2016 (4) TMI 827 - HC - Income Tax

Exemption u/s 11 denied - transfer of fund for subsequent distribution to the members before payment of tax - whether the respondent society is managing its activity on behalf of its members in the most beneficial way by selling the products manufactured by the members? - members of the Respondent-Society are Maliks who are owners of land (Agar) on which salt is manufactured - Held that - Income is defined under Section 2(24) of the Act and it includes profits and gains. The above facts lead us an irresistible inference that the Agar (the land) belonging to the Maliks is used to manufacture salt and its by-product and the same is sold by the Assessee-Society itself. In the course of its business, Society earns profits which falls within the definition of income under Section 2(24) of the Act. Therefore, in our considered view, the Assessing Authority was right in holding that the transfer of fund for subsequent distribution to the members before payment of tax is not a deductible expenditure in computation of business income of the Assessee-Co- operative Society and further that the income declared after disbursement of profits is not logical and has no relevance to determination of taxable profit under the Income Tax Act. Revenue collection augments State exchequer. A prosperous treasury is a means for development leading to good living of citizenry. Income Tax one of the tributaries which flows into State coffers. Therefore, we are of the view it is imperative for the Courts to opt strict interpretation while dealing with fiscal laws. Based on evidence and admission of appellant, we have held, that the Society has transferred funds to Distribution Pool before offering to Tax. On facts, we have held that, the Society has indulged in the enterprise of manufacture and sale of salt. Non-compliance of statutory provisions is sought to be justified by the Society on a plea that Society indulges in such enterprise on behalf of members of the society and tax demand on the entire income would run counter to cooperative movement. There can be perhaps no disagreement with the proposition that Co-operative movement is benevolent to its members. Nonetheless, an ideology however lofty does not ipso facto exempt such entity from the solemn duty and sacrosanct obligation of obeying the law of the land nor does it insulate the entity from the vigour of penal actions in case of default. Thus, assessee a co-operative entity which runs a business enterprise is duty bound to offer its profits to tax before diverting any funds to the Distributable Pool Fund Account. - Decided in favour of revenue

Summary

Issues Involved:
1. Whether the Tribunal was correct in holding that the respondent society managed its activities beneficially for its members despite the assessing authority's findings.
2. The role and participation of members in the society's activities.
3. The nature of the society's activities-whether they were commercial for profit.
4. The legality of the society's transfer of funds to the Distributable Pool Fund Account.
5. The applicability of the doctrine of res judicata in income tax proceedings.
6. The interpretation of the society's bye-laws regarding income and expenses.

Detailed Analysis:

1. Tribunal's Decision on Society's Management for Members' Benefit:
The Revenue questioned whether the Tribunal correctly held that the respondent society managed its activities beneficially for its members by selling products manufactured by the members. The Revenue argued that the society was engaged in commercial activities for profit, without active participation from its members, making the Tribunal's findings perverse.

2. Members' Participation in Society's Activities:
The Revenue contended that the society's members, who were landowners ('Maliks'), had transferred their rights to the society, which then managed the manufacturing and selling of salt and its by-products. The society was managed by a governing body, and the members' lands vested in the society. The assessing authority found no active participation of members in the society's activities.

3. Commercial Nature of Society's Activities:
The Revenue argued that the society, being a juristic person registered under the Karnataka Co-operative Societies Act, was engaged in the business of manufacturing and selling salt and its by-products. The society's income from these activities was liable to tax under the Income Tax Act. The society's practice of transferring sale proceeds to the Distributable Pool Fund Account before offering the remaining income to tax was challenged.

4. Legality of Fund Transfers to Distributable Pool Fund Account:
The assessing authority observed discrepancies in the society's financial statements, particularly regarding the transfer of funds to the Distributable Pool Fund Account. The Chartered Accountant's refusal to comment on this transfer raised suspicions. The Revenue argued that this transfer was not a deductible expenditure and that the society's income should be taxed before any distribution to members.

5. Applicability of Doctrine of Res Judicata:
The Revenue cited the Supreme Court's judgment in Radhasoami Satsang v. Commissioner of Income Tax, asserting that the doctrine of res judicata does not apply to income tax proceedings. Each assessment year is a separate unit, and previous years' decisions do not bind subsequent years. The society's argument that the practice of transferring funds to the pool was long-standing and should not be questioned was rejected.

6. Interpretation of Society's Bye-laws:
The court examined the society's bye-laws, which defined 'Malik' and 'Agar' and outlined the society's aims and objectives. The bye-laws allowed the society to acquire members' rights to manufacture and sell salt. However, there was no provision for transferring funds to the Distributable Pool Fund Account before taxation. The court concluded that the society's income from manufacturing and selling salt was taxable, and the transfer of funds to the pool was not justified.

Conclusion:
The court held that the society's income from its business activities was taxable before any distribution to members. The orders of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal were set aside, and the assessing authority's order was restored. The substantial question of law raised by the Revenue was answered in its favor, emphasizing strict interpretation of fiscal laws to ensure compliance and proper revenue collection.