Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX, U.P.-II, LUCKNOW
Vs.
RESPONDENT:
BAZPUR CO-OPERATIVE SUGAR FACTORY LTD.,BAZPUR, DISTRICTNAINI
DATE OF JUDGMENT06/05/1988
BENCH:
KANIA, M.H.
BENCH:
KANIA, M.H.
PATHAK, R.S. (CJ)
CITATION:
1988 AIR 1263 1988 SCR (3)1034
1988 SCC (3) 553 JT 1988 (2) 597
1988 SCALE (1)1016
ACT:
Whether a Co-operative Society registered under Co-
operative Societies Act, 1912 has power to amend its bye-
laws with retrospective effect-Whether the amended bye-law
is operative during period previous to accounting year-
Whether deposits made by members of the society by way of
deductions contemplated under bye-law 50 of the Society were
in the nature of permanent liabilities and were capital
receipts not liable to be included in taxable income of
assessee-Society or whether the deductions were revenue
receipts liable to tax.
HEADNOTE:
Civil Appeal No. 563 of 1975 filed in the Court was
directed against the Judgment of the High Court in an
Income-tax Reference.
The respondent (assessee) was a registered co-operative
Society, carrying on business of manufacture and sale of
sugar. The respondent had established a fund called "Loss
Equalisation and Capital Redemption Reserve Fund" to which
it added, during the relevant accounting year, a sum of
Rs.5,15,863 by deduction from the price payable by the
respondent to its members for the supply of sugarcane
received from the members. The deductions were made under
bye-law 50 of the Byelaws of the society, which was amended
later. The Income-tax Officer in assessing the respondent
for the relevant assessment year held that the sum above-
mentioned represented a revenue receipt and was liable to be
included in the taxable income of the assessee. On appeal,
the Assistant Commissioner affirmed the view of the Income-
tax Officer, holding that the case had to be decided on the
basis of the bye-law as it stood during the relevant
accounting year. The respondent-assessee appealed to the
Income-tax Appellate Tribunal, which held that the amended
bye-law was operative even during the relevant previous year
in view of the retrospective amendment thereof and that in
view of the said amended bye-law 50 the deposits made by the
members by way of deductions from the price as contemplated
in the bye-law 50 were in the nature of permanent
liabilities and hence they were capital receipts and not
liable to be included in the taxable income of the assessee.
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The Tribunal directed that the said amount of Rs. 5,15,863
be deducted
1035
from the taxable income of the assessee. At the instance of
the appellant, a reference was made to the High Court for
the determination of the question whether the Income-tax
Appellate Tribunal was right in holding that the amount of
Rs.5,15,863 was not a revenue receipt liable to tax. The
High Court answered the question in the affirmative and in
favour of the assessee. The Commissioner of Income-tax moved
this Court by this appeal against the decision of the High
Court.
The appellant contended that the amendment of the bye-
law 50, which was purported to be made with retrospective
effect, could have no retrospective effect in law. There was
no delegation of power to the respondent society to make
bye-laws with retrospective effect.
Allowing the appeal, the Court,
^
HELD:The respondent society had no authority in law to
amend its bye-law 50 with retrospective effect. The
amendment of bye-law 50 could not have any retrospective
effect and the amounts deducted from the amounts payable to
members for the supply of sugarcane, would have to be dealt
with as if they were deducted under the provisions of bye-
law 50 as it stood in the relevant accounting period. If the
provisions of the unamended bye-law were applied, it was
clear that the amounts deducted by the respondent from the
price payable to its members on account of supply of
sugarcane were deducted in the course of the trading
operations of the respondent and these deductions were a
part of its trading operations. The receipts by way of these
deductions must be regarded as revenue receipts and were
liable to be included in the taxable income of the
respondent. Those receipts could not be regarded as
deposits. The receipts constituted by the deductions were
really trading receipts of the assessee society and were
liable to be included in its taxable income. The High Court
was in error and the question referred must be answered in
favour of the revenue. [1042A, G-H;1044D-E]
Civil Appeal No. 564 of 1975 was filed against the
judgment of the High Court in an income-tax reference in
which the question referred for determination was whether a
sum credited during the year of account to the loss
equalisation and capital redemption reserve fund by deposits
received from producer members of the society under clause
50 of its bye-laws was in the nature of a revenue receipt
assessable to tax.
Allowing the appeal, the Court,
1036
HELD:In view of its decision in Civil Appeal No. 563 of
1975, the Court answered the question referred in the
affirmative and in favour of the revenue. [1045A]
Income-tax Officer, Alleppey v. M.C. Poonnoose and
Ors., [1970] 1 S.C.R. 678; Hukam Chand etc. v. Union of
India & others, [1973] 1 S.C.R. 896; Co-operative Central
Bank Ltd. & Ors. v. Additional Industrial Tribunal, Andhra
Pradesh & Ors., [1970] 1 S.C.R. 205; Dr. Indramani Pyarelal
Gupta v. W.R. Nathu and others, [1963] 1 S.C.R. 721;
Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-
tax West Bengal, [1973] 87 I.T.R. 541 and Punjab Distilling
Industries Ltd. v. Commissioner of Income-tax Simla, [1959]
35 I.T.R. 519, referred to.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 563 &
564 of 1975.
From the Judgment and Orders dated 15.11.71 and 9.5.72
of the Allahabad High Court in I.T.R. No. 67 of 1969 and 724
of 1971.
B.B. Ahuja, Ms. A Subhashini and K.C. Dua for the
Appellants.
S.C. Manchanda, Mrs. A.K. Verma and Joel Pares for the
Respondents.
The Judgment of the Court was delivered by
KANIA, J. This is an appeal against the judgment of a
Division Bench of the Allahabad High Court in Income-tax
Reference No. 67 of 1969. The appeal has been filed at the
instance of the Commissioner of Income-tax, U.P..
The relevant facts are as follows:-
The respondent (assessee) is a Co-operative Society
registered under the Co-oprative Societies Act, 1912. It
carries on the business of manufacture and sale of sugar and
runs at a Mill situated at Bazpur. The relevant assessment
year is the assessment year 1961-62, the corresponding to
the accounting year 1st July, 1959 to 30th June, 1960, which
was the relevant co-operative year. The assessee had
established a fund called "Loss Equalization and Capital
Redemption Reserve Fund". On the opening day of the year of
account, namely, 1st July, 1959, a sum of Rs.1,30,196 stood
to the credit of
1037
this fund. During the relevant accounting year, the
respondent society added a sum of Rs.5,15.863 to this fund
by deduction from the price payable by the respondent to its
members for the supply of sugarcane received from its
members. These deductions were made under the provisions of
bye-law 50 of the Bye-laws of the respondent society, to
which we shall presently come. Bye-law 50 under which the
said amount was deducted from the price payable by the
respondent to its members for the supply of sugarcane at the
relevant time ran as follows:-
"There shall be established a Loss Equalisation
and Capital Redemption Reserve Fund in the
Society. Every producer shareholder shall deposit
every year a sum not less than 32 np and not more
than 48 np per quintal of the sugarcane supplied
by him to the society as may be determined by the
Board. After adjusting the losses, if any, in the
working year the deposits shall be allowed to
accumulate and utilised for repayment of the
initial loan from the Industrial Finance
Corporation of India and thereafter for redeeming
Government share.
The balance of the said deposit after meeting
losses shall be used in being converted into share
capital in accordance with bye-law 44(xix) and
each producer share holder shall be issued shares
of the society of the corresponding value in lieu
thereof."
During the accounting year, the respondent debited a
sum of Rs.2,34,354 to the said fund by adjusting this amount
against the loss brought forward from the previous year,
with the result that at the close of the said year on 30th
June, 1960, the account showed a credit balance of
Rs.4,11,705. A meeting of the Sub Committee of the
respondent society which was held on August 26, 1964 took
the view that bye-law 50 was not clear as to whether the
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fund in question was perpetual or terminable and also that
it was not clear as to how the liability for the loss of the
respondent society can be fastened on the said fund. The Sub
Committee recommended an amendment of the bye-law 50 and
pursuant to this recommendation, at a general meeting of the
respondent held on 30th June, 1965, bye-law 50 was amended
to run as follows:-
"There shall be established a Loss Equalisation
and Capital
1038
Redemption Reserve Fund in the Society. Every
producer share holder shall deposit every year a
sum not less than 32 paise and not more than 48
paise per quintal of the sugarcane supplied by him
to the society as may be terminated by the Board,
until the shares to be subscribed by a member are
fully paid up. The amounts standing to the credit
of this fund presently or to be credited in future
shall be used for making the partly paid shares
fully paid up. The balance of the said account
shall be refunded to the members concerned soon
after the present loan from the Industrial Finance
Corporation of India is repaid, whereafter the
fund shall cease to exist.
This amended bye-law shall be deemed to have come
into force from 1st July, 1958."
It may be mentioned here that the respondent society
came into existence in 1958-59 and the original bye-laws
came into force from 1st July, 1958. The Income-tax Officer
in assessing the respondent for the relevant assessment year
held that the said sum of Rs.5,15,863 represented a revenue
receipt and was liable to be included in the taxable income
of the assessee. On appeal the Appellate Assistant
Commissioner affirmed the view of the Income-tax Officer
holding that the case has to be decided on the basis of the
bye-law as it stood during the relevant accounting year. The
respondent assessee went in appeal to the Income-tax
Appellate Tribunal which took the view that the amended
Clause 50 must be held to be operative even during the
relevant previous year in view of the retrospective
amendment thereof and that in view of the said amended bye-
law 50 the deposits made by the members by way of deductions
from the price as contemplated in bye-law 50 were in the
nature of permanent liabilities and hence they were capital
receipts and not liable to be included in the taxable income
of the respondent assessee. The tribunal allowed the appeal
of the assessee and directed that the said amount of
Rs.5,15,863 should be deducted from the taxable income of
the assessee as determined by the Income-tax Officer. At the
instance of the Commissioner a reference was made to the
Allahabad High Court and the question framed for
determination of the High Court was as follows:-
"Whether on the facts and in the circumstances of
the case, the Income-tax Appellate Tribunal was
right in holding that the amount of Rs.5,15,863
was not a revenue receipt liable to tax?"
1039
The Division Bench of the High Court which disposed of
the said reference agreed with the view of the Tribunal that
the bye-law 50 of the bye-laws of the society was validly
amended with retrospective effect and that retrospective
effect must be given to that bye-law. The Division Bench
took the view that in view of the amended bye-law the amount
of Rs.5,15,863 was not an amount which the society could
deal with as its income or according to its will and hence
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the source of the receipt was diverted. The High Court
answered the question referred to it in affirmative and in
favour of the assessee. The present appeal is directed
against the said decision of the High Court.
Before coming to the contentions urged by the
respective counsel, it will be useful to take note of the
relevant statutory provisions and the relevant rules. The
respondent society was registered under the Co-operative
Societies Act of 1912. Clause (a) of Section 2 of the said
Act of 1912 defines "bye-laws" as registered bye-laws for
the time being in force and includes a registered amendment
of the bye-laws. Section 6 deals with the conditions for the
registration of a co-operative society. Section 43 confers
upon the State Government power to make rules for registered
societies to carry out the purposes of the said Act. The
relevant portion of clause (c) of sub-Section (2) of Section
43 runs as follows:
"In particular and without prejudice to the
generality of the foregoing power, such rules may
prescribe the matters in respect of which a
society may or shall make bye-laws, and the
procedure to be followed in making, altering and
abrogating bye-laws, and the conditions to be
satisfied prior to such making, alteration or
abrogation."
Clause (e) of Section 43(2) runs as follows:-
"In particular and without prejudice to the
generality of the foregoing power, such rules may
regulate the manner in which funds may be raised
by means of shares or debentures or otherwise;"
Pursuant to the powers conferred under Section 43 of
the Co-operative Societies Registration Act, 1912, the
Government of U.P. framed certain rules known as United
Provinces Co-operative Societies Rules, 1936 for registered
societies and these rules were in force at the relevant
time. The relevant portion of Rule 8 under heading "III-Bye-
laws" ran as follows:-
1040
"A society shall, subject to the provisions of the
Act and of the rules, make bye-law in respect of
the following matters, namely:
(1) the name of the society;
(2) its registered address;
(3) its aims and objects;
(4) the purposes for which its funds may be
applied;"
Rule 10 conferred power on a society to make bye-laws
in respect of any other matter incidental to the management
of its business. Rule 11 which deals with the amendment of
rules runs as follows:
"An amendment may be made in the bye-laws, i.e. a
bye-law may be altered or rescinded or a new bye-
law added by a resolution passed by the votes of
at least two-thirds of the members present at a
special meeting called for the purpose."
It was submitted by Mr. Ahuja, learned counsel for the
appellant (revenue) that the amendment of bye-law 50,
although it was purported to be made with retrospective
effect could, in fact, have no retrospective effect in law.
It was submitted by him that a co-operative society governed
by the Co-operative Societies Act, 1912 was not a body
constituted by the said Act nor a statutory body. The power
to make bye-laws was conferred upon the society by
delegation under rules which themselves were framed by the
Government in exercise of power delegated to the Government
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by the legislature under Section 43 of the aforesaid Act of
1912. It was submitted by him that as there was no
delegation of any power on the respondent society to make
bye-laws with retrospective effect, it had no power to do so
and the amendment of bye-law 50 made by the society,
although purporting to be retrospective, could not be given
any such effect. In support of this submission, Mr. Ahuja
relied upon the decision of this Court in Income-tax
Officer, Alleppey v. M.C. Poonnoose & Ors., [1970] 1 S.C.R.
p. 678 in which the Court held as follows:
"Where any rule or regulation is made by any
person or authority to whom such powers have been
delegated by the legislature it may or may not be
possible to make the same
1041
so as to give retrospective operation. It will
depend on the language employed in the statutory
provision which may in express terms or by
necessary implication empower the authority
concerned to make a rule or regulation with
retrospective effect. But where no such lenguage
is to be found it has been held by the courts that
the person or authority exercising subordinate
legislative functions cannot make a rule,
regulation or bye-law which can operate with
retrospective effect (see Subba Rao J., in Dr.
Indramani Pyarelal Gupta v. W.R. Nathu & Others.
[1963] SCR 721-the majority not having expressed
any different opinion on the point; Modi Food
Products Ltd., v. Commissioner of Sales Tax U.P.,
A.I.R. 1956 All. 356; India Sugar Refineries Ltd.
v. State of Mysore, A.I.R. 1960 Mys. 326 and
General S. Shivedev Singh & Another v. The State
of Punjab & Others, [1959] P.L.R. 514.")
The aforesaid observations have been cited with
approval by this Court in Hukum Chand etc. v. Union of India
& Others, [1973] 1 S.C.R. p. 896 where the Central Govenment
was held to have acted in excess of its powers in so far as
it gave retrospective effect to the Explanation to Rule 49
framed under the Displaced Persons (Compensation and
Rehabilitation) Act, 1954, exercising the powers conferred
by Section 40 of the Act. We may also refer here to the
decision of this Court in Co-operative Central Bank Ltd. &
Ors. v. Additional Industrial Tribunal, Andhra Pradesh &
Ors., [1970] 1 S.C.R.p. 205 where it has been stated by this
Court as follows:
"We are unable to accept the submission that the
bye-laws of a co-operative society framed in
pursuance of the provisions of the Act can be held
to be law or to have the force of law. It has no
doubt been held that, if a statute gives power to
a Government or other authority to make rules, the
rules so framed have the force of statute and are
to be deemed to be incorporated as a part of the
statute,. That principle, however, does not apply
to bye-laws of the nature that a co-operative
society is empowered by the Act to make. The bye-
laws that are contemplated by the Act can be
merely those which govern the internal management,
business or administration of a society."
We may mention that the Act under which the bye-laws
were framed was the Andhra Pradesh Co-operative Societies
Act, 1964.
1042
In the light of the decisions discussed earlier, it
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appears to us that the respondent society had no authority
in law to amend bye-law 50 with retrospective effect as it
purported to do. We have already pointed out the power of
the society to amend its bye-laws arises from the provisions
of Rule 11 of the United Provinces Co-operative Societies
Rules, 1936, which rule has been made under the powers
conferred by Section 43 of the United Provinces Co-operative
Societies Act, 1912. There is nothing expressly or impliedly
in Rule 11 which confers any power on the society to amend
its bye-laws with retrospective effect and in the absence of
any such power being conferred, either expressly or by
implication, it cannot be said that the society had any
power to amend its bye-laws with retrospective effect. Mr.
Manchanda, learned counsel for the respondent-society placed
strong reliance on the decision of this Court in Dr.
Indramani Pyarelal Gupta v. W.R. Nathu and Others, [1963] 1
S.C.R. p. 721 where it was held that the substituted bye-law
52AA of the East India Cotton Association made by the
Central Government in exercise of the power conferred upon
it under Section 12 of the Forward Contracts (Regulation)
Act, 1952 and which, very shortly stated, conferred power on
the Forward Markets Commission, after notifying with the
Chairman of the Board of the East India Cotton Association,
to close hedge contracts in the eventualities mentioned in
the said rule was not invalid in law or ultra vires the
Constitution. On a proper construction, the amended or
substituted bye-law applied not only to contracts to be
entered into futute but also to subsisting contracts. This
Court pointed out that, in that case, the power to make bye-
laws so as to affect the rights in subsisting contracts
followed as a necessary implication from the terms of
Section 11 of the Forward Contracts (Regulation) Act, 1952.
In the case before us, however, there is nothing in Section
43 of the U.P. Co-operative Societies Act, 1912 or Rule 11
of the United Provinces Co-operative Societies Rules, 1936
to indicate that there is any power, express or by implied,
in a co-operative society registered under that Act to make
bye-laws with retrospective effect in respect of its
business.
In view of the above discussion, in our view, the
amendment of bye-law 50 of the respondent society cannot
have any retrospective effect and the amounts deducted from
the amounts payable to members for the supply of sugarcane,
will have to be dealt with as if they were deducted under
the provisions of bye-law 50 as it stood in the relevant
accounting period.
If the provisions of the unamended bye-law are to be
applied, it
1043
is clear that these amounts which were deducted by the
respondent from the price payable to its members on account
of supply of sugarcane were deducted by the respondent from
the price payable to its members on account of supply of
sugarcane were deducted in the course of the trading
operations of the respondent and these deductions were a
part of its trading operations. The receipts by way of these
deductions must, therefore, be regarded as revenue receipts
and are liable to be included in the taxable income of the
respondent. It is urged by Mr. Manchanda, that these
receipts have been described in the bye-law 50 as deposits,
but we fail to see how they can really be regarded as
deposits. It was held by this Court in Chowringhee Sales
Bureau P. Ltd. v. Commissioner of Income-tax, West Bengal,
[1973] 87 I.T.R. p. 541 that it is the true nature and
quality of the receipt and not the head under which it is
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entered in the account books as would prove decisive. If a
receipt is a trading receipt, the fact that it is not so
shown in the account books of the assessee would not prevent
the assessing authority from treating it as a trading
receipt. The same principle can be derived from the decision
of this Court in Punjab Distilling Industries Ltd. v.
Commissioner of Income-tax, Simla, [1959] 35 I.T.R. p. 519.
In that case, the assessee carried on business as a
distiller of country liquor and sold the produce of its
distiller to licensed wholesalers. Under a scheme devised by
the Government, the distiller (assessee) was entitled to
charge the wholesaler a price for the bottles in which the
liquor was supplied, at rates fixed by the Government, which
he was bound to repay when the bottles were returned. In
addition to the price fixed under the Government scheme, the
assessee took from the wholesalers certain further amounts,
described as security deposits without the Government’s
sanction and entirely as a condition imposed by the assessee
itself for the sale of its liquor. The moneys described as
security deposits were also returned as and when the bottles
were returned but in this case the entire sum taken in one
transaction was refunded when 90 per cent of the bottles
covered by it were returned. The price of the bottles
received by the assessee was entered by it in its general
trading account while the additional sum was entered in the
general ledger under the heading "empty bottles return
security deposit account." The question was whether the
assessee could be assessed to tax on the balance of the
amounts of these additional sums left after the refunds made
out of the same. It was held that the additional amount
described as security deposit by the assessee was really an
extra price for the bottles and was a part of the
consideration for the sale of liquor; it did not make any
difference that the additional amount was entered in a
separate ledger termed "empty bottles return deposit
account". It was held that these additional
1044
amounts, which remained after the refunds were made, were
trading receipts of the assessee and liable to tax. Applying
these principles to the present case, in our opinion, it
makes no difference that in the bye-law, these amounts have
been referred to as deposits and the account in which these
receipts were entered has been called "Loss Equalisation and
Capital Redemption Reserve Fund". The essence of a deposit
is that there must be a liability to return it to the party
by whom or on whose behalf is made on the fulfillment of
certain conditions. Under the amended bye-law, the amounts
deducted from the price and credited to the said fund were
first liable to be used in adjusting the losses of the
respondent society in the working year; thereafter in the
repayment of initial loan from the Industrial Finance
Corporation of India and then for redeeming the Government
share and only in the event of any balance being left, it
was liable to be converted to share capital. The primary
purpose for which the deposits were liable to be used were
not to issue shares to the members from whose amounts the
deductions were made but for the discharging liabilities of
the respondent-society. In these circumstances, the receipts
constituted by these deductions were really trading receipts
of the assessee society and are liable to be included in its
taxable income. In our view, the learned judges of the High
Court were, with respect, in error in answering the question
referred in the negative. In our opinion, the question
referred must be answered in affirmative and in favour of
the revenue.
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In the result, the appeal succeeds and is allowed with
costs. The respondent shall also pay to the appellant the
costs incurred in Income-tax Reference No. 67 of 1979.
CIVIL APPEAL No.564 OF 1975
This is an appeal against the judgment of a Division
Bench of the Allahabad High Court in Income-tax Reference
No. 724 of 1971. The question referred to us for
determination is as follows:-
"Whether on the facts and in the circumstances of
the case, the sum of Rs.6,11,846 credited during
the year of account to the loss equalisation and
capital redemption reserve fund by deposits
received from producer members of the society
under Clause 50 of its bye-laws is of revenue
nature assessable to tax"?
1045
In view of our decision, the appeal must be allowed and
the question referred answered in the affirmative and in
favour of the revenue. The appeal is allowed. No order as to
costs.
S.L. Appeal allowed.
1