2006 (3) TMI 304 - AT - Income Tax

Issues Involved:
1. Confirmation of additions of Rs. 2,24,84,410 and Rs. 1,22,11,637 for the assessment years 1991-92 and 1992-93 respectively.
2. Whether the rate difference distributed among members by the assessee society can be treated as the income of the society.
3. Admission of additional evidence.
4. Application of principles of diversion of income by overriding title.
5. Application of the McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 principle.

Analysis of the Judgment:

1. Confirmation of Additions:
The main dispute in the appeal was the confirmation of additions of Rs. 2,24,84,410 and Rs. 1,22,11,637 for the assessment years 1991-92 and 1992-93 respectively, representing the rate difference on the sale of yarn distributed among the members by the assessee society. The Assessing Officer and CIT(A) confirmed these additions, treating them as the income of the assessee society.

2. Whether the Rate Difference Distributed Among Members is Income:
The assessee, a cooperative society, argued that it was formed to promote the economic interest of its members by supplying yarn at concessional rates. Initially, the society distributed yarn quotas to its members, but due to market conditions and members' requests, it switched to selling yarn on behalf of members and distributing the rate difference. The society contended that it acted as an agent for its members, and the income from the sale of yarn belonged to the members, not the society.

The Tribunal, by majority view, held that the society was under a legal and contractual obligation to distribute the rate difference to its members. The society merely received the proceeds as an agent of the members, and the income never reached the society as its own income. This view was supported by the decision of the jurisdictional High Court in CIT v. Y.S. Desale [1982] 137 ITR 117 (Bom.) and the Supreme Court in Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521.

3. Admission of Additional Evidence:
The assessee sought to admit additional evidence before the CIT(A) and the Tribunal, which included applications from members showing ownership of looms and IT returns of some members. The CIT(A) refused to admit the evidence, and the Judicial Member also rejected the request. However, the Accountant Member impliedly admitted the evidence. The Third Member concluded that the additional evidence should be admitted, as it was essential to dispose of the question referred.

4. Application of Principles of Diversion of Income by Overriding Title:
The assessee argued that even if it was not treated as an agent, the principle of diversion of income by overriding title applied. The Tribunal agreed, citing the Bombay High Court's decision in CIT v. Shri Chhatrapati Sahakari Sakhar Karkhana Ltd. [2000] 245 ITR 498 and other relevant cases. The Tribunal held that the income was diverted to the members by overriding title and could not be taxed in the hands of the society.

5. Application of the McDowell & Co. Ltd. v. CTO Principle:
The revenue argued that the assessee's actions were a device to avoid tax, invoking the principle laid down in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. However, the Tribunal found that the change in the distribution system was for valid commercial reasons and not a colorable device to avoid tax. The Tribunal relied on decisions in CWT v. Arvind Narottam (Individual) [1988] 173 ITR 479 (SC), Union of India v. Playworld Electronics (P.) Ltd. [1990] 184 ITR 308 (SC), and Banyan & Berry v. CIT [1996] 222 ITR 831 (Guj.) to support this view.

Conclusion:
By majority view, the Tribunal held that the rate difference distributed among the members by the society could not be treated as the income of the society. The appeals for the assessment years 1991-92 and 1992-93 were allowed, and the additions made by the Assessing Officer and confirmed by the CIT(A) were set aside.

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