1990 (3) TMI 96 - AT - Income Tax

Issues Involved:
1. Allowability of the payment of Rs. 5,47,69,105 as a deduction.
2. Restoring the claims for expenses on cattle feed and veterinary facilities.
3. Disallowance of group insurance premium.
4. Disallowance of depreciation and investment allowance on plant and machinery received in kind.
5. Disallowance of advertisement expenses.
6. Disallowance of contribution to Gujarat Rajya Sahakari Education Fund.
7. Disallowance under section 80VV.
8. Restriction of deduction under section 80P(2)(e).
9. Levy of interest under section 215.
10. Levy of interest under section 216.
11. Deduction of the amount transferred to reserve fund account.

Issue-wise Detailed Analysis:

1. Allowability of the Payment of Rs. 5,47,69,105 as a Deduction:
The primary issue revolves around whether the payment of Rs. 5,47,69,105 made by the assessee, an apex co-operative society, to its member societies as an additional price for milk supplied, is an allowable deduction. The Income-tax Officer (ITO) and the Commissioner (A) disallowed the deduction, arguing that the payment was not guided by commercial principles and appeared to be a distribution of profits rather than a genuine business expense. The ITO noted that the assessee failed to provide a satisfactory explanation or data justifying the additional payment, suggesting it was a scheme for tax evasion. The Commissioner (A) supported this view, distinguishing it from a precedent where similar payments were allowed due to government directives.

The assessee argued that the payment was a part of the final price determined based on market conditions and was necessary to ensure continuous supply from member societies. The assessee emphasized the cooperative nature of its operations, aiming to benefit poor farmers and eliminate middlemen. The Accountant Member of the Tribunal supported the assessee's view, highlighting the consistent practice of making such payments and the reasonable nature of the final price compared to other similar societies. The Third Member, agreeing with the Accountant Member, concluded that the payment was a part of the purchase price and not a distribution of profits, emphasizing the contractual obligation and commercial expediency behind the final price determination.

2. Restoring the Claims for Expenses on Cattle Feed and Veterinary Facilities:
The Commissioner restored the claims for expenses on cattle feed and veterinary facilities to the ITO for detailed examination. This ground became infructuous as the ITO, in giving effect to the Commissioner's order, allowed the assessee's claim for deduction.

3. Disallowance of Group Insurance Premium:
The Commissioner confirmed the disallowance of group insurance premium amounting to Rs. 9,34,006, arguing that the farmers insured were not directly connected to the assessee society's day-to-day activities. However, the Tribunal allowed this ground, noting that the insurance benefited farmers who supplied milk to the assessee, thus maintaining the supply line, which was in the assessee's interest. The Tribunal relied on the Andhra Pradesh High Court's decision in CIT v. Vazir Sultan Tobacco Co. Ltd., which allowed similar expenditures designed to further the assessee's business objectives.

4. Disallowance of Depreciation and Investment Allowance on Plant and Machinery Received in Kind:
The Tribunal rejected the assessee's ground regarding the disallowance of depreciation and investment allowance on plant and machinery received in kind, consistently with a previous Tribunal decision in ITA No. 1872/Ahd./86.

5. Disallowance of Advertisement Expenses:
The ground regarding the disallowance of advertisement expenses was not pressed by the assessee and was accordingly rejected.

6. Disallowance of Contribution to Gujarat Rajya Sahakari Education Fund:
The Tribunal rejected the ground concerning the disallowance of a sum of Rs. 50,441 contributed to the Gujarat Rajya Sahakari Education Fund, consistently with its earlier decision in ITA No. 1872/Ahd./86.

7. Disallowance under Section 80VV:
The ITO allowed Rs. 5,000 out of the total expenditure of Rs. 17,000 incurred on professional fees, disallowing the balance under section 80VV. The Tribunal allowed an additional Rs. 7,000, considering half of the consolidated bill from M/s C.C. Chokshi & Co. as not covered under section 80VV, resulting in a total allowance of Rs. 12,000 and a disallowance of Rs. 5,000.

8. Restriction of Deduction under Section 80P(2)(e):
The Commissioner restricted the deduction under section 80P(2)(e) to 90% of the storage charges received from the Indian Dairy Corporation, estimating 10% as the related expenses. The Tribunal found this estimate reasonable and confirmed the Commissioner's order, rejecting both the assessee's and the department's appeals on this point.

9. Levy of Interest under Section 215:
The Tribunal, applying the Gujarat High Court's decision in CIT v. Bharat Machinery & Hardware Mart, held that the levy of interest under section 215 was not justified, as the assessee could not have anticipated the additions made by the ITO.

10. Levy of Interest under Section 216:
The Tribunal, applying the Gujarat High Court's decision in CIT v. Nagri Mills Ltd., held that interest under section 216 could not be levied, as the ITO did not provide a positive finding that the assessee had underestimated the advance tax payable.

11. Deduction of the Amount Transferred to Reserve Fund Account:
The Commissioner directed the ITO to examine and decide on the issue of deduction of Rs. 5,04,412 transferred to the reserve fund account as per section 67 of the Gujarat Co-operative Societies Act, 1967. The Tribunal agreed with this approach, rejecting the assessee's ground.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the department's appeal, with the Third Member's opinion favoring the allowability of the payment of Rs. 5,47,69,105 as a deduction, thus resolving the primary issue in the assessee's favor.

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