Holding

Non‑refundable and refundable deposits are deposits, not income, and are excluded from taxable income; the Cane Development Fund amounts are taxable, while the taxability of the Area Development Fund is left for fresh determination.

Summary

The case concerned several Maharashtra sugar‑co‑operative societies that deducted amounts from the cane price payable to their farmer members as non‑refundable and refundable deposits and as contributions to various funds. The Income Tax Department treated these deductions as trading receipts and taxed them under the Income Tax Act, 1961, invoking its power under Section 263 to revise earlier assessments. The societies argued that the deductions were deposits payable back to members on the occurrence of specified events, or were merely agency collections for government‑run funds, and therefore could not be income of the societies. The Supreme Court held that the non‑refundable and refundable deductions are genuine deposits with an enforceable right of repayment or conversion into shares, and thus are excluded from taxable income, while amounts collected towards the Cane Development Fund constitute income of the societies. The Court also held that the taxability of the Area Development Fund requires fresh determination by the Tribunal. Consequently, the societies' appeals were allowed, the revenue’s appeal was partly allowed, and the taxability of the Cane Development Fund was affirmed.

Issues considered

The nature of compulsory deductions (non‑refundable and refundable deposits) made by sugar co‑operative societies: whether they constitute taxable trading receipts.
Whether such deductions qualify as deposits with an obligation to refund or convert into shares, rendering them non‑taxable.
The extent of the societies' dominion over the deducted amounts and the relevance of the "may" versus "shall" language in the bye‑laws.
The taxability of amounts collected towards the Chief Minister's Relief Fund, Y.B. Chavan Memorial Fund, Hutment Fund, Area Development Fund and Cane Development Fund.
The applicability of Section 263 of the Income Tax Act to revise assessments for the years in question.
The interpretation of the societies' bye‑laws under the Maharashtra Co‑operative Societies Act, 1960.

Legislation cited

Income Tax Act, 1961s. 256(1), s. 263, s. 41(1)
Maharashtra Co-operative Societies Act, 1960

Subjects

Income TaxCo-operative SocietiesDepositsTaxable IncomeNon‑refundable DepositRefundable DepositSection 263Maharashtra Co-operative Societies ActArea Development FundCane Development FundAgency CollectionDominion over Funds

Judgment

SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. A
v.
C.l.T., KOLHAPUR AND ORS.

SEPTEMBER 8, 2004

[P. VENKATARAMA REDDI AND RUMA PAL, JJ.] B

Income Tax Act, 1961-Compulsory deductions from cane growers
made by sugar co-operative societies-repayment on occurrence of specified
event ofrepayment ofgovt. loans-Held, is a deposit-Events not uncertain-
Further Held, deposits belong to members-Dominion with such members. C
Refundable and Non-Refundable deposits-Payment ofinterest credited
to individual member's accounts-Refund on the happening of certain
event-Held, such clear deposits liable to be excluded from the income of
the co-operative societies.
D
Maharashtra Co-operative Societies Act, 1960-Deduction made by
assessee societies from cane growers-Towards various funds such as Chief
Minister's Funds-Money collected for any on behalf of the person to whom
it is payable-Held, such receipts should not be treated as income of the
asses see.
E
Cane Development Fund-Collected for utilization for benefit of itself
and members-Held, is income taxable in the hands of the assessee societies.

The Appellants are registered Cooperative Societies, governed by
the provisions of Maharashtra Co-operative Societies Act, 1960, are its F
members are predominantly sugarcane farmers. The sugarcane growing
areas in the State of Maharashtra have been divided into different
territorial units and each area has a factory for manufacturing sugar
and the sugarcane growers within the territory are obliged to sell their
sugarcane only to the said factory. The bye-laws provided for deduction
of amounts towards refundable and non-refundable deposits from the G
cane price payable to the grower members. In addition to that pursuant
to the orders passed or circulars issued by the State Government/Director
of Sugars, amounts were deducted for being credited into various Funds
such as Chief Minister's relief Fund, Y.B. Chavan Memorial Fund, Area
Development Fund etc. The amounts credited to these Funds were utilized H
155
156 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A either by the Society directly as per the guidelines or remitted to the
Government or trustees for socio-economic development of the
operational area. Till the assessment year 1984-85, these collections/
deposits were not treated as income of the assessee on the footing that
they were not trading receipts.
B After judgment in Bazpur Co-operative's case the Commissioner
of Income Tax revised the assessments for the assessment years 1984-85
and 1985-86 in respect of non-refundable deposits and refundable deposits
and other deduction by exercising power under Section 263 of the Income
Tax Act. As far as the following years were concerned, namely, assessment
C years 1986-87, 1987-88 and 1988-89, assessment orders were passed by
the Income-tax authorities treating the non-refundable deposits,
refundable deposits and other deductions as trading receipts. The
Commissioner of Income Tax (Appeals) dismissed the appeals filed by
the· assessees. All these orders were challenged before the Income Tax
D Appellate Tribunal by the Sugar Co-operative Societies was heard and
disposed of by a Special Bench of the Tribunal which-decided the question
in favour of the Sugar Cooperatives holding that the bye-laws in Bazpur
Co-operative 's case and the character of deductions made were
substantially different from those in the case of Sugar Co-operatives in
the State of Maharashtra. The Tribunal referred 15 questions to the
E High Court at Bombay under Section 256(1) of the Income Tax Ac~. The
High Court decided the question whether the various amounts collected
by the Society from the cane growers out of the Sugarcane Purchase
Price in the name of deposits are taxable as income of the assessee
Society holding that the non-refundable and refundable deposits are
F trading receipts whereas· deductions on account of Area Development
Fund, Cane Development Fund, Hutment Fund, Y.B. Chavan Memorial
·Fund, The Chief Minister's Relief Fund, Education Fund are not trading
receipts and therefore not taxable. · ,

Before this Court both assessees and Revenue filed appeals. The
G appellant-assessee contended that the High Court overlooked certain
important aspects of the case and laid undue stress on the fact that the
amount treated as deposit is deducted from the price payable to the
cane growers as part of the trading operations and, therefore, it was. in
the nature of trading receipt; that the assessee Society was always treating
H the deposits as the money belonging to the members (cane growers),
SIDDHESHWAR SAHAKARI SAKHARKARKHANA LTD. v. C.I.T. 157

credited the deducted amounts to the individual accounts of the members A
on which interest at fixed rate was being credited; that the society treated·
the deposits as its liability towards the members/depositors, that under
the bye-laws there is sufficient indicia that the members own the deposits;
that the deposits are not utilized for carrying on the trading operations
by the society, but they are utilized only for the discharge of capital B
liabilities; that if at all, they are capital receipts, but not revenue receipts;
that it is not appropriate to describe the deposit as non-refundable
deposit. It is non-refundable in the sense that it may not be paid in cash
to the member, but it will go to augment the share capital of the member.

The department contended that the true nature and character of C
receipt has to be taken into account not withstanding the nomenclature
used or the accounting method adopted; it is the origin or genesis of the
receipt that should be taken into account but not the manner in which
the amount is utilized; that the deduction is from out of the price payable _
to the member and as a result thereof the rectipts on account of deposits D
bring about savings in the cost of raw material is a strong indication
that it is a trading receipt; that the members have no volition except to
suffer the deduction and they have no enforceable legal rights which are
otherwise available to the depositors in the ordinary course; that even
in limited contingencies such as resignation and death, there is no
unfettered right to get back the deposited amount lying in the account E
of the individual member; that the Government's share capital though
nominal is always retained so that the process of deduction can go on
and the so called deposits are utilized for the purposes of the society;
that crediting of interest is not decisive and it practically remains on
paper, that there is practically no difference between the on-amended
bye-law which was considered,. in Bazpur Co-op. Sugar case and the bye- F
laws in the present case; that the Board of Directors may very well
refuse to convert the d~posits into shares in exercise of its discretion on
the ostensible ground that the financial position of the Society does not
permit such conversion and that such discretion negates the existence
of liability to convert the deposit into shares; and that the possibility of G
return of the deposit (by way of conversion into shares) depends on
uncertain events and the repayment remains to be a remote possibility.

Disposing of the appeals, the Court

HELD : 1. Once the loans of the description mentioned in the bye- H
158 SUPREME.COURT REPORTS [2004] SUPP. 4 S.C.R.

A laws which were outstanding on the date the deposit was made are
repaid, the Board of Directors is bound to convert the deposit amount
into shares. The discretion is always coupled with a duty; the discretion
cannot be used to circumvent the obligation cast under the law or contract
governing the parties. It would be appropriate to read the expression
B 'may' as 'shall'. On the occurrence of the specified event, namely, the
repayment of the loans referred to in the bye-law and the Government
share capital, the member/depositor can clutch at a legally·enforceable
right to demand repayment, may be, in the form of conversion into
additional shares. (177-E, F, G)

C 2. The retention of the deposited money with the Society in order
to utilize the same for repayment of term loans etc., does not denude the
amount of its character of 'deposit' carrying with it the obligation to
repay. Nor is it necessary, as the High Court was ~nclined to think, that
the separate identity of the deposited amounts should be kept up~ The
D absence of the right to secure repayment on demand is again not
inconsistent with the receipt being a deposit. Liability to return need not
be immediate and unconditional, following a demand by the depositor.
Even if such liability gets crystallized on the· happening of a specified
contingency, it is still a liability which can be legally enforced by th(!
depositor. The existence of such liability is an antithesis to the idea of
E ownership of the money by the Society. [177-G, H; 178-A, BJ

Corpus Juris Secundum (Vol. 26A) - Deposits; Words and Phrases
(Permanent Ed'l. Vol. 39-A): Shanti Prasad v. Director of Enforcement,
(1963) 2 SCR 297, referred to.
F
3. It is wrong to assume that the events giving rise to refund are
uncertain. The repayment of.Joans-taken for capital expenditure and the
share capital of the Government are the two specified events which are
by no means uncertain, though the time of repayment is indefinite. On
the occurrence of the said two events, the right to demand refund would
G accrue to the depositor. The obligation which had been in in~hoate form
ripened itself into a complete obligation on the occurring of specified
events stipulated in the bye laws. Such an obligation may be contingent
in nature initially but the right to enforce the obligation inheres in the
depositor from the beginning. The existence of other features such as
H transferability of the deposit to another member and the provision for
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. 159

refund of the deposited amount to the member in case of cessation of A
membership or to his legal heirs in case of death, are important indicators
against the treatment of the deposited amount as the money belonging
to the Society. The payment of interest from year to year at a specified
· rate is another important factor that supports the conclusion of the
disputed sum being a deposit. Such payment of interest is only consistent B
with the fact that the deposited amount still belongs to the member. The
fact that the deposited amounts are credited to the individual accounts
of the members is a corroborative circumstance to indicate that the
deposits belong to the members. [180-D, E, F, G)

4. The assessee-Society had no absolute dominion over the impugned C
deposits. Firstly, the manner of user of the deposit is limited by the bye-
laws. Para (4) of bye-law 61-A makes it clear that the amount of deposits
shall be utilized for the repayment of term loans taken for the capital
expenditure from the banks and financial institutions. Unlike the case of
Bazpur Co-operative Society the deposited amount cannot be 'adjusted' D
against the term loans much less the losses though it can be temporarily
utilized by the assessee to clear the loans. The fact that the depositor can
seek transfer of the deposit to another member by filing an application
for that purpose again highlights the fact that the power of disposal of
the deposit lies with the member. The obligation to convert the deposits
into shares subsequent to the repayment of certain types of loans coupled E
with the right given to the member to seek transfer of the amount lying
to his credit and the obligation to refund the deposit to the depositor on
cessation of his membership or to his legal heirs in case of death subject
of course to certain restrictions, are all pointers that the assessee can
exercise dominion over the deposits only in a limited sphere. On a F
consideration of the bye-laws as a whole, it is difficult to hold that either
the assessee or the depositor exercises complete dominion over the
deposited amounts. If so, it is not possible to countenance the plea that
the title to the deposits will throughout remain in the hands of the
Society and the depositor has no stake or interest therein, once it reaches
the assessee's hands. [181-D, E, F, G) G

Commissioner of Internal revenue v. Indianapolis Power & Light
Company, 493 US 203, relied on.

5. Meeting the financial commitments of the Society may be one of H
160 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
. . \
A the purposes for which the deposits were collected but that is not all. The
augmentation of the share capital which may be in the overall interests of
the members as well as the Society is an equally important purpose which
cannot be overlooked. At any rate, the view taken by the Tribunal appears
to be a reasonable view and the High Court need not have disturbed that
B finding. Though deducted from the cane price, the refundable deposits
are pure and simple fixed deposits repayable on the expiry of a definite
period of time with interest. The restrictions and conditions governing the
non-refundable deposits are not incorporated in bye-law 61-B. These
'deposits' are akin to the transaction of loan. They are clearly liable to be
excluded from taxable income. [182-D, E; 183-E, F]
c
CIT v. Bazpur Co-Op. Sugar Factory Ltd., [1988) 3 SCC 553 and
Explained and Shree Nirmal Commercial Ltd. v. CIT, 193 ITR 694,
distinguished.

D 6. A person by becoming the member of a Co-operative Society,
volunteers to abide by the bye-laws of the Society, the real object of which
is to provide for internal management of the Society including rendering
assistance to the members. There is an authority for the proposition that
the bye-laws of the Co-operative Society constitute a contract between the
Society represented by its managing body and its constituents. The mere
E fact that the contract has to be entered into in conformity with and subject
to restrictions imposed by law does not per se impinge on the consensual
element in the contract. "Compulsion of law is not coercion" arid despite
such compulsion, "in the eye of law, the agreement is freely made",
Therefore the non-refundable and refundable deposits cannot be treated
F as the income of the assessee-Societies. (183-G; H; 184-A, C, D]

Hyderabad Karnatal<a Education Society v. Registrar of Society and
Others, [2000) 1 SCC 566 (Vide paragraph 28); The Cooperative Central
Bank Ltd & Ors. v. The Additional Industrial Tribunal, Andhra Pradesh,
[1969) 2 SCC 43; N.C. Sanyal v. Calcutta Stock Exchange Association Ltd.,
G [1971) t SCC 57 and Andhra Sugars Ltd. v. State of A.P., AIR (1968) SC
599, referred to.

7. As regards the Chief Minister's Relief Fund, Late Y.B. Chavan
Memorial Fund, Hutment Fund the assessee merely acted as an agent
H in collecting the amounts and remitting the same to the Government/
SIDDHESHW AR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. 161

Trustees. In truth and in substance, the money collected by the assessee A
was not reaching the assessee as part of its income, but the collection
was made "for and on behalf of the person to whom it is payable". It
had no manner of right or title over the said monies. The amount collected
towards Hutment Fund stands on no different footing. It was meant to
be handed over to Collector for the purpose of providing shelter to B
landless poor inhabitants within the area of operation of the sugar factory.
The Court agrees with the conclusion reached by the Tribunal and the
High Court that these receipts should not be treated as income of the
assessee. (185-D, E, F)

CIT v. Sheela/ Das, 41 ITR 367, relied on. c
8. Unlike the other funds like Chief Minister's Relief Fund, the
amount collected towards Area Development Fund is retained by the
sugar factory itself and utilized as per the guidelines issued by the
Government or the National Cooperatives Development Corporation. D
The collective Body of the Society and its elected representatives take the
decision as to how much amount has to be spent and for what purposes.
The Director of Sugars or other designated official, no doubt acts in a
supervisory capacity to oversee that the funds are properly utilized. On
that account, it cannot be said that the collection is made by the Society as
an agent of the Government or the proprietary interest in the funds is E
vested with the Government. The conclusion has been reached by the
Tribunal mainly on the basis of requirement of prior sanction of the
Director of Sugars for incurring the expenditure. Such restriction
prescribed in the larger interest of the Society itself does not in any way
detract from the fact that the Societies concerned do exercise dominion F
over the fund and deal with that money subject of course to the guidelines
and restrictions evolved by the Government. The Tribunal failed to
approach the question in proper perspective on an analysis of the relevant
circulars and orders. The High Court too fell into an error in invoking the
theory of diversion of income at source. The crux of the matter is that
there has never been a diversion of income to a third party (Government) G
before it reached the assessee. The receipts in the form of Area Development
Fund always remained with the assessee. [186-E, F, G; 187-A)

9. Unlike the Area Development Fund, the monies out of Cane
Development Fund are not spent for purposes unconnected with the H
162 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A growth and functioning of the sugar factory. The Tribunal was inclined
to view it as a 'compulsory levy' on the depositors collected by the
Government through the agency of sugar factory. This approach is wholly
unsustainable and is in the realm of surmise. There is no scope for the
application of principle of diversion of Income at sou~ce in the case of
B collections made towards Cane Development Fund. The amounts realized
on this account undoubtedly reach the assessee as its income and is
utilized by the assessee for the benefit of itself and its members. As
already observed, the supervisory role of the Directorate of Sugar to
ensure that the amount is properly utilized to promote the objectives
with which the fund was formed, does not make a material difference on
C the quality and character of the receipt. Therefore the deductions made
out of cane price towards Cane Development Fund should be treated as
the income of the assessee. [187-G, H; 188-A, BJ

CIVIL APPELLATE WRISDICTION : Civil Appeal Nos. 6973-6975
D of2000.

From the Judgment and Order dated 4.5.2000 of the Bombay High
Court in LT.A. No. 405, 407 and 411 of 2000.

WITH
E
C.A. Nos. 6976-7026, 7028-7038, 7461-7465/2000, 177-269, 7923-
7924/2001, 4293, 4878 of 2002 and 1013-1017/2002, 2122, 2544, 2717-
2718, 2958, 3339-3348, 3429-32, 3378-3380, 4008-09, 3996-4002, 3589-
3591, 3567, 3777-3785, 3790-3796, 3962-64, 4191, 4062-63, 4666-4671,
4479-80, 4673-4682, 4732-36,4691-4731, 4737-4742, 5479-88, 6088-89,
F 5207, 5489-94, 5496-5502, 6611, 7243, 7454/2001, 466-470, 3475, 5073-
77, 7399-7400/2002, 469-470/2003, 5867, 5868, 5869, 5870, 5871-5875,
5876, 5877, 5878, 5879/2004.

Ashok Desai, Uday Lalit, Gupal Jain, R.N. Karanjawala, Ms. Nandini
G Gore, Ashish Jha, Vivek Sharma, Ms. Jasmine Dhamakewala and Ms. Manik
Karanjawala for the Appellant.

R.P. Bhatt, P. Kapur, Ms. Neera Gupta, Ranbir Chandra, Rajiv Tyagi,
B. V. Bairam Das and K.J. John for the Respondents.

H The Judgment of the Court was delivered by
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDD!, J.] 163

P. VENKATARAMA REDDI, J. : In all these appeals, the question A
for decision is whether compulsory deductions made by sugar cooperative
societies on account of non-refundable and refundable deposits and other
Funds are revenue receipts liable to be taxed under the Income Tax Act.

The appellants in the first batch of appeals are registered Cooperative
Societies governed by the provisions of Maharashtra Co-operative Societies
B
Act, 1960 and which is referred hereafter as 'the Act'. The affairs of these
Societies are regulated by the bye-laws framed or adopted by the Societies
in accordance with the procedure laid down under the Act.

The appellant in each of the appeals carries on the business of C
manufacturing sugar. Its members are predominantly sugarcane farmers.
According to the policy of the Government, the sugarcane growing areas in
the State of Maharashtra have been divided into different territorial units.
Each unit has a factory for manufacturing sugar and the sugarcane growers
within the territory are obliged to sell their sugarcane only to the said factory. D
The project cost of the appellant was met partly by share capital and partly
by way of capital subsidy provided by either the Central Government
(Ministry of Industrial Development) or financial institutions such as IDBI,
IFCI etc. The share capital was contributed not only by the members but also
by the State Government. So long as the State Government held share capital
in the Society, the Government was entitled to fix the sugarcane price which E
it did. The bye-laws provided for deduction of amounts towards refundable
and non-refundable deposits from the cane price payable to :he grower
members. There were also instructions of the Director of Sugars to this effect.
Apart from that, pursuant to the orders passed or circulars issued by the State
Government/Director of Sugars, amounts were being deducted for being F
credited into various Funds such as Chief Minister's Relief Fund, Y.B.
Chavan Memorial Fund, Area Development Fund etc. The amounts credited
to these Funds are meant to be utilized either by the Society directly as per
the guidelines issued by the Director or remitted to the Gow~rnment or
trustees for socio-economic development of the operational area. Till the
assessment year 1984-85, these collections/deposits were not treated as G
income of the assessee on the footing that they were not trading receipts.

However, on the basis of the judgment in Bazpur Co-operative 's case
rendered in the year I 988, the Commissioner of Income Tax revised the
assessments for the assessment years I 984-85 and 1985-86 in respect of non- H
164 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A refundable deposits and refundable deposits and other deductions, by exercising
the power under Section 263 of the Income Tax Act. As far as the following
years were concerned, namely, assessment years 1986-87, 1987-88 and 1988-
89, assessment orders were passed by the Income-tax authorities treating the
non-refundable deposits, refundable deposits and other deductions as trading
B receipts. The Commissioner of Income Tax (Appeals) dismissed the appeals
filed by the assessees. All these orders were challenged before the Income
Tax Appellate Trib~nal by the Sugar Co-operative Societies. The matter was
heard and disposed of by a special Bench of the Tribunal which decided the
question in favour of the Sugar Cooperatives holding that the bye-laws in
Bazpur Co-operative 's case and the character of deductions made were
C substantially different from those in the case of Sugar Co-operatives in the
State of Maharashtra. At the instance of the Revenue, the Tribunal referred
15 questions to the High Court at Bombay under Section 256(1) of the
Income Tax Act. The Division Bench of the High Court addressed itself to
the question whether the various amounts collected by the So.ciety from the
D cane growers out of the Sugarcane Purchase Price in the name of deposits
are taxable as income of the assessee Society. The learned Judges of the High
Court answered the questions by holding that the non-refundable and
refundable deposits are trading receipts whereas deductions on account of
Area Development Fund, Cane Development Fund, Hutment Fund, Y.B.
E Chavan Memorial Fund, The Chief Minister's Relief Fund, Education Fund
are not trading receipts and therefore not taxable. Accordingly, the References
and appeals were disposed of by the High Court. The Sugar Co-operative
Societies have impugned the decision of the High Court in so far as it decided
the questions raised against them and the Revenue has preferred appeals in
so far as the decision went against it.
F
As the assessees' appeals tum much on the interpretation and implications
of the bye-laws 60, 61-A and 61-B which relate to the non refundable and
refundable deposits, it is worth quoting them verbatim.

Bye-law No. 60: (Regarding Fixation of Cane Price)
G
"The rate of sugarcane supplied by members will be fixed each year
by the Board of Directors. The same will be of ex-gate cane. It will
be the same for all the members. The Karkhana will also reimburse
to the members their expenses of harvesting and transporting the
cane upto the factory-gate at the rate fixed by the Board of Directors.
H
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. [REDDI,J.] 165

·- Such transporting expenses will differ in the case of every member
depending upon the distance of his field from the factory gate. Such
A

expenditure reimbursed by the Karkhana will be treated as a part of
cost of sugarcane. The Board of Directors will, each year, fix the
rate of sugarcane to be paid to the members considering the
constitution, objects and bye-laws of the Karkhana and the financial B
results of each year. However, so long as the Karkhana has not fully
repaid the share capital contributed by the State Govt. and/or the
Joans taken on block capital account from IFC and other Central
financing institutions, the Board of Directors will pay the price as
fixed by the State Government.
c
The rate of cane supplied by the non-members at the gate will be
fixed by the Board of Directors. It will not be more than the rate
fixed for the Members' cane. If however, rate of cane for the non-
members has to exceed the members', the approval of the State
Government is necessary.
D
BYE-LAW NO. 61-A

(1) Every year the society shall collect from the members non-
refundable deposits at the rate not less than Rs. I per ton of
sugarcane supplied by them. The rate of deposit will be
decided by the Board of Directors. However, in determining
E
such rate the board shall consider the amount required for the
repayment of Joan of I.F.C.I. and bank loan taken towards
capital expenditure and the repayment of time deposits received
from the members. The rate of interest on such deposit shall
not exceed 12 percent so long as the Government share capital, F
the Jong term Joans of IFCI, Maharashtra State Co-operative
Bank and other financial agencies advanced for capital
expenditure has not been repaid. The NRD collected as above
shall not be refunded to the member till the Govemm'lnt share
capital and the term loans taken from l.F.C.I. and ·other G
financial institutions for capital expenditure are repaid fully.

(2) The Deposits collected as above shall not be refundable to the
members. However, the Board may convert such deposits into
shares after repayment of loans taken towards capital expenditure
from Maharashtra State Co-operative Bank, Government share H
166 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A capital and long term loans taken from other banks for capital
expenditure. The amount of fixed deposits collected by the
--
society from members shall not exceed three times the shares
held by the members. Thereafter, such fixed deposits shall not
be accepted by the Karkhani The Karkhana has to collect the
deposits until it holds Government share capital and has other
B
loans outstanding.

(3) On a member ceasing to be a member as provided in bye-law
No. 22, the amount standing to the credit of his account as a
non-refundable deposit may be transferred to any other '-
c member's account at his option and approval of the board of
directors or shall be refunded to such members or his legal
heirs with the approval of the board of directors after the lapse
'>
of one year from ceasing to be members, on recovery of all
amounts due from him if any, and after considering the
financial position of the society. However, the total amount of
D such refund in any year shall not exceed Ill 0th of the total non-
refundable deposits standing at the beginning of the year.

(4) The amount of deposits so collected shall be utilized for the
repayment of tenn loans taken for the capital expenditure as
E mentioned in sub-clause (2) above.

(5) The amount of deposit so collected from the members or part
thereof can be transferred to the name of any other member
on an application by the member. However, consent of both
members in writing shall be necessary.
F
Bye-Law No. 61-B

In addition to the non-refundable deposit from the member as
mentioned in bye-law No.61-A above, if the board of directors find
it necessary, they shall have a right to c91lect the time deposits for
G a period not exceeding five years, out of the cane price payablfl to
the cane supplier at a prescribed rate per ton of sugarcane supplied
as may be de1cided by them every year. These deposits will be used
by the society only for the purpose of expansion programme and
capital expeno1iture and interest paid on .these deposits will not
H exceed 12 percent.
SJDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDD!, J.] 167

Now, we shall take up the controversial issues for consideration. A
Non-refundable deposits

The taxability of 'non-refundable deposits' being the most contentious
issue in these appeals, we shall first concentrate on that issue. At the outset,
we would like to advert to the findings of the Tribunal and the High Court B
on this aspect.

First, we would like to setout the findings of the Tribunal in brief. The
Tribunal, having noted the proposition that if a trader collects money frori:i
the customer as part of trading receipts, those receipts would constitute C
income, observed that the nature and object of the collection is equally
material. The Tribunal observed: "what is relevant to see is not how the
amount was collected but with what obligation it was collected".

After referring to the bye-laws, the Tribunal observed that the purpose
for which the deductions were made in the name of non-refundable deposits D
was not only to pay the term loans and the Government share capital but also .
to convert the deposits into shares. The Tribunal pointed out that the entire
amount of deposit was liable to be converted into shares except that the time
at which it could be so converted was only postponed till the loans were
repaid. The Tribunal pointed out that the expression 'non-refundable' only E
means non-refundable in cash. Though, according to the Tribunal, the
collections were in the course of trading operations, it was only an occasion
for the collection of the deposit and cannot be viewed as consideration for
the supply of cane. The Tribunal stressed on the provision for the payment
of interest and the manner in which the deposits were treated by the Society.
It was stressed that the retained amounts were credited to the individual F
accounts of the depositors and they were shown as liability in the balance-
sheet. It means that the 'deposits' were not regarded as assessee's own
money.

The Tribunal distinguished the case of Bazpur Co-operative Sugars G
inter alia on the ground that the amounts deducted by the Society and credited
to the loss equalization fund were liable to get depleted or consumed after
applying the funds for various purposes mentioned in the bye-laws including
the working losses, whereas that is not the case in the present appeal.

The Tribunal summed up the position as follows: H
168 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A "To sum up, according to our understanding, the true nature and purpose
of the bye-law 61A is to collect contribution towards share capital from the
cane growers by deducting the amount from the sugarcane purchase price
payable to them in a slow and graduated manner so that the funds so retained
by the assessee could in the meantime be used for repaying the term loans
taken from the financial institutions. This is a process and a method devised
B and adopted in such a way that the cane growers will ultimately become the
shareholders contributing the necessary capital not at one time but by degrees
without causing to themselves, any kind of financial strain. The incentives
provided in devising the scheme are payment of interest by treating the
retained money as loan in the meantime and secondly eventual conversion
·C of the same towards share capital. Thus there is no element of income
embedded in it nor can it be said that these moneys were collected or received
by the assessee as and by way of income".

The REASONING OF THE HIGH COURT in support of its conclusions
is summarized as follows:
D
The fixation and payment of the price of sugarcane form part· of the
trading operations of the assessee. The deposits have been recovered by the
Society as part of trading operations and therefore it constitutes "part of
trading receipts". Such deductions provided a periodical return and a source
of income to the Society. A reading of the bye-laws clearly indicates that
E
the deposits are trading receipts, the primary purpose of collecting the
'deposits' being to discharge the liabilities of the society but not to issue the
shares at a later point of time as held by the Tribunal. The assessee is
empowered to hold on to the deposits till the repayment of the Government
share capital and the loans taken from the financial institutions. In the case
F of deposits, a fixed maturity period is prescribed and on maturity, the
depositor has a right to repayment. In the present case, there is no such period
nor any such right has been given. There is no separate contract of fixed
deposits between the Society and the members and no separate fund came
to be created as the sums were credited to the individual accounts. The refund
G is within the discretion of the Board of Directors who may refuse to repay
on the ground of weak financial position of Society. The payment of interest
is not-a conclusive factor.

The High Court observed:

H "In our opinion, in a matter of this type, the correct test to be applied
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. [REDD!, J.) 169

is whether the amounts sought to be deducted reached the assessee A
as his income, if so, it would constitute trading receipts. On the facts
of this case, it is clear that the amount reached the assessee as its
income."

After referring to the case of Commissioner of Income Tax v. B
Bazpur Cooperative Sugar Factory Ltd, [1988] 3 SCC 553, the High Court
held:

"In the present case also, under the bye-laws, the rate of deposits
was fixed by the society and not by the cane growers. In the present
case also, under the bye-laws, no event or contingency has been C
contemplated under which the share holders could demand repayment
of the deposit. Hence, merely because the Karkhana has agreed to
pay the interest, will not be a conclusive test to come to the
conclusion that the liability has accrued to the society on deduction."

Contentions
D

The learned senior counsel for the app.,,llant-assessee contended that
the High Court fell into error in overlooking certain important aspects of the
case and laying undue stress on the fact that the amount treated as deposit
is deducted from the price payable to the cane growers as part of the trading
operations and, therefore, it was in the nature of trading receipt. The
assessee-Society was always treating the deposits as the money belonging to
the members (cane growers), credited the deducted amounts to the individual
accounts of the members on which interest at fixed rate was being credited.
The society treated the deposits as its liability towards the members/ F
depositors. It is contended that under the bye-laws there is sufficient indicia
that the members own the deposits. For instance, in the case of resignation,
the deposited amount can be claimed and in the case of death, the amount
is heritable. The deposits are not utilized for carrying on the trading
operations by the society, but they are utilized only for the discharge of
capital liabilities. If at all, they are capital receipts, but not revenue receipts. G
The learned counsel further argued that it is not appropriate to describe the
deposit as non-refundable deposit. It is non-refundable in the sense that it
may aot be paid in cash to the member, but it will go to augment the share
capital of the member. With reference to some data prepared, it is pointed
• out that instances of refund and transfer are not rare. H
170 SUPREME COURT REPORTS [2004) SUPP. 4 S.C.R.

A Justifying the findings of the High Court, it is contended by the learned
senior counsel appearing for the respondent - department that the true nature
and character of receipt has to be taken into ·account notwithstanding the
nomenclature used or the accounting method adopted. It is the origin or
genesis of the receipt that should be taken into account but not the manner
in which the amount is utilized. The fact that the deduction is from out of
B
the price payable to the member and as a result theteofthe receipts on account
of deposits bring about savings in the cost of raw material is a strong
indication that it is a trading receipt. It is pointed out that the members have
no volition except to suffer the deduction and they have no enforceable legal
rights which are otherwise available to the depositors in the ordinary course.
C Even in limited contingencies such as resignation and death, there is no
unfettered right to get back the deposited amount lying in the account of the
individual member. Even conversion into share capital is a contingency
hedged in by various limitations. The discretion in this regard is vested with
the Board of Directors. The Government's share capital though nominal is
D always retained so that the process of deduction can go on and the so called
deposits are utilized for the purposes of the society. The right to get refund
of the deposit in cash or by way of conversion into share capital is, on the
whole, a right which is too tenuous and remote. The learned counsel for the
respondent further contended that crediting of interest is not decisive and it
practically remains on paper. Placing reliance on the case of Bazpur
E Cooperative Sugars, it is contended that there is practically no difference
between the un-amended bye-law which was considered in that case and the
bye-laws in the present case.

As the sheet anchor of the Department's case rests on the decision in
CIT v. Bazpur Cooperative Sugar Factory Ltd, [1988) 3 SCC 553, it
F
becomes necessary to refer to that decision in detail. During the relevant
assessment year 1961-62, certain amounts were deducted from the price
payable for the sugarcane supplied by the members and the Society credited
the same to the 'Loss Equalisation and Capital Redemption Reserve Fund'.
These deductions were made under the provisions of bye-law 50. At the
G relevant point of time, the bye-law read 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 paise and not more
than 48 paise R~!. quiniai"'of''ll'ie-"SUgarcaQe supplied by him to the
.... H ·~·----- ·-..,,.. ·~--·-· .
SIDDHESHWARSAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. [REDD!, J.] 171

society as may be determined by the Board. After ac.ijusting the A
losses, if any, in the working year, the deposits shall be allowed to
accumulate and utilized 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 B
in being converted into share capital in accordance with bye-law
44(xix) and each producer-shareholder shall be issued shares of the
society of the corresponding value in lieu thereof."

(*emphasis supplied) C
The bye-law was amended with retrospective effect from 1.7 .1958. The
gist of the amendment is adverted to a little later.

The question arose whether the amounts received by the Society from
its members by way of deduction from the price of sugarcane were revenue D
receipts taxable under the Income Tax Act. Before answering the question,
this Court had to consider whether the amended or unamended bye-law
would apply. The Court having held that the respondent-Society had no
authority in law to amend the bye-law with retrospective effect as it purported
to do, proceeded to examine the issue whether in the light of the unamended
bye-law, the deducted amounts credited to the fund could be regarded as
E
trading receipts liable to tax. The Court answered the question in favour of
the Revenue and allowed the appeal.

It may be noticed that in contrast with the unamended bye-law, the
amended bye-law contained a clear provision that the deposit into the reserve F
fund at a prescribed rate shall be made "until the shares to be subscribed by
a Member are fully paid up". After the amounts standing to the credit of the
fund are used for making partly paid shares fully paid up, the balance
remaining in the account shall be liable to be refunded to the members
concerned "soon after the present loan from the IFC is repaid". Thereafter,
the fund shall cease to exist. There were no such definite stipulations in the G
unamended bye-law. However, we are not called upon to dilate on the
question whether the amended bye-law would have had a different impact
on the conclusion reached.

The Court reiterated the principle that "it is the true nature and quality H
172 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A of the receipt and not the head under which it is entered in the account books .
as would prove decisive" and that it makes no difference that the disputed
amounts have been referred to as deposits and proceeded to consider the
crucial issue in that light.

B How far the ratio of the decision in Bazpur case could be applied to
the case on hand is the first and foremost controversy. In the present case,
the purchase and payment of price of sugarcane is undoubtedly part of trading
operations of the assessee. It is in the course of such trading operations that
the assessee realized the amounts (treated as deposits) with regularity and
utilized the money so receive·d in its business. To the extent the full payment
C is not made to the farmers, the assessee saved the raw material cost as well.

These factors may broadly satisfy the first test applied in Bazpur
Cooperative Sugar's case. The following are the relevant observations in this
regard:

D "It 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 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
E be regarded as revenue receipts and are liable to be included in the
taxable income of the respondent."

However, it needs to be clarified that the line of inquiry, in order to
detennine the true nature and character of the receipts, does not stop at
F ascertaining the mere fact whether the realization was in the course of trading
operations. The moment it is found that certain amounts were deducted by
the assessee out of the price payable to its members who supplied the raw
material, the conclusion does not necessarily follow that all such realizations
get impressed with the character of revenue receipts, giving rise to taxable
income in the hands of the assessee. It is not any and every receipt linked
G to the trading activity that acquires the quality of revenue receipt. The
tribunal or the court should go further and delve into the true nature, character
and purpose of the realizations. If the amounts are meant to be held a.S
deposits liable to be returned to the depositor at a specified point of time or
on the happening of specified contingencies which are by no means uncertain
H or is otherwise treated as members' money-the depository having no
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDDI, J.] 173

unfettered dominion over the said funds, then, it is difficult to characterize A
them as the income of the assessee. The realization of monies from the
grower-members in the course of trading operations could as well be
construed to be an occasion, mode or convenient point of time at which the
'deposit' could be collected. Perhaps keeping this legal position in view,
notwithstanding what has been stated in the earlier portion of the judgment, B
the learned Judges proceeded to address the next question, i.e, whether the
receipts by way of deductions could be regarded as deposits as described in
the bye-laws. While answering that question in the negative, the Court
pointed out that it is the true nature and quality of the receipt that is material
but not the head under which it is entered in the account books-a principle
which is reiterated in a catena of decisions. The Court then went on to C
conclude that the receipts by way of deductions from the purchase price were
not in the nature of deposits. In this context, the reasoning of the Bench may
be noticed.

"The essence of a deposit is that there must be a liability to return D
it to the party by whom or on whose behalf it is made on the
fulfillment of certain conditions. Under the amended (sic unamended)
by-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 E
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 of liabilities of the F
respondent-society. In these circumstances, the receipts constituted
by these deductions were really trading receipts of the assessee
society ... "

The Court apparently felt that the event of return of the amounts by way
of conversion into share capital was remote, if not impossible. Jn meeting G
the point urged by the assessee that it was a deposit, the Court proceeded
to apply the primary purpose test. The primary purpose, according to the
learned Judges, was not to issue shares to the members but it was meant to
discharge various liabilities of the society. Therefore, it was felt that it would
be a misnomer to call it members' money or a returnable deposit. That is H
174 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A the ratio of the decision.

To what extent the principle laid down or the test applied in the Bazpur
case can be pressed into service in the present case is the question which
needs our close attention. There are two distinguishing features which
become apparent on a reading of the bye-laws. The first is the absence of
B provision for payment of interest under the bye-laws of Bazpur Co~operative
Sugars Ltd Secondly, in Bazpur case the deducted amounts credited to "Joss
equalization and capital redemption reserve fund" are liable to be adjusted
against the losses of any working year. It is only after adjusting such losses,
the deposits are allowed to accumulate and be utilized for repayment of IFCI
c loan and for redeeming the Government's share contribution. In the process
of such adjustment, the entire amount collected from the members and
credited to the fund may be dissipated or consumed, whereas in the instant
case, the amount collected as deposit remains intact, though it could be
utilized from time to time for meeting certain liabilities of capital nature.
D However, there is one qualification in this behalf. If the society has not
incurred any loss and it remains a profit-making concern, the situation will
be very similar in both the cases. The amounts will then be utilized for
repayment of long-term loans due to the financial institutions and the
Government's share capital and after such process of repayment is complete,
the disputed amounts could be made available to the grower members in the
E form of increased shares. Yet, in .Bazpur case, at the time the sums were
received from the grower-member and remitted to the loss equalization fund,
there was no knowing whether the 'deposit' would remain in tact at all. The
claim of the member to the deposited amount at that stage was too tenuous
and slippery to earn the legal recognition of any proprietory interest over it.
It cannot be said that the member had the right to get back the amount when
F
it was recovered and credited to the Fund. The ultimate conclusion reached
in Bazpur case can be explained on this basis. There is yet another angle
from which the problem can be viewed. As between the member and the
society, who is having substantial dominion over the 'deposits'? In Bazpur
case the answer could only be that it is the assessee-society which had such
G dominion. The position is different in the present case, as explained hereafter.

The ratio in Bazpur case not being squarely applicable, the whole basis
on which the revision was initiated crumbles. Still, we have to examine
whether the assessment of impugned amounts as taxable income is justified
H in law.
SIDDHESHWARSAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. [REDD!, J.] 175

Keeping in view the bye-laws of the society, the approach of this Court A
in Bazpur case and the settled principles, we must examine the fundamental
question, viz., what is the true nature and quality of the receipts sought to
be taxed? The question has to be examined from various angles running in
a common direction. For instance, it becomes necessary t~ enquire: Do the
receipts bear the character of income at the time they reach the hands of the
B
assessee? Does the title to the money get vested with the assessee Society
once and for all, the assessee exercising complete dominion over the funds
in question? OR, is it to be regarded as the money of depositors/members
notwithstanding the custody of the Society and the authority given to the
Management of the Society to utilize the money for the overall advantage
of the Society? Does the assessee-Society stand in the position of debtor in c
relation to these deposits? ls there in law an obligation to repay the amounts,
i.e., by way of augmentation of share capital of members? What is the
primary purpose behind-the collection of the amounts as deposits? These are
the various questions of overlapping nature.which have been debated before
us in some form or the other, and call for answers in order to resolve the D
crucial controversy. Though the manner in which the sums are treated by the
assessee in its accounts is neither conclusive nor .a sure indication of the
nature and character of the re_ceipt, yet, it is not an irrelevant factor.

As rightly observed by the High Court, the relevant bye-laws of the
Society shall be kept in the forefront in finding an answer to the E
issue raised. On an analysis· of the relevant bye-laws regarding sugarcane
price and non-refundable deposits, the following salient features are discernible:

1. The price of sugarcane is fixed every year by the Board of
Directors, on a consideration of relevant factors. F
...i. However, so long as the share capital contribution of the State
Government and/or the loans taken on capital account from IFCI
and other Central Financial Institutions remain outstanding, the
price as fixed by the State Government is liable to be paid by the
society. G

3. Every year the society shall collect from the members supplying
sugarcane a non-refundable deposit at the minimum rate of Re. I/
- per ton. In fixing the rate, the Board of Directors has to take
into account the liabilities towards the;! loan due to IFCI and other H
176 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A loans borrowed for capital expenditure and the repayment of time
deposits received from the members.

4. The Society should continue to collect the deposits so long as it
_holds Government share capital and other loans (on capital
account) are outstanding. However, the deposits collected by th:
B Society shall not exceed three times the shares held by the
members.

5. The rate of interest on the deposits collected shall not exceed 12%.

C 6. The non-refundable deposit shall not be refunded to the memb~rs
till the Government share capital and term loans taken from IFCI
etc. towards capital expenditure are repaid fully. On such
repayment, the Management of the Society may convert such
deposits into shares.

D 7. The amount of deposits collected shall be utilized for the repayment
of term loans taken for the purpose of capital expenditure.

8. The amount collected as deposit can be transferred to the
name of any other member on an application submitted in this
behalf.
E
9. On ceasing to be a member for whatsoever reason, the non-
refundable deposit standing to his credit may be transferred to any
other member's account subject to the approval of the Board of
Directors or can be refunded to such member or his legal-heirs
F with the approval of the Board of Directors, but, such refund can
only be granted after the lapse of one year, that too after
considering the financial position of the Society.

Although the use of the expression 'deposit' does not conclude the
issue, there are intrinsic indications in the bye-laws that the expression has
G been used to mean just what it says. These are: (a) conversion of the deposit
into additional shares, (b) transferability I heritability, (c) refundability and
(d) payment of interest on the deposit. The first three features are no doubt
dependent upon occurrence of certain contingencies or hedged in by certain
limitations. But the deposited amount is not denuded of its character of
H 'deposit' for that reason alone.
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDD!, J.] 177

First, discussion needs to be focused on the first feature, namely, A
conversion of deposit into shares. The Tribunal rightly pointed out and it is
not disputed before us that such conversion is as good as refund. Such.
conversion into additional shares is however postponed till the events of
repayment of loans towards capital expenditure and the repayment of
Government share capital happen. In other words, till such time, the member/
depositor has no immediate right to demand the payment. Nevertheless, the
B
obligation to repay stood annexed to the deposited amount at the time it was
received by the assessee subject of course to the occutTence of the contingency
specified in the bye-law itself. It cannot be said, as has been said by the High
Court, that "under the bye-laws, no event or contingency has been
contemplated" under which the members could demand the repayment of the C
deposit. Nor can it be said that even after the happening of the event specified
in the bye-laws, the right to demand repayment becomes illusory in view of
the discretion reserved to the Board of Direct.ors 'of the Society. In this
context, much of the argument has been built up on the use of the expression
'may' followed by the words "convert such deposits into shares after D
repayment of loans etc." It is contended by the learned counsel appearing for
the Revenue that the Board of Directors may very well refuse to convert the
deposits into shares in exercise of its discretion on the ostensible ground that
the financial position of the Society does not permit such conversion. The
very existence of discretion,·it is pointed out, negates the existence ofliability
to convert the deposit into shares. We cannot accede to this contention. Once E
the loans of the description mentioned in the bye-laws which were outstanding
on the date the deposit was made are repaid, in our view, the Board of
Directors is bound to convert the deposit amount into shares. The discretion
is always coupled with a duty; the discretion cannot be used to circumvent
the obligation cast under the law or contract governing the parties. In our F
view, it would be appropriate to read the expression 'may' as 'shall'. On
the occurrence of the specified event, namely, the repayment of the loans
referred to in the bye-law and the Government share capital, the member/
depositor can clutch at a legally enforceable right to demand repayment, may
be, in the form of conversion into additional shares.
G
In our view, the retention of the deposited money with the Society in
order to utilize the same for repayment of term loans etc., does not denude
the amount of its character of 'deposit' carrying with it the obligation to
repay. Nor is it necessary, as the High Court was inclined to think, that the
separate identity of the deposited amounts should be kept up. The absence H
178 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A of the right to secure repayment on demand is again not inconsistent with
the receipt being a deposit. Liability to return need not be immediate and
unconditional, following a demand by the depositor. Even if such liability
gets crystallized on the happening of a specified contingency, it is still a
liability which can be legally enforced by the depositor. The existence of
such liability is an antithesis to the idea of ownership of the money by the
B
Society.

Deposits are of various types with variations in their features and
incidents. It would be apposite, in this context to refer to certain passages
dealing with deposits from well known treatises. In Corpus Juris secundum
C (volume -26A) the following passages occur:

The deposits are classified as Special Deposits, General Deposits and
other Deposits.

Special Deposit:
D
A special deposit is one in which the identical subject matter deposited
must be kept and redelivered, or applied to a particular purpose.

General Depm;it:
E
A general deposit is one in which the identical subject matter need not
be returned and, as distinguished from a deposit for safe-keeping, this form
of deposit has been termed a deposit for exchange, that·is, one in which the
depositary ls only bound to return a thing corresponding in kind to that which
is deposited: In determining whether or not a deposit is special, the character
F of the business of the depositary is entitled to considerable weight, but is not
controlling.

It is further stated:

G "An agreement to pay interest is strong evidence that a deposit is general
rather than special".

Dealing with ~uties and liabilities of depository it is stated:

"An obligation to redeliver the subject matter in specie or in kind, on
H the demand of the depositor or otherwise in accordance with the terms of ·
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. (REDD!, J.) 179

the deposit*, is necessary to constitute the transaction a deposit, and it is the A
duty of the depositary to make delivery in accordance therewith. The fact that
there is not to be a redelivery of the thing delivered is a strong indication
that the transaction is not a deposit. In the absence of an agreement to the
contrary, the depositary must also return with the thing deposited all increase
which has accrued thereto during the term of t,he _~~R?~ik!h~ fact that the B
depositor has the right to sell or exchange ·-.....
Jhe deposinind
,
s4j)stitute 'therefor
act . ; . .
the proceeds of the sale or exchange does not deprive the :aeposif of its
character as such". '· · ·.. '' · ·

(*emphasis supplied)
c
In words and phrases (Permanent edition, Volume-39A), the distinction
between the special deposit and the general deposit and the concept of a
specific deposit is clarified as follows:-"

The distinction between a 'special deposit' and a 'general deposit' is
generally held to be that the subject of a 'general deposit' is mingled with D
the general assets of the depository, whose property it becomes, and its
separate identity is lost, and the relation between the bank and the depositor
is that of debtor and creditor; while the subject of a 'special deposit' is to
keep safely, separate and distinct from the general assets of the bank, as
the title remains in the depositor, who is entitled to receive back the identical E
thing deposited, and the relation assumed between the depositor and the bank
is that of bailor and bailee".

"Money deposited for a definite purpose without any agreement or
understanding that it shall not be used by the depositee for its own purposes
is a 'general deposit for a specific purpose', or, as it is sometimes called, F
a 'specific deposit' and creates the relation of debtor and creditor just as in
the case of a general deposit".

(emphasis supplied)

In Shanti Prasad v. Director of Enforcement, (1963) 2 SCR 297 this
G
Court, while dealing with the deposit in a bank, reiterated the settled law that
relationship between the banker and the customer is one of debtor and
creditor and observed thus:

"The banker is entitled to use the monies without being called upon H
180 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A to account for such user, his only liability being to return the amount
in accordance with the terms agreed between him and the customer."

(emphasis supplied)

The above juristic exposition of the concept of deposit removes the
B possible doubts on the impugned amounts being treated as deposits.

It is the contention of the learned senior counsel appearing for the
Revenue that the possibility of return of the deposit (by way of conversion
into shares) depends on uncertain events and the repayment remains to be
C a remote! possibility. It is difficult to appreciate this contention. True, the
obligation to refund the deposit by way of conversion into shares would arise
0nly on the occurrence of the contingencies specified in the bye-laws. But,
in our view, it_is wrong to assume that the events giving rise to ·refund are
uncertain. The repayment of loans taken for capital expenditure and the share
D capital of the Government are the two specified events which are by no means
uncertain, though the time of repayment is indefhite. On the occurrence of
the said two events, the right to demand refund would accrue to the depositor.
The obligation which had been in inchoate form ripened itself into a complete
obligation on the occurring of specified events stipulated in the bye laws.
Such an obligation may be contingent in nature initially but the right to
E enforce the obligation inheres in the depositor from the beginning. The
existence of other features such as transferability of the deposit to another
member and the provision for refund of the deposited amount to the member
in case of cessation of membership or to his legal heirs in case of death, are
important indicators against the treatment of the deposited amount as the
money belonging to the Society. The payment of interest from year to year
F
at a specified rate is another important factor that supports the conclusion of
the disputed sum being a deposit. Such payment of interest is only consistent
with the fact that the deposited amount still belohgs to the member. The fact
that the deposited amounts are credited to the individual accounts of the
members is a corroborative circumstance to indicate that the deposits belong
G to the members.
l
In Commissioner of Internal Revenue v. Indianapolis Power & Light
Company [493 US 203], the question arose whether the deposit amount was
an advance payment towards electricity charges and therefore liable to be
H subjected to income-tax. While recognizing the principle that the loan
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDDI, J.) 181

proceeds do not qualify as income because of the repayment obligation, the A
US Supreme Court applied the test whether the assessee enjoyed complete
dominion over the customer deposits entrusted to it and observed thus:

" ... .IPL hardly enjoyed 'complete dominion' over the customer
deposits entrusted to it. Rather, these deposits were acquired subject
to an express 'obligation to repay', either at the time service was
B
terminated or at the time a customer established good credit. So long
as the customer fulfills his legal obligation to make timely payments,
his deposit ultimately is to be refunded, and both the timing and
method of that refund are largely within the control of the customer."
c
In that case too, the refund was linked to contingent events which were
not uncertain.

Applying the above test to the present case, we cannot hold that the
assessee-Society had absolute dominion over the impugned deposits. Firstly, D
the manner of user of the deposit is limited by the bye-laws. Para (4) ofbye-
law 61-A makes it clear that the amount of deposits shall be utilized for the
repayment of term loans taken for the capital expenditure from the banks and
financial institutions. Unlike the case of Bazpur Co-operative Society the
deposited amount cannot be 'adjusted' against the term loans much less the
losses though it can be temporarily utilized by the assessee to clear the loans. E
The fact that the depositor can seek transfer of the deposit to another member
by filing an application for that purpose again highlights the fact thal the ·
power of disposal of the deposit lies with the member. The obligation to
convert the deposits into shares subsequent to the repayment of certain types
of loans coupled with the right given to the member to seek transfer of the
F
amount lying to his credit and the obligation to refund the deposit to the
depositor on cessation of his membership or to his legal heirs in case of death
subject of course to certain restrictions, are all pointers that the assessee can
exercise dominion over the deposits only in a limited sphere. On a
consideration of the bye-laws as a whole, it is difficult to hold that either the
assessee or the depositor exercises complete dominion over the deposited
amounts. If so, it is not possible to countenance the plea that the title to the
deposits will throughout remain in the hands of the Society and the
depositor has no stake or interest therein, once it reaches the assessee's hands.

Viewed from the point of view of the primary purpose of deposit-a test H
182 SUPREME COURT REPORTS (2004) SUPP. 4 S.C.R.

A which has been formulated by this Court in Bazpur case though without much
of discussion, we are of the view that the answer cannot be the same as in
Bazpur case. In this connection the Tribunal recorded the finding that the
purpose of collecting non- refundable deposits "was not only to repay term
loans taken from financial institutions and to repay the government share
B capital, but also to convert the so called deposits into shares". The Tribunal
expressed the view that the whole idea was to increase the capital base of .
·.the assessee in a phased manner by retaining some portion of the .money
payable to cane-growers, while at the sanie time compensating the depositors
by way of interest. However, the High Court was not incHned to accept the
finding of the Tribunal. The High Court commented:
c
" ... on the contrary the. above bye-laws clearly indicate that the
primary purpose of collecting the deposits i.e. the deductions was
to discharge the liabilities of the Society".

We are unable to endorse the view taken by the High Court. Meeting
D the financial commitments of the Society rroy be· one of the purposes for
which the deposits were collected but that is not all. The augmentation of
the share capital which may be in the overall interests of~ members aswell
as the Society is an equally important purpose which canriot be overlooked.
At any rate, the view taken by the Tribunal appears to be a reasonable view
E and the· High Court need not have disturbed that finding. · '

· The High Court relied on the decision of the same High Court in Shree
Nirmal Commercial Ltd v. C.l.T., (193 in !TR 694) in order to hold that
the payment of interest on. the deposited amount is not inconsistent with the
· amount being a revenue receipt. We are of the view that the ratio ·of that
F decision cannot be pressed into service in the present case. On a consideration
of th; Scheme and Agreement under which non-"refundable interest-bearing
deposit was collected by the assessee-company, it was found as a matter of
fact that "the deposit was the absolute property. of the Company ·and the
. provision fer payment.of interest was only a device for showing the amount
G received in the course of trade as deposit." In the instant case, the plea of
•device, though raised faintly before the Tribunal, was not accepted. It rejected
the argument that the provision in the bye-law 61-A providing for conversion.
of deposits into share:capital was a make believe ·affair and that the High
Court in answer to question No.12 affirmed this finding. ·

H To fortify the argument that the disputed amount is nonlte income of
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.l.T. [REDDI, J.] 183

the assessee, the learned Sr. Counsel appearing for the assessees pointed out A
that the entire amount of cane price was treated as agricultural income of the
member and was taxed accordingly under the Maharashtra Agricultural
Income Tax Act. So also, the interest payable on the deposits was shown as
the member's income and the deposits were shown in the wealth tax returns
as the member's wealth. According to the learneti co11nsel, all this indicated B
as to how the deposited amounts were being treated by the members apart
from the assessees. We are not inclined to delve into these aspects which are
being projected for the first time before us. Though this stand was taken
before the Tribunal and a sample assessment order was filed, evidently the
finding of the Tribunal was not invited on this aspect.
c
The learned counsel for the Revenue tried to invoke Section 41(1) to
fortify his argument that the impugned receipts constitute income in the hands
of the assessee - Society. No such question was considered by the High Court
or even by the Tribunal specifically. In fact, the questions formulated in the
reference cases indicate that the decision of the High Court was not invited D.
on this point. Hence we do not propose to deal with it.

As regards refundable deposits, the relevant bye-law is 61-B which has
been quoted supra. In the light of what we have said about non-refundable
deposits, it does not require further elaboration to conclude that these deposits
cannot in any sense be treated as income of the assessee-Society. Though E
deducted from the cane price, they are pure and simple fixed deposits
repayable on the expiry of a definite period of time with interest. The
restrictions and conditions governing the non-refundable deposits are not
incorporated in bye-law 61-B. These 'deposits' are akin to the transaction
of loan. They are clearly liable to be excluded from taxable income. F
There is one more point to be adverted to. Compulsory nature of the
deposit has been stressed by the Revenue and the High Court too as being
obnoxious to the idea of a deposit. It has been pointed out that the member
had no option but to agree for deduction on pre-ordained terms and there
could not be in law a contract creating deposit. This contention, however, G
does not appeal to us. A person by becoming the member of a Co-operative
Society, volunteers to abide by the bye-laws of the Society, the real object
of which is to provide for internal management of the Society including
rendering assistance to the members. There is an authority for the proposition
that the bye-laws of the Co-operative Society constitute a contract between H
184 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A the Society represented by its managing body and its constituents. This legal
position has been recognized in Hyderabad Karnataka Education Society v.
Registrar of Societies and Others, (2000] 1 SCC 566 (vide paragraph 28).
In The Cooperative Central Bank Ltd. & Ors. v. The Additional Industrial
Tribunal, Andhra Pradesh, (1969] 2 SCC 43, this Court held that the bye-
laws of the Society framed by virtue of the authority conferred by the .Co-
B operative Societies Act were on par with Articles of Association of a
Company, which, it is well settled, establish a contract between the Company
and its members and between the members inter se (vide paragraph 14 in N.C.
Sanyal v. Calcutta Stock Exchange Association Ltd., (1971] 1 SCC 57. That
apart, the mere fact that the contract has to be entered into in conformity with
C and subject to restrictions imposed by law does not per se impinge on the
consensual element in the contract. "Compulsion of law is not coercion" and
despite such compulsion, "in the eye of law, the agreement is freely made",
as pointed out in Andhra Sugars Ltd. v. State of A.P., AIR (1968) SC 599.

For .the aforesaid reasons we conclude that the non-refundable and
D refundable deposits cannot be. treated as the income of the assessee-Societies.
The Civil Appeals filed by the assessees/Co-operative Sugar Factories are
allowed without costs.

Revenue's appeals
Re : Other deductions made towards various Funds
E
Leave granted ill Special leave petition (Civil) Nos. 5407, 5338, 588.'!,
17143 of 2001, 523-527, 18548, 23892 of 2002, 2747 and 4871 of 2003.

Pursuant to the instructions issued and the guidelines evolved by the
F Director of Sugars, may be under the authority of the State Government, the
deductions at the prescribed rate were made out of the cane price for being
credited into (1) Chief Minister's Relief Fund, (2) Late Shri Y.B. Chavan
Memorial Fund, (3) Hutment Fund, (4) Area Development Fund, (5) Cane
Development Fund and (6) Members' Small Savings Fund. It is common
ground that the identity of such deducted amounts was being preserved and
G separate accounts were being maintained in relation theretb. In regard to Area
Development Fund, the Tribunal was of the view that the assessee had no
control over these funds and they were collected on behalf of and as an agent
of the State Government. In regard to other funds, the Tribunal held that the
deducted amounts were only retained with the assessee in order to make them
H over to the Government which ultimately spent the same for certain purposes.
SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDD!, J.] 185

The High Court, while pointing out that "a trading receipt means the A
assessee's own money which can be put to any use", applied the principle
of diversion of income by overriding title. The High Court concurred with
the conclusion of the Tribunal.

Unfortunately, in none of the orders of the Income Tax authorities or B
the Tribunal, the details relating to the nature and purpost: of the funds and
the manner of disbursement of the amounts have been set out though there
is only a skeletal reference here and there. That is why perhaps the High Court
too could not give these factual details in its order. Even in the appeal
memorandum or the written submissions filed on behalf of the Revenue we
do not find these details. Despite this handicap, we have looked into some C
of the orders and circulars issued by the Director of Sugars and other
authorities contained in the paper book submitted to the Income Tax
Appellate Tribunal.

As regards the Chief Minister's Relief Fund, Late Y.B. Chavan D
Memorial Fund and Hutment Fund, no serious attempt has been made to
assail the order of the Tribunal/High Court, the obvious reason being that they
were required to be and in fact being remitted to the Government or to the
Trustees of late Y.B. Chavan Prathisthan. The assessee merely acted as an
agent in collecting the amounts and remitting the same to the Government/
Trustees. In truth and in substance, the money collected by the assessee was E
not reaching the assessee as part of its income, but the collection was made
"for and on behalf of the person to whom it is payable", to borrow the
language in CIT v. Sheetal Das, [41 ITR 367]. It had no manner of right
or title over the said monies. The amount collected towards Hutment Fund
stands on no different footing. It was meant to be handed over to Collector F
for the purpose of providing shelter to landless poor inhabitants within the
area of operation of the sugar factory. We agree with the conclusion reached
by the Tribunal and the High Court that these receipts should not be treated
as income of the assessee.

The main contest by the Department has been in respect of Area G
Development Fund and Cane Development Fund. The Tribunal has also dealt
with these items separately at paragraphs 28 & 29.

The Area Development Fund, as we see from the various communications
placed in the paper-book, is meant to enable the co-operative sugar factories H
186 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A to render socio-economic services in the area of operation. The area
development programmes may cover agricultural extension, irrigation facilities,
educational and medical services, development of animal husbandry and
poultry, drought relief work and so on. By doing so, the sugar cooperatives
will be supplementing the efforts of the Government in promoting the socio-
B economic development of the area. The Board of Directors of the cooperative
society are required to pass a resolution specifying the details of expenditure
proposed to be incurred from out of the Area Development Fund. They
should obtain the sanction of the Director of Sugars for incurring such
expenditure. Such information is also required to be placed before the
General Body of the society and the approval to be obtained from the General
C Body. On 21st June, 1988, the Agriculture and Co-operation department of
the Government of Maharashtra framed certain directive principles laying
down the modalities of utilization of Area Development Funds. The said
order was issued in exercise of the power under Section 79-A of the
Maharashtra State Cooperative Societies Act. This order passed during the
D middle of the last assessment year relevant to these appeals gives statutory
basis for the already existing practice. It is difficult to equate this fund to the
other categories of funds, as has been done by the Tribunal and affirmed by
the High Court. Unlike the other funds like Chief Minister's Relief Fund, the
amount collected towards Area Development Fund is retained by the sugar
factory itself and utilized as per the guidelines issued by the Government or
E the National Cooperatives Development Corporation. The.collective Body of
the Society and its elected representatives take the decision as to how much
amount has to be spent and for what purposes. The Director of Sugars or other
designated official, no doubt acts in a supervisory capacity to oversee that
the funds are properly utilii;ed. On that account, it cannot be said that the
F collection is made by the Society as an agent of the Government or the
proprietary interest in the funds is vested with the Government. The
conclusion has been reached by the Tribunal mainly on the basis of
requirement of prior sanction of the Director of Sugars for incurring the
expenditure. Such restrictio•1 prescribed in the larger interest of the Society
itself does not in any way detract from the fact that the Societies concerned
G do exercise dominion over the fund and deal with that money subject of
course to the guidelines and restrictions evolved by the Government. The
Tribunal failed to approach the question in proper perspective on an analysis
of the relevant circulars and orders. The High Court too fell into an error in
invoking the theory of diversion of income at source. The crux of the matter
H is that there has . never been a diversion of income to a third , party
SIDDHESHW AR SAHAKARI SAKHAR KARKHANA LTD. v. C.I.T. [REDDI, J.] 187

(Government) before it reached the assessee. The receipts in the form of Area A
Development Fund always remained with the assessee.

It could still be contended, as has been contended by learned senior
counsel appearing for the assessees, that the realizations made by the assessee
towards Area Development Fund are impressed with a specific legal obligation B
to spend the monies for spe<;ified purposes which are unrelated to the business
of the sugar factory and therefore such receipts cannot be treated as income
of the assessee. The analo~f collection of amounts towards charity, as in
the case of C.J. T. v. Bijlee .Critton Mills, [ 1979 1 SCC 496, has been invoked
to substantiate the argument. It is contended that the realizations towards Area
Development Fund would more or less stand on the same footing as deposits. C
The controversy has not been approached in the light of the above arguments.
We do not consider it ·appropriate to express our view for the first time,
especially when the determination thereof may depend on the consideration
of certain facts. We therefore leave this point open for fresh determination
by the Tribunal. D

As far as Sugar Cane Development Fund is concerned, the case of the
Revenue seems to stand on a stronger footing. In the paper-book, we find
a Circular dated 18th August, 1986 in which certain directive principles have
been laid down to regulate the expenditure to be incurred out of Cane
Development Fund. The items specified in the directive principles are (1) E
green manuring, (2) lift irrigation schemes, (3) distribution of cane seeds and
(4) construction of new wells or deepening of old wells. The sugar factory
is required to make sure that any project which they want to undertake out
of the Cane Development Fund is technically and financially sound and to
send the proposals in advance to the Directorate of Sugar for requisite F
sanction. The projects will directly benefit the members and augment the
sugarcane production which will incidentally help the Society in its
manufacturing operations. The beneficiaries under the scheme are no other
than the members of the Sugar Cooperative Society concerned and the
advantage of enhanced production of sugarcane will ultimately be felt by the
Society itself. Unlike the Area Development Fund, the monies out of Cane G
Development Fund are not spent for purposes unconnected with the growth
and functioning of the sugar factory. The Tribunal was inclined to view it
as a 'compulsory levy' on the depositors collected by the Government
through the agency of sugar factory. This approach in our view is wholly
unsustainable and is in the realm of surmise. We do not also see any scope H
188 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A for the application of principle of diversion of income at source in the case
of collections made towards Cane Development Fund. The amounts realized
on this account undoubtedly reach the assessee as its income and is utilized ·
by the assessee for the benefit of itself and its members. As already observed,
the supervisory .role of the Directorate of Sugar to ensure that the amount
is properly utilized to promote the objectives with which the fund was
B formed, does not make a material· difference on the quality and character of
the receipt. We are therefore of the view that the deductions made out of cane
price towards Cane Development Fund should be treated as the income of
the assessee. We are, of course, not expressing any view whether it is a
permissible deduction under the provisions of the Income Tax Act. If any
C such claim is made, the Tribunal .shall examine the same when the matters
are taken up by it to consider the issue of tax liability in relation to Area
Development Fund.

Though the item relating to collections towards Members' Small
D Savings Scheme has also been included in the memorandum of appeal, no
argument has been advanced on this aspect and therefore we need not deal
with this.

We therefore allow the appeals of the Commissioner of Income Tax
partly in respect of the amounts collected by the respondent-Societies towards
E Cane Development Fund and Area Development Fund. We declare that the
amount collected towards Cane Development Fund shall be treated as the
income of t_he assessees and any claim for deduction shall be entertained and
decided by the Tribunal. As regards the Area Development Fund, the matters
are remitted to the Income Tax Appellate Tribunal, Pune Bench for fresh
determination subject to the observations made in this judgment. In respect
F of other items, the appeals shall stand dismissed.

In the ultimate analysis, the assessees' appeals are allowed and the
Commissioner's appeals are partly allowed to the extent indicated above.

G V.M. Appeals dismissed.