2017 (11) TMI 1363 - AT - Income Tax

Allowable expenditure - Withheld price / additional price paid to the milk producers for procuring milk - AO observed the same as tax evasion device in payment withheld price through equity allotment partly and through contribution to trust partly - amount which is debited to the profit & loss account, but not actually paid to the milk suppliers, taken to capital contribution and also contribution to the trust, which is not allowable expenditure hence, liable to the disallowed - principles of mutuality - Held that - For the issue of equity shares is concerned, clause 10(b) of the Articles of Association of the assessee company provides each member shall receive initial payment as may be determined by the Board for the produce/products. Every member shall receive withheld price (remaining price) which will be disbursed in cash or in kind or by allotment of equity shares in proportion to the quantity of milk supplied to the assessee company. Even as per section 581 of the Companies Act, the price withheld may be disbursed to the seller member in cash or through allotment of equity shares in proportion to the milk supplied during the financial year to such extent as may be decided by the Board. We find that the assessee company as per section 581 of the Companies Act and also Articles of Association, passed the resolution dated 05/10/2009 and equity shares are issued. Therefore, the Assessing Officer is not correct in saying that it is a tax avoidance device adopted by the assessee to avoid the payment of tax. The ld. CIT(A) by considering all the details has correctly decided that out of withheld price, equity shares issued is in accordance with law. Insofar as contribution paid to the trust is concerned, as per Memorandum of Association of Companies Act, it is under obligation of the assessee to establish schools, colleges, training centres & hospitals. Accordingly, the assessee has already established hospital and educational institutions and out of withheld price some portion is paid to the trust and same is received by the trust. Nowhere the Assessing Officer doubted the transaction. The only doubt expressed by the Assessing Officer is that the above payments are only made to avoid taxes. In our opinion, the assessee producer company running in the lines of mutuality basis for the benefit of the members, in the interest of the members instead of payment cash, some shares are allowed and established educational institutions and also hospitals for treatment of the members of the milk suppliers and certain payments made out of withheld price as per Companies Act and also Articles of Association followed by Board resolution. The Assessing Officer is not correct in saying that the assessee adopted device for avoidance of tax. We further observe that once the milk suppliers having shares in the company, they will be having a feeling of supplying milk to their own company. Therefore, the assessee company will be able to procure milk from the milk producers continuously. Therefore, allotment of equity shares to the milk producers for the above reason has to be considered as business expediency. - Decided in favour of assessee. Sale of powder - plant machinery not erected and kept idle for six years - assessee has claimed the same as other manufacturing expenses - AO is of the opinion that it is a capital loss and accordingly he disallowed the same - assessee has submitted that once loss claimed by the assessee, is considered by the Assessing Officer as capital loss, whenever there is a capital gain, loss may be allowed to set off of against the capital gain - Held that - We find that there is a merit in the argument of the counsel for the assessee. Therefore, we direct the Assessing Officer, whenever there is a capital gain, against the gain, the assessee‟s claim of set off may be allowed in future in accordance with law. Accordingly, this cross objection filed by the assessee is allowed for statistical purpose.

Issues Involved:
1. Disallowance of withheld price payments by the assessee.
2. Treatment of loss on sale of machinery as capital loss.

Issue-wise Detailed Analysis:

1. Disallowance of Withheld Price Payments by the Assessee:

Facts and Background:
The assessee-company, engaged in the business of selling milk and milk products, was originally registered under the AP State Cooperative Societies Act, 1964, and later converted into a Producers company under the Companies Act, 1956. The main activity involves procuring milk from farmers through cooperative societies, processing it, and selling milk and by-products. For the Assessment Year 2010-11, the assessee filed a return of income admitting total income of ?1,93,00,233/-. The case was selected for scrutiny, and the Assessing Officer (AO) disallowed an amount of ?46,96,02,293/- on account of withheld price.

Assessing Officer’s Observations:
The AO noted that the assessee procures milk from producers and pays a price based on circulars issued periodically. However, the AO observed that the price declared in the circulars was final and not adhoc, and no additional price or bonus was mentioned. The AO found that the price of milk procured and debited to the profit & loss account was higher by ?96,60,12,828/- than the procurement price as per circulars. The assessee explained that this additional amount was paid as withheld price, which was partly paid to farmers, partly capitalized by issuing equity shares, and partly contributed to a trust.

Assessee’s Submission:
The assessee contended that the withheld price was determined based on market conditions, competitors' prices, and other factors. The Board of Directors decided the procurement price and withheld price, which was informed to the members. The withheld price was paid in cash, equity shares, or contributions to a trust providing educational and medical facilities to members.

CIT(A)’s Decision:
The CIT(A) admitted additional evidence and observed that the concept of withheld price is consistent with the Companies Act and the Articles of Association of the assessee-company. The CIT(A) found that the payment of withheld price was in line with cooperative principles and commercial expediency. The CIT(A) also noted that the AO did not question the quantum of withheld price but only the mode of payment. The CIT(A) held that the payment by way of equity shares and contributions to the trust was genuine and not a tax avoidance device. The CIT(A) directed the AO to delete the disallowance of ?46,96,02,293/-.

Tribunal’s Analysis:
The Tribunal upheld the CIT(A)’s decision, noting that the assessee’s practice of paying withheld price was consistent with its Articles of Association and statutory provisions. The Tribunal observed that the payment of withheld price ensured continuous supply of milk and cultivated a saving habit among milk producers. The Tribunal found that the payment by way of equity shares and contributions to the trust was genuine and commercially expedient. The Tribunal dismissed the revenue’s appeal.

2. Treatment of Loss on Sale of Machinery as Capital Loss:

Facts and Background:
The assessee purchased powder plant machinery in 2003 for ?4,90,41,337/-, which was sold in the Financial Year 2009-10 for ?2,65,20,000/-. The assessee claimed this loss as other manufacturing expenses, but the AO treated it as a capital loss and disallowed it.

CIT(A)’s Decision:
The CIT(A) confirmed the AO’s decision to treat the loss as a capital loss.

Tribunal’s Analysis:
The Tribunal agreed with the CIT(A) and directed the AO to allow the set-off of this capital loss against future capital gains as per law. The cross-objection filed by the assessee was allowed for statistical purposes.

Conclusion:
The Tribunal dismissed the revenue’s appeal and allowed the assessee’s cross-objection for statistical purposes, upholding the CIT(A)’s decision on both issues. The order was pronounced in the open court on 27th September 2017.

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