1988 (12) TMI 151 - AT - Income Tax

Appeal allowed for Co-op Society's claim of deduction for milk purchase price increase post-accounting year.

The departmental appeal was allowed as the liability to pay the extra price for the purchase of milk did not arise during the accounting year. The ... Accounting Year, Assessment Year, Purchase Price Issues Involved:1. Whether the assessee is entitled to a deduction of Rs. 24 lakhs provided to be paid to the Producers from whom the assessee had purchased milk during the accounting year.Issue-wise Detailed Analysis:1. Entitlement to Deduction of Rs. 24 Lakhs:The primary issue for decision in this departmental appeal is whether the assessee, a Co-operative Society, is entitled to a deduction of Rs. 24 lakhs, which was provided to be paid to the Producers from whom the assessee had purchased milk during the accounting year ending 30th June 1981. The assessee had been paying the producers varying rates for the purchase of milk, depending on the fat content. During the accounting year, some producers requested an increase in the purchase price, as evidenced by letters received from various Milk Producers' Unions.The accounts of the assessee were approved and audited by the Registrar, but were not yet completed or audited when the Andhra Pradesh Dairy Development Co-operative Federation Ltd. (APDDFL) issued a circular on 1-3-1982, informing all milk supply unions to adopt revised purchase rates from 1-3-1982. The governing body of the assessee-society met on 10-10-1982 and resolved to treat the procurement price paid to milk suppliers as tentative and to fix the final price at the end of the year. The General Body of the assessee met on 7-11-1983 and passed a resolution implementing the revised Milk Procurement price from the accounting year 1980-81, resulting in a provision of Rs. 24 lakhs towards the final purchase price adjustment.For the assessment year 1982-83, the Income-tax Officer rejected the assessee's claim for deduction of Rs. 24 lakhs, stating that the decision to pay the extra price was made long after the close of the year and was only an ad hoc provision. The Commissioner (Appeals) allowed the deduction, referencing the Supreme Court decision in CIT v. Mysore Electrical Industries Ltd., which he interpreted to mean that recommendations for appropriations from the accounts relate back to the close of the accounting year.The department appealed, arguing that the price at which milk was purchased was fixed by a pre-existing contract and that the liability to pay the extra amount arose only on 7-11-1983, outside the accounting year. The department also cited the Andhra Pradesh High Court decision in Armoor Co-operative Marketing Society v. CIT, which held that liability arises only on the passing of a resolution.The assessee argued that no final price was fixed during the accounting year and that the actual price was to be determined later, which is permissible under section 9(2) of the Sale of Goods Act. The assessee also referenced decisions from various High Courts supporting the validity of such transactions.Upon consideration, it was found that there was no contract between the assessee and the primary milk producers during the accounting year, and the price fixed was final, not tentative. The resolution passed on 10-10-1982 aimed to convert the final price into a tentative price to benefit the primary producers. Therefore, during the accounting year, the price was final.The arguments based on section 9(2) of the Sale of Goods Act were deemed irrelevant as the price had already been fixed. The case laws cited by the assessee, primarily dealing with the fixation of sugar cane prices under the Sugar Cane Control Order, were found to be distinguishable from the facts of the assessee's case.The Andhra Pradesh High Court decision in Armoor Co-operative Marketing Society was found relevant, as it held that liability arises when a resolution is passed. Applying this ratio, the liability to pay the extra amount arose only when the general body passed the resolution, not during the accounting year.The Supreme Court decision in CIT v. Mysore Electrical Industries Ltd. was found irrelevant to the issue, as it dealt with the disposal of profits, not the price at which the assessee is to buy milk. The relevant case was CIT v. Gajapathi Naidu, which held that the right to an additional amount arises only when the buyer agrees to pay the extra amount.In conclusion, the liability to pay the extra price for the purchase of milk did not arise during the accounting year, and the assessee was not entitled to the deduction claimed. The departmental appeal was allowed.