THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2, , VISAKHAPATNAM vs. SRI VIJAYA VISAKHA MILK PRODUCERS COMPANY LIMITED, VISAKHAPATNAM

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM (Through web-based video conferencing platform) BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER I.T.A. No. 154/VIZ/2020 (Asst. Year : 2017-18) DCIT, Central Circle-2, vs. M/s. Sri Vijaya Visakha Milk Visakhapatnam. Producers Company Ltd., Visakha Dairy, Akkireddypalem, Opp. BHEL, Visakhapatnam. PAN No. AAJCS 7398 P (Appellant) (Respondent)

Assessee by : None. Department By : Shri D.K. Sonawal, CIT-DR

Date of hearing : 24/11/2020. Date of pronouncement : 26/11/2020. O R D E R PER V. DURGA RAO, JUDICIAL MEMBER

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-3, Visakhapatnam, dated 29/01/2020 for the Assessment Year 2017-18. 2. In this appeal there is a delay of 76 days. The department has filed a petition for condonation of delay and submitted that office was under lockdown due to Covid-19, therefore there is a

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delay of 76 days. We find that there is a sufficient cause to condone the delay. Accordingly, delay is condoned. 3. The Revenue has raised the following grounds of appeal:- “1) On the facts and circumstances of the case ld. CIT(A) erred in deleting the addition of Rs. 22,90,84,000/- made towards additional price/withheld price of milk produced. 2) On the facts and circumstances of the case ld. CIT(A) erred in not appreciating that the said payment is in the nature of distribution of profits without paying due taxes though there is no obligation to tax a final price. 3) Any other ground of appeal that may arise at the time of hearing. “

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the same. The price of such milk procured was paid by the assessee at the end of each fortnight basing on the price published in the circulars issued by the assessee. The Circular dated 28/10/2015 the price and withheld price are mentioned. The assessee has been paying only adhoc price and not paying the purchase price. The adhoc price means the difference of purchase price and withheld price. As per the ledger of withheld price the total withheld price for the A.Y. 2017-18 is Rs. 191,19,78,283/-, the breakup of which is as follows:- Amount claimed to had been actually paid 1,68,28,94,283 Amount said to be capitalised by issue of 22,90,84,000 equity shares Total withheld price 191,19,78,283

From the above particulars it can be seen that while outgo is only Rs. 1,68,28,94,283/-, the amount claimed as expenditure which is capitalized. The AO was of the view that the amounts not actually paid but debited to profit & loss account only to be capitalized and thus he opined that the assessee’s case is a clear case of employing a device to increase its capital without paying taxes due to exchequer. The AO has calculated the amount of Rs.22,90,84,000/- debited to profit & loss account which was not actually paid to the milk suppliers and taken to the capital is not

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allowable and accordingly the said amount was disallowed and added to the total income of the assessee. 5. On appeal, ld. CIT(A) by following the decision in assessee’s own case for the A.Y. 2010-11 in ITA No. 288/VIZ/2014 dated 27/09/2017 directed the AO to delete the addition. For the sake of convenience, the relevant portion of the order is extracted as under:-

“9.1) I have carefully considered the written submissions filed by the appellant and gone through the ITAT's order relied upon by it for the assessment year 2010-11 in its own case in ITA No.288/VIZ/2014, dated 27/09/2019 and found that the issue involved in the asst year under consideration, i.e. A.Y.201718 and the A.Y.2010-1 1 in respected of which the ITAT passed its order is one and the same. The ITAT in its order cited above has endorsed the views of the CIT(A) made in his appellate order extracted as under, in it's order at para no.33 which is extracted as under. "As per the Articles of Association of the appellant company, Board of Directors may determine time to time' the benefits may be conferred on members by way of limited return, patronage bonus and determination of withheld price and such other benefits as the Board may deem fit in the larger interest of the members of the company. It is further observed by the Id. CIT(A) that the procurement price, normal price normally comprise an initial payment and withheld price , the latter price may be paid in cash or in kind or allotment of equity shares as determined by the Board. The copies of resolution filed by the assessee also show that the payment made initially is on a tentative /adhoc price and the CIT(A) is of the opinion that there is no infirmity in the assessee's practice of procuring milk through initial payment and withheld price and such practice is consistent with its Articles of Association and relevant statutory provisions governing the producer company. The payment of withheld price is also constituent with the principles of cooperative societies."

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Observing in the above manner the CIT(A) finally concluded that the withheld price paid to the members cannot be said to the excessive and also cannot be said that this practice is to avoid tax. 9.2) As already observed above, the ITAT in its order cited above, is in full agreement with the observations made by the CIT(A) in his appellant order as extracted above by stating at page-32 of its order that as per the provisions of Companies Act section 581E, 581D, 581R & 581S and Articles of Association of the assessee particularly 10 & 15, the withheld price paid by the assessee company to the milk suppliers is according to taw. Accordingly, the addition of Rs.22,90,84,000/- made on account of Additional price/Withheld price is here by deleted placing reliance on the ITAT's order cited above.(Relief:22,90,84000/-)”

The department is in appeal before us. 6. Ld.DR strongly supported the order passed by the AO. None for the assessee. 7. We have heard both the sides, perused the material available on record and orders of the authorities below. 8. We find that the issue involved in this appeal is squarely covered by the decision of the coordinate bench of the tribunal in assessee’s own case for the A.Y. 2010-11 in ITA No.288/VIZ/2014 by order dated 27/09/2017 wherein the Tribunal has considered the issue in detail and directed the AO to delete the addition by upholding the order of the ld. CIT(A). The relevant portion of the order is extracted as under:- “31 We have heard both the sides, perused the material available on record and orders of the authorities below.

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32 The assessee company M/s. Vijaya Visakha Milk Producers Company Ltd. incorporated under the Companies Act, 1956 as a producers company. The main object of the company is to procure milk from the farmers through the societies situated in villages of Srikakulam, Vizianagaram, Visakhapatnam, East Godavari and West Godavari Districts of Andhra Pradesh. The suppliers are the members of the assessee-company, from which milk is being procured every day. The company has been working on the cooperative principles even after it was registered under the Companies Act as Producer Company. In the assessment order, the Assessing Officer has noted that the assessee procures buffalo and cow milk from milk producers, the price of such milk is paid by the assessee at the end of each fortnight based on the price published in the circulars issued. The assessee company paid amounts as per the price declared in the circular for the purchasing during the year as follows:- Procurement price as per circulars Buffalo Milk Rs. 1,75,34,54,590/- Cow Milk Rs. 1,13,10,63,892/- Total Rs. 2,88,45,18,482/-

However, the assessee company has debited to the profit & loss account for price procured much higher by an amount of Rs. 96,60,12,828/-. On query, it was explained to the Assessing Officer that in addition to the above procurement price, the milk producers were also paid additional price/withheld price on 28/03/2010 and submitted the details of such additional price to the Assessing Officer vide letter dated 18/10/2013 that withheld price for buffalo milk Rs. 49,27,19,254/-, for cow milk Rs. 47,32,93,574/-, totalling to Rs. 96,60,12,828/-. The Assessing Officer asked the assessee what is the basis for the withheld price paid by the assessee. It was submitted before the Assessing Officer that rate per kg for buffalo milk and total solids for cow milk paid by competitors, rate per kg fat and total solids paid by cooperative dairies in AP and other states and the competition prevailing in the market and producers demand for prices before finalization of the final price for payment of milk price from farmers. The assessee also filed a comparative prices from website of NABARD. Thereafter, the Assessing Officer has asked the assessee company to furnish the details of the withheld price of Rs.96,60,12,828/- paid to the milk producers that the amount actually paid to the suppliers of milk of Rs. 49,64,10,534.61, equity shares issued in the name of the milk suppliers of Rs.

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41,23,18,509.91, contribution to the trust of Rs.5,72,83,783.48. The above breakup filed by the assessee has been considered by the Assessing Officer and observed that out of total withheld price of Rs. 96,60,12,828/-, the actual amount paid to the milk suppliers only of Rs.49,64,10,534.61, the amount of Rs.41,23,18,509.91 claimed as expenditure was in fact capitalized and the amount of Rs.5,72,83,783/- was taken as contribution to the trust. Accordingly, the Assessing Officer took the view that the amount actually paid by the assessee can be held as made on commercial line to ensure clamed supplies that thereby aid in furthering of the business of the assessee, the amounts not actually paid but debited to profit & loss account to be capitalized or contributed cannot said to have been based on commercial line. The Assessing Officer also took a view that the assessee is employing device to increase its capital without paying taxes which are due to exchequer. The Assessing Officer by considering the decisions of the Shahabad Cooperative Sugar Mills Ltd. Vs. CIT (226 ITR 582) and Budhewal Cooperative Sugar Mills Ltd. Vs. CIT (316 ITR 461) and held that the amount of Rs.96,60,12,828/- which is debited to the profit & loss account, but not actually paid to the milk suppliers, taken to capital contribution and also contribution to the trust, which is not allowable expenditure hence, liable to the disallowed. Accordingly, the addition of Rs.46,96,02,293/- was added to the total income of the assessee. 33. On appeal before the ld. CIT(A), the assessee has filed an additional evidence such as Board resolutions in respect of withheld price for the Assessment Years 2007-08, 2008-09, 2009- 10 & 2010-11 and other relevant documents and the ld. CIT(A) called the comments of the Assessing Officer vide letter dated 03/12/2013 and the Assessing Officer has also filed its report dated 10/03/2014. On the comments of the Assessing Officer, the assessee filed written submissions dated 21/03/2014 & 2503/2014. The ld. CIT(A) by considering section 581E & 581D, 581R & 581S and also Articles of association of the company 10(a) to 10(f) and also clause 15 of the Articles of Association has observed that the concept of withheld price as defined by the Companies Act that “withheld price means part of the price due and payable for goods supplied by any member to the producer company; and as withheld by the producer company for payment on a subsequent date.”. The above definition is incorporated in the Articles of Association of assessee Company. As per section 581E of the Companies Act the Articles of a producer company shall stipulate how the consideration for the produce delivered by a member will be settled and paid; and every member shall

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initially received such value for the produce supplied as the Board of the producer company may determine. The section further provides that the price withheld may be disbursed to seller member in cash or by allotment of equity share in proportion to the produce supplied during the concerned financial years to such extent as may be decided by the Board. Thus, the concept of withheld price is not alien in the conduct of business of a producer company. As per the Articles of Association of the assessee company, Board of Directors may determine from time to time the benefits that may be conferred on members by way of limited return, patronage bonus and determination of withheld price and such other benefits as the Board may deem fit in the larger interest of the members of the company. It is further observed by the ld. CIT(A) that the procurement price normal price normally comprise an initial payment and withheld price, the latter price may be paid in cash or in kind or allotment of equity shares as determined by the Board. The copies of resolutions filed by the assessee also show that the payment made initially is on a tentative/adhoc price and the ld.CIT(A) is of the opinion that there is no infirmity in the assessee’s practice of procuring milk through initial payment and withheld price, and such practice is consistent with its Articles of Association and relevant statutory provisions governing the producer company. The payment of withheld price is also consistent with the principles of cooperative societies. The ld. CIT(A) has also considered that the equity shares allotted to the members, contribution to the M/s. Milk Producers & Employees Educational Health and Medical Welfare Trust , which provides educational and medical facilities to the members and employees of the assessee company and it is approved under section 12A of the Act and it cannot be said that the above payments made by the assessee from the withheld price not in commercial lines as decided by the Assessing Officer is not correct. The ld. CIT(A) has further observed that the assessee company has allotted the shares from the withheld price to the tune of Rs.41,20,66,000/-. Copy of Form No.2 filed with Registrar for such allotment was filed and payment to the contribution made to the Trust of Rs. 5,72,83,783/-, bank statement also filed, which shows receipt of the said amount. The amount is utilized by the trust to expand the hospital facilities provided to the members of the company. The ld. CIT(A) came to a conclusion that withheld price paid to the members by way of equity shares and also contribution to the trust, cannot be said to be excessive and also cannot be said that this practice is to avoid the tax. We find that the ld. CIT(A) has considered the objects of the assessee company and also the provisions of Companies Act

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section 581E, 581D, 581R & 581S and Articles of Association of the assessee particularly 10 & 15, he came to a conclusion that withheld price paid by the assessee company to the milk suppliers is according to law. We also gone through the provisions of Articles of Association and also paper book at page Nos. 53 to 64 and find that assessee company decided the withheld price after resolution passed by the Board of Directors and accordingly the amount of Rs. 49,64,10,534.61 cash payment made to the milk suppliers was not objected by the Assessing Officer. The only objection raised by the Assessing Officer in respect of equity shares issued to the tune of Rs.41,23,18,509.91, contribution to the assessee’s trust of Rs.5,72,83,783.48. Insofar as, the issue of equity shares is concerned, clause 10(b) of the Articles of Association of the assessee company provides each member shall receive initial payment as may be determined by the Board for the produce/products. Every member shall receive withheld price (remaining price) which will be disbursed in cash or in kind or by allotment of equity shares in proportion to the quantity of milk supplied to the assessee company. Even as per section 581 of the Companies Act, the price withheld may be disbursed to the seller member in cash or through allotment of equity shares in proportion to the milk supplied during the financial year to such extent as may be decided by the Board. We find that the assessee company as per section 581 of the Companies Act and also Articles of Association, passed the resolution dated 05/10/2009 and equity shares are issued. Therefore, the Assessing Officer is not correct in saying that it is a tax avoidance device adopted by the assessee to avoid the payment of tax. The ld. CIT(A) by considering all the details has correctly decided that out of withheld price, equity shares issued is in accordance with law. 34 Insofar as contribution paid to the trust is concerned, as per Memorandum of Association of Companies Act, it is under obligation of the assessee to establish schools, colleges, training centres & hospitals. Accordingly, the assessee has already established hospital and educational institutions and out of withheld price some portion is paid to the trust and same is received by the trust. Nowhere the Assessing Officer doubted the transaction. The only doubt expressed by the Assessing Officer is that the above payments are only made to avoid taxes. In our opinion, the assessee producer company running in the lines of mutuality basis for the benefit of the members, in the interest of the members instead of payment cash, some shares are allowed and established educational institutions and also hospitals for

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treatment of the members of the milk suppliers and certain payments made out of withheld price as per Companies Act and also Articles of Association followed by Board resolution. The Assessing Officer is not correct in saying that the assessee adopted device for avoidance of tax. We further observe that once the milk suppliers having shares in the company, they will be having a feeling of supplying milk to their own company. Therefore, the assessee company will be able to procure milk from the milk producers continuously. Therefore, allotment of equity shares to the milk producers for the above reason has to be considered as business expediency. So far as case-laws relied on by the Assessing Officer are concerned, they have no relevancy to the facts and circumstances of the case. Keeping in view of the above, we find no infirmity in the order passed by the ld.CIT(A) and uphold the same.”

Sd/- sd/- (D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member

Dated: 26th November, 2020. vr/-

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Copy to: 1. The Assessee - M/s. Sri Vijaya Visakha Milk Producers Company Ltd., Visakha Dairy, Akkireddypalem, Opp. BHEL, Visakhapatnam. 2. The Revenue – DCIT, Central Circle-2, Visakhapatnam. 3. The Pr.CIT (Central), Visakhapatnam. 4. The CIT(A)-3, Visakhapatnam. 5. The D.R., Visakhapatnam. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.