Commissioner of Income Tax vs New Horizon Sugar Mills Pvt. Ltd.

Janarthanam, J.—The assesses. New Horizon Sugar Mills Pvt. Ltd., Pondicherry, is a private limited company carrying on business in the

manufacture and sale of sugar. The assessment years involved are 1978-79 to 1981-82 for which accounting years ended on June 30, 1977, June

30, 1978, June 30, 1979 and June 30, 1980 respectively.

The assessee, inter alia, claimed the amount set apart for the construction of molasses storage tank, as a deduction in computing the total income

for these years. According to the assessee, the amount was to be kept separately as required by the Molasses Control Order ; it had no power to

spend the amount as it liked ; it was to be spent only as per the directions of the Government and, therefore, the amount kept apart should not be

treated as income.

According"" to the Inspecting Assistant Commissioner, what had been set apart by the assessee for the relevant assessment years was nothing

but a part of sale price of the molasses and it had been set apart only after receipt of income. The money utilised for erection of storage facility

would, therefore, constitute the property of the assessee. It was a case of application of the income under the direction of the Government and the

assessee was not divested of ownership of the income or the asset created. Therefore, the amount set apart for these years were added back as

income.

On appeal, the claim of the assessee was allowed by the Commissioner of Income Tax (Appeals), by following the order of the Tribunal in the

assessee''s own case for the assessment year 1977-78 in ITA No. 1244/Mad of 1980, dated July 7, 1981.

On appeal by the Revenue, the Tribunal upheld the orders of the Commissioner of Income Tax (Appeals) as they were in accordance with the

earlier order of the Tribunal in the assesse''s own case for the assessment year 1977-78 cited supra.

It is on these facts, the Tribunal at the instance of the Revenue referred the common question of law for the assessment years in question u/s

256(1) of the Income Tax Act, 1961, for the opinion of this court ;

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount set apart towards molasses storage

reserve fund should be excluded from its total income as revenue expenditure ?

Arguments of Mr. R. Sivaraman, learned counsel representing Mr. C. V. Rajan, learned junior standing counsel representing the Revenue, and

of Mr. P. P. S. Janarthana Raja, learned counsel representing Subbaraya Aiyar, learned counsel appearing for the respondent were heard.

An identical question like the one in the instant case arising for consideration came up for consideration before a Division Bench of this court in

Commissioner of Income Tax Vs. Salem Co-operative Sugar Mills Ltd., .

In that case, the assessee was a co-operative society carrying on business in manufacture and sale of sugar. The selling price of molasses, a by-

product obtained in the process of refining sugar, is fixed by the Molasses Control (Amendment) Order, dated February 6, 1972. This order

provides that a portion of the sale price should be accounted for and funded separately for providing adequate storage facilities in accordance with

the guidelines prescribed in this behalf by the Government. The schedule to the order has specified varying rates per quintal for different grades of

molasses, for determining the quantum to be transferred from the sale proceeds to the storage fund.

The transfer made by the assessee in conformity with the statutory obligation cast by the above order during the accounting year amounted to

Rs. 91,476 which the assessee claimed as deduction in the computation of its total income for the assessment year 1975-76.

The Tribunal allowed the appeal. On a reference, a Division Bench of this court held that even before collection of the amount as directed by

the Central Government under the Molasses Control (Amendment) Order, the assessee was directed to keep this amount under a separate

account under the head ""Molasses storage fund"". Though the assessee collected this amount under the statutory obligation, it did not belong"" to the

assessee, but to the molasses storage fund. The assessee could not utilise the amount in the said fund for any other purpose. The fund had to be

utilised for the purpose of constructing a storage tank in accordance with the specifications given by the Central Government. If the assessee failed

to collect such amount as directed by the Molasses Control (Amendment) Order, the Central Government would construct a molasses storage

tank and recoup the construction charges from the assessee. Therefore, there was diversion of title at the source of the income collected under the

directions given under the Molasses Control (Amendment) Order. The sum in question was not includible in the assessee''s total income.

In the face of the decision in the case of Commissioner of Income Tax Vs. Salem Co-operative Sugar Mills Ltd., , it goes without saying that

the Tribunal was right in holding that the amount set apart towards molasses storage reserve fund should be excluded from its total income as

revenue expenditure. This question is, therefore, answered against the Revenue and in favour of the assessee.

These tax cases are thus disposed of. There shall, however, be no order as to costs, on the facts and in the circumstances of the cases.