TaxTMI 
TaxTMI 
2005 (2) TMI 25
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....r, after making various additions and disallowances, the Assessing Officer framed an assessment under section 143(3) of the Act on March 18, 1987, on a total income of Rs. 8,01,67,335. Out of the various additions/disallowances, the only issue which falls for consideration is payment of Rs. 5,47,69,105 made to other co-operative societies, who are members of the assessee-society, for supply of milk. The assessee is the apex co-operative society, in other words, a federation of various milk producers' co-operative societies. Such member societies are having individuals as its members. The individuals supplied milk to the co-operative societies of which they are members; and such co-operative societies, namely, member co-operative societies, in turn supplied milk to the assessee. The milk so procured is sold by the assessee to consumers. It appears that the assessee made payment of Rs. 5,47,69,105 to its member societies by way of additional price on March 31, 1984. According to the Assessing Officer, the aforesaid payment by way of additional price was not allowable as a deduction either under section 28 or 37(1) of the Act because-(i) the payment was made on the last day of the ....
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....of Income-tax (Appeals) also distinguished the decision of the Appellate Assistant Commissioner in the case of-Kaira District Milk Producers' Union which was relied upon by the assessee as being identical on facts by stating that the facts were different. According to the Commissioner of Income-tax (Appeals), the payment was in the nature of application of income by the assessee; the additional payment was under a self-generated obligation and hence, even if such an obligation was discharged, the assessee was not entitled to deduction of such additional payment. When the matter was carried in appeal before the Tribunal, there was a difference of opinion between the Judicial Member and the Accountant Member and, therefore, under section 255(4) of the Act, the following point of difference was referred to a Third Member through the President of the Tribunal: "Whether the payment of Rs. 5,47,69,105 is an allowable deduction?" It may be noted that the Judicial Member had accepted the case of the Department while the Accountant Member had accepted the stand of the assessee. The Third Member, for the reasons recorded in his order dated March 20,1990, concurred with the view expr....
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.... for the purpose of the business or profession. That the term "wholly" denoted quantum of the expenditure while the term "exclusively" denoted the motive or the justification or the basis for the expenditure. That once the respondent had failed to justify incurring of the expenditure, it was not entitled to any deduction thereof. In other words, there being no basis for the rate of payment of additional price, and the assessee having failed to satisfy the Assessing Officer as to motive for incurring the expenditure, it was within the power and jurisdiction of the Assessing Officer to make the disallowance. A further contention was raised that, while making payment of price in the accounting period, the assessee had informed the primary societies through their circulars that the amount that was being paid was provisional price and the final price would be worked out and paid subsequently, would merely create an obligation qua the assessee but there was no overriding charge. In other words, the submission was that it was a discretion available to the assessee and it was not binding on the assessee to make further payment merely because the circulars were issued during the accounti....
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....Ramanbhai Patel v. ITO [1995] 215 ITR 323 (Guj) and (iii) Lalludas Children Trust v. CIT [2001] 251 ITR 50 (Guj) for the proposition that in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, the question of allowability of purchase price could not have been agitated. That the facts in the earlier years were identical was not disputed and such finding of fact had already been recorded by the Tribunal. The hon'ble Supreme Court's decision in the case of Berger Paints India Ltd. v. CIT [2004] 266 ITR 99, was cited in support of the proposition that once the Revenue had not challenged the same modality of working out a payment of purchase price in the case of other societies, it was not open to the Revenue to challenge its correctness in the case of the assessee, without just cause. The decision in the case of CIT v. Dhanrajgirji Raja Namsingirji [1973] 91 ITR 544 (SC) was cited for the proposition that it was for the assessee to decide what expenditure to incur and how best to protect its own interest; that it was not open to the Department to prescribe what expenditure an assessee should incur, in what cir....
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....erative Societies, one nominee each of the financial institutions like Gujarat Industrial and Investment Corporation, Indian Dairy Corporation, National Dairy Development Board, Mehsana District Central Cooperative Bank Ltd. The managing director is the ex officio member. One member is also drawn from Gujarat Co-operative Milk Marketing Federation Ltd. The manner of distribution of profits also was provided in clause 54 of the articles, which in particular provided that after providing for all the expenses, bonus, provision for income-tax, provision for the payment of the dividend on the paid-up share capital as per the provisions of the Co-operative Societies Act and Rules as decided by the annual general meeting and the balance of profit, if any, is to be transferred to the general fund, which can be used with the approval of the general body meeting either for distribution among the members supplying the milk and milk products or for research and development work or for dividend equalisation or for charity fund or for co-operative training and promotion purposes. Thus, the distribution of profits is subjected to very strict control and it has to be in the stipulated channels. As....
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.... final price increase/decrease will be decided and shall be intimated.' It was in pursuance of this undertaking to fix the final price increase or decrease that the board of directors of the assessee-society at its meeting held on March 31,1984, for which notice was issued on March 24, 1983, passed the following resolution: 'The milk purchase prices paid to the milk producing co-operative societies during the year have been provisional. It is hereby resolved that the final prices be paid to co-operative societies to enable them to pay, to their milk producers on good milk supplied by them during the period April, 1983 to February, 1984, at the rate on the provisional price paid for good quality buffalo milk supplied at 12.5 per cent, and on good quality cow milk supplied at 15.5 per cent, and accordingly, the final price for the current year is decided/fixed'." Pursuant to the aforesaid resolution, the additional purchase price which became payable to the supplier societies came to be paid and this is the figure of Rs. 5,47,69,105 which is in dispute. In the light of the aforesaid findings, undisputed facts which have come on record are, that the amount has in fact gone....
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....ice is fixed. The concept of charge, is misplaced, in the circumstances. A charge in legal parlance means securing a debt or an obligation by offering a security in the nature of some property or a guarantee like bank guarantee. Hence, this contention does not carry the case of the Revenue any further. The proposition that the payment in question amounted to application of income is also misconceived. The said submission proceeds on the premise that income had already accrued to the assessee and was available for distribution. The Assessing Officer has used the phrase "adjustment of profits" while the Commissioner of Income-tax (Appeals) has used the phrase "application of income". However, both the authorities, and the learned member who concurred with them, have lost sight of the legal position regarding accrual of profits and income. In the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42, the hon'ble Supreme Court was called upon to decide as to when the share of income or any part thereof from the partnership accrued to the assessee and whether it could be charged in the hands of the assessee. The karta of a Hindu undivided family represented the Hindu undivided family ....
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....t stated intervals, the right of a partner to demand his share of the profits does not arise until the contingency which by operation of law or under a covenant of the partnership deed gives rise to that right has arisen." Therefore, applying the aforesaid principles, it is not possible to state that merely because the board resolved to fix the final purchase price and pay on the last day of the accounting period, it would amount to application of profits. There is no finding recorded by any authority that the profits had been ascertained by making up the accounts. Therefore, though on the last day when the resolution was made by the board of directors to pay the final price, the gross receipts of the assessee, in which dormant profits lay embedded, could not be equated to profits chargeable to tax under the provisions of the Act. The case of the payment being application of income is therefore, without any basis. It is necessary to take note of the fact that the Assessing Officer had made disallowance in the alternative, i.e., either under section 28 or under section 37 of the Act. The law as to how profits must be ascertained before being brought to tax under section 28 of ....
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....ously states that it would amount to adjustment of profits, without determination as to whether at the point of time when the additional purchase price was paid profits had accrued or arisen in the hands of the assessee. The over emphasis on the aspect of the basis or the data for fixing the final price by the board of directors created a situation whereunder the authorities lost sight of the settled position of law governing allowability or otherwise of such an expenditure. The Tribunal has while recording the majority opinion rightly considered that for the past years identical fact situation prevailed and in the absence of any change in circumstances the Department could not have reagitated the issue. The legal position is well-settled in this regard. Similarly, the Tribunal was also justified in taking into consideration the factum of other similarly situated societies being allowed deduction of additional purchase price despite adopting the same modality of working out and payment of final price. Lastly, it is necessary to take note of the fact that the authorities have levelled an allegation of tax evasion against the assessee. The majority view of the Tribunal on this ....