The Hindu Business Line : Elasticity of income definition

INCOME is the backbone of income-tax law in India. If one considers all the alphabetical permutations and combinations in Section 2(24) of the I-T Act (the section that defines income), 21 possible amounts that would satisfy the definition of income have been explained.

However, as the law has evolved, the term has witnessed a number of interpretations and the definition of income can hardly be said to be restricted to the 21 sub-paras of Section 2(24).

Recently, the Supreme Court gave its diktat on a particular interpretation of the word as regards deposits and deductions therefrom in Siddheshwar Sahakari Sakhar Karkhana Ltd (SSSKL) vs CIT (2004 138 Taxman 441).

A society and its funds

SSSKL, a sugar cooperative society, consisted primarily of sugarcane farmers as its members. The society had its byelaws, which stipulated deduction of amounts towards refundable and non-refundable deposits from the cane price payable to the members.

The society had a philanthropic side too and was deducting some amounts towards the Chief Ministers Relief Fund, the Y. B. Chavan Memorial Fund, the Cane Development Fund and the Area Development Fund.

There was no controversy till 1988 when the Commissioner of Income Tax (Appeals) read the order of the Supreme Court in CIT vs Bazpur Cooperative Sugar Factory Ltd (1988 3 SCC 553): Deposits of societies. He brought into play Section 263 and treated the deposits and other deductions as trading receipts. He did not waste much time is dismissing the appeals filed also.

A Special Bench of the Income-Tax Appellate Tribunal dismissed the order in favour of the cooperative society distinguishing the Bazpur case as being different on facts. The High Court added to the twist in the tale by ruling that the deductions in respect of deposits were trading receipts while the philanthropic deductions could not be so christened.

Electricity deposit

The apex court referred the decision of the US Supreme Court in Commissioner of Internal Revenue vs Indianapolis Power and Light Co (493 US 203), wherein a question arose whether the deposit amount was an advance payment towards electricity charges and, therefore, liable to be subjected to income-tax. The USSC ruled: "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 terminated or at the time a customer established goods credit.

"So long as the customer fulfils 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."

Applying the ratio of this decision to this case, the Supreme Court held that the society did not have absolute dominion over the deposits since the manner of use of the deposits is limited by the byelaws and the depositor has the freedom to transfer the deposit to another member. As such, the refundable and non-refundable deposits could not be classified as trading receipts in the hands of the society.

Cane development

The apex court observed that apart from the deposits, the society was deducting some amounts towards various funds such as the Chief Ministers Relief Fund, the Y. B. Chavan Memorial Fund, the Hutment Fund, the Area Development Fund, the Cane Development Fund and the Members Small Saving Fund.

It did not take much time for the court to rule that apart from the area and cane development funds, the rest were non-controversial and could not be charged to tax as trading receipts. The court observed that the Area Development Fund was meant to render some socio-economic activities in the area of operation and felt that the Tribunal had not looked into the case in totality and put the case back in the hands of the Tribunal by asking it to look into both the taxability of the deduction and also as to whether the society could claim some deduction for this.

As far as the Sugar Cane Development Fund was concerned, the court observed that this fund was being used for green manuring, lift irrigation schemes, distribution of cane seeds and construction of new wells.

These projects would directly help the members and augment sugarcane production, which would make these deposits connected with the growth and development of the sugar factory. Hence, these deposits were trading receipts in the hands of the society and liable to tax.

(The author is a Hyderabad-based chartered accountant.)