COMMISSIONER OF INCOME-TAX VS BHOPAL SUGAR INDUSTRIES LTD., 1998 PTD-MADHYA-PRADESH-HIGH-COURT-INDIA 1084 (1996)

Income-tax---

----Income---Sugar industry---Amount credited to create reserve fund unde Government order ---Assessee had no control over amount---Amount not includible in its income.

The assessee-company derived income from the manufacture and sale of sugar. In the accounting year relevant to the assessment year 1978-79, the assessee had created a reserve of Rs.1,07,933 in all from out of its sales each month during the year, in pursuance of the Molasses Control Order, 1961, of the Government of India read with its Standing Order, dated December 3, 1976. The Income-tax Officer held that the amount was deductible. The Commissi6ner of Income-tax felt that as the reserve was created out of the sales, the sales to that extent got reduced resulting in lower income being taxed. He enhanced the income of the assessee by a sum of Rs.1,07,933. The order of the Commissioner of Income-tax was set aside by the Tribunal, On a reference:

Held, that the assessee was under a statutory obligation to create a reserve fund of 33 per cent. of its sales every month and such reserve had to be invested in deposits with the nationalised banks and could be withdrawn for use only at the instance of the Molasses Controller. Therefore, the assessee had no control over the reserve fund. The sum of Rs.1,07,933 was not includible in the income of the assessee.

Keshkal Cooperative Marketing Society Ltd. v. CIT (1987) 165 ITR 437 (MP) ref.

A. Adhikari for the Commissioner.

Nemo for the Assessee.

JUDGMENT

This is a reference at the instance of the Revenue under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") and the following question of law has been referred by the Tribunal for answer of this Court, which reads as under:

"Whether, on the facts and in the circumstances of the case, the reserve of Rs.1,07,933 created by the transfer from sales and not from profit and loss appropriation account for the construction of molasses tank in accordance with the provisions of the Molasses Control Order, 1961, and the Standing Order, dated 3rd December. 1976, has been rightly treated by the Tribunal as not includible in the income of the assessee?"

The brief facts giving rise to this reference are thus: This reference relates to the assessment year 1978-79 for which the previous year ended on September 30, 1977. The assessee-company derives income from manufacture of sugar and its sale. The assessee had created a reserve of Rs.1,07,933 in all from out of. its sales each month during the year in pursuance of the Molasses Control Order, 1961, of the Government of India read with its Standing Order, dated December 3, 1976. The Income-tax Officer completed the assessment on that basis. But the Commissioner of Income-tax felt that as the reserve was created out ,of the sales, the sales to that extent got reduced resulting in lower income being taxed, and as such he held that the order of assessment was erroneous in so far as it is prejudicial to the interests of the Revenue and, therefore, he, in exercise of his revisional power, conferred under section 263 of the Income Tax Act, enhanced the income of the assessee by a sum of Rs.1,07,933.

Aggrieved against the order of the Commissioner of Income-tax, the assessee approached the Tribunal by filing an appeal. The Tribunal set aside the order of the Commissioner of Income-tax and affirmed the order of the Income-tax Officer. Hence, an application was moved by the Revenue to the Tribunal for referring the aforesaid question of law before this Court and the Tribunal has referred the aforesaid question of law for answer of this Court. Hence, this reference application.

We have heard learned counsel for the Revenue and perused the record. The question before us is that whether the reserve of Rs.1,07,933 created by the transfer from sales and not from the profit and loss appropriation account for the construction of a molasses tank in accordance with the provisions of the Molasses Control Order, 1961, and the Standing Order, dated December 3, 1976, has been rightly treated by the Tribunal as not includible in the income of the assessee. A similar question came up before this Court in the case of Keshkal Cooperative Marketing Society Ltd. v. CIT (1987) 165 ITR 437. But in that case, it was a cooperative society and the cooperative society was under the obligation to create a fund which is to be managed by the Registrar of the Cooperative Societies and in that context, their Lordships answered the question in favour of the assesee and against the Revenue that this fund will not be includible in the income of the assessee. In the present case, the facts are almost identical. Here, as per the Molasses Control Order, a reserve fund has to be created for the construction of a molasses tank and it is a statutory obligation of the assessee. Therefore, it is not correct to say that this amount should be derived from the profit. But, as a matter of fact, this amount has to be taken out from the income of the assessee for his business expenditure under the requirement of the statutory provisions and, therefore, this will be deductible from the income of the assessee and not from the profit. The Tribunal, after analyzing the provisions of the Molasses Control Order and decision of this Court, has taken the view that the assessee is under a statutory obligation to create a reserve fund of 33 per cent. of its sales every month and such reserve has to be invested in deposits with nationalized banks and can be withdrawn for use only at the instance of the Molasses Controller. Therefore, the assessee has no control over the fund represented by the reserve fund and in this view of the matter we are of the opinion that the view taken by the Tribunal is correct. Hence, we answer this reference in favour of the assessee and against the Revenue.

M.B.A./1270/FCReference answered.