2023 (12) TMI 1027 - AT - Income Tax

Addition towards limited return on share capital - limited return on share capital needs to be given out of reserves and cannot be debited to P L Account as expenditure - DR submitted that the limited return on share capital at 1% on the share capital amount paid to the farmers is identical to the dividends and cannot be a charge to the P L Account and it cannot be construed as a Finance Cost as claimed by the assessee - CIT(A) deleted the addition stating that it is legitimate business expenditure - assessee-company is a special category company under the Companies Act and is covered by the Part-IXA of the Companies Act, 1956 - HELD THAT - The limited return is nothing but a maximum dividend payable / paid to the Members of the Producer Company as authorized by the Articles of Association and hence it cannot be considered as an expenditure and claimed as expenditure. It is not a charge to the P L Account but only an appropriation of the profit and hence the Ld. AO has rightly disallowed the same. We therefore allow the Grounds No. 1 2 raised by the Revenue. Disallowance towards withheld price / additional price - as per DR same is only application of income as the company makes payment towards additional price / withheld price of milk procured out of profit and therefore, the same cannot be debited to P L Account as an expense and not an allowable deduction - CIT(A) deleted addition - HELD THAT - We find that the assessee-company has paid withheld price to the milk suppliers even in the earlier assessment years and the same was allowed by the Ld. AO. The Coordinate Bench of the Tribunal in the assessee s own case for the AY 2010-11 2017 (11) TMI 1363 - ITAT VISAKHAPATNAM has allowed the appeal of the assessee thereby directed the Ld. AO to delete the addition of payment of withheld price made to the milk producers. However, as pointed out by the Ld. DR, the Revenue is in appeal before the Hon ble High Court of Andhra Pradesh contesting the order of the ITAT. In this connection, we hereby direct the Ld. AO to decide this issue based on the outcome of the decision of the Hon ble High Court of Andhra Pradesh, in order to avoid multiplicity of litigation. Accordingly, this ground raised by the Revenue is disposed off for statistical purposes. Allowability of expenditure incurred during the General Body meeting by way of payment of gifts to the Members of the Producer Company - CIT(A) deleted the disallowance made - as per DR distribution of gifts are not encouraged in AGM to curb cooperate misdoing and is against established practice of corporate governance - HELD THAT - Admittedly these amounts of gifts were distributed at the time of AGM which is being gifted to the milk producers who were also Members of the assessee-company. We also find that these gifts are made to the Members who were also suppliers of milk and are also shareholders of the assessee-company. Hence we are of the considered view that these expenditures are in the nature of business promotion expenditure which shall be allowed as deduction U/s. 37 of the Act. We therefore find no infirmity in the order of the Ld. CIT(A) on this ground - Decided against revenue.

Summary

Issues Involved:
1. Allowability of "limited return on share capital" as an expenditure.
2. Disallowance of withheld price/additional price paid to milk suppliers.
3. Allowability of expenditure on gifts distributed during the Annual General Meeting (AGM).

Summary:

Issue 1: Allowability of "Limited Return on Share Capital" as an Expenditure
The Revenue contended that the "limited return on share capital" is akin to dividends and should not be charged to the Profit & Loss (P&L) Account as an expenditure. The assessee argued that as a Producer Company under the Companies Act, 1956, the limited return is a permissible charge. The Tribunal, referencing Section 581E and 581A(c) of the Companies Act, 1956, concluded that the limited return is indeed a form of dividend and not an expenditure. Thus, it upheld the Revenue's disallowance of Rs. 1,65,72,145/-.

Issue 2: Disallowance of Withheld Price/Additional Price Paid to Milk Suppliers
The Revenue argued that the withheld price, being an application of income, should not be allowed as an expenditure. The assessee cited a prior Tribunal decision in its favor for AY 2010-11. The Tribunal noted that the Revenue's appeal on the same issue is pending before the Andhra Pradesh High Court. It directed the Assessing Officer (AO) to decide based on the High Court's outcome, thus keeping the issue open for statistical purposes.

Issue 3: Allowability of Expenditure on Gifts Distributed During AGM
The Revenue opposed the deduction of Rs. 14,90,000/- spent on gifts during the AGM, citing corporate governance norms. The assessee claimed these were business promotion expenses to retain milk suppliers. The Tribunal agreed with the assessee, recognizing these as business promotion expenses allowable under Section 37 of the Income Tax Act, 1961, and upheld the CIT(A)'s decision.

Other Grounds:
- Ground No.5 in ITA No. 244/Viz/2020 and Ground No.3 in ITA No. 243/Viz/2020 were deemed general and required no adjudication.
- The Cross Objections by the assessee were dismissed as infructuous since they supported the CIT(A)'s decisions.

Conclusion:
The Tribunal partly allowed the Revenue's appeals for statistical purposes, primarily upholding the disallowance of the limited return on share capital and directing the AO to await the High Court's decision on the withheld price issue. The expenditure on AGM gifts was allowed as a business promotion expense.