Additional purchase price fixed before profit ascertainment is deductible business expenditure, not distribution of profits.

A pre-year-end resolution fixing an additional milk price linked to the quantity and quality supplied was treated as a business expenditure, not an appropriation of profits. Because the rate difference was decided before profits could be ascertained under the co-operative law scheme, it reflected a commercial purchase price adjustment made to procure milk on competitive terms. The fact that payment was made after year-end did not convert it into bonus or dividend. The principle of real profits required only truly ascertained profits to be distributed, so the final rate difference was allowable in computing business income.

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Issues: Whether the final rate difference paid by the co-operative milk societies to member societies and, in some cases, non-members, before the close of the accounting year was an allowable business deduction or an appropriation of profits.

Analysis: The payment was linked to the quantity and quality of milk supplied and not to shareholding. The resolution to pay the additional price was taken before the end of the financial year, while the profits could be ascertained only later in accordance with the statutory scheme governing co-operative societies. On these facts, the amount represented a -related purchase price adjustment made for commercial expediency and for procuring milk on competitive terms, rather than distribution of net profits. The principle of real profits requires that only profits truly accrued after proper ascertainment can be treated as distributable, and a pre-profit price adjustment cannot be equated with bonus or dividend merely because payment was made subsequently.

Conclusion: The final rate difference was deductible and not an appropriation of profits; the question was answered in the affirmative and in favour of the assessee.

Ratio Decidendi: A payment made as an additional purchase price for goods, fixed with reference to quantity and quality before profits are ascertained, is a expenditure allowable in computing real profits and does not become distribution of profits merely because it is paid after the year-end.

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