Cit Vs. Nizam Sugar Factory Ltd - Court Judgment

Excerpt:
counsels: s. r. ashok, for the revenue c. kodandaram, for the assessee head note: income tax income--diversion by overriding titleamount credited to mollasses storage fund account by assessee-sugar factory catch note: to comply with mollasses control order, 1961 assessee transferred certain sums to mollasses storage fund account and claimed as diverted by overriding title--the assessing officer and commissioner (appeals) disallowed assessee's claim--however, tribunal allowed assessee's claim--justified--obligation of assessee is only to collect amount from purchaser of molasses and credit same to separate account called molasses storage fund account-- from above, it is clear that to the extent of amount specified to be credited to molasses storage fund account from out of price of molasses, same is diverted from source itself and it never reaches the assessee, therefore, it cannot be included in the income of the assessee. ratio: obligation of assessee is only to collect amount from purchaser of molasses and credit same to separate account called molasses storage fund account-- from above, it is clear that to the extent of amount specified to be credited to molasses storage fund account from out of price of molasses, same is diverted from source itself and it never reaches the assessee, therefore, it cannot be included in the income of the assessee. held: if one examines the facts of the present case and the mode of creation of the molasses storage fund account, it is clear that the central government while fixing the rates of molasses included in it a part, which is to be set apart and credited to the molasses storage fund account. it is not part of the revenues of the assessee or profits of the assessee. a specified portion of the price fixed by the central government under the molasses control order has to be set apart. it is a statutory obligation on the part of the assessee to set apart that portion of the amount fixed under the molasses control order as a separate fund by crediting the same to a separate account. the assessee has absolutely no control over the fund for its being utilised for any purpose. the assessee is holding and maintaining that account only as a trustee. if the assessee wants to withdraw the amount even for spending the same for the purpose for which the fund was created, it is not free to withdraw the amount without the approval of the appropriate authority or the central government. further, it is also provided that if the assessee did not carry out the obligation of construction of the storage tanks, the authority under the control order is free to carry out the said function and the assessee is obligated to make the funds available to it. to the extent of the amount specified under the control order, it goes straight into the separate fund called molasses storage fund. obligation of assessee is only to collect amount from purchaser of molasses and credit same to separate account called molasses storage fund account. from above, it is clear that to the extent of amount specified to be credited to molasses storage fund account from out of price of molasses, same is diverted from source itself and it never reaches the assessee, therefore, it cannot be included in the income of the assessee. case law analysis: cit v. pandavapura sahakara sakkare kharkane ltd. (1992) 198 itr 690 (karn) and somaiya orgeno-chemicals ltd. v. cit (1995) 216 itr 291 (bom) followed. application: also to current assessment year. decision: in favour of assessee. income tax act 1961 s.4 in the andhra pradesh high court s.r. nayak & ananda reddy, jj. - cantonments act[c.a. no. 41/2006]. section 346 & cantonment fund (servants rules, 1937, rules 13, 14 & 15: [h.l. gokhale, ag. cj, p.v. hardas, naresh h. patil, r.m. borde & r.m. savant, jj] jurisdiction of school tribunal constituted under maharashtra employees of private schools (conditions of service) regulations act, (3 of 1978) held, school run by the cantonment board is a primary school and it is not a school recognised by any such board comparable to the divisional board or the state board. the school tribunal constituted under section 8 of the maharashtra act cannot entertain appeals filed under section 9 by the employees working in schools which are established and administered by the cantonment board. teacher employed in the school run by cantonment board being covered under rule 2 (f) of the cantonment fund servants rules, 1937 can file appeal under rules 13, 14 and 15 to authorities provided therein against any order imposing any penalties etc. [deolali cantonment board v usha devidas dongre, 1993 mah. lj 74; 1993 lab ic 1858 overruled]. -- maharashtra employees of private schools (conditions of service) regulations act, 1978 [act no. 3/1978]. sections 9 & 2(21): jurisdiction of school tribunal whether a school run by cantonment board is not a recognised school within the meaning of section 2(21)? - held, the act is enacted to regulate recruitments and conditions of employees in certain private schools and provisions of the act shall apply to all private schools in the state whether receiving any grant-in-aid from the state government or not. private school is defined in section 2(2) of the act as a recognised school established or administered by a management other than the government or a local authority. recognised means recognised by director, the divisional board or state board. thus as far as the first part of the definition of being recognised is concerned, it includes, as stated above, four directors, the divisional boards and four state boards. the second part of this definition which comes after the comma refers to any officer authorised by director or by any of such boards. the question to be examined is whether school run by the cantonment board could be said to be one run by any such boards. a private school has to be recognised by the state or the divisional board or by any officer authorised in that behalf. when this phrase namely: recognised by any officer authorised by the director or by any such boards, is included in the latter part of section 2(21), such boards will be of the level of the state board or the divisional board. the boards referred to in the definition of the word recognised means the boards which deal with education at levels other than that of the level at which primary schools are operating. thus for being recognised, the school has to be recognised by the board and therefore, it has to be operating at a higher level i.e., secondary level. section 2(21) of the act defines the term recognised. the last clause therein is by any of such boards. the term such is defined in oxford dictionary as of the kind or degree indicated or implied by the context. therefore, the term such board will have to mean a divisional board of or the level of divisional board or the state board. the divisional board holds the examination and issues certificates after 10th and 12th standard examinations. the state board advises the state government on policy matters, ensures uniform pattern of secondary and higher secondary education, lays down principles for determining syllabi, prescribes text books, etc. the cantonment board does not discharge any of such duties nor is there any other board or body under the cantonments act discharging any such duties. the duties of the cantonment board are laid down in section 62 and amongst others, clause (xiv) lays down the duties of establishing and maintaining or assisting primary schools only. the cantonment board is not required to enter into the area of secondary education. therefore, school run by the cantonment board is a primary school and it is not a school recognised by any such board comparable to the divisional board or the state board. that being the position, it is not possible to accept it to be a recognised school for being a private school under the act. for the reasons state above, the school tribunal constituted under section 8 of the act cannot entertain appeals filed under section 9 by the employees working in schools which are established and administered by the cantonment board. [deolali cantonment board v usha devidas dongre, 1993 mah.lj 74; 1993 lab ic 1858 overruled]. - this was contested by the assessee before the commissioner (appeals), unsuccessfully. 5. in the event of failure to construct the quantum of storage facilities within the time schedule referred to in sub-paragraph (4), the controller shall have the work executed through the public works department of the central government or the state government or the building construction organisation of the central government or the state government or a private agency and the management of the sugar factory or khandasari unit, shall place such amount, as required for the work, at the disposal of the controller. the amount to be credited to the fund account is clearly provided in the schedule itself. 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. 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. ' however, strong reliance was placed by learned standing counsel appearing for the department on the decision of the apex court in the case of associated power co. [1984]145itr740(cal) .the apex court finally held that :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 into the contingencies reserve reach the electricity company and are not diverted away from it.s. ananda reddy, j. r. c. no. 256 of 1991 :at the instance of the revenue, the income tax appellate tribunal, hyderabad bench-a, hyderabad, referred the following questions under section 256(2) of the income tax act, 1961 (hereinafter referred to as 'the act') arising out of its order dated 27-2-1982, in i.t.a. nos. 243 and 433 of 1981 and 1333 and 1334 of 1981 for the assessment years 1977-78. 1973-74 and 1976-77 :'1. whether, on the facts and in the circumstances of the case, the appellate tribunal was right in allowing the deduction of rs. 5,38,962 for the assessment year 1977-78, rs. 26,238 for the assessment year 1973-74 and rs. 1,05,241 for the assessment year 1976-77 representing the amount utilised for the creation of the molasses storage fund ?2. whether, on the facts and in the circumstances of the case, the appellate tribunal was correct in allowing the deduction of a sum of rs. 13,670 and rs. 4,401 towards interest credited to the molasses fund account for the assessment years 1977-78 and 1976-77, respectively ?'r. c. no. 169 of 1991 :similarly, at the instance of the revenue, the income tax appellate tribunal referred the following question under section 256(2) of the act, arising out of its order dated 27-6-1984, in i.t.a. no. 1163 of 1983 for the assessment year 1978-79 :'whether, on the facts and in the circumstances of the case, the appellate tribunal was right in allowing the deduction of rs. 5,07,148 being a reserve created as molasses storage fund account and rs. 34,148 being interest thereon for the assessment year 1978-79 in the manner indicated by the appellate tribunal in para 7 of its order ?'r. c. no. 98 of 1991 :at the instance of the revenue, the income tax appellate tribunal referred the following question under section 256(2) of the act arising out of its order dated 13-3-1989, in i.t.a. nos. 1917 and 1918 of 1986 for the assessment years 1980-81 and 1981-82 :'whether, on the facts and in the circumstances of the case, the appellate tribunal is justified in holding that the contributions made by the assessee to the molasses storage fund for the assessment years 1980-81 and 1981-82 are to be excluded from the assessable income of the assessee ?'as the issue involved in all the above referred cases is almost identical, they were heard together and disposed of by this common judgment.as the facts are similar in all the r. cs., the facts in r. c. no. 256 of 1991 are stated as under :the assessee is limited company owned by the government of andhra pradesh carrying on the business of manufacture and sale of sugar. the government of india passed an order known as the 'molasses control order, 1961'. it was extended to the state of andhra pradesh by notification, dated 14-8-1961. by another notification dated 6-2-1972, the 'molasses control order, 1961', was amended by the molasses control order, 1972'. as per the relevant provisions of the said 'molasses control order' (hereinafter referred as the 'control order') 1/3rd of the sale price of molasses has to be accounted and funded separately as per the procedure provided therein and shall be utilised for the erection of adequate storage facilities in accordance with the orders that may be issued by the central government for the regulation of such funds. the amounts to be credited to the molasses storage fund account are provided in the schedule to the said control order, which fixes the rate of molasses to be sold by the producers. the amounts credited to the said fund are to be utilised in accordance with the provisions contained therein and the control of the authorities is specified by the central government under the provisions of the said control order. while so, for the relevant assessment years, the assessee-company credited to the molasses storage fund account, a sum of rs. 26,238 in the assessment year 1976-77 and rs. 5,32,962 in the assessment year 1977-78 and claimed that these amounts should not be treated as part of the income of the assessee-company. the assessing officer, while framing the assessment, negatived the claim of the assessee for exclusion of the amount credited to the molasses storage fund account, as according to him, there is nothing in the record to show that the said amount was not the income of the assessee. therefore, the said amount was included. a similar view was taken by the assessing officer for all the assessment years and he included the said amount credited to the molasses storage fund account. the assessing officer also referred to the judgment of vellore electric corporation ltd. v. cit : [1977]109itr454(mad) and even as per the said judgment as the assessee's dominion over the fund has not ceased, the said amount was includible in the total income of the assessee. this was contested by the assessee before the commissioner (appeals), unsuccessfully. therefore, the assessee preferred appeals before the income tax appellate tribunal. the income tax appellate tribunal, after elaborately considering the claim of the assessee-company in the light of the provisions contained in the said control order, finally held that there is a diversion of income at the source itself and therefore the amount credited to the molasses storage fund account should not be treated as income of the assessee-company. the tribunal also relied upon and followed the decisions of the calcutta and madras bench decisions of the tribunal.aggrieved by the said orders of the tribunal, the revenue sought the references to this court for its opinion.learned standing counsel appearing for the revenue contended that the tribunal was not justified in holding that there was a diversion of title to the income and therefore to the extent of the amount credited to the molasses storage fund account it should not be treated as the income of the assessee. it was contended that the provisions of the said control order contemplate creation of a fund for the purpose of providing adequate storage facilities. the said provision of storage facilities is for the benefit of the assessee, who is the producer of molasses, in order to retain the quality of the molasses produced by it. further, though the amount is credited to a separate account, it continued to be within the control of the assessee. the assessee never parted with the amount that was credited to the molasses storage fund account. when once the assessee-company is having possession and control over the amounts that were credited to the molasses storage fund account, there is absolutely no merit in claiming that there was diversion of title to the said income. according to learned counsel, it is only an obligation created by the control order and nothing else. in order to discharge the said obligation, the assessee-company has to maintain the fund account and the amount credited to the said fund is to be utilised for providing such storage facility., according to learned counsel, in case the assessee-company fails to construct the storage tank as per the provisions of the control order, the central government is obligated to carry out the said function and further by recouping or collecting the amounts that are required for carrying out such function of erecting the storage tank. it was also contended that after the construction of the storage tank, the said storage tank continues to be the asset of the company. therefore, there is no merit in the claim of the assessee that the income was diverted by overriding title and, therefore, the same ceases to be the income of the assessee. it was also stated that when once a fund is created for the purpose of erecting a storage tank, if the assessee-company fails to continue its business of manufacture and sale of sugar, then in that case the fund would go to the assessee-company, therefore, the amount credited to the fund continues to be that of the assessee-company only. it was also stated that even with reference to the storage tank, the assessee is entitled to claim depreciation by treating the said storage tank as its asset. therefore, it was contended that the assessee continues to be having control over the fund, even after crediting a part of the sale consideration to the said account and even during the utilisation and after utilisation of the said fund for the purpose of which it was created and the asset created with the said fund continues to be that of the assessee. therefore, the said amount does not cease to be that of the assessee. hence, the tribunal was not justified in excluding the said income while computing the assessee's income for the respective assessment years. learned counsel relied upon the judgment of the madhya pradesh high court in the case of jiwajirao sugar co. ltd. v. cit : [1989]176itr182(mp) the decisions of the madras high court in vellore electric corporation ltd. v. cit (supra) ; associated power co. ltd. v. cit : [1996]218itr195(sc) and cit v. sitaldas tirathdas : [1961]41itr367(sc) and contended that the decision rendered by the income tax appellate tribunal is contrary to the judgments rendered in the above decisions. hence, the questions referred to this court are to be answered in favour of the revenue and against the assessee.learned counsel appearing for the assessee, on the other hand, supported the orders of the tribunal. it was contended that in order to comply with the provisions of the said control order, the assessee-company was obligated to create a molasses storage fund account and credit a part of the sale price fixed by the government under the said control order. the said fund has to be utilised for the erection of the storage tank. the assessee was only a trustee in respect of the said account and the said fund has to be utilised for the purpose for which it was created in terms of the said control order. the assessee-company though acts as a trustee, it is not free to withdraw the amounts credited to the said account and utilise them either for any other purpose or even for construction of the storage tank except in accordance with the directions and approval of the central government or any other officer appointed by it. therefore, it was contended that the assessee-company has absolutely no control over the amount credited to the said storage fund account. learned counsel also contended that the sale price of molasses is being fixed by the central government under the terms of the control order and as per the terms of the said control order a specific part of the sale consideration is to be credited to the said account and to be utilised under the supervision and control of the central government for the purpose of erection of the molasses storage tanks. therefore, the assessee-company has absolutely no right or title to the extent of the part of the sale consideration, which was liable to be credited in terms of the control order to the separate storage fund account. the assessee-company while maintaining the said account would act only as a trustee for the proper utilisation of the said funds under the directions and supervision of the central government or any of its appointed authority. therefore, it was contended that the assessee never received the said amount that was credited to the storage fund account nor it has any control over the said fund. therefore, it was contended that the said amount was rightly not included in the total income of the assessee. learned counsel also relied upon the following decisions in support of its claim :(1) cit v. pandavapura sahakara sakkare karkhane ltd. : [1992]198itr690(kar) ;(2) cit v. salem co-operative sugar mills ltd. : [1998]229itr285(mad) ;(3) somaiya orgeno-chemicals ltd. v. cit : [1995]216itr291(bom) ; and(4) cit v. new india sugar mills ltd. : [1994]206itr212(cal) .from the above rival contentions, the issue to be considered is whether the amounts that were credited to the molasses storage fund account are includible in the total income of the assessee-company ?before considering the rival contentions, it would be appropriate to refer to the relevant portions of the control order. the molasses, which come as a by product in the manufacturing process of sugar, have to be stored and sold in accordance with the provisions of this control order. the prices are also being fixed by the central government under the said control order. the molasses that were produced by the various industries are also classified into various grades and their prices are also fixed at varying rates depending upon their grade. the prices fixed under the 1961 control order are fixed as per the 'schedule, which reads as under:'the schedulegrade of molassesprices12grade k-1rs. 9.00 per 100 kilogramstotal reducing sugar by weight 60 per cent. grade k-iirs. 7.50 per kilograms total reducing sugar by weight from 55 to 60 percent. grade k-iiirs. 6.00 per kilogramsas per specification of grade i cane molasses grade k-iv4.80 per 100 kilogramsas per specification of grade ii cane molasses grade k-vrs 3.60 per 100 kilogramsas per specification of grade iii cane molasses below grade k-vrs. 3.60 for every 40 kilograms reducing sugar content thereinnote : from the price fixed under the above schedule, 33-1/3 per cent thereof shall be accounted for and funded separately by the producers, 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.'the note appended to the said schedule shows that 33-1/3 per cent of the prices fixed in the schedule shall be accounted for and funded separately by the purchasers 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. further, the utilisation of the funds has been provided in the following manner :1(a). the amount certified to the account shall not be used by the sugar factory or khandasari unit for any purpose other than the construction or erection of storage facilities for molasses.(b) where any amount is intended to be withdrawn from the account, the management of the sugar factory or khandasari unit shall submit proposals to the controller, who shall after satisfying himself about the proposals, permit the withdrawal.2. the commissioner shall fix the storage facility for molasses required by each sugar factory or khandasari unit at a level equivalent to 50 per cent of its average production of molasses during the calendar years 1970 and 1971.3. the storage tanks for molasses will be as per the specifications formulated by the indian standards institution in is: 5521-1969 or made of pucca covered masonry, as may be decided by the commissioner.4. the controller, in consultation with each sugar factory or khandasari unit, shall fix a time schedule within which the particular quantum of storage facilities for molasses shall be constructed by the sugar factory or khandasari unit.5. in the event of failure to construct the quantum of storage facilities within the time schedule referred to in sub-paragraph (4), the controller shall have the work executed through the public works department of the central government or the state government or the building construction organisation of the central government or the state government or a private agency and the management of the sugar factory or khandasari unit, shall place such amount, as required for the work, at the disposal of the controller.6. in the event of a dispute over the quantum of the amount of money needed for the purpose referred to in sub-paragraph (5) the assessment made by the executing agency shall be final and binding on the management of the sugar factory or khandasari unit.7. the molasses controller or any other officer nominated by him shall inspect the storage facility erected by the sugar factory or khandasari unit to satisfy himself that it has been put up in accordance with the specification referred to in sub-paragraph (3).8. the amount available in the account shall be maintained as a separate account in the bank of the sugar factory or khandasari unit concerned.though the control orders are being amended from time to time in so far as the provisions relating to the creation and the maintenance of the storage fund account remains unchanged. therefore, even while withdrawing the fund from the said storage fund account, the assessee is not free to utilise the said fund except with the approval and in accordance with the regulations. the amount to be credited to the fund account is clearly provided in the schedule itself. therefore, automatically 1/3rd of the sale price of molasses fixed by the central government under the control order is to be credited to the storage fund account for being utilised for the construction of the storage tanks.a similar question was considered by the bombay high court in somaiya orgeno-chemicals ltd. v. cit : [1995]216itr291(bom) 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 30-1-1971. under the said control order, the central government prescribes the maximum ex-distillery prices of ethyl alcohol as set out in the said order. under clause 2 of the said order a table is provided which prescribes such maximum ex-distillery prices of ethyl alcohol. the said table deals with rectified spirit confirming 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. a note is provided at the bottom of this table, which reads as under (page 294) :'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.'as per this note, the amount which is to be funded separately has to be utilised in accordance with the orders that may be issued by the government of india, ministry of petroleum and chemicals and mines and metals. as per the control order, the fund that was set apart has to be utilised for the erection of storage facilities for molasses and alcohol. the control order 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 also 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 monthly return and an annual return showing the total production of alcohol and 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.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 specification 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 the 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.on these facts, the question that arose for consideration was whether the amount deducted from the sale proceeds of alcohol and spirit and transferred to the storage fund for molasses and alcohol account under the ethyl alcohol (price control) amendment order, 1971, is an admissible deduction while answering the question, the bombay high court held as under (page 296) :'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.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 the 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.'the bombay high court while arriving at the above decision, considered the following decisions rendered by various courts :(1) cit v. pandavapura sahakara sakkare kharkane ltd. : [1992]198itr690(kar) ;(2) cit v. pandavapura sahakara sakkare karkhane ltd. : [1988]174itr475(kar) applied ;(3) keshkal co-operative marketing society ltd. v. cit : [1987]165itr437(mp) ;(4) cochin state power and light corporation ltd. v. cit : [1974]93itr582(ker) ;(5) amalgamated electricity co. ltd. v. cit : [1974]97itr334(bom) ;(6) cwt v. bombay suburban electric supply ltd. : [1976]103itr384(bom) relied on ;(7) jiwajirao sugar co. ltd. v. cit : [1989]176itr182(mp) dissented from; and(8) cit v. calcutta electric supply corporation ltd. : [1982]138itr111(cal) distinguished.the karnataka high court in the case of cit v. pandavapura sahakara sakkare kharkane ltd. : [1992]198itr690(kar) had an occasion to consider almost an identical issue under the molasses control order and held (headnote) : 'that the utilisation of the amount in question could 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 in the hands of the assessee'.against the said decision of the karnataka high court, the department filed special leave petition before the supreme court and the same was dismissed vide (1992) 195 itr 136.the apex court while considering the issue of diversion of income by overriding title in cit v. sitaldas tirathdas (supra) held that (headnote) :'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 by 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.'the above decision was explained by the apex court in moti lal chhadami lal jain v. cit : [1991]190itr1(sc) as follows :'the expressions 'reaches the assessee' and 'has been received' have been used by the supreme court in the case of sitaldas tirathdas : [1961]41itr367(sc) not in the sense of the income being received in cash by one person or another. what the court emphasized 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.'however, strong reliance was placed by learned standing counsel appearing for the department on the decision of the apex court in the case of associated power co. ltd. v. cit : [1996]218itr195(sc) . the said judgment was rendered by the apex court under the provisions of the electricity (supply) act, 1948. the facts as set out in the said judgment are thus :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 assessment year 1973-74. this amount was claimed by the assessee as a deduction in the computation of its total income for. the purposes of the income-tax. the income tax officer rejected the claim. the appellate assistant commissioner allowed the assessee's claim, relying upon the decision of the kerala high court in the case of cochin state power and light corporation ltd. v. cit : [1974]93itr582(ker) and of the bombay high court in the case of amalgamated electricity co. ltd. v. cit : [1974]97itr334(bom) . the revenue filed an appeal before the tribunal and cited the judgment of the madras high court in the case of vellore electric corporation ltd. v. 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. accordingly, it is set aside the order of the appellate assistant commissioner and referred the following question directly to the apex court under section 257 of the income tax act, 1961 (page 197) :'whether, on the facts and in the circumstances of the case, the income tax appellate 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 ?'under section 57 of the electricity (supply) act, 1948, the provisions of the sixth schedule shall be deemed to be incorporated in the licence of every licensee not being a local authority. clauses ill, iv and v of the sixth schedule, which deals with the creation of reserves, are as under (page 199) :'ill. there shall be created from existing reserves or from the revenues of the undertaking a reserve to be called 'contingencies reserve'.iv. (1) the licensee shall appropriate to contingencies reserve from the revenues of each year of account a sum not less than one-quarter of one per centum and not more than one-half of one per centum of the original cost of fixed assets, provided that if the said reserve exceeds, or would by such appropriation, be caused to exceed, five per centum of the original cost of fixed assets, no appropriation shall be made which would have the effect of increasing the reserve beyond the said maximum.(2) the sums appropriated to the contingencies reserve shall be invested in securities authorised under the indian trusts act, 1882 (2 of 1882), and such investment shall be made within a period of six months of the close of the year of account in which such appropriation is made.v. (1) the contingencies reserve shall not be drawn upon during the currency of the licence except to meet such charges as the state government may approve as being-(a) expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented ;(b) expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal ;(c) compensation payable under any law for the time being in force and for which no other provision is made.provided that where the undertaking is purchased by the board or state government, the amount of the reserve computed as above shall, after further deduction of the amount of compensation, if any, payable to the employees of the outgoing licensee under any law for the time being in force, be handed over to the board or the state government, as the case may be.'the apex court noted the divergent views taken by the kerala high court and the bombay high court on the one hand and the madras high court and the calcutta high court on the other. the apex court also noted that the kerala high court relied upon the decision of the apex court in the case of poona electric supply co. ltd. v. cit : [1965]57itr521(sc) while accepting the contention of the assessee that the reserves should not be included in the total income of the assessee. the apex court also considered the facts under which the judgment in the case of poona electric supply co. ltd. v. cit : [1965]57itr521(sc) was rendered. this was a case that related to the consumers' rebate reserve. the poona electric supply company ltd., the assessee in that case, claimed deduction of the amount credited to this reserve from its taxable income. the apex court noted the provisions of the electricity (supply) act and the sixth schedule and observed that their object was to statutorily rationalise and regulate the rates chargeable for energy supplied in the interest of the public and for electrical development. under the rules embodied in the sixth schedule certain appropriations and deductions had to be made to arrive at the clear profits ; otherwise, the items might be manipulated to sustain a demand for abnormal rates. these rules had no concern with income-tax; though, for the purpose of arriving at the clear profit, the taxes paid were deductible. the apex court then held (page 200 of 218 itr) :'under section 10(1) of the income tax act, tax shall be payable by an assessee under the head 'profits and gains of business' in respect of profits and gains of any business carried on by him. the said profits and gains are not profits regulated by any statute, but profits in a business computed on business principles. they are business profits and not statutory profits. they are real profits and not notional profits. the real profit of a businessman under section 10(1) of the income tax act cannot obviously include the amounts returned by him by way of rebate to the consumers under statutory compulsion. it is as if he received only from the consumers the original amount minus the amount he returned to them. in substance, there cannot be any difference between a businessman collecting from his constituents a sum of rs. y in addition to rs. x by mistake and returning rs. y to them and another businessman collecting rs. x alone. the amount returned is not a part of the profits at all.'after considering various judgments, the apex court observed that the income-tax was a tax on the real income, i. e., the profit arrived at on commercial principles subject to the provisions of the income tax act. the real profit could be ascertained only by making the permissible deductions. there was a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. in a given case, whether the out goings fell in one or the other of the heads was a question of fact to be found on the relevant circumstances. having regard to business principles. another distinction that had to be borne in mind was that between the real profits and the statutory profits, that is, between the commercial profits and the statutory profits, the latter was statutorily fixed for a special purpose. the assessee was a commercial undertaking. it did the business of supply of electricity, subject to the provisions of the electricity (supply) act. as a business concern its real profit had to be ascertained on the principles of commercial accountancy. as a licensee governed by the statute its clear profit was to be ascertained in terms of the statute and its schedule. the two profits were for different purposes one was for commercial and tax purposes and the other was for statutory purposes in order to maintain a reasonable level of rates. for the purposes of the electricity (supply) act, during the accounting years, the assessee credited an amount to the consumers' rebate reserve. it was a part of the excess amount paid to it and it was reserved to be returned to the consumers. it did not form a part of the assessee's real profit. so, to arrive at the taxable income of the assessee from business that amount had to be deducted from its total income.thereafter, the apex court considered the facts in the case of cochin state power and light corporation ltd. v. cit : [1974]93itr582(ker) rendered by the kerala high court, while relying relied upon the judgment of the apex court in the case of poona electric supply co. ltd. v. cit (supra). it was held by the kerala high court that the amount covered by the contingencies reserve is a diversion by reason of the overriding obligation created by the statute and, therefore, for determining the commercial profits of the assessee, the amount of this reserve has to be deducted. the said decision was followed by the bombay high court in the case of amalgamated electricity co. ltd. (supra). the apex court thereafter noted that the different view taken by the same bombay high court in the context of the wealth-tax in the case of cwt v. bombay suburban electric supply ltd. : [1976]103itr384(bom) than that of the kerala high court and the bombay high court in the judgments referred to earlier. the apex court also noted the differing views expressed by the madras high court in veliore electric corporation ltd. v. cit (supra) and the calcutta high court in the case of cit v. sijua (iharriah) electric supply co. ltd. : [1984]145itr740(cal) . the apex court finally held that : 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 into the contingencies reserve reach the electricity company and are not diverted away from it.' the above decision rendered by the apex court in terms of the provisions of the electricity (supply) act, 1948, which contemplates the creation of reserve from out of the profits when its clear profits exceeds a reasonable return and those reserves are to be utilised by the assessee-company therein may be under certain contingencies. therefore, the contingencies reserve created by the assessee in that case always continued to be with the assessee-company, might be subject to certain restrictions. therefore, the decision of the apex court rendered in the above case may not be of any assistance to the department.similarly, learned counsel also relied upon the judgment of the madhya pradesh high court in the case of jiwajirao sugar co. ltd. v. cit (supra). in this judgment, the madhya pradesh high court had taken a view that the assessee's sugar company never parted with the fund that was collected and credited to the molasses storage fund though kept separately by the assessee. as per the view of that court the assessee's title to the fund is not lost, hence, it is not deductible. but, this decision was specifically referred to and dissented from by the bombay, karnataka and madras high courts.if we examine the facts of the present case and the mode of creation of the molasses storage fund account, it is clear that the central government while fixing the rates of molasses included in it a part, which is to be set apart and credited to the molasses storage fund account. it is not part of the revenues of the assessee or profits of the assessee. a specified portion of the price fixed by the central government under the molasses control order has to be set apart. it is a statutory obligation on the part of the assessee to set apart that portion of the amount fixed under the molasses control order as a separate fund by crediting the same to a separate account. the assessee has absolutely no control over the fund for its being utilised for any purpose. the assessee is holding and maintaining that account only as a trustee. if the assessee wants to withdraw the amount even for spending the same for the purpose for which the fund was created, it is not free to withdraw the amount without the approval of the appropriate authority or the central government. further, it is also provided that if the assessee did not carry out the obligation of construction of the storage tanks, the authority under the control order is free to carry out the said function and the assessee is obligated to make the funds available to it. to the extent of the amount specified under the control order, it goes straight into the separate fund called molasses storage fund. the obligation of the assessee is only to collect the amount from the purchaser of the molasses and credit the same to the separate account called molasses storage fund account. from the above, it is clear that to the extent of the amount specified to be credited to the molasses storage fund account from out of the price of the molasses, the same is diverted from the source itself and it never reaches the assessee. therefore, it cannot be included in the income of the assesseeduring the course of hearing, learned standing counsel from the department raised a contention that in case of discontinuance of the business by the assessee, to whom this fund would go. according to him, the fund would go to the assessee's company. no doubt, there are no specific provisions under the control order. but, once the assessee-company is not free to withdraw any part of the fund from the fund account even to spend it for the purpose of construction of the molasses storage tanks, then how could the amount be taken away by the assessee even in the case of discontinuance of its business by the assessee. in such case also if the assessee-company wants to withdraw the amount, the central government has to approve it. in fact under the provisions of the income tax act also appropriate provisions are there, if it is paid to the assessee to tax the same as its income. another contention advanced by learned standing counsel was that after the construction of the storage tanks, the storage tanks would be treated as the asset of the company in respect of which it is entitled for depredation. all these things are outside the question referred for the opinion of this court. even in that case also appropriate provisions are there in the income tax act; if an asset was acquired by the assessee not out of its own fund but out of the funds borne by some others, the assessee is not entitled for depreciation as is provided under section 43(1), which defines the cost of the asset to the assessee. therefore, these contentions advanced by learned standing counsel would not in any way affect the decision on the question referred for the opinion of this court.under the above circumstances, we answer the questions in all the r. cs., in the affirmative and in favour of the assessee and against the revenue.