispute is finally settled by the Court. According to him even as per commercial principle it is the actual price which has been paid which is to be taken into account in ascertaining true commercial profits for the relevant year. The assessee is now in further appeal before us.
8. We have heard the parties and considered the materials produced before us. A copy of the plaint in the suit filed by the said corporation against the assessee has been filed before us. However, copy of written statement filed by the assessee in the Court has not been filed. It is not known as to what defence the assessee has taken in the Court in respect of this claim. It is obvious that the assessee has denied the claim in the Court. Thus the claim in question was a disputed claim. It had not crystallised during the relevant year. Even on the date when we heard the appeal the claim had not crystallised.
The matter was subjudice before the Court. The principle laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co, Ltd. (supra) is applicable in respect of statutory liability. The statutory liability arises as soon as relevant event taken place irrespective of stand that that the assessee may take in respect of that liability.
However, as far as a contractual liability is concerned, the matter is different. It is only when the liability gets crystallised that a deduction can be claimed. Absence of provision in the accounts would not be a bar for claiming statutory liability because such liability arises on account of statutory provision. However, absence of provision would certainly be a very important factor in considering whether the liability had crystallised in the relevant accounting year or not. If the liability had really crystallised the assessee would not have failed to make provision in respect of the said amount in the account books. His conduct in not making provision indicated that he did not accept the liability. When the liability was not accepted by the assessee and when the matter was still pending in the Court, deduction would not be allowed. The decision in the case of CIT v. Sugar Dealers [1975] 100 ITR 424 (All.) on which reliance was placed is of no assistance because in that case forfeiture of deposits had taken place in the relevant year which indicated that there was liability in praesenti and on those facts it was immaterial that the assessee was contesting the liability and had taken proceedings for recovery on security. However, in the present case there is mere claim by the corporation in respect of the amount in question. The assessee has not accepted the claim. Consequently the liability cannot be said to have crystallised We hold that the assessee would be entitled to claim deduction in the year in which the liability gets crystallised finally by the order of the Court or by subsequent mutual agreement. The deduction was not allowable in the assessment year 1978-79. We accordingly reject the ground raised by the assessee.
9. We now come to the assessee's appeal for the assessment year 1980-81. The assessee had paid Rs. 50,000 to the State Govt. of Maharashtra as contribution to Education Fund, Maharashtra State. This payment was made under the provisions of Section 68 of the Maharashtra Co-operative Societies Act, 1960 read with Rule 52 of the relevant rules. The assessee claimed deduction in respect of this amount on the ground that it represented revenue expenditure. The ITO held that the provisions of Section 68 of the Maharashtra Co-operative Societies Act did not create any charge on the profits of the assessee and that the payment was only appropriation of profits. He accordingly disallowed the claim. The assessee filed appeal before the CIT(A). The CIT(A) relied on certain decisions of the Tribunal and confirmed the disallowance. The assessee is now in further appeal before us.
10. At the time of hearing of the appeal the learned representative of the assessee conceded that the point in controversy had been decided against the assessee and in favour of the department by the Special Bench in Shri Panzara-Kan Sahakari Sakhar Karkhana Ltd. v. ITO [1983] 5 ITD 449 (Pune). However, he submitted that we should not follow the said decision of the Special Bench of the Tribunal because the Special Bench had not properly considered certain aspects of the question involved. He submitted that the obligation of payment of Rs. 50,000 had direct and intimate connection of the assessee's business and that the payment had been made by the assessee as a co-operative society-cum-trader and as laid down in the case of Indian Aluminium Co.
Ltd. v. CIT [1972] 84 ITR 735 (SC) such payment was allowable as business expenditure. According to him in said decision the Supreme Court had laid down that when a person had a dual capacity, of a trader-cum-owner, and he paid tax in respect of property which was used for the purpose of trading, the payment should be regarded to be in the capacity of trader according to the ordinary commercial principle. He submitted that the contribution to the Education Fund had been paid under the law relating to co-operative Societies and since the assessee was carrying on business as co-operative society the payment had direct connection with the business of the assessee. It was further submitted that the Maharashtra State Co-operative Union to whom the payment was made was conducting training courses for the staff of the co-operative societies and was arranging educational seminars and was sending informative leaflets and was making representation to the Govt. about the problems of the co-operative societies. These aspects were not considered by the Tribunal and as such decision of the Special Bench should not be followed. He further submitted that in CIT v. Pandavapura Sahakarq Sakkare Karkhane Ltd. [1988] 174 ITR 475 the Karnataka High Court held that the contribution to education fund amounted to diversion of income by overriding title and was allowable as deduction.
According to him this decision should be followed in preference to the decision of the Special Bench of the Tribunal.
11. The learned departmental representative, on the other hand, submitted that all the aspects to which our attention had been drawn has been considered by the Special Bench and as such we should follow the decision of the Special Bench of the Tribunal. It was submitted that the provisions of Karnataka Act were materially different from those of the Maharashtra Act and as such the decision of the Karnataka High Court was not applicable. It was submitted that the provisions of Tamil Nadu Co-op. Act were similar to the Maharashtra Co-op. Act and that decision of the Madras High Court which has been relied on in the Special Bench decision and which is reported in CIT v. South Arcot District Co-operative Supply & Marketing Society Ltd. [1981] 127 ITR 467 should be followed.
12. We have considered the rival submissions. We do not accept the submission on behalf of the assessee to the effect that the Special Bench has not considered all the aspects which have been mentioned by him. All these aspects have been duly considered by the Special Bench of the Tribunal. The Tribunal has examined in detail the relevant provision of the Act and has come to the conclusion that the contribution made by the assessee to the Education Fund had no nexus with the business of the assessee and that payment was in the capacity of a co-operative society. The Tribunal also examined the question whether the expenditure could be said to have been laid out wholly and exclusively for the purpose of business and came to the conclusion that it was not laid out wholly and exclusively for the purpose of business.
It is true that in para 19 of the order of the Tribunal has observed that the Tribunal did not have the benefit of noting the manner in which the amounts in the education fund was spent by the Govt. and advantages that were secured to the assessee. However, this does not affect the final decision of the Tribunal. This is because the Tribunal had come to a definite conclusion that the alleged relation between the payment and any advantage given to the assessee was too meagre to establish a casual relationship between the two. The Tribunal had come to a further conclusion that this was a payment to a fund which had a large sweep and which may or may not benefit the assessee's business and this was clear from the fact that the payment was required to be made under said provision even by non-business cooperative societies.
On these facts the Tribunal came to the conclusion that the claim of "wholly and exclusively" benefit to a business, was not satisfied.
13. The Tribunal in said decision compared the relevant provisions of the Tamil Nadu Co-op. Societies Act and came to the conclusion that the provisions were similar to the Maharashtra Co-op. Societies Act and as such the decision of the Madras High Court referred to above was applicable. That decision was against the assessee and in favour of the department. Since the Tribunal has considered all the aspects in detail, we see no reason for not following the said decision, particularly when said decision is being consistently followed in other cases at Pune.
14. The decision of the Karnataka High Court referred to above on behalf of the assessee is based on the provisions in the Karnataka Co-op. Societies Act. We find that the scheme of the Karnataka Act is different from that of Maharashtra Act. Attention of the Karnataka High Court was drawn to the decision of the Madras High Court decision referred to above and Karnataka High Court held that the scheme of Tamil Nadu Act was different from the Karnataka Act. According to the Karnataka High Court Section 62 of the Tamil Nadu Co-op. Societies Act provided that profit of the co-operative societies would be appropriate towards contribution to the education fund while that of Karnataka Co-operative Societies Act did not say that appropriation should be out of profits. That Act according to the Karnataka High Court created a liability to pay in relation to profits earned by the society. Thus as far as Maharashtra Co-op. Societies Act is concerned the Tribunal has examined various provisions and has come to the conclusion that in substance the contribution to the education fund was appropriation out of profits rather than the charge against the profits. Consequently we hold that the decision of the Karnataka High Court referred to above was not applicable. We follow the decision of the Special Bench of the Tribunal and reject the ground raised by the assessee.