ITA No. 694/Pun/2012; Asst. yr. 2002-03

Ms. Sushma Chowla, J.M. & Anil Chaturvedi, A.M.

B.Y. Chavan, for the Appellant :
Nikhil Pathak, for the Respondent

ORDER

MS. SUSHMA CHOWLA, A.M. :- The appeal filed by the Revenue is against the order of CIT(A)-I, Nashik, dt. 25th Jan., 2012 relating to asst. yr. 2002-03 against order passed under s. 143(3) of the IT Act, 1961 (in short ‘the Act’).

2. The Revenue has raised the following grounds of appeal :

"1. The learned CIT(A) has erred in law and on facts in allowing the claim of income of assessee that there is diversion of income by overriding title to the tune of Rs. 3,23,87,523 and thereby made deletion of addition made by AO.

2. The learned CIT(A) has erred in law and on facts in adopting the rate of sugar i.e. sale price per bag at Rs. 1,290 as against adopted by AO at Rs. 1,430 and thereby reducing the profit derived by the AO on sale of sugar bags.

3. The learned CIT(A) has erred in law and on facts in allowing the relief of Rs. 41,12,429 by holding that alleged additional profit of Rs. 41,12,429 earned by the appellant on sale of sugar purchased from Agasti SSK Ltd. in the domestic market instead of exporting the same is not liable to tax

4. The order of the CIT(A) may be vacated and that of the AO be restored."

3. The issue arising in the present appeal filed by the Revenue is against the order of CIT(A) in allowing the claim of assessee of diversion of income by overriding title to the tune of Rs. 3,23,87,523. The Revenue is also aggrieved by the order of CIT(A) in adopting sale price of sugar per bag at Rs. 1,290 as against Rs. 1,430 adopted by the AO. The Revenue is also in appeal against the order of CIT(A) vide ground of appeal No. 3 in allowing the relief of Rs. 41,12,429.

4. Briefly, in the facts of the case, the assessee was dealing in sugar on wholesale basis and was also acting as commission agent. For the year under consideration, the assessee had declared total income of Rs. 2,55,930. The Investigation Unit, Nashik had collected certain information to the effect that the assessee had purchased sugar out of export quota of sugar from various sugar factories without excise duty payment by executing bond, but had sold the same in the domestic market and accordingly, earned premium on the same. The case of assessee accordingly, was taken up for scrutiny. The information which has been received from the Investigation Unit, Nashik and also collected by the AO is tabulated under para 5 at p. 2 of the assessment order. The factory-wise details, number of bags-wise and cost-wise information was collected in respect of sugar purchased by the assessee out of export quota of sugar which is tabulated under para 6 at pp. 3 and 4 of the assessment order. Further, the AO has also received information regarding excise duty paid by the assessee, factory-wise, date-wise and amount-wise, which is tabulated under para 7 at pp. 4 and 5 of the assessment order. The AO concluded that the assessee had purchased sugar out of export quota of sugar between the period 3rd Nov., 2001 to 28th Jan., 2002 from different sugar factories as under :

"8. Thus, it is seen that the assessee (Merchant Exporter) had purchased sugar out of export quota of sugar from following sugar factories as follows.

5. The AO on investigation found that the assessee had sold the entire quota of sugar in the open market. As per sugar export agreement, it was provided that for any reasons beyond the control of assessee, merchant exporter, if it was not possible for him to export the quota of sugar lifted, then he is free to sell the same in the domestic market. The Investigation Unit, Nashik, and the AO collected the information vis-a-vis domestic rates of sugar S-30 prevailing during the period of lifting the export quota of sugar, factory-wise which was as follows :

6. The AO further collected information regarding rates prevailed in the domestic market of S-30 sugar from the Commr. of Sugars, Maharashtra State, Pune, which was at Rs. 1,318 per quintal and Rs. 1,310 per quintal in respect of sugar from Vasantdada SSK Ltd. and Niphad SSK Ltd., respectively. Further, the AO collected the rates prevailing in the domestic market in the relevant period from the Sugar Merchants Association, Navi Mumbai and the same was at Rs. 1,430 per quintal. The assessee had shown the average selling rate @ Rs. 1,233.50 per quintal for export quota sugar, in its trading account. Thus, for 1,64,822 bags sold by the assessee, the average rate for export quota of sugar per bag was Rs. 1,233.50 per bag. During the course of assessment proceedings, the assessee was asked to substantiate its claim supported by sale bills raised by the assessee on different parties and also by producing bank accounts, wherein the sale proceeds had been credited. The assessee was also asked to produce the books of account. The assessee expressed his inability to produce the books of account, since the same were destroyed in fire at the shop premises on 1st Nov., 2002 and further, the data available in the computer had been destroyed including the entire computer system. The assessee in this regard filed the copy of Panchanama drawn by the police authorities and also the press reports in various local dailies. The AO noted that the assessee had taken similar stand before the Investigation Wing, Nashik, during the course of enquiry. The assessee was also show-caused to explain the selling rates prevailing in the domestic market, as per information furnished by the Sugar Merchants Association, Navi Mumbai at Rs. 1,430 per quintal during the relevant period. The assessee in reply explained that since sugar supplied by the factories was an inferior quality than S-30 type and was out of old stock of about a year and was damaged due to moisture, then such kind of sugar fetches lower market price. Since the sugar could not be exported, the assessee explained that all the sugar factories raised written demands of payments to be made to them towards payment of excise duty. Thus, funds were needed by the assessee urgently to meet the above-said demands of sugar factories and hence, he sold at the rates lower than prevailing markets that too within a short span of time. The assessee also explained that sugar was purchased not at the domestic market rate but at a lower rate for export, therefore, the sale of sugar was effected at a lesser price. The assessee thus, explained that he could only fetch average selling price of Rs. 1,233.50 per quintal. In this regard, he also placed reliance on the Circular dt. 19th Nov., 2001 of Vasantdada Patil Sugar Institute, in which rates of sugar sold in the domestic market were Rs. 1,260 per quintal.

7. With regard to information collected from Bombay Sugar Merchants Association, Navi Mumbai of sale rate of Rs. 1,430 per quintal, the assessee stated that the rates of said association were always higher by Rs. 100 to Rs. 125 per quintal over the rate of others and hence, the said selling rate of Rs. 1,430 per quintal could not be adopted. The AO on the other hand, referred to the statement recorded under s. 131 of the Act of the assessee on 5th March, 2003. He referred to the question of production of books and also referred to the answer of assessee that those books were destroyed in fire at the premises. He was asked to furnish information in respect of persons to whom the said sugar was sold. However, the assessee could furnish the names of only two persons i.e. Shyam Trading Co. and Radhamohan Rajeshkumar, wherein both the deals were executed through the broker. The AO also asked the assessee to produce transportation details in respect of said stock which could not be furnished by the assessee except to the claim of assessee that the transactions were arranged by one Shri Pralhadbhai. Further, information called for from the assessee was not furnished. The AO noted that in the absence of books of account, sale memos/details, etc. and any other proof regarding his claim that he has sold the said sugar in domestic market at Rs. 1,233.50 per quintal except financial statements, justify the adoption of rate at Rs. 1,430 per quintal on the basis of information collected from Bombay Sugar Merchants Association, Navi Mumbai. The plea of assessee that sugar was of inferior quality and hence lower rate was fetched, was also rejected by the AO, since information was collected from sugar factories from whom the assessee had purchased the export quota sugar which indicated that it was S/30 type out of export quality which is higher in rate. The AO also received information that the lot lifted by the assessee on 3rd Nov., 2001 was out of the manufacture cycle of hardly 10-11 months. Another aspect noted by the AO was that no information on office records that the assessee had taken any step to export the said sugar, on the other hand, the same was sold in domestic market on the first available opportunity. The AO thus, concluded by holding that the assessee had purchased the sugar with whole intention to divert the same in the domestic market to earn more profit than could have been earned by exporting the same to foreign countries. The AO also observed against the plea of assessee of fire at its office and concluded by saying that the selling rate at Rs. 1,430 per quintal in respect of entire quantity sold by the assessee in the domestic market, merits to be accepted. The assessee had placed reliance on circular dt. 19th Nov., 2001 issued by Vasantdada Patil Sugar Industries regarding domestic market rate at Rs. 1,260 per quintal of sugar (S/30). However, reliance by the assessee on the said circular was dismissed by the AO. The assessee had purchased the sugar out of export quota of sugar (S/30) at Rs. 1,075 per quintal excluding excise duty.

8. Another point noted by the AO was the claim of assessee vide submissions dt. 10th March, 2005 that Agasti SSK Ltd. had claimed compensation in subsequent years on account of various overheads for not lifting the quota allotted to him. The AO adopting the rate of sugar at Rs. 1,430 per quintal worked out profit @ Rs. 350/355 per quintal and worked out the addition at Rs. 3,23,87,523. The other additions made on account of FDR interest not shown and certain other disallowances, were also made.

9. The CIT(A) in the first round partly confirmed the addition made by the AO. The Tribunal in ITA Nos.1571/Pn/2005 and 1592/Pn/2005 and 1875/Pn/2005, vide order dt. 30th June, 2011 had remitted the matter back to the file of CIT(A) for adjudicating the additional grounds of appeal raised by the assessee before the Tribunal. The plea of assessee before the Tribunal was that no addition on account of alleged excess sale price received by the assessee on sale of sugar in domestic market, was justified as assuming without admitting that the assessee had received the alleged excess sale proceeds were with an obligation to return excess amount to the sugar societies and accordingly, the said income did not constitute income in the hands of assessee.

10. The CIT(A) in the second round, noted the order of his predecessor who had worked out the sale price of sugar at Rs. 1,350 per quintal as against the declared price at Rs. 1,233.50 per quintal. The assessee in the second round explained that the cost of Rs. 1,350 per quintal was incorrectly worked out and reference was made to the letter dt. 25th June, 2005 of Nashik Sugar Brokers Association for selling rate of sugar prevailing at Nashik and Mumbai. The assessee pointed out that the predecessor CIT(A) had considered the sale rate of Nashik at Rs. 1,284 per quintal and sale rate of Mumbai at Rs. 1,392 per quintal. However, he inadvertently had not considered the additional cost to be incurred for selling the sugar at Mumbai which was about Rs. 100 to 125 per quintal. In view of above, he pointed out that if the above mistake of not considering the above cost considered is at Rs. 100, that the selling price of sugar would works out to Rs. 1,292 at Mumbai and the average selling price would work out to Rs. 1,288 per quintal, since the assessee had sold inferior quality of sugar than the average selling price claimed by the assessee at Rs. 1,233.50 per quintal was reasonable. The CIT(A) noted that the order of his predecessor was set aside since the additional evidence filed by the assessee was not forwarded to the AO for his comments/report. The CIT(A) forwarded information along with evidences in the form of copies of sale bills of sugar, transportation receipts and octroi receipts in respect of sale rate of sugar per quintal to the AO, who in turn, filed his comments. The CIT(A) held that the AO had adopted the sale rate of sugar at Rs. 1,430 per quintal as per sale rate of Mumbai without considering octroi cost. He further noted that his predecessor had worked out the cost per bag at Rs. 1,338 per quintal and after considering the apparent mistake of Rs. 72 on account of excise duty cost, the cost per bag works out to Rs. 1,266 per quintal. Similarly, after considering the additional cost of Rs. 100 to be incurred for selling sugar at Mumbai market, the average selling price works out to Rs. 1,288 per quintal. In view thereof, the CIT(A) adopted the sale price of sugar per bag to be at Rs. 1,290 as against Rs. 1,430 per quintal adopted by the AO and declared by the assessee at Rs. 1,233.50 per quintal. The difference in profit of sale of 1,64,822 bags @ Rs. 56.50 per bag was worked out at Rs. 93,12,443. The CIT(A) observed that this profit was subject to the amount to be refunded to the three sugar factories on account of their overriding title of income from sale of sugar in domestic market instead of exporting the same. He also noted that the assessee had also refunded the alleged additional profit of Rs. 41,12,429 to Agasta SSK Ltd. He thus, held that the additional profit is not liable to be taxed in the hands of assessee. The CIT(A) also deleted the addition of Rs. 41,12,429 which was alleged profit earned by the assessee on sale of sugar purchased from Agasta SSK Ltd. in domestic market instead of exporting the same. The CIT(A) held that the same was not liable to tax.

11. The Revenue is in appeal against the order of CIT(A). The grievance of the Revenue is against the order of CIT(A) in accepting the ground of assessee that the addition on account of alleged excess sale rate received by the assessee on sale of sugar in domestic market was not justified and also accepting the plea of assessee of diversion of income by overriding title.

12. The learned Departmental Representative for the Revenue pointed out that the assessee was a sugar broker and had picked up export quota sugar. It was further pointed out by him that the assessee was to export sugar, but due to some difficulties if not exported, then the sugar factories can ask for compensation since for exporting, the sugar is procured at a lower rate. The assessee claims that because of low quality of sugar, it did not receive the market rate and the average price adopted by the assessee was Rs. 1,233 per bag. The AO on the other hand, adopted the rate at Rs. 1,430 per quintal. He pointed in the first round of appeal, the CIT(A) fixed the rate of sugar sold at Rs. 1,350 per bag and the Tribunal in cross-appeals remitted the issue back to the file of CIT(A). He further pointed out that during the appellate proceedings, certain sale bills were produced, admittedly, no books of account were produced since the same had been damaged in fire. He further stated that there is no demand by the sugar factories of excess price charged by the assessee and also that the assessee has not paid till date to two factory owners. He stressed that the claim of overriding title is not allowable. In this regard, he placed reliance on the ratio laid down by the Hon’ble High Court of Karnataka in CIT vs. Nagarbail Salt-Owners Co-operative Society Ltd. (2016) 290 CTR (Kar) 211 : (2016) 135 DTR (Kar) 22 : (2016) 68 taxmann.com 149 (Kar) and the Delhi Bench of Tribunal in Mussoorie Dehradun Development Authority vs. Addl. CIT (2012) 143 TTJ (Del) 395 : (2012) 65 DTR (Del)(Trib) 297 : (2012) 22 taxmann.com 93 (Del) .

13. The learned Authorized Representative for the assessee on the other hand, referred to the agreement entered into by the assessee, wherein the purchase rate for export of sugar was Rs. 1,075 per quintal. He further pointed out that in case sugar purchased by the assessee from the export quota was not exported, then the difference had to be given to the factory owner. He pointed out that the assessee was compelled to sell the sugar in domestic market and the average rate at which it was sold was Rs. 1,233.50 per quintal. The next plea made by the learned Authorized Representative for the assessee was that the assessee paid Excise duty on 1,64,000 bags which was purchased from three factory owners. He also pointed out that the AO had adopted the rate of sale at Rs. 1,430 per quintal, which was reduced by the CIT(A) to Rs. 1,350 per quintal, in the first round of appeal. He pointed out that before the Tribunal, the assessee for the first time raised an additional ground of appeal of diversion of income as additional ground and the matter was restored back to the file of CIT(A). The CIT(A) in the second round adopts the selling price at Rs. 1,290 against which the assessee is not in appeal. He further pointed out that out of three parties from whom the purchases were made, the assessee had paid differential amount to Agasta SSK Ltd. as against the purchase cost of Rs. 1,075, compensation was paid @ Rs. 222 totalling about Rs. 41 lakhs. In respect of other two parties i.e. Vasantdada SSK Ltd. and Niphad SSK Ltd., proceedings are pending before the Arbitrator. He also pointed out that the Revenue is in appeal against the rate of sugar bags to be applied i.e. @ Rs. 1,290 as worked out by the CIT(A) in the second round. In respect of second aspect of the issue, the learned Authorized Representative for the assessee pointed out that the Excise duty was paid by the assessee on its own, wherein the dispute was before the Arbitrator even as to who has to pay the Excise duty. However, both the sugar authorities and the Arbitrator did not accept the claim of assessee and hence, as per agreement, the assessee was obliged to make the said payments. The assessee has no right to the said amount and the assessee is not obliged to pay taxes, where the amount never reaches the assessee. He further referred to the computation of additional income in the hands of assessee, wherein the AO at pp. 15 and 20 had computed the total bags of sugar at 1,64,822 and had applied the difference of Rs. 196.50 to work out the addition of Rs. 3.23 crores. The CIT(A) has reduced the difference to Rs. 57 as against Rs. 196.50 and hence, the addition re-works to 164822 x 57 = Rs. 93,94,854. He made reference to the ratio laid down by the Hon’ble High Court of Calcutta in CIT vs. G. Basu & Co. (1990) 182 ITR 472 (Cal), wherein the theory of overriding title has been explained, wherein the Hon’ble High Court also refers to the ratio laid down by the Hon’ble Supreme Court in CIT vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) and CIT vs. A. Tosh & Sons (P) Ltd. (1987) 59 CTR (Cal) 272 : (1987) 166 ITR 867 (Cal) . Further, reliance was placed on the ratio laid down by the Hon’ble High Court of Andhra Pradesh in CIT vs. Devatha Chandraiah & Sons (1987) 61 CTR (AP) 187 : (1985) 154 ITR 893 (AP) , wherein the proposition laid down is whether the assessee pays excess amount to X or not, it could not be considered as assessee’s income. Further, reliance was placed on the ratio laid down by the Mumbai Bench of Tribunal in Amitabh Bachchan vs. Dy. CIT (2005) 97 TTJ (Mumbai) 516 , wherein the assessee had an agreement with ABCL to pay 70 per cent of its earning as it had given loan of Rs. 15 crores to the assessee. The Tribunal held the same to be charge of overriding title. The Tribunal applied the concept of diversion of income by overriding title and allowed the claim of assessee therein.

14. The learned Departmental Representative for the Revenue in rejoinder pointed out that the perusal of accounts of assessee would reflect that almost equal amount of FDR has been made by the assessee, on which the interest has been received. He further stressed that in the absence of any such claim being made before the AO, the same cannot be raised now. He further stressed that the AO on the evidence available had worked out the rate at Rs. 1,490 per quintal, then the same should be adopted for making the addition in the hands of assessee. He further pointed out that the reliance made by the learned Authorized Representative for the assessee on different case law are factually different and cannot be applied.

15. We have heard the rival contentions and perused the record. In the facts of the present case, the assessee was merchant exporter of sugar. During the year under consideration, the assessee had purchased sugar out of export quota of sugar from different sugar factories as follows :

"8. Thus, it is seen that the assessee (Merchant Exporter) had purchased sugar out of export quota of sugar from following sugar factories as follows :

16. Where the sugar is to be exported, then the purchase of sugar is at concessional rates. In case the same is not exported for any reason, then the same can be sold in domestic market. The assessee during the period 3rd Nov., 2001 to 28th Jan., 2002 had lifted the sugar out of export quota of sugar from the sugar factories. In this regard, it may be pointed out that sugar factories are also entitled to Excise duty benefit and once the sugar is sold out of export quota of sugar by the sugar factories, no Excise duty is charged. The assessee had entered into an agreement in this regard with the said parties. The copy of agreement with Vasantdada SSK Ltd. is placed at pp. 38 to 41 of the paper book, under which the sugar factory owner had agreed to sell particular quantity of sugar at pre-fixed price to the assessee. Further, it is agreed upon that as per the requirement of Central Excise Rules, buyer/exporter shall complete the necessary documentation for removal of goods, without payment of duty from the factory/godowns and for this purpose, the buyer/exporter shall issue B-15 in favour of the Central Excise and Customs Department against the bank FDR of Rs. 12.50 lakhs pledged with the Commr. of Excise and Customs, Nashik Division. In addition to this, FDR of Rs. 35 lakhs would be taken by the buyer/exporter in the same name and will be given to the custody of seller. The same will remain in force till submission of proof of export. The agreement also clearly mentions that the goods purchased are meant for export out of country. It is also agreed that any additional incentive declared on export of sugar by the Government of India after the date of signing this contract shall be passed on to the seller. It is further agreed that any quantity of sugar under the contract is not exported for any reason whatsoever, beyond the control of exporter viz., cyclone, earthquake, etc., then the buyer would have the right to sell the sugar in domestic market. However, seller shall demand the difference towards additional realization and the buyer/exporter agreed for the same. It is further agreed that the buyer/exporter shall bear the cost for obtaining any regulatory permission and payment of Excise duty, penalty and interest therein charged by the customers and Excise Department, if required on such disposal. The assessee had also entered into similar agreement with Agasta SSK Ltd., copy of which is placed at pp. 42 to 46 of the paper book and with M/s Niphad SSK Ltd., copy of which is placed at pp. 47 to 50 of the paper book.

17. Pursuant to the agreement, sugar which was picked up by the assessee as per the agreement and in view of low quality of sugar, was entirely sold in the open market. The reason for not exporting the said sugar was the inferior quality of sugar and the sugar being nearly one year old. The assessee computes the average selling price of the goods at Rs. 1,233.50 per quintal. The assessee during the course of assessment proceedings also furnished the copy of lab report certifying that the samples of sugar had particular Ph content and since the sugar factories had supplied the sugar out of old stock, the same could not be exported. Since the sugar was not exported, then there was a demand for payment to be made to them towards payment of excise duty. The assessee in such scenario claims to have sold the sugar at the rates lower than prevailing market rates in order to meet the demands of payment by the sugar factories. The assessee admittedly, had purchased the sugar at the rate of about Rs. 1,075 per quintal, which in turn, was sold for average rate of Rs. 1,233.50 per quintal. The AO on the other hand, has collected information and the prevailing domestic market rates for purchasing the goods was varying between Rs. 1,318 per quintal and Rs. 1,310 per quintal in respect of sugar from Vasantdada SSK Ltd. and M/s Niphad SSK Ltd., respectively. The AO also collected information from the Bombay Sugar Merchants Association, Navi Mumbai for the relevant period and the rate of sale as per the AO prevailing in the domestic market was Rs. 1,430 per quintal. The AO was of the view that on the basis of the said information collected from the Bombay Sugar Merchants Association, Navi Mumbai, the adoption of sale rate of Rs. 1,430 per quintal was not correct since the rates of association at Bombay were always higher by Rs. 100 to Rs. 125 per quintal over the rate of others. The claim of assessee before the AO was that the rates declared by the assessee should be accepted in entirety. One factor which was against the assessee was non-production of books of account from which the assessee could establish its rate of sale of sugar. The assessee submitted that the books of account were destroyed in fire against which, it had filed FIR report and hence, they were not available. In the absence of the same, the AO was of the view that the sale rate declared by the assessee was not correct and the same should be adopted at Rs. 1,430 per quintal, since the assessee had lifted 1,64,822 bags from the sugar factories out of export quota of sugar and sold the same. Rejecting the plea of assessee that the said export quota was of second quality and damaged fetching lower price in the market, was held to be incorrect and the selling rate of sugar out of export quota of sugar was adopted at Rs. 1,430 per quintal. The assessee claimed that while calculating the difference between the purchase price of Rs. 1,075/1,080 per quintal and selling price proposed to be taken at Rs. 1,430, resulting in profit of Rs. 350/355 per quintal, was without considering expenses viz. Excise duty, interest on delayed customs duty payments and purchase expenses. The purchase price was computed at Rs. 1,203.77 per quintal and not at Rs. 1,075/1080 per quintal. The AO however, computed the income on the basis of sale rate of Rs. 1,430 per quintal and less average sale rate declared in the trading account at Rs. 1,233.50 and computed the addition in the hands of assessee at Rs. 3,23,87,523. The explanation of assessee that the sale rate as declared in the trading account should be accepted, was rejected in the absence of sale memos and/or books of account. The claim of assessee before the AO was that it had received most of sale proceeds through negotiable instruments duly credited to the bank accounts maintained and hence, the sale rate as reported in the trading account should be accepted. The AO rejecting the claim of assessee and basing its estimate on the selling rate as collected from the Bombay Merchants Sugar Association, worked out suppressed income of Rs. 3.23 crores, which is added to the total income of assessee.

18. Before the CIT(A), the assessee furnished copies of sale bills justifying the average sale price declared in the trading account at Rs. 1,233.50, in addition, the assessee also gave information regarding selling rate of sugar prevailing at Nashik and Mumbai. The sale rate at Nashik was Rs. 1,284 per quintal and sale rate at Mumbai was Rs. 1,392 per quintal. Further, the assessee claimed that there was additional cost for selling the sugar at Mumbai which was about Rs. 100 to Rs. 125 per quintal on account of transportation, octroi, market fees to APMC and other miscellaneous expenses. In this regard, the assessee pointed out that if the additional cost is considered at Rs. 100 then the selling price of sugar works out to Rs. 1,292 per quintal at Mumbai. The assessee claims that because of inferior quality of sugar as against the average selling price of Rs. 1,288 per quintal, the assessee could only sell the goods at the average price of Rs. 1,233.50 per quintal. The said additional evidence was first considered by the CIT(A) in the original round of appellate proceedings but since no remand report was obtained, the matter was set aside to the file of CIT(A) by the Tribunal. In the second round of appellate proceedings, the evidence was forwarded to the AO, who in the remand report reiterated what he had said in the assessment order. However, the CIT(A) took note of the additional evidence filed i.e. copies of sale bills showing the sale rate of between Rs. 1,250 to Rs. 1,280 per quintal. The CIT(A) considered the evidence and was of the view that the sale price of sugar per bag is to be considered at Rs. 1,290 as against Rs. 1,430 per quintal adopted by the AO and declared by the assessee at Rs. 1,233.50 per bag.

19. The Revenue is in appeal against the order of CIT(A) in this regard. However, the assessee has not filed any appeal against working of sale price of sugar per bag at Rs. 1,290. The first issue which arises is adoption of sale price at Rs. 1,290 as against average sale price of Rs. 1,233.50 per quintal declared by the assessee in its trading account. The AO in the assessment proceedings had adopted the rate of Rs. 1,430 on the basis of information received from the Bombay Sugar Merchants Association. However, the Nashik Sugar Brokers Association vide letter dt. 25th June, 2005 had reported that selling rate of sugar prevailing at Nashik was Rs. 1,284 per quintal and at Mumbai was Rs. 1,392 per quintal. The difference in the sale rate was mainly due to additional cost to be incurred towards transportation, octroi and market fees of Washi market. The difference was between Rs. 100 to Rs. 125 per quintal. In the said facts and circumstances, the order of AO in taking the sale price of sugar at Rs. 1,430 per quintal is not correct, in view of prevailing facts and circumstances, the benefit of Rs. 100 of additional cost to be incurred at Mumbai merits to be allowed. Further, the CIT(A) in the original round of proceedings had worked out the cost per bag of Rs. 1,338 per quintal, after considering apparent mistake of Rs. 72 in considering Excise duty cost, the cost per bag worked out to Rs. 1,266 per quintal. Further, after considering the additional cost of Rs. 100 to be incurred for selling sugar in Mumbai market, the average selling price of Nashik works out to Rs. 1,288 per quintal, as per working at p. 15 of the appellate order. In the totality of the above said facts and circumstances, we are in conformity with the order of CIT(A) in adopting sale price of sugar per bag at Rs. 1,290 as against Rs. 1,430 per quintal adopted by the AO. The difference in sale price works out to Rs. 56.50 per bag and consequently, difference in profit on sale of 1,64,822 bags works out to Rs. 93,12,443.

20. The claim of assessee before us is after paying excise duty which was not considered as part of cost, the assessee suffered losses. It is further pleaded by the learned Authorized Representative for the assessee that even otherwise, the additional realization, if any, is to be transferred to sugar factories, as per agreement entered into between the parties. The assessee thus, claims that the additional profit, if any, is diverted by overriding title, in view of obligation of assessee as per the terms of the agreement entered into and hence, the same cannot be treated as income of the assessee.

21. The question which arises in the present set of facts is whether the amount reaches the hands of assessee as its income and hence, is taxable in the hands of assessee. Undoubtedly, every receipt is not income. The nature and character of receipt is to be seen to come to a finding as to whether the same is to be added as income in the hands of assessee. Where the receipt is impressed with character of income, whether it is distributed before or after the receipt is of no consequence. Similarly, where there is an obligation to pay and it has to be diverted by overriding title, it could not be treated as income. This principle has been laid down by the Hon’ble Supreme Court in CIT vs. Sitaldas Tirathdas (supra), wherein it was held as under :

"In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow, It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income but for and on behalf of the person to whom it is payable."

22. Similar proposition has been laid down by the Hon’ble High Court of Calcutta in CIT vs. A. Tosh and Sons (P) Ltd. (supra), wherein it was held as under :

"On a consideration of the facts as found, the provisions of the relevant agreements between the assessee and its foreign buyers, the respective submissions of the parties and the decisions cited, it appears to us that, under the agreements it was made clear that the assessee would be entitled to receive the excise duty rebate and customs duty drawback only on account of the foreign buyers and not on his own account. Under the said agreements the assessee was also under an obligation to remit the said amounts received to the foreign buyers after obtaining the permission from the Reserve Bank of India. It follows that the said amount never reached the hands of the assessee as its own receipt or income. The assessee received the same on behalf of its foreign buyers and the foreign buyers were entitled to the same and to hold the assessee accountable for the same. Even if the permission of the Reserve Bank was not received for remittance of the said amount outside India, it was open to the foreign buyers to receive the said money in India and spend the same in India."

There is no reason why the principles laid down in the decisions cited on behalf of the assessee should not apply to the facts of the case. If such principles are applied, it would follow that the said amounts received on account of excise duty rebate and customs duty drawback were never the real income of the assessee."

23. The Hon’ble High Court of Calcutta in CIT vs. G. Basu & Co. (supra) had applied the two principles and had held as under :

"24. The principles are thus well-settled. An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in diversion of the income. It is necessary to decide, in the context and setting of the facts of a case, as to whether the disbursement in question amounts to diversion of income or not. The test is to find out whether the amount sought to be deducted did or did not reach the assessee as his own income. Obligations there are in every case, but it is the nature of the obligation which is the decisive test. In the instant case, there is a legal obligation in terms of the deed of retirement to pay in a particular manner to the erstwhile partners in respect of realisation of fees after their retirement. This is an instance of the source being subject to an obligation. The mere collection of income where obligation is attached to the source of such income cannot be taxed as it can never be income, far less a real income."

24. Further, the Mumbai Bench of Tribunal in Amitabh Bachchan vs. Dy. CIT (supra) had considered the facts of the case, where the assessee had entered into an agreement with ABCL and pursuant to the said agreement, receipts were transferred to ABCL in terms of said agreement, then the said receipts stood diverted at source by overriding title, holding as under :

"7.3 Now, coming to the view of the Department that the payment to ABCL under the arbitration award is only an application of income and not diversion of income by overriding title, we are unable to find any force in it. The income although received by the assessee had to be accounted to ABCL in terms of the agreement dt. 10th Jan., 1995. There is no escape for the assessee in this regard. Since we have already held the agreement of 1995 to be a genuine agreement on which the parties have acted upon, the nature of dispute arising out of this agreement cannot be held to be non-genuine and, therefore, was correctly a subject-matter of reference under the relevant provisions of the Arbitration Act as well as under the subsisting agreement between the parties. The sole arbitrator has settled the dispute to the satisfaction of both the parties and the award has also been accepted by both the parties leaving no scope for us to hold that such proceedings or the award itself was non-genuine. Therefore, in our view the only conclusion that can be reached in the facts and circumstances of the case is that to the extent there is an outgoing from out of Rs. 23 crores as a result of the arbitration award, the same is the result of diversion of income at source before its accrual in the hands of the assessee. In the light of these discussions the main issue is decided in favour of the assessee and it must be understood that the principles laid down in all the case law specifically dealt with by the AO and the CIT(A) and also canvassed by both the parties before us should be taken to have been considered while coming to this decision although not specifically referred to herein.

7.4 We may now deal with the decision in the case of L. Hans Raj Gupta & Anr. vs. CIT (1969) 73 ITR 765 Del) , relied upon. The Hon’ble High Court, after considering the decision of the Hon’ble Supreme Court in CIT vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) , held the report as under :

‘The principles deducible from the above decisions are that if a person has assigned his source of income in such a manner that it ceases to be his, he cannot be taxed on that income but if, on the other hand, he merely applies the income in such a manner that it passes through him and goes over to another person he may be taxable on the income notwithstanding the legal obligation to apply it for the transferee ...... But if there is an overriding title created to divert the income from the assessee it cannot be considered as the income of the assessee at all. Such diversion by overriding title may be created either by a will or by law or by any other document. The crux of the problem always being ‘is it an application of income or a diversion at the source before becoming the income of the assessee.’

In the light of the above decision as soon as the assessee has entered into another agreement in violation of the agreement dt. 10th Jan., 1995, the income earned thereafter was not of his but belonged to ABCL from the date of agreement and not from the date of arbitration award as tried to be made out by the learned CIT(A). Hence, the contention of the learned senior Departmental Representative that the award was a contractual liability and, therefore, if applicable, is applicable only from asst. yr. 2002-03 is not tenable.

8. Before parting with, we may deal with certain other issues that were raised by the learned Departmental Representative regarding the argument that income cannot accrue to the company as the activity underlining there is ultra vires its object clause as enshrined in the memorandum and articles of association. In our view, the taxability of an income does not depend upon the memorandum and articles of association as held by the jurisdictional High Court in CIT vs. Himalayan Tiles & Marble (P) Ltd. (1975) 100 ITR 177 (Bom) . In any case, cls. 53, 56 and 128 of memorandum of association are exhaustive enough to cover the activities carried on by the company.

9. Another significant feature of this case is the similar agreements entered into by the assessee with ICICI, Pepsi and Luxor, etc. as a brand ambassador of these products. The income from these had been made over by the assessee to ABCL and the Department has taxed such income in the hands of ABCL virtually accepting that the agreement of 1995 is binding, valid and genuine. Therefore, in the light of this information it cannot be said that when it comes to the assessment of income accruing to the assessee by virtue of the tripartite agreement, the agreement of 1995 that the assessee has entered into with ABCL has become invalid, non-genuine and, therefore not binding or a part of make believe arrangements."

25. Before parting, we may refer to the reliance placed upon by the learned Departmental Representative for the Revenue. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the ratio laid down by the Hon’ble High Court of Karnataka in CIT vs. Nagarbail Salt Owners Co-operative Society Ltd. (supra), wherein it was case of co-operative society of Maliks who were the owners of land on which salt was manufactured. The society had taken the said rights from its owners and had manufactured and sold salt in its own name and earned profit thereon. However, it transferred the sale proceeds to separate account for distribution amongst the members of society and offered remaining income to tax. It was held by the Hon’ble High Court that the assessee, a co-operative society was running a business enterprise and it had to offer its profit to tax before diverting any funds for distribution amongst the members of society. The factual aspects before the Hon’ble High Court of Karnataka are at variance and hence, the said ratio is not applicable.

26. Similar is the position in respect of decision of Delhi Bench of Tribunal in Mussoorie Dehradun Development Authority vs. Addl. CIT (supra).

27. Now, coming to the present case, where admittedly, the assessee had picked up the sugar out of export quota of sugar from sugar factories on concessional rates and without payment of Excise duty and there was an obligation to export the said sugar outside India. However, because of certain circumstances i.e. inferior quality of sugar and other factors, whole quota of sugar was sold in the open market. The assessee had picked up the sugar at concessional rates and had sold the sugar in the open market at lesser than the prevailing market price on various factors. The average rate at which the assessee sold the same was at Rs. 1,233.50 per quintal. However, in the paras hereinabove, we have come to a finding that the sale price of sugar is to be adopted at Rs. 1,290 per quintal. The assessee claimed that extra, if any, arising on sale of sugar out of export quota of sugar is diverted by source, in view of the terms agreed upon by the assessee with the sugar factories. As per covenants of the said agreement, in case the buyer sells the sugar in domestic market, the seller can demand the difference towards additional realization and the buyer/exporter agrees for the same. Here, it may be pointed out that one of the sugar factories i.e. Agasta SSK Ltd. has already made a demand for additional profit and the assessee has refunded sum of Rs. 41,12,429 to the said party. In respect of other two parties, the issue is pending before the Arbitrator i.e. the settlement of dues to be paid to them. In view of the totality of the facts and circumstances, we hold that the receipt arising on extra sale value of sugar does not arise to the assessee since the said receipt is cast with an obligation to pay the same to sugar factories and hence, it has to be diverted by overriding title. In this regard, we apply the principles laid down by the Hon’ble Supreme Court in CIT vs. Sitaldas Tirathdas (supra), which has already been followed in other decisions. Accordingly, we hold that the difference in profit is not to be included as income in the hands of assessee.

28. The last issue raised by the Revenue is in respect of allowability of expenditure towards payment of Rs. 41,12,429 to Agasta SSK Ltd. The said amount on account of additional profit on sale of sugar is agreed to be refunded to Agasta SSK Ltd. and we have already held that the additional profit is diverted by overriding title and hence, the issue becomes academic in nature. The grounds of appeal raised by the Revenue are thus, dismissed.

29. In the result, the appeal of Revenue is dismissed.