1987 (2) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to claim business expenditure for bonus payable to maize suppliers.
2. Validity of the society's resolutions and compliance with bye-laws.
3. Applicability of section 45 of the Andhra Pradesh Co-operative Societies Act.
4. Relevance of mercantile system of accounting for deduction of expenses.
5. Legal obligation to pay bonus based on government policy and Registrar's directions.

Detailed Analysis:

1. Entitlement to Claim Business Expenditure for Bonus Payable to Maize Suppliers:
The primary issue was whether the assessee, a primary co-operative marketing society, could claim Rs. 1,60,654 as business expenditure for the assessment year 1969-70 towards bonus payable to maize suppliers. The Income-tax Officer rejected the claim, arguing that the assessee acted as an agent and no actual payment was made during the relevant period. The Appellate Assistant Commissioner reversed this decision, noting that the bonus payment was authorized by the Registrar and actually paid to the growers. However, the Income-tax Appellate Tribunal restored the original assessment order, stating that the Registrar's letter was merely advisory and did not create a legal liability.

2. Validity of the Society's Resolutions and Compliance with Bye-laws:
The Tribunal held that there was no contractual or statutory obligation for the society to pay the bonus, and the society's bye-law 75(g) only allowed for disbursement of net profits not exceeding 30% to members. The Tribunal concluded that the society's resolutions to pay the bonus were not backed by a binding legal requirement. However, the court found that the society's general body resolutions, passed to implement the Registrar's directions, were valid and did not require amending the bye-laws for the payment of bonus.

3. Applicability of Section 45 of the Andhra Pradesh Co-operative Societies Act:
Section 45 deals with the disposal of net profits, including payment of dividends and rebates to members. The court noted that the Registrar's letter, embodying government policy, implicitly permitted the society to pay the bonus. Even though the Registrar's approval came after the relevant assessment year, the court held that the society's actions were in compliance with the policy directions. The court clarified that the payment was not a rebate or dividend but additional purchase money, thus not requiring compliance with section 45(2)(a) or (b).

4. Relevance of Mercantile System of Accounting for Deduction of Expenses:
The court emphasized that under the mercantile system of accounting, a liability is deductible in the year it accrues, not when it is paid. Citing various precedents, including Kedarnath Jute Mfg. Co. Ltd. v. CIT and CIT v. Orient Supply Syndicate, the court upheld that the society's liability to pay the bonus had accrued when the general body passed the resolution, making it deductible for the relevant assessment year.

5. Legal Obligation to Pay Bonus Based on Government Policy and Registrar's Directions:
The court concluded that the Registrar's letter was a directive reflecting government policy aimed at eliminating middlemen and incentivizing farmers. This directive created a legal obligation for the society to pay the bonus. The court rejected the Tribunal's view that the letter was merely advisory, affirming that the society was bound to follow the policy directions, which were in line with the broader objectives of economic justice and farmer welfare.

Conclusion:
The court answered the question in favor of the assessee, holding that the society was entitled to claim the bonus as business expenditure. The resolutions passed by the society were valid, and the liability to pay the bonus had accrued in the relevant assessment year. The court emphasized the importance of viewing the society's actions pragmatically, in light of government policy and the mercantile system of accounting.