COMMISSIONER OF INCOME-TAX vs. MEHSANA DISTRICT CO-OPERATIVE MILK PRODUCERS UNION LTD

ITR/26/1993HC GujaratGJHC24021153199324 February 2005Author: HONOURABLE MR. JUSTICE D.A.MEHTA,HONOURABLE MS. JUSTICE HARSHA DEVANI16 pages
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What were the facts?

The Commissioner of Income-tax referred a question to the High Court concerning Assessment Year 1984-85. The assessee, Mehsana District Co-operative Milk Producers Union Ltd., a co-operative society, filed a return of NIL income. The Assessing Officer, however, framed an assessment on a total income of Rs. 8,01,67,335/-, including an addition of Rs. 5,47,69,105/-. This amount represented an additional price paid to its member co-operative societies for milk purchased on the last day of the accounting year, March 31, 1984. The Assessing Officer disallowed this as a deduction, citing the payment date, lack of commercial principles, and an intention to evade tax. The CIT (Appeals) confirmed the addition, distinguishing it from earlier favourable rulings. The Income Tax Appellate Tribunal (ITAT) had a difference of opinion, with the Third Member ultimately concurring with the Accountant Member, holding the payment as part of the purchase price.

What did the High Court hold?

The High Court held that the Appellate Tribunal was right in law and on facts in deleting the addition of Rs. 5,47,69,105/-. The Court reasoned that the expenditure in question could not be termed an application of income in the absence of evidence of profit accrual. The payment of additional/final price made on the last day of the accounting year was allowable under Section 28 of the Act as a necessary deduction for ascertaining real profits on commercial accounting principles. Alternatively, it was allowable under Section 37 of the Act, having been incurred wholly and exclusively for the purpose of the business. The Court emphasized that the Assessing Officer's jurisdiction is confined to the reality of the expenditure, not the reasonableness of the amount or the type of expenditure. The Tribunal was justified in considering past years' treatment and the practice of similarly situated societies. The allegation of tax evasion was not substantiated, and the onus was not discharged by the department. The Court answered the referred question in the affirmative, in favour of the assessee.

What were the issues?

1. Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 5,47,69,105/-, being the alleged additional price towards the purchase of milk, sanctioned on the last day of the accounting year, March 31, 1984? Assessee's Contentions (as inferred from the Tribunal's majority view and the High Court's reasoning): The payment of Rs. 5,47,69,105/- was an additional purchase price determined at the end of the year and was payable to the primary societies, not a distribution of profits. The inability to explain the basis for the amount did not change its nature. The expenditure was incurred wholly and exclusively for the purpose of business and was allowable under Section 28 or Section 37 of the Income-tax Act, 1961. Similar situations in past years were allowed, and other similarly situated societies received similar deductions. The allegation of tax evasion was unsubstantiated. Revenue's Contentions (as per Assessing Officer and CIT(Appeals)): The payment was not allowable as a deduction under Sections 28 or 37(1) because it was made on the last day of the accounting period, was not guided by commercial principles, and the price increase was not linked to market conditions, suggesting an objective of tax evasion. The payment was in the nature of an application of income under a self-generated obligation, not a deductible business expense. Inquiries showed lower prices paid by another milk producer in Mehsana.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 143(3),Section 28,Section 37(1),Section 255(4),Section 40A(2)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No.26 of 1993

For Approval and Signature:

HON'BLE MR.JUSTICE D.A.MEHTA and HON'BLE MS.JUSTICE H.N.DEVANI ============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : YES

3.

Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge

The order continues below.

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