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TMI Blog1987 (2) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... the same outside the State. The object of conferring such monopoly on the co-operative marketing societies was to ensure a good price to the farmers by eliminating middlemen and also to encourage production of more maize, especially of the hybrid variety. The policy decision taken by the Government in this regard was embodied in the letter dated August 26, 1967, issued by the Registrar of Co-operative Societies. The letter contemplated that a good proportion of the profits Made by the society in maize should go back to the cultivators as bonus to encourage them to grow more maize and the balance be utilised to improve the financial position of the society by crediting it to the reserve fund, building fund, etc. If necessary, the letter advised the societies to amend the bye-laws suitably. In pursuance of the above policy, the apex body, the Andhra Pradesh State Co-operative Marketing Federation, requested all the district and primary marketing societies to enter the market immediately and speed up the purchase of maize. By its letter dated September 15, 1967, the apex body appointed all the societies within its jurisdiction to act as its agents for the procurement of maize, green g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iety, the managing committee of the society was competent to frame subsidiary bye-laws for conducting the business. The managing committee accordingly passed a resolution on September 26, 1967, and the general body approved the same for payment of bonus to the extent of 50% of the profits made in the maize procurement. These resolutions were subsequently approved by the Registrar and, therefore, the expenditure incurred was allowable. The Department carried the matter in appeal to the Income-tax Appellate Tribunal which accepted the contentions put forth by the Revenue and reversing the order of the Appellate Assistant Commissioner restored the assessment order of the assessing authority. The Tribunal was of the view that the letter of the Registrar was in the nature of advice given by the head of the co-operative department to all the co-operative marketing societies to suitably amend their respective bye-laws providing for payment of bonus. At the instance of the assessee, the aforesaid question was referred to this court. Sri Y. Ratnakar, learned counsel for the assessee, contends that there was no need for the society to amend any of its bye-laws in order to give effect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sundaram Mills (P.) Ltd. [1974] 95 ITR 365 (Mad) and Pankaja Mills Ltd. v. CIT [1963] 50 ITR 665 (Mad). In Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, the Supreme Court has considered the question whether an assessee-company which follows mercantile system of accounting is entitled to claim deduction by way of business expenditure when the amount of tax for the assessment year was due although the demand was quantified and paid subsequently. In that case, the assessee contested the proceedings before the appropriate tax authorities. Dealing with this aspect, the Supreme Court held (p. 366): " It is not possible to comprehend how the liability would cease to be one because the assessee bad taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc. An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed." The Supreme Court also observed (p. 367): " Whether the assessee is ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total basic pay drawn by the staff and directing payment to be made after the final accounts for the year have been drawn up. Pursuant to that resolution, a sum of Rs. 6,500 was earmarked for the payment of bonus and the said sum was claimed as deduction for the year 1962-63. The Income-tax Officer disallowed the claim. While considering that question, the Allahabad High Court observed (p. 92): " Now, the importance of the accounts being kept on the mercantile system is that in such a case a deduction in respect of bonus can be claimed when the company incurs the liability to pay the bonus and makes appropriate entries in the books of accounts. The date of actual payment of bonus is immaterial. Under the cash system, a deduction can be allowed only when the payment is made. In the instant case, the assessee-company keeps its accounts on mercantile system. It is not disputed that the assessee had incurred a liability when it passed the resolution. The company had made appropriate entries in the books of accounts. In the circumstances, the company was clearly entitled to the deduction claimed by it regardless of the fact that the actual profits had not been worked out, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees. " In the light of the dictum laid down in the aforesaid cases, could it be said that the assessee did not incur the liability to pay bonus in the year previous to the relevant assessment year in question ? The policy of the Government as contained in the letter of the Registrar dated August 26, 1967, clearly aims at eliminating the middlemen to improve the lot of the farmers. , The progressive policy of the State in the field of agriculture for the purpose of increasing production by giving necessary incentives to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members and the balance should be be paid to them. By another resolution passed on November 29, 1971, the general body unanimously resolved to enrol maize suppliers as members of the society, The Registrar (which expression includes Deputy Registrar) accorded permission to the assessee by his letter dated September 26, 1972, under section 45(2)(a) of the Andhra Pradesh Co-operative Societies Act, 1964, for conversion of the bonus granted to the maize suppliers as share capital on their becoming members of the Co-operative Marketing Society, Armoor. Section 45 of the Andhra Pradesh Co-operative Societies Act deals with disposal of net profits. Sub-section (1) thereof speaks of disposal of net profits towards reserve fund, co-operative education fund, etc. The balance amount may be utilised for the purposes specified in clauses (a) to (e) of sub-section(2). The relevant portion of sub-section (2) reads as follows: " The balance of the net profits may be utilised for all or any of the following purposes, namely: (a) payment of dividend to members on their paid-up share capital at a rate not exceeding the prescribed limit ; (b) payment of rebate to members on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pretation of section 45(2)(b), we are of the view that the amount paid by the society to the growers by way of bonus was not a rebate falling within the ambit of section 45(2)(b). The general body of the society passed a resolution approving the resolution of the managing committee to distribute 50% of the bonus out of the net profits to the growers with the qualification " subject to the approval of the Registrar. " In our view, this was done only by way of abundant caution. The policy statements of the Government as contained in the letter of the Registrar did not spell out in what proportion the profits should be shared between the society and the suppliers of the maize. In order to give effect to the directions contained in the letter of the Registrar, the apex body issued a circular dated September 15, 1979, containing the guidelines which, inter alia, stated that 1/4th of the net profit earned by the co-operative marketing society should be remitted to the apex body and the, remaining 3/4ths should be retained by the concerned society. The general body of the assessee-society felt that 50 per cent. of the society's 3/4ths share of the income should reasonably be diverted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple. Elimination of middlemen and encouraging the farmers directly to market their produce through co-operative societies is one of the recognised methods of ensuring economic justice to farmers and thus protecting them from exploitation by middlemen. When the society was asked to carry out such a policy decision, it had incurred the liability when it had adopted the resolution to pay 50 per cent. of the net profits earned by it. Incurring of the liability was not subject to any necessary preconditions. The accounting year of the assessee ended on June 30, 1968. The general body's resolution was on November 22, 1967, much earlier to the ending of the accounting year. By passing the resolution, the society had incurred the liability and a corresponding right had accrued to the grower to demand payment in terms of the resolution. In the light of the law laid down by the Supreme Court in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358 (SC), it is not necessary for the assessee to incur the liability by virtue of any contract or statute. As held by the Allahabad High Court in Symonds Distributors (P.) Ltd. v. CIT [1972] 86 ITR 88 (All), the date of the resolution is relevant. The date ..... X X X X Extracts X X X X X X X X Extracts X X X X
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