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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 997 OF 2008
The Commissioner of Income Tax-IV
.. Appellant
vs
The Solapur Dist.Coop Milk Producers
and Process Union Ltd .. Respondent
WITH
INCOME TAX APPEAL (Lodging) NO.290 of 2006
The Commissioner of Income Tax (Central)
.. Appellant
ig vs
The Kolhapur Zilla Sahakari Dudh Utpadak
Sangh Ltd .. Respondent
..
Mr.P.S.Sahadevan with Mr.Vimal Gupta for
Appellant
Mr.S.N.Inamdar for Respondent
..
CORAM : F.I.REBELLO AND
R.S.MOHITE, JJ
JUDGMENT RESERVED ON: 18th March, 2009
JUDGMENT PRONOUNCED ON: 4th April, 2009
JUDGMENT ( Per F.I.Rebello, J )
1. These appeals are being disposed of by this
common order as they involve the same questions of
law which is framed as under :
. ” Whether on the facts and
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Hon’ble Tribunal was justified in
deleting the addition of Rs.1,55,81,519/-
by holding the said amount represented
rate difference payment in the purchase
of milk paid by the assessee even though
the said payment lof Rs.1,55,81,519 was
paid at the end of the previous year. “
A few facts may now be set out from the case of
and Process
‘ The Solapur District Cooperative Milk Producers
Union Ltd.’ The facts in the other
case are also same or similar except to the extent
of supply of milk by non-members also.
2. The assessee-societies are federal milk
societies and its members are primary milk
co-operative societies and the business of the
assessee is to purchase milk from its members and
other producers of milk at the rate i.e. similar
to both the members and outside milk producers and
sell the milk to various parties. The difference
in purchase price and sale price after the normal
expenses is the profit of the assessee- societies
which is liable to tax. This profit in turn is
distributed to the member primary milk
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co-operative societies.
3. The rate of purchase price is fixed by the
board of the assessee-societies. The purchase
price is linked to the fat content of milk and
also varies according to seasons like the rate for
purchase of milk in the lean season is different
from the flush season.
4. The respondents fixes the rate of processing
of milk at the beginning of the year on the basis
of the price declared by the Government of
Maharashtra and price which other buyers pay to
the vendors. These rates are revised from time to
time. It is made always clear that the rates are
provisional to the final milk rate difference
which is determined in the month of March every
year and paid subsequently in the following year.
It is ascertained and verified that the primary
milk society also in turn makes payment of final
rate difference to the individual milk producers
around Diwali. The respondents are apex district
societies of primary milk societies; Individual
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milk producers are members of these primary
societies. Individual producers supply milk to
the primary milk co-operative milk societies. The
milk so collected is brought to the processing
unit of the assessee societyand payment to member
cooperative socties/non-member cooperative
societies is made on the basis of quality of fat
and SNF content. Milk is also supplied by
non-members to the primary milk societies. The
processed milk is supplied to the ” Mahananda
i.e.Maharashtra
milk
federation.
Rajya
The
Co-op
assessee
Dudh
before
Sangh,
the
a
end
state
of
the financial year depended on its books, makes a
final rate difference to the primary society who
in turn pay the difference to members and
non-members who supply milk.
5. The learned A.O. refused to exclude the final
rate difference paid from the total amount paid by
the respondents on the ground that :
(a) It was not linked to the quality of
the milk like fat content or source of
milk, quality of milk, period of milkprocurement.
(b) It was paid only to member societies
and not to other suppliers;
(c) It was not linked to the price paid
by government or other cooperative
societies;
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(d) It was made on the basis of the
accrued profits of the year and hence theamounted to distribution of profits;
6. Against the order of the A.O. an appeal was
preferred by the assessee. The C.I.T. (Appeals)
affirmed the claim of the assessee that the prices
fixed provisionally were not found supported by
any documentary evidence. The C.I.T. (Appeals)
also observed that the assessee’s arguments that
such payment are made to keep an edge over its
competitors
supply
milk
and
to
attract
the
more
assessee
and
is
more
without
members
any
to
merit.
It was also held that the assessees has been
unable to establish that the final market rate
difference was paid at a fixed price per litre
irrespective of the quality of the milk fat and
its content. The C.I.T. (Appeals) substantially
agreed with the reasoning of the A.O. and
accordingly dismissed the appeal.
7. The assessees aggrieved preferred an appeal to
the I.T.A.T. in respect of the findings recorded
by the A.O. which we have reproduced earlier and
which is affirmed by the C.I.T.(Appeals), the
tribunal recorded as under :
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(i) The basic price itself was based on
quality, any increase in basic price
which was provisional was automaticallylinked with quality e.g.if price paid on
the basis of fat and SNF content was X &
Y final rate difference of say 25 paiseincreased theprice as X+ 25 paise &Y +25
paise.
(ii) The supply by non-members was
miniscule and that too only for twoyears. Therefore, non payment of final
rate difference to outsiders does not
convert the payments to members in
respect of milk as appropriation of
profits. Here, we may mention the case
of Solapur District Cooperative MilkProducers and Process Union Ltd, a
finding has been recorded that payment is
made ig to members as well as non-members.
(iii) The government only fixes minimum
price to be paid. The board has
authority under bye laws to fix theprice of the milk purchased from time to
time. In view of the cooperative
principles, assessee tend to pass on the
maximum price to its member societies.
Similar situation was obtaining inMehsana Districts case 282 ITR 24 wherein
Gujrat High Court has answered similar
issue in favour of the assessee.
(iv) The resolution to pay final rate
difference were always passed in the
month of March every year i.e. before
the end of previous year and only theresolution to disburse the amounts were
passed after the year end. Rate
difference was paid only on the basis of
quantity of milk supplied during year not
in proportion of shareholding so as to
amount to distribution of profits. Thedates on which the resolutions is to pay
the final milk rate difference are
recorded before the end of the year. It
accordingly allowed the appeal and
allowed deductions of final rate.
8. At the hearing of these appeals, on behalf of
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the revenue, learned counsel submits that there is
material on record to show that the final rate
difference was paid after accrual of the net
profits and out of the net profits. The
transactions which were recorded and noted during
the course of survey shows that the final milk
rate difference was paid after accrual of net
profit and payment of final milk rate difference
was not included in the total per litre production
of cost of milk. This was corroborated in the
statement
society.
recorded
It is
of
also
the
set
Finance
out
Manager
that the
of the
resolution
of final rate difference in the same case was
passed after expiry of the relevant financial
year. There was no legal obligation on the
assessee society to make payment of final rate
difference to member cooperative societies. Our
attention is drawn to the fact that the
C.I.T.(Appeals) has recorded a finding that in
some cases the assessee paid commercial purchase
price by even excluding the amount of final rate
difference to milk producers as compared by the
purchase price of milk to government and some
other cooperative societies. It is submitted that
there is also a finding of C.I.T.(Appeals), that
in some cases the apex societies purchased milk
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under consideration at a fixed purchase price and
not at provisional price. For these reasons, the
appeals ought to be dismissed.
9. The entire argument sought to be advanced on
behalf of the revenue is that what in fact is paid
to the milk suppliers whether they be members or
non-members is out of the profits of the society;
The resolution to pay may be passed before the
accounts are approved, but nevertheless, it is out
of
A.O.
profits.
as
ig That
affirmed
being
by
the
the
case the order
C.I.T.(Appeals)
of the
was
justified. Apart from supporting the order of the
ITAT, it is also submitted, that the profits were
arrived at after debiting the expenditure by way
of market rate difference and there was no
allocation of the profits and this fact has
remained uncontroverted.
In the case of C.I.T. vs Shri Sarvaraya Sugars
Ltd, (1987) 163 ITR 429 and Addl.C.I.T.Kanpur vs
MP Sugar Mills (P) Ltd (1984) 148 ITR 203, it has
been held that the liability for additional price
of sugar cane under price linking formula in the
year the sugarcane is purchased and arises on
receipt of goods and additional price paid relates
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back to such receipts. If this test is applied to
the assessee’s case, it would be squarely covered.
Payment is made not in proportion to shareholding
but, based on quality of milk and quantity
supplied. The tribunal has further held that ” If
in the final accounts certain amounts are taken as
liability for purchase of goods, quantified on the
basis of quality or quantity of goods purchased
then it cannot be said that the payment amounts
to appropriation of profits.
10.
ig Is the price difference paid out of the
profits ? Firstly, the profits have to be
ascertained. If there be profits they attract tax
at that point of time. The word ‘profit as
observed by Lord Chancellor Halsbury in Greshem
Life Assurance Society of Styles (1982) A.C.309 is
to be understood in its natural and proper sense –
in a sense in which no commercial man would
misunderstand. When an individual or a company
has in that proper sense ascertained what are the
profits of his business or trade the destination
of profits charged on those profits by previous
agreements or otherwise is immaterial. The
profits are to be determined considering two
points of time and they can be determined only
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after all expenses incurred for the business are
deducted from the gross income. As held by the
Supreme Court in CIT vs Travancore Sugars and
Chemicals Ltd (1973) 88 ITR the amount paid by
reeference to profit can either be that, – (i) it
is paid after the profits become deductible or
(ii) the amount is payable prior to such
distribution to be computed by reference to
notional profits or what in certain cases termed
as approved net profits. In the first instance,
it will
deductible in computation
ig be
of profits as
distributed out of profits and not
expenditure.
10. Section 64 of the Maharashtra Cooperative
Societies Act, 1960 (M.C.S.Act) sets not that no
part of the funds other than the dividend
equalisation or bonus equalisation funds as may be
prescribed or the net profits of the society shall
be paid by way of bonus or dividend or otherwise
distributed among its members. Under section 65
the society shall construct its relevant annual
financial statements and arrive at its consequent
net profit or loss in the manner prescribed. The
proviso explains that no part of the profits shall
be appropriated except with the approval of the
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annual general meeting and in conformity with the
Act, rules and bye-laws. From a reading of this
provision, it is apparent that the net profits
have first to be determined and then only can be
appropriated after the approval of the annual
general meeting. The net profits do not accrue
from day to day or from month to month and profits
have to be ascertained by comparison at two stated
points of time. The assessee when it decided to
pass a resolution to pay the price difference had
not
resolution
ascertained
passed
ig at
the
its
net
A.G.M.
profits
to
nor
distribute
was a
the
profits as by way of higher price difference. In
the instant case, admittedly the decision to pay
the additional purchase price was based on the
resolution of the Board of Directors, approved at
the general meeting.
11. From the facts on record and arguments
advanced what emerges is as under :
1) That the price difference paid in the
case of Kolhapur society to its members
and in case of Solapur society to both
members and non-members ;
2) Payment is made only to members who
are suppliers;
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3) Payment is made to suppliers not on
the basis of the shares held by them but,on the amounts of the milk supplied and
on the basis of the fat content of the
milk ;
4) The resolution to pay additional price
is taken before the end of the financial
year i.e. before the profits can be said
to accrue though payment is made in thesubsequent financial year; and
5) The profits are only payable in terms
of section 65 of the Maharashtra
Cooperative Societies Act, 1960.
12.
consideration
A
ig similar
before the
question
Gujrat
had
High
come
Court.
up for
The
Gujrat High Court was considering in case of
Commissioner of Income Tax vs Mehasena District
Cooperative Milk Producers Union Ltd (2005) (195 )
CTR 385, as to whether a claim for deduction was
allowable either under section 28 or section 37
(1). There also an additional payment was made
towards the price of the milk. The A.O.
disallowed the same on the ground of profit
adjustment. The C.I.T.(Appeals) affirmed the
order of the A.O. The tribunal allowed the
assessee’s claim. Various contentions were sought
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to be canvassed before the learned High Court.
The learned bench noted the legal position as to
when accrual of profits can be said to have
accrued. It considered the case of C.I.T. vs
Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC) and
noted that the words “accrue” and ” arise” are
used
Income
to
is
ig said
contradistinguish
to be received
the
when
word
it reaches
‘receive’.
the
assessee. When the right to receive the income
becomes vested in he assessee, it is said to
accrue or arise. Dealing with profits, this is
what the learned Court said:
” Profits do not accrue from day to day
or even from month to month and have to
be ascertained by a comparison of assets
at two stated points. Unless the rightto profits comes into existence there is
no accrual of profits and the destination
of profits must be determined by the
title thereto on the day on which they
arise. “
Applying the test, the learned Court held that
because the board resolved to fix the final
purchase price and pay on the last day of the
accounting period it would not amount to
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application of profits. The Court also noted that
the profits to be assessed have to be the ” real
profits ” and are required to be determined on the
ordinary principles of commercial trading and
commercial accounting. The Court further noted as
under :
a) The expenditure in question cannot be
termed to be application of income in
absence of any evidence as to accrual of
profits in light of settled legalposition;
ig (b) The payment of additional/final price
made on the last day of the accounting
year is allowable under section 28 of the
Act being a necessary deduction for
ascertaining the real profits onprinciples of commercial accounting and ;
(c) The payment in question is
alternatively allowable under section 37
of the Act having been incurred whollyand exclusively for the purpose of
business carried on by the assessee in
light of the evidence which has come onrecord ;
13. Coming to our case, (as we have noted this is
not the case of distribution of profits) as the
amount to be paid was not out of the profits
ascertained at the annual general meeting. It is
not paid to all shareholders. The amount which is
the subject matter is paid to members who supply
milk and in some case also to non-members. The
payment is for the quantity of milk supplied and
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in terms of the quality supplied. The commercial
expediency for payment of this price are the
market conditions, and the need to procure more
milk from the members and non-members to the
assessee. To our mind, therefore, the amount paid
by no stretch of imagination can be said to be
dividend to the members or shareholders or payment
in the form of bonus as bonus also has to be paid
from the accrued profits.
14.
agreement
In
with
ig the
the
light
views
of our
taken
discussion,
by
we
the
are
tribunal
in
and
the question at present has to be answered in the
affirmative in favour of assessee and against the
the revenue. Appeals dismissed.
{ R.S.Mohite, J } { F.I.Rebello, J }
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