2015 (2) TMI 163 - AT - Income Tax

Income recognition - method of computation of income followed from the inception of the society - reopening of assessment - CIT(A) deleting the income of the assessee brought to tax as profit of its business of manufacture and sale of salt - Held that - CIT(A) has categorically discussed every points raised by the Assessing Officer and also the submissions of the assessee in the impugned order. Also going through the written submissions filed by the assessee wherein, in different bye laws, the objectives of the society are mentioned, we find that the clauses mentioned in the bye laws of the society are supplementary and complimentary to clauses 4(a) & 4(q). In fact clause 4(i) stipulates that the society pays on behalf of the members the assessment and malign rent. This also shows that the society is only managing the whole activity on behalf of the members to maximize the profits in the most beneficial way to the members. This activity is carried on for last several years and even before the operation of the present IT Act, which is IT Act 1962. The submissions of the assessee that earlier society was for the limited purpose of selling the products manufactured by the members in a profitable way by taking advantage of cooperative methods and the present society is acting on similar lines, therefore, denial of the same is not legally correct by taking different plea by the AO. It is a fact that the bye laws cannot be segregated and read to hold the income generated as income of the assessee. We have gone through the case laws cited by the assessee, which are also supporting the case of the assessee. In view of this, we reject grounds of appeal taken by the revenue. - Decided in favour of assessee.

Issues Involved:

1. Deletion of income brought to tax as profit from the manufacture and sale of salt.
2. Acceptance of the assessee's method of income computation.
3. Validity of proceedings initiated under Section 147.
4. Treatment of sale of salt declared in VAT returns.
5. Allowability of expenditure claimed as a transfer to the distribution pool fund.
6. Application of the Radhasoami Satsang vs. CIT ratio.
7. Application of the Tuticorin Alkali Chemicals & Fertilizers Ltd vs. CIT ratio.
8. Status of the cooperative society acting as an agent for its members.

Detailed Analysis:

1. Deletion of Income Brought to Tax:
The CIT(A) erred in law and on facts by deleting the income of the assessee brought to tax as profit from its business of manufacturing and selling salt. The Assessing Officer (AO) observed that the society's income from manufacturing and selling salt was transferred to the distribution pool fund account before being offered to tax, which is not a deductible expenditure. The AO concluded that the income of the society had escaped assessment.

2. Acceptance of Assessee's Method of Income Computation:
The CIT(A) accepted the assessee's contention that the method of income computation had been followed since the society's inception and was accepted by the department, despite it not being in accordance with the law. The assessee argued that the income generated from the land was offered to tax in the hands of the members, and the society's share of the income was offered in its hands.

3. Validity of Proceedings Initiated Under Section 147:
The CIT(A) upheld the proceedings initiated under Section 147 and the reasons for reopening the assessment but deleted the assessment based on the same reasons. The AO had given detailed reasons for reopening the assessment, which the CIT(A) found valid.

4. Treatment of Sale of Salt Declared in VAT Returns:
The CIT(A) ignored the fact that the sale of salt was declared in the VAT returns as that of the assessee-society, and the profit belonged to the assessee, liable to tax before distribution to the members. The AO observed that the society was not merely marketing the salt produced by the members but was engaged in the business of manufacturing and selling salt.

5. Allowability of Expenditure Claimed as Transfer to Distribution Pool Fund:
The CIT(A) erred in not considering that the claim of expenditure by way of transfer of "net sales" to the distribution pool fund was a self-imposed obligation, not authorized or allowable under any provisions of the Income Tax Act. The AO proposed to assess the net profit without allowing the deduction claimed as a transfer to the distribution pool account.

6. Application of Radhasoami Satsang vs. CIT Ratio:
The CIT(A) applied the ratio of Radhasoami Satsang vs. CIT, which dealt with issues of entitlement to exemption under Sections 11 and 12 of the Income-tax Act, whereas the issues involved in the assessee's case were those of a business association. The CIT(A) found strength in the argument that the members had a right by overriding title on the income generated.

7. Application of Tuticorin Alkali Chemicals & Fertilizers Ltd vs. CIT Ratio:
The CIT(A) applied the ratio of Tuticorin Alkali Chemicals & Fertilizers Ltd vs. CIT, wrongly considering that the entire receipts of the business by the sale of salt were charged to income tax, ignoring that only the profits after deducting manufacturing and administrative expenses were determined as the income of the assessee.

8. Status of Cooperative Society Acting as an Agent:
The CIT(A) erred in not following that the cooperative society is not allowed in any law to act as an agent for its own members. The lands were surrendered to the society to increase profit, and the society was liable to tax before the profits were shared by the members. The AO observed that the society was neither a worker cooperative nor a producer cooperative, with no active participation of members.

Conclusion:
The appellate authority found no infirmity in the CIT(A)'s well-reasoned order, which comprehensively addressed the AO's points and the assessee's submissions. The CIT(A) concluded that the society's bye-laws indicated that the society managed the activity on behalf of the members to maximize their profits, and the income generated was rightfully the members' income, with the society only entitled to commission. The revenue's appeals were dismissed, and the CIT(A)'s order was upheld.

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