9911796707
TMI Blog2006 (3) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... Govt. of Maharashtra 17,760 Weaver Members 16,620 Weaver Co-operatives 3 Co-op. Societies 20 -------- 34,403 ------------------------------------------ The main object of the Society for which it was formed is mentioned in bye-law No. 7 of the Society which reads as under: "7. The object of the Mill shall be to promote economic interest of its members by undertaking spinning, dyeing, sizing, weaving and manufacturing of textile materials of all kinds and supply of yarn of all types to the Weavers and others. When the yarn is supplied to the Weaver members, the same shall be supplied at reasonable price consistent with economic working of the Mill." To attain the above object, the Mill was competent to do several activities including the following: "(b) to purchase cotton and/or man made fibre and carry on ginning, spinning, sizing, weaving, bleaching, mercerizing, dyeing, printing and other allied processes and to sell the finished material so manufactured. (i) to enter into contract with Co-op. Societies, Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was a clear legal obligation on the assessee to pay to each member the surplus arising out of the quota rights allotted to them. This legal obligation arose simultaneously or, in other words, even before the receipt of money and, therefore, the assessee did not have any title to the income relatable to the quota rights which at all the material times really vested in the members. The Assessing Officer rejected the contentions raised before him for the following reasons: (i) The activity of the assessee Society to sell on behalf of the Member Mills yarn and distributing the profits as rate difference is beyond its object and this is not the purpose for which it is established and no permission is obtained from any Government authorities. (ii) The Resolution passed by the Members authorising the assessee Society does not create obligation on the assessee Society to sell goods on behalf of the Member Mills instead of distributing the quota. It does not create any overriding obligation on the Society. (iii) The Society is allocating more type counts of yarn on quota when the quota was distributed however, after the system of paying rate difference, the Mill started allocatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board of Directors. The price was determined by the Board of Directors by generally fixing it at a price consistent with the cost of production and prevailing market price. However, as the entire production of the Mill was to benefit the members of the assessee Society, the price fixed would always be lower than the market price but nevertheless would be consistent with the economic working of the Mill. In other words, yarn of specified count, type and variety would be allotted to various members of the assessee Society at concessional price fixed from time to time. The procedure followed was explained with the examples as well as actual quota slips issued. Shri Dastur also drew our attention to the Resolution of the Board of Directors as well as the Yarn Quota Committee as was prevailing in 1979 onwards. As per the procedure followed, the quota slip used to be sent to the various members who would then utilise the quota and procure yarn from the assessee-Society, if the count and quality, type and variety were suitable to the requirements of the member. In the event the quota was for count, type and variety which was not suitable to the member, he would sell, transfer or assig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allotted by the assessee Society. Therefore, even though the Society declared the quota at a particular rate, members did not lift the same. Due to non-lifting of yarns by the members, the stock levels of the yarn with the Mill used to go very high due to which, it had to suffer loss in two ways, loss on account of depressed market as well as interest on the funds blocked in the stocks lying with the assessee Society. Therefore, the Society had to discontinue the quota slips in some years, i.e., 1986-87 till October, 1989. During this period, the assessee Society was selling the yarn in the open market by auction. However, if the members wanted to purchase, they were given discount of up to 10 per cent and this continued up to October, 1989. 8. In view of the difficulties experienced, submitted Shri Dastur, as the main object of the assessee-Society, i.e., safeguarding the interest of its members, was not being met, various members proposed that a new system be adopted. A formal request was made by the members that the assessee Society should sell the yarn quota allocable to the members, on their behalf at the market price and the difference or the surplus between the quota rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e difference is distributed amongst the members. The change-over from the 'quota distribution' system to the 'quota price distribution' system was effected to benefit the assessee and its members. According to the learned counsel, the new system overcomes problems of the earlier system and there were genuine commercial benefits. Our attention was drawn to the various Resolutions of the Yarn Sale Committee placed at pages 29 to 40 of paper book and also the credit of the quota right difference to the account of each member at pages 67 to 69 of the paper book. 12. As regards the observations of the Assessing Officer that no permission had been obtained from any other Government authorities or the bye-laws do not permit the assessee Society to carry on the activity of sale of yarn on behalf of the Member Mills, Shri Dastur pointed out that the main object of the Society is to promote the economic interest of its Members. For this purpose, the Society can carry on any activity including "purchase, sale of raw materials and finished products of Mills and its Members and to appoint agents etc..." "and when the yarn is supplied to the weaver members, the same shall be supplied at a reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the Society collectively on behalf of all the Member Mills, sell the yarn quota (allocable to the members) through agent to outsiders and distributes the surplus as per their quota, who in turn use such surplus for their benefits. The purpose by both methods was to ensure the benefit to the Members. The learned counsel emphasized that if the earlier method was legally acceptable to the department, merely because 'form' of operating system was changed, so as to maximize benefits to the members, how that could be objected. 14. As regards the observation of the Assessing Officer that quota had been reduced though the production had gone up and that in between the years, i.e., 1986-87 to 1988-89, no quota or yarn difference was distributed, Shri Dastur submitted that as mentioned above, as per the system followed by the Society, the quota was offered to the Members at certain price which was keeping in mind the economic working of the Society. If, therefore, there is not much difference in the cost of production of yarns in the market price, there was hardly demand from the Member Mills to purchase the quota and either sell or utilize themselves. There used to be always a time-li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee Society. Since the interest of the Members was a paramount consideration, the procedure was changed and it was for valid commercial reason. He further submitted that the surplus, being the difference between the quota price and the market price which is realised by the assessee-Society is not the income of the assessee-Society at all but the income of the assessec-Society's members who in terms of the Resolution clearly have a right to the income even before the income is received by the assessee-Society. According to the learned counsel, the Society cannot lay claim to the difference between the market price and the quota price, because the assessee Society merely receives the contributions and holds the same for and on behalf of the members of the assessee Society without having any interest therein. They are thus in possession of the funds as agents of the individual members within the meaning of section 182 of the Contract Act. According to the learned counsel, where an income is received by an agent, he receives it for and on behalf of the principal and in support of this contention, he placed reliance on the judgment of the Bombay High Court in the case of CIT v. Y.S. De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re/weaving of cloth, Shri Dastur pointed out that these allegations do not seen to be correct for two reasons, (i) no weaver can become a member of the Mill unless he submits the declaration that he owns... (number) of looms at... (place), (ii) no opportunity was given to the assessee to cross-examine these people which the Assessing Officer has claimed to have given statements that they never owned any looms, Shri Dastur pointed out that in fact the person rendered by the Assessing Officer Shri S.M. Jadhav and other six persons named by him are the owner of the looms as can be seen from the certificate/permits issued to them by the Government of Maharashtra. Our attention was invited to pages 158 to 185 of the paper book. 18. As regards the CIT(A)'s action of not admitting the additional evidence, Shri Dastur submitted that the ld. CIT(A) was not justified in ignoring the evidence furnished before him. The learned counsel submitted that the Assessing Officer almost on the last date of the hearing merely showed the statements recorded of the 7 members and asked the assessee's representative to comment. Though it was specifically pointed out by the assessee's representative that u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Resolution, which is against the bye-laws. The Society has abdicated its main object and relegated itself into a g business organisation. According to Shri Rajkumar, the Society is a consumer society; its bye-laws do not authorize the Society to sell the yarn in the market. Bye-law 7(1) merely authorises the sale by the Society of the members' finished products, but not of their raw materials. Shri Rajkumar pointed out that there is only sharing of profit, but no sharing of loss by the members and this makes it a distribution of profits by the assessee. The ld. CIT (DR) drew our attention to bye-law 12(c)(4) and submitted that it requires every member/shareholder to sign an agreement to purchase yarn to the extent offered to him. However, from assessment years 1986-87 to 1989-90, there were no sales to members on quota basis and hence the assessee suffered losses. The ld. CIT (DR) further pointed out that the commission of Rs. 13,45,465 paid to the Mills' agents has been deducted but not the other selling expenses. The fact that the other selling expenses have not been deducted shows that the sales were in its own right as owner. In conclusion, Shri Rajkumar re-emphasised that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n taken by the Society to improve the benefits to the members, or economical conditions of the Members, it can be treated as it is in the interest of the members of the Society. Earlier, almost up to 1985 the Society was distriburting yarn amongst the various members as per their shareholding in the Society. This has been accepted by the revenue as a legal and acceptable activity of the assessee and no fault was found in the same. With the difficulties faced and with the practical experience gained when it was noticed that the distribution of quota yarn was not really and directly benefiting the members, but intermediaries were taking advantage of their position, at the request of the Members, the Society agreed in 1989 to sell the yarn quota allocated to the Members for and on their behalf collectively and distribute the surplus over the quota yarn price determined therefrom amongst the Members. Therefore, in substance it cannot be said that there is any difference in the system or the mechanism. Under both the systems, the realisations from the yarn have been utilised by the Members. As far as the Society is concerned, the profit it used to get under both the systems have remaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act as will be clear from the provisions of section 146 thereof. Clauses (d) and (e) of section 146 which are relevant, read as follows: 'It shall be an offence under this Act, if- (a) any person collecting share money for a society in formation, does not within a reasonable period deposit the same in the State Co-operative Bank, or a Central Co-operative Bank, or an Urban Co-operative Bank, or a Postal Savings Bank; or (b) any person, collecting the share money for a society in formation, makes use of the funds so raised for conducting any business or trading in the name of a society to be registered or otherwise.' These provisions will, therefore, show that if the promoters had chosen to use the funds of the proposed society in any other manner for the purpose of conducting any business or otherwise, the penalty provision in section 146 would have been attracted. Under section 147 contravention of the provisions of section 146, clause (d), is made punishable with firm which may extend to 500 rupees and contravention of the provisions in clause (e) is made punishable with imprisonment for a term which may extend to one year, or with fine or with both. Thus, the promoter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Income-tax Act, 1922, the amounts had to be deducted." The Hon'ble Supreme Court further held that: "That, as the appellant had adopted the mercantile system of accounting, the amounts so reserved for future payments were deductible in computing the income, profits and gains from the appellant's business for the relevant years, since the liability had accrued in those years." The Supreme Court further held that income-tax is a tax on the real income, i.e., in the case of a business, the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The Hon'ble Apex Court further held that there is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. It was further held that there is a distinction between real profits ascertained on commercial principles and profits fixed by statute for a specified purpose. 22. As has been pointed out in detail above, the Society was under legal and contractual obligation as per directions of the Members for whom yarn was sold to hand over the profits to them. The Society merely received the proceeds as Agent of the Members. The income has nev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and for one day on behalf of the Beggars' Rehabilitation Fund. The assessee claimed that the net collections for the above three days were not assessable as income in its hands as the assessee had no power to deal with the said collections. The department did not accept the claim of the assessee. The matter came by way of reference to the High Court which took the view that the obligations are there in every case but it is the nature of the obligation which is the decisive factor. Where by the obligation, income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation, after such income reaches the assessee, then, it is taxable. On the facts, looking to the nature of the obligations, the Madras High Court came to the conclusion that the collections for charitable purpose effected during three days under the instructions of the Government were not taxable as it was a case of diversion of income by overriding title. Therefore, the real question in all the above matters is whether the income has accrued to the assessee and whether the profits on the scheme from the income of the assessee. Applying the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ujarat High Court in Banyan Berry's case and Mumbai Tribunal in the case of S.B. Garware. In our opinion, switching over from distribution of yarn quota to sale of yarn/yarn quota allotted to the Members on their behalf is for commercially valid justification and was with a view to maximise the benefits to the Members of the Society for which it was forward. Therefore, it cannot be treated as a paper transaction or a colourable device to avoid tax. 25. In the light of above discussion, we hold that the rate difference distributed amongst the members by the Society of Rs. 2,24,84,410 in the assessment year 1991-92 and of Rs. 1,22,11,637 in the assessment year 1992-93 cannot be treated as income of the assessee Society. To that extent, we reverse the orders of the ld. CIT(A) and the Assessing Officer. 26. In the result, the appeals are allowed. Per U.B.S. Bedi, Judicial Member.- 27. Before considering the proposed order in its entirety I had to seek clarification from the learned Accountant Member with respect to dealing with and outcome of the request for admission of additional evidence, as sought for by the assessee vide application dated 3-10-2001 the learned Accountant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 186-189 ------------------------------------------------------ The first set of papers viz., page Nos. 158 to 185 as annexed to the paper book sought to be admitted as additional evidence before the first appellate authority were refused on the ground that the case of the assessee is not covered by exceptional clause under rule 46A of the Income-tax Rules or otherwise it could be admitted. As regards second set of papers, the same were sought to be admitted for the first time before the Tribunal but in respect to the entire additional evidence sought to be admitted, the assessee has not been able to establish before the Tribunal that as to how the case of the assessee falls under the exceptions as contained in rule 46A of the Income-tax Rules. The assessee has also not adduced any material or evidence which could prove that the documents sought to be admitted remained to be filed before the lower authorities either for lack of opportunity being allowed or for any other valid reasons when the Assessing Officer has specifically observed in the order of assessment that statements of seven of the members of the assessee-society (named in the assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er appropriate nor relevant to the issue in hand, I adopt all other arguments as recorded in the proposed order. 31. After hearing both the sides, considering the material on record, orders of the authorities below, case law cited and relevant provisions of the law and the documentary evidence to which attention of the Bench was drawn, I find that it is the case of the assessee that the sum deducted from the total sales of yarn represent the compensation for the surrender of quota rights. The assessee had been supplying the yarn to its members since 1979 at a price slightly above the cost but below the market price. The quota and its price was being fixed by a sub-committee of the Board of Directors. The quota was distributed amongst the members who were selling the quota slips in the market. The members approached the mill with the representation dated 9-11-1989 and requested it to sell the quota allotted to them in the market and pass on the rate difference between the quota price and the market price to them. The assessee-Society passed a resolution in its General Body Meeting on 12-11-1989 resolving to sell the quota yarn on behalf of the members and distribute the rate diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on itself. Therefore, it cannot even be treated as diversion of income by overriding title. It cannot be said to be even diversion of income at source but application of income and merely income is taxed in other hands does not necessarily mean that the income should not be taxed in the hands of the recipient. Therefore, entire receipts on account of sale of yarn is a trading receipt of the assessee and no part of it could be deducted by naming it as so-called rate difference because it neither has any statutory authority for excluding that income from the total income of the assessee nor it was diverted at the stage before reaching to the assessee. Hence its exclusion is unwarranted and at the most, it is a colourful device and ratio of the decision in the case of McDowell Co. Ltd. becomes applicable and as such diversion of income, on account of rate difference, cannot be given benefit of and is liable to be taxed in the hands of the assessee. 33. It is also the case of the department that 7 of the members whose names have been given in the assessment order were examined on oath after summoning them by the Assessing Officer. The statements, so recorded by the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference between quota price and selling price to its members is more convenient for the members who are of the type mentioned above. They need not have to bother about anything and they will be getting their share in the profit, by virtue of their shareholding. Moreover, by the present system the assessee society will be allocating only such type of yarn which is running in the market fetching more price than the quota price and the profit to the members is assured. The society can manipulate this allotment in such a way that the members will always be benefited. This is already evident from the very act of the assessee society in allocating more types/counts of yarn on quota - that is from assessment years 1981-82 to 1985-86 it has allocated on quota only 3 count types (34s carded, 40s combed and 60s combed) whereas after they started in the system of paying rate difference the mill has been allocating yarn of 14 different counts/variation. By so doing the assessee has been distributing its profit without paying any taxes." 34. On the basis of above given details, Assessing Officer further' noted that the assessee has used this device of paying the rate difference to members fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n properly upheld by the learned CIT(A) whose decision is liable to be further confirmed. 36. So far as resolution dated 12-11-1989 is concerned, it is found that on the basis of representation made by 93 out of 3015 members consisting of total 3012 weavers, said resolution was passed by the General Body Meeting and on that basis, the rate difference on account of sale of quota yarn of members has been deducted from the income of the assessee and it was claimed as exempt by taking the plea that the income has been diverted at source before it could reach to the assessee, hence, by overriding title, the same cannot be taxed as income of the assessee, besides sale having been effected on behalf of the members of the assessee-society, therefore, the difference between price fixed, which is slightly above the cost price, and the sale price received, is the income of the members to be shared in accordance with their shareholding. 37. Keeping in view entirety of the facts, other relevant material and basis and reasoning as given by the authorities below and noted above, it is observed that since the bye-laws of the society do not contemplate such arrangement neither there is any stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper". 39. Yet in another case, the Madras High Court in the case of CIT v. Madras Race Club [1996] 219 ITR 39 where the assessee was asked to conduct races for two days on behalf of the Chief Minister Relief Fund and for one day on behalf of the Beggars' Rehabilitation Fund. The assessee claimed that the net collections for the above three days were not assessable as income in its hands as the assessee had no power to deal with the said collections. The department did not accept the claim of the assessee. The matter came by way of reference to the High Court, which took the view that the obligations are there in every case but it is the nature of the obligation, which is the decisive factor. Where by the obligation, income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation, after such income reaches the assessee then it is taxable. In the instant case, the income has come to the assessee first and then it claimed deduction. So applying the ratio of this decision such difference in price is part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht of the latter to receive the entire income and so it would be a case of diversion. On the other hand, where the obligation is self-imposed or gratuitous, it is only a case of application of income." 43. From the ratio of the above noted decisions, it emerges that income of the assessee can be said to be deductible by overriding title and as such is not taxable if it is diverted either in order to execute any directions issued by the State Government, or because of any statutory requirement or other legal obligations, or the same is diverted before it could reach the assessee. But if any income is applied to discharge obligation after it is received or it is diverted in order to discharge the self-created obligation, then it is taxable income and no deduction can be allowed. 44. Now adverting to the facts of the present case, it will be worth noting that the so-called obligation of the assessee is self-created, without having any statutory sanction, liable to be discharged after having received by it and is also beyond the scope of the bye-laws. Therefore, the rate difference has rightly been taken as part of the trading receipt and claim of deduction is found to have justifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was asked to explain the nature of the deduction from the sale of yarn and was asked again to explain why this should not be treated as assessee's income. It was submitted, assessee, a Co-operative Society was formed with the main object of promoting economic interest of its members by undertaking spinning, dyeing, sizing, weaving and manufacturing of textile material and to supply yarn of all types to its members, weavers and others. Assessee commenced production in 1977. Having established the credible presence in the market, assessee switched to a system known as "quota system", under which the Directors fixed certain quota to be allotted to its members and by this method allotted certain quota of yarn of different counts to its members as per share they held. Under this system, they could lift the allotted quota and normally the prices were fixed much below the market price but a little above the cost of production. The procedure followed was that a quota slip would be sent to various members, who would then utilise the quota and procure yarn from the assessee if the count and quality were suitable to the requirements of the members. If it was not suitable, they would sell the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this, did not lift their quota yarn and it often caused piling up of yarn with the assessee. 5. Taking clue from Bye-Law No. 7, which is the object of the mill, i.e., to say that the Society was established with the basic purpose of promoting economic interest of the members and to supply them yarn, Assessing Officer observed, assessee is a consumer society, which manufactures and supplies yarn for their benefit. It is the main object of the assessee. Assessing Officer considered the Resolution passed in the Annual General Meeting on 12-11-1989 objectively and came to the conclusion that now the assessee has turned itself into a business organization of manufacturing and selling yarn and thus gone back from its main object of supplying yarn to its members, whose business interest was to be protected by the assessee. Assessing Officer noticed, for the first two years immediately after coming into existence, there was no sale of yarn to its members by the assessee. From 1981-82 to 1985-86, i.e., for five years, assessee supplied yarn on quota basis. From 1986-87 to 1989-90, there was no quota yarn supply. Again in 1990-91, assessee allotted quota yarn to its members, but from A No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comments. He further noted, some of the members summoned stated that they were not holding any power-looms at all at any point of time; some of them have power-looms but let it out to others, hence not utilised the yarn allotted to them; some of them occasionally used the yarn but most of the time they were selling the quota slips in the open market on a premium; and some of them were not even aware of the term "rate difference", which assessee claims that led to the Resolution, etc. Assessing Officer concluded that the Society can always manipulate this kind of allotment in such a way that its members will always be benefited. 8. From the above facts, Assessing Officer came to the conclusion that the compensation paid to the members on surrender of quota rights is an application of its income and a device to reduce its tax liability. The assessment years under consideration have been chosen to make this kind of manipulation by the assessee because, after adjusting all carry forward business losses, depreciation, investment allowance, etc. still there is a huge tax liability. Assessing Officer held, a consumer society cannot embark upon to sell its own products on behalf of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r rate difference and cannot refuse to lift their quota in certain years and insist for the same in certain years. Further, the bye-laws of the appellant did not permit it to market its own yarn on behalf of the members, it being a consumer society." He further noted, no direction from the Registrar of Co-op. Societies was taken for selling the quota allotted to its members in the market. Further, taking note of the fact that the quotas were being allotted to members who had no looms or where looms were given on hire and quota slips were being also sold in the market, CIT(A) held, assessee has done something against the bye-laws of the Society by acting on behalf of the members and also the members had no right to ask the assessee to sell the products and to pay them the profit made out of such sale. In other words, the CIT(A) agreed with the Assessing Officer that this was a device to siphon off the profits to its members without incurring liability to income-tax. The object of the existence of the assessee itself is to supply yarn to its members whereas the assessee indulged in an activity contrary to the bye-laws and Maharashtra Co-op. Societies Act. Hence, he upheld the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r complaint was raised by any authority and, the Government appointed Auditors certified that no bye-law has been violated. The revenue has accepted the distribution of quota system as well in the past. Objecting the finding of the revenue authorities that the assessee Society had no authority as per the object or obligation or as per the Resolution to sell on behalf of the members the yarn quota allotted, it was contended that actually there is no difference in both methods in effect. The only difference is earlier, most of the members had to sell it directly in the market and now it is done through the assessee, which is beneficial to the members because at least siphoning off the profit by agents/third parties is not taking place. It is not a device of the Society to divert the profits to its members and a device to reduce the tax liability. The interest of the members is of paramount importance. The procedure adopted to make the yarn available directly or to sell it in the market on their request and to give the profit to members does not make any difference. 11. By no stretch of imagination it could be presumed that the Society could lay claim to the difference between the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmit additional evidence before the CIT(A), but the CIT(A) ignored this evidence furnished before him without justification. The statement was shown to the assessee on the last day of the hearing and assessee submitted, unless the person certified that he owns the loom, nobody could be a member. To verify the genuineness of the statement alleged to be made by seven persons, it was submitted, the verification of records is necessary and for that purpose the assessee sought time. The request was not accepted. 15. On the other hand, the learned CIT DR submitted before the Bench, the assessee Society converted itself into a business organization of manufacturing and selling yarn. The payment of profit out of the sale of yarn is nothing but application of its income, defrauding the revenue. The Society abdicated its main object and flouted the bye-laws. The assessee Society had not obtained permission from the Registrar of Societies. Every member/shareholders were to agree to lift the yarn offered to them. Some members violated the above agreement. Request of such members to pass a Resolution and acceptance of the same by the assessee is contrary to the bye-laws of the Society. Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd set of evidence, which was sought to be admitted for the first time before the Tribunal, the learned JM held, assessee could not adduce any material or evidence to prove that the documents sought to be admitted remained to be filed before the lower authorities either for lack of opportunity being allowed or for any other valid reason, when the Assessing Officer has specifically observed in the assessment order that statements from seven members of the assessee Society (named in the assessment order) were recorded, which were duly shown to the assessee during the course of assessment proceedings and a chance was also given to comment upon such statements. Assessee did not avail the opportunity. JM held, at the stage of second appeal, assessee's assertion that proper opportunity was not given to it is of no consequence, especially in the absence of any affidavit having been filed to contradict the stand of the findings of the revenue authorities. He further noted, rule 29 of the ITAT Rules does not confer any right on either of the party to produce any additional evidence, either oral or documentary, before the Tribunal. Learned JM held, "such right has been taken away by prohibit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusion JM relied upon the decision of the Hon'ble Supreme Court in the case of State Financial Corpn. v. Jagdamba Oil Mills AIR 2002 SC 834, wherein it was held "Courts should not place reliance on the decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed". Learned JM also relied upon the decisions of the Hon'ble Madras High Court in the cases of CIT v. Madras Race Club [1996] 219 ITR 39 and CIT v. Madras Race Club [2002] 255 ITR 98 to come to the above conclusion. [I had reason to believe that none of the parties cited CIT v. Madras Race Club [1996] 219 ITR 39 (Mad.) and CIT v. Madras Race Club [2002] 255 ITR 98 (Mad.) before the Bench because AM has not made any reference to these decisions]. Learned JM also relied upon the decision of the Hon'ble Supreme Court in the case of Motilal Chhadami Lal Jain v. CIT [1991] 190 ITR 1 to hold that there was no overriding title in the instant case of the assessee as the obligation is self-imposed or gratuitous and it does not flow out of an antecedent and independent title of any third party. 23. In the light of the above discussion, the learned JM hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined by the Third Member because - (i) Assessing Officer's case is that as the assessee's members are not loom owners, distribution of difference by the assessee is a pure financial reward to the shareholders; (ii) Learned JM has laid stress on the point that the assessee did not controvert the Assessing Officer's statement that some members were not loom owners; (iii) The issue goes to the root of the matter and the Tribunal is the final fact finding authority, it is essential that the Third Member should admit the said evidence and decide on merits. 27. Shri Dastur further submitted that the evidence, viz., order sheet now produced, i.e., during the hearing before the Third Member, in spite of repeated requests, was not made available to the assessee. The order sheet now presented definitely shows that on the last day of the hearing, i.e., on 25-3-1994, which is also the date of the order, assessee was merely shown some statements. It is not certain from the order sheet, which statements were shown to the assessee; whether they were the same statements of seven persons whose statements were alleged to be recorded during the assessment proceedings; and whether there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer that opportunity was given to the assessee but it was not availed. Particularly, Shri Dastur brought my attention to Page 7 of the order of the Hon'ble jurisdictional High Court in the case of Smt. Prabhavati S. Shah v. CIT [1998] 231 ITR 1 (Bom.). It reads as under:- "On a plain reading of rule 46A, it is clear that this rule is intended to put fetters on the right of appellant to produce before the Appellate Assistant Commissioner any evidence, whether oral or documentary, other than the evidence produced by him during the course of the proceedings before the Income-tax Officer, except in the circumstances set out therein. It does not deal with the powers of the Appellate Assistant Commissioner to make further enquiry or to direct the Income-tax Officer to make further enquiry and to report the result of the same to him. This position has been made clear by sub-rule (4) which specifically provides that the restrictions placed on the production of additional evidence by the appellant would not affect the powers of the Appellate Assistant Commissioner to call for the production of any document or the examination of any witness to enable him to dispose of the appeal." 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int of difference referred to him. Thus he submitted, the additional evidence now sought to be produced, vide Paper Book Pages 157 to 189 should be ignored. 32. In his rejoinder Shri Dastur submitted, it is not necessary to refer a separate question as to whether additional evidence has been admitted or not admitted. This is an integral and un-avoidable fact to be decided by the Tribunal to dispose off the appeal and the question referred to. Shri Dastur submitted, the contention of the learned CIT DR that the issue of additional evidence is not before the Third Member, as there is no dissenting on this, is incorrect. A plain reading of the learned AM's order shows that he has accepted the additional evidence especially as he refers, at Page 19, the decision of the Hon'ble Allahabad High Court in the case of Smt. Mohindar Kaur v. Central Government [1976] 104 ITR 120 and the decision of the jurisdictional High Court in the case of Smt. Prabhavati S. Shah v. CIT [1998] 231 ITR 1 (Bom.), without any adverse comment. Shri Dastur reiterated, the letter dated 20-5-2002 written by the learned AM after passing the order dated March 2002, need to be ignored The decision cannot be amended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of opinion between the two Members as to whether the additional evidence has been admitted or not. Hence, the contention of Shri Dastur that there is no need of reference of a separate question is to be accepted because in order to answer the question referred, this point is to be decided first. 37. The learned CIT DR's reliance in the case of A.N. Seth is also of no much relevance. This was a case wherein the Members arrived at the same conclusion but for different reasons. Referring to the above, the Hon'ble Delhi High Court held, "therefore, if the Members agree on the conclusion on a point, but differ in the reasoning or reasons for arriving at the conclusion, the provision in the sub-section does not apply, and the question of any reference to one or more of the other Members does not arise". Coming to the instant case of the assessee, whether the c evidence has been admitted or not is a fact to be ascertained so as to arrive at the right conclusion with regard to the question referred before the Third Member. 38. Coming to the case of H.P. Agro Industries Corpn. Ltd., Shri Dastur submitted, the Third Member is empowered to arrive at the same end result for a different re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence in opinion on any point which arises in the course of deciding of an appeal. Therefore, the jurisdiction of the Third Member is not limited to the language of the question(s) framed in the reference but it extends to the entire sum and substance of opinion on the specified point(s). The questions are framed in accordance with rules for identifying the dispute but it is well-settled principle of law that the rules cannot restrict the scope of the powers conferred under the statute. Therefore, the rules do not have the effect of curbing the scope of power of the Third Member conferred upon him under section 255(4). The Supreme Court in the case of Saiyad Mohammad Bakar El-Edroos v. Abdulhabib Hasan Arab JT 1998 (3) SC 76, 81 held that procedural law is not to defeat the very object which is sought to be achieved and that it is always subservient to the substantive law. As nothing can be given by a procedural law what is not sought to be given by a substantive law, similarly nothing can be taken away by the procedural law what is given by the substantive law. Section 255(4) confers the power of reference to the Third Member in regard to the dispute arising between two Members of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de in the last hearing. On 25-3-1994 the statement recorded from Shri Jadhav, a member of ICOSPIN holding 10 shares, was shown. It makes clear that the copy was not given. From the case sheet recording it is clear that the statement recorded shown on earlier occasion and also on the last day. Mere showing is not proper opportunity. There is violation of principles of natural justice. As rightly contended by Shri Dastur, the first opportunity available to the assessee was before the CIT(A). Assessee has taken a specific ground as well, viz. Ground No. 7. The CIT(A), at Page 12 of his order records that the copies were shown to the assessee to comment. He records further "on this occasion, the appellant failed to avail any opportunity to cross examine the said seven members. He did not even bother to mention before the Assessing Officer that Shri S.M. Jadhav, one of the members had four looms as claimed before me. No such evidence was produced before the Assessing Officer. The evidence now produced before me during the course of hearing in this regard is not admitted as it is not covered by any exceptional clause of Rule 46A". 43. At Page 157 of the Paper Book is a letter dated 3-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.) (TM), I do not find this decision further revenue's case. In this case the Third Member held, section 255 of the Income-tax Act, 1961, empowers the Third Member in law to arrive at a conclusion of the two Members constituting the Division Bench, although he may do it by a different route and what is necessary is that he must agree with one of its Members constituting the Division Bench. With reference to this, I have to say that there do exist a difference of opinion between the two Members with regard to the admission of the additional evidence. I have already held in the preceding Para that the learned AM, as rightly c contended by Shri Dastur, has admitted the additional evidence, impliedly. Even otherwise I have held that the Third Member has the power to take into evidence the additional evidence, if it is very essential to dispose off the question referred to the Third Member on merit, provided the additional evidence was at least tendered before the original Bench. 47. Coming to the decision relied upon by the learned DR in the case of Niraj Petrochemicals Ltd. v. ITO [2000] 73 ITD 1 (Hyd.)(TM), the Third Member held, wherein specific differences are referred to Third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf of the members and he relied on the decision of the learned AM. He further submitted, the effect of the Resolution passed in the Annual General Meeting and the Yarn Sales Committee is that there is first a determination of the "quota right distribution kgs." that each member is entitled to, depending on his shareholding and the "quota right distribution rate". Then, there is sale of yarn of member's quota right by the mill's sales depot, through agents. In selling the quota yarn in the market, the assessee is acting as the agent of the members. The amounts of sale proceeds (to the extent of difference) are received by the assessee on behalf of its members. The assessee has no right to receive the said funds by its own. Shri Dastur submitted, in the case of Y.S. Desale the promoters were nominated by the Executive Committee for a limited purpose of registering a Co-operative Society and the promoters collected a large amount from the persons who were to become members. There was a delay in formation of the Society and the amounts were deposited in the bank as required by law to avoid penal provision of the Co-operative Societies Act. Question arose - interest on deposits as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the department that the Assessing Officer rejected all the contentions as raised before him on the ground that the events that have taken place over the years it is clear that the object of the company to supply yarn to its members but the society has converted itself into a business organization of manufacturing and selling and the so-called payment of rate difference is nothing but payment of profit. Since the society is not an agent of the members under the bye-laws, therefore, the obligation, which is self-created through resolution, is totally against the bye-laws. The society has abdicated its main object and relegated itself into a business organization. The society is a consumer society; its bye-laws do not authorise the society to sell the yarn in the market. Bye-law 7(i) [not 7(1)] merely authorises the sale by the society of the members' finished products but not of their raw material." I find, this observation of the learned JM is not correct. Clause 7(i) reads as under:- "7. The objects of the Mill shall be to promote the economic interest of its members by undertaking spinning, dyeing, sizing, weaving and manufacturing of textile materials of all kinds, and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r undertakings, its factory buildings, plant and machinery and lands for the benefit of the Mill with prior approval of the Ichalkaranji Mill and the Registering Authority." It further states, vide clause 7(n), "to do such other things as are incidental or conducive the attainment of all or any of the above objects". The main object, as contended by Shri Dastur, is to attain and keep the interest of its members. 56. From the facts stated hereinabove, it is clearly established that the yarn counts supplied to its members were comparatively few and they were not having the required counts to use in their mill. So they were to sell it in the open market. To overcome this difficulty, they approached the assessee by way of a request by certain members and subsequently a Resolution was passed by the Society to that effect. Hence, Shri Dastur's contention that the assessee was acting as an agent is to be accepted. I agree with the finding of the learned AM on this point. This view is also supported by the decision of the Hon'ble jurisdictional High Court, relied upon by the learned AM in the case of Y.S. Desale. 57. Coming to the decision relied upon by the learned DR in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndividual) the Hon'ble Supreme Court held "where the true effect on the construction of the deed is clear, appeal to discourage tax avoidance is not a relevant consideration". In the case of Union of India v. Playworld Electronics (P.) Ltd. [1990] 184 ITR 308, the Hon'ble Supreme Court held "tax planning may be legitimate provided it is within the framework of law. Colourable device cannot be part of tax planning". From the facts narrated above, it is very difficult to come to the conclusion that the sale of yarn at the instance of its members is a device to reduce the tax liability of the assessee. The assessee is a Co-operative Society formed for the benefit of the members and acting on Resolution of the majority, cannot be treated as a mere device to avoid tax. In the case of Banyan Berry v. CIT [1996] 222 ITR 831, the Hon'ble Gujarat High Court held that the decision in the case of McDowell Co. Ltd. was solely for the purpose of reducing the tax liability and it was not a transaction in reality of receiving a price lower than the one which it was making. In view of the above, the Hon'ble Gujarat High Court distinguished the decision in the case of McDowell Co. Ltd. observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka v. CIT [1966] 82 ITR 323 (SC) (5) CIT v. A. Tosh Sons [1987] 166 ITR 867 (Cal.). (6) Dalmia Cement Ltd. v. CIT [1999] 237 ITR 617 (SC) (7) CIT v. Champa Properties (P.) Ltd. [1995] 212 ITR 303 (Cal.). 62. Even coming to the alternate contention, in any case it is diversion of income by overriding title, is to be accepted and the reasoning given by the learned JM to come to a different conclusion, that it is not diversion of income by overriding title and his finding that the case of CIT v. Shri Chhatrapati Sahakari Sakhar Karkhana Ltd. [2000] 245 ITR 498 (Bom.) is not applicable in the instant case of the assessee because in the instant case of the assessee it is self-imposed obligation created by the assessee whereas in the case of Shri Chhatrapati Sahakari Sakhar Karkhana Ltd. it was not so, is incorrect. A careful reading of the decision of the Hon'ble jurisdictional High Court in the case of Shri Chhatrapati Sahakari Sakhar Karkhana Ltd. will clearly show that the real issue is whether the income has accrued to the assessee and whether the profit on the scheme from income of the assessee. In the instant case of the assessee the yarns were at no time belonged to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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