2009 (4) TMI 19 - HC - Income Tax

Appropriation of profits or business expenses - Amount paid by milk societies to members and non-members - A.O. refused to exclude the final rate difference paid - Is the price difference paid out of the profits? -commercial expediency for payment of this price - HELD THAT - As 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 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. We are in agreement with the views taken by the tribunal and the question at present has to be answered in the affirmative in favour of assessee.

Issues Involved:
1. Justification of deleting the addition of Rs.1,55,81,519/- as rate difference payment in the purchase of milk.
2. Determination if the payment was made out of profits or as a business expense.
3. Compliance with the Maharashtra Cooperative Societies Act, 1960 regarding profit distribution.

Detailed Analysis:

1. Justification of Deleting the Addition of Rs.1,55,81,519/- as Rate Difference Payment:
The primary issue was whether the Tribunal was justified in deleting the addition of Rs.1,55,81,519/- by holding that the amount represented rate difference payment in the purchase of milk. The assessees, federal milk societies, purchased milk from members and non-members and sold it to various parties. The purchase price was linked to the fat content and varied according to seasons. The rate was provisional and finalized in March, with payments made subsequently.

The Assessing Officer (A.O.) refused to exclude the final rate difference from the total payment, arguing it was not linked to milk quality, was paid only to member societies, was not linked to government prices, and amounted to profit distribution. The C.I.T. (Appeals) affirmed this, noting the lack of documentary evidence and the inability to establish a fixed price per litre based on milk quality.

However, the I.T.A.T. found that the basic price was linked to quality, the supply by non-members was minimal, and the government only fixed a minimum price. The board had the authority to fix prices, and the resolution to pay the final rate difference was passed before the end of the financial year. Therefore, the Tribunal allowed the appeal and deductions of the final rate.

2. Determination if the Payment was Made Out of Profits or as a Business Expense:
The revenue argued that the final rate difference was paid out of net profits and not included in the total per litre production cost. The Tribunal held that the payment was made based on milk quality and quantity, not shareholding. The profits were ascertained after deducting all business expenses, and the payment was not an appropriation of profits.

The Tribunal cited cases like C.I.T. vs Shri Sarvaraya Sugars Ltd. and Addl.C.I.T. Kanpur vs MP Sugar Mills (P) Ltd., where additional price liability related back to the receipt of goods. The Tribunal concluded that the payment was a business expense, not a profit distribution.

3. Compliance with the Maharashtra Cooperative Societies Act, 1960:
Section 64 of the Maharashtra Cooperative Societies Act, 1960, mandates that no part of the funds other than prescribed funds or net profits shall be distributed among members. Section 65 requires constructing annual financial statements and determining net profits before appropriation. The Tribunal found that the decision to pay the additional purchase price was based on a board resolution before ascertaining net profits, and the payment was not a distribution of profits.

The Tribunal referenced a similar case from the Gujarat High Court (Commissioner of Income Tax vs Mehasena District Cooperative Milk Producers Union Ltd.), where additional payment towards milk price was allowed as a business expense under section 28 or section 37 (1) of the Act. The Gujarat High Court held that profits must be real and determined on commercial principles, and additional payments made on the last day of the accounting period were allowable deductions.

Conclusion:
The Tribunal concluded that the rate difference payment was not a distribution of profits but a business expense necessary for ascertaining real profits. The payment was made based on milk quality and quantity, not shareholding, and was necessary to attract more milk suppliers. The Tribunal's view was that the payment complied with the Maharashtra Cooperative Societies Act, 1960, and was not an appropriation of profits. The appeals were dismissed, and the question was answered in favor of the assessee.

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