THE COMMISSIONER OF INCOME -TAX,PUNE-IV vs. THE SOLAPUR DIST. CO-OP. MILK PRODUCERS ND PROCESS UNION LIMITED

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IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION

INCOME INCOME INCOME TAX APPEAL NO. 997 OF 2008 TAX APPEAL NO. 997 OF 2008 TAX APPEAL NO. 997 OF 2008

The Commissioner of Income Tax-IV

.. Appellant

The Solapur Dist.Coop Milk Producers

and Process Union Ltd

Respondent

WITH

INCOME INCOME INCOME TAX APPEAL (Lodging) NO.290 of TAX APPEAL (Lodging) NO.290 of TAX APPEAL (Lodging) NO.290 of 2006 2006 2006

The Commissioner of Income Tax (Central)

.. Appellant

The Kolhapur Zilla Sahakari Dudh Utpadak

Sangh Ltd

.. Respondent

Mr.P.S.Sahadevan with Mr.Vimal Gupta for

Appellant

Mr.S.N.Inamdar for Respondent

CORAM CORAM CORAM : F.I.REBELLO AND : F.I.REBELLO AND : F.I.REBELLO AND

R.S.MOHITE, R.S.MOHITE, R.S.MOHITE, JJ JJ JJ

JUDGMENT JUDGMENT JUDGMENT RESERVED ON: RESERVED ON: RESERVED ON:

18th 18th 18th March, 2009 March, 2009 March, 2009

JUDGMENT JUDGMENT JUDGMENT PRONOUNCED ON: 4th April, 2009 PRONOUNCED ON: 4th April, 2009 PRONOUNCED ON: 4th April, 2009

JUDGMENT JUDGMENT JUDGMENT ( Per F.I.Rebello, J ) ( Per F.I.Rebello, J ) ( Per F.I.Rebello, J )

These

appeals are being disposed of by

this

common order as they involve the same questions of

law which is framed as under :

. " Whether on the facts and CNR No : HCBM020061932008 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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circumstances of the case and in law, the

Hon’ble

Tribunal

was

justified

deleting the addition of Rs.1,55,81,519/-

holding

the said amount

represented

rate

difference payment in the

purchase

milk paid by the assessee even though

the

said payment lof Rs.1,55,81,519

was

paid at the end of the previous year.

A few facts may now be set out from the case of

’ The Solapur District Cooperative Milk Producers

and

Process

Union Ltd.’ The facts in

the

other

case are also same or similar except to the extent

of supply of milk by non-members also.

The

assessee-societies

are

federal

milk

societies

and

its

members

are

primary

milk

co-operative

societies

and the business

the

assessee

is to purchase milk from its members and

other

producers of milk at the rate i.e.

similar

to both the members and outside milk producers and

sell

the milk to various parties.

The difference

purchase price and sale price after the normal

expenses

is the profit of the assessee- societies

which

liable to tax.

This profit in turn

distributed to the member primary milk Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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co-operative societies.

The

rate of purchase price is fixed

the

board

the assessee-societies.

The

purchase

price

linked to the fat content of

milk

and

also varies according to seasons like the rate for

purchase of milk in the lean season is different

from the flush season.

The respondents fixes the rate of

processing

milk at the beginning of the year on the basis

the

price

declared

the

Government

Maharashtra

and

price which other buyers pay

the vendors.

These rates are revised from time to

time.

It is made always clear that the rates are

provisional

the

final milk

rate

difference

which

determined in the month of March

every

year

and paid subsequently in the following year.

ascertained and verified that the

primary

milk

society also in turn makes payment of

final

rate

difference to the individual milk

producers

around

Diwali.

The respondents are apex district

societies

of primary milk societies;

Individual Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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milk

producers

are

members

these

primary

societies.

Individual

producers supply milk

the primary milk co-operative milk societies.

The

milk

collected is brought to

the

processing

unit

of the assessee societyand payment to member

cooperative

socties/non-member

cooperative

societies

is made on the basis of quality of

fat

and

SNF

content.

Milk

also

supplied

non-members

the primary milk societies.

The

processed

milk

supplied to the

Mahananda

i.e.Maharashtra

Rajya

Co-op Dudh Sangh, a

state

milk

federation.

The assessee before the end

the

financial year depended on its books, makes a

final

rate difference to the primary society

who

in turn pay the difference to members and

non-members who supply milk.

The learned A.O.

refused to exclude the final

rate difference paid from the total amount paid by

the respondents on the ground that :

(a)

It was not linked to the quality

the

milk

like fat content or source

milk,

quality

of milk, period

milk

procurement.

(b)

It was paid only to member societies

and not to other suppliers;

(c)

It was not linked to the price

paid

government

other

cooperative

societies; Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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(d) It was made on the basis of the

accrued profits of the year and hence the

amounted to distribution of profits;

Against the order of the A.O.

an appeal

was

preferred

by the assessee.

The C.I.T.

(Appeals)

affirmed the claim of the assessee that the prices

fixed

provisionally

were not found supported

any

documentary evidence.

The C.I.T.

(Appeals)

also

observed that the assessee’s arguments

that

such

payment

are made to keep an edge

over

its

competitors

and attract more and more members

supply

milk to the assessee is without any merit.

was

also

held that the

assessees

has

been

unable

establish that the final

market

rate

difference

was

paid at a fixed price

per

litre

irrespective

the quality of the milk fat

and

its

content.

The C.I.T.

(Appeals) substantially

agreed with the reasoning of the A.O. and

accordingly dismissed the appeal.

The assessees aggrieved preferred an appeal to

the

I.T.A.T.

in respect of the findings recorded

the A.O.

which we have reproduced earlier and

which is affirmed by the C.I.T.(Appeals), the

tribunal recorded as under : Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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(i)

The basic price itself was based

quality,

any

increase

basic

price

which

was provisional was

automatically

linked

with quality e.g.if price paid on

the

basis of fat and SNF content was X &

final rate difference of say 25

paise

increased

theprice as X+ 25 paise &Y +25

paise.

(ii)

The

supply

non-members

was

miniscule

and

that

too

only

for

two

years.

Therefore, non payment of

final

rate

difference

to outsiders

does

not

convert

the

payments

members

respect

milk

appropriation

profits.

Here, we may mention the

case

Solapur

District

Cooperative

Milk

Producers

and

Process

Union

Ltd,

finding has been recorded that payment is

made to members as well as non-members.

(iii) The government only fixes minimum

price to be paid. The board has

authority under bye laws to fix the

price of the milk purchased from time to

time. In view of the cooperative

principles, assessee tend to pass on the

maximum price to its member societies.

Similar situation was obtaining in

Mehsana Districts case 282 ITR 24 wherein

Gujrat High Court has answered similar

issue in favour of the assessee.

(iv)

The

resolution to pay

final

rate

difference

were

always

passed

the

month

March every year i.e.

before

the

end

of previous year and

only

the

resolution

to disburse the amounts

were

passed

after

the

year

end.

Rate

difference

was paid only on the basis of

quantity of milk supplied during year not

proportion

of shareholding so as

amount

to distribution of profits.

The

dates

on which the resolutions is to pay

the

final

milk

rate

difference

are

recorded

before the end of the year.

accordingly

allowed

the

appeal

and

allowed deductions of final rate.

At the hearing of these appeals, on behalf of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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the revenue, learned counsel submits that there is

material

record to show that the

final

rate

difference

was

paid

after accrual

the

net

profits

and

out

the

net

profits.

The

transactions

which were recorded and noted during

the

course

of survey shows that the

final

milk

rate

difference

was

paid after accrual

net

profit

and payment of final milk rate

difference

was not included in the total per litre production

cost

of milk.

This was corroborated

the

statement

recorded of the Finance Manager of

the

society.

It is also set out that the

resolution

final

rate

difference in the same

case

was

passed

after

expiry

of the

relevant

financial

year.

There

was

legal

obligation

the

assessee

society

to make payment of

final

rate

difference

to member cooperative societies.

Our

attention

drawn

the

fact

that

the

C.I.T.(Appeals)

has

recorded a finding

that

some

cases the assessee paid commercial

purchase

price

by even excluding the amount of final

rate

difference

milk producers as compared by

the

purchase

price

milk to government

and

some

other cooperative societies.

It is submitted that

there

is also a finding of C.I.T.(Appeals),

that

some

cases the apex societies purchased

milk Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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under

consideration at a fixed purchase price and

not at provisional price. For these reasons, the

appeals ought to be dismissed.

The entire argument sought to be advanced

behalf of the revenue is that what in fact is paid

the milk suppliers whether they be members

non-members

is out of the profits of the society;

The

resolution

to pay may be passed

before

the

accounts are approved, but nevertheless, it is out

profits.

That being the case the order of the

A.O.

affirmed

the

C.I.T.(Appeals)

was

justified.

Apart from supporting the order of the

ITAT,

it is also submitted, that the profits were

arrived

at after debiting the expenditure by

way

market

rate

difference

and

there

was

allocation of the profits and this fact has

remained uncontroverted.

In the case of C.I.T.

vs Shri Sarvaraya Sugars C.I.T.

vs Shri Sarvaraya Sugars C.I.T.

vs Shri Sarvaraya Sugars

Ltd, Ltd, Ltd,

(1987) 163 ITR 429 and Addl.C.I.T.Kanpur

(1987) 163 ITR 429 and Addl.C.I.T.Kanpur

(1987) 163 ITR 429 and Addl.C.I.T.Kanpur

MP MP MP

Sugar Mills (P) Ltd (1984) 148 ITR 203,

Sugar Mills (P) Ltd (1984) 148 ITR 203,

Sugar Mills (P) Ltd (1984) 148 ITR 203, it has

been

held that the liability for additional price

sugar cane under price linking formula in

the

year

the

sugarcane

is purchased and

arises

receipt of goods and additional price paid relates Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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back to such receipts.

If this test is applied to

the assessee’s case, it would be squarely covered.

Payment

is made not in proportion to shareholding

but,

based

quality

milk

and

quantity

supplied.

The tribunal has further held that " If

in the final accounts certain amounts are taken as

liability for purchase of goods, quantified on the

basis of quality or quantity of goods purchased

then it cannot be said that the payment amounts

to appropriation of profits.

10.

Is the price difference paid out of the

profits

Firstly,

the

profits

have

ascertained.

If there be profits they attract tax

that

point

time.

The

word

’profit

observed

Lord Chancellor Halsbury in

Greshem

Life Assurance Society of Styles (1982) A.C.309 is

to be understood in its natural and proper sense -

sense

which no

commercial

man

would

misunderstand.

When

an individual or a

company

has

in that proper sense ascertained what are the

profits

of his business or trade the

destination

profits

charged on those profits by

previous

agreements

otherwise

immaterial.

The

profits

are

determined

considering

two

points

time and they can be

determined

only Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

-10-

after

all expenses incurred for the business

are

deducted

from

the gross income.

As held by

the

Supreme

Court

CIT vs Travancore

Sugars

and CIT vs Travancore

Sugars

and CIT vs Travancore

Sugars

and

Chemicals Chemicals Chemicals

Ltd

(1973) 88 ITR

Ltd

(1973) 88 ITR

Ltd

(1973) 88 ITR the amount

paid

reference

to profit can either be that, - (i)

paid

after the profits become

deductible

(ii)

the

amount

payable

prior

such

distribution

computed

reference

notional

profits or what in certain cases

termed

approved net profits.

In the first

instance,

will

distributed out of profits

and

not

deductible in computation of profits as

expenditure.

10.

Section

64 of the

Maharashtra

Cooperative

Societies

Act, 1960 (M.C.S.Act) sets not that

part

the

funds

other

than

the

dividend

equalisation or bonus equalisation funds as may be

prescribed or the net profits of the society shall

paid by way of bonus or dividend or

otherwise

distributed

among its members.

Under section

the

society

shall construct its relevant

annual

financial

statements and arrive at its consequent

net

profit or loss in the manner prescribed.

The

proviso explains that no part of the profits shall

appropriated

except with the approval of

the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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annual

general meeting and in conformity with the

Act,

rules and bye-laws.

From a reading of

this

provision,

is apparent that the

net

profits

have

first to be determined and then only can

appropriated

after

the

approval of

the

annual

general

meeting.

The net profits do not

accrue

from day to day or from month to month and profits

have to be ascertained by comparison at two stated

points

of time.

The assessee when it decided

pass

a resolution to pay the price difference had

not

ascertained

the

net

profits

nor

was

resolution passed at its A.G.M.

to distribute the

profits

as by way of higher price difference.

the

instant case, admittedly the decision to

pay

the

additional

purchase price was based

the

resolution of the Board of Directors, approved at

the general meeting.

advanced what emerges is as under :

That the price difference paid in the

case

of Kolhapur society to its

members

and

case of Solapur society to

both

members and non-members ;

Payment

is made only to members

who

are suppliers; Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

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3) Payment is made to suppliers not on

the basis of the shares held by them but,

on the amounts of the milk supplied and

on the basis of the fat content of the

milk ;

4) The resolution to pay additional price

taken before the end of the financial

year i.e.

before the profits can be said

accrue though payment is made in

the

subsequent financial year;

and

The profits are only payable in terms

section

the

Maharashtra

Cooperative Societies Act, 1960.

12.

similar

question

had

come

for

consideration

before the Gujrat High Court.

The

Gujrat

High

Court

was considering

case

Commissioner Commissioner Commissioner

Income Tax vs Mehasena

District

Income Tax vs Mehasena

District

Income Tax vs Mehasena

District

Cooperative Cooperative Cooperative Milk Producers Union Ltd (2005) (195 )

Milk Producers Union Ltd (2005) (195 )

Milk Producers Union Ltd (2005) (195 )

CTR CTR CTR

385,

385,

385, as to whether a claim for deduction

was

allowable

either

under section 28 or section

(1).

There

also an additional payment was

made

towards

the

price

the

milk.

The

A.O.

disallowed

the

same

the

ground

profit

adjustment.

The

C.I.T.(Appeals)

affirmed

the

order

the

A.O.

The

tribunal

allowed

the

assessee’s claim. Various contentions were sought Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

-13-

canvassed before the learned

High

Court.

The

learned bench noted the legal position as

when

accrual

profits

can be

said

have

accrued.

considered the case of

C.I.T.

vs C.I.T.

vs C.I.T.

Ashokbhai Ashokbhai Ashokbhai

Chimanbhai

(1965) 56 ITR 42

(SC)

Chimanbhai

(1965) 56 ITR 42

(SC)

Chimanbhai

(1965) 56 ITR 42

(SC)

and

noted

that

the words "accrue" and "

arise"

are

used

contradistinguish

the

word

’receive’.

Income

is said to be received when it reaches the

assessee.

When

the right to receive the

income

becomes

vested

he assessee, it

said

accrue or arise. Dealing with profits, this is

what the learned Court said:

" Profits do not accrue from day to day

or even from month to month and have to

be ascertained by a comparison of assets

at two stated points. Unless the right

to profits comes into existence there is

no accrual of profits and the destination

of profits must be determined by the

title thereto on the day on which they

arise. "

Applying the test, the learned Court held that

because

the

board

resolved

fix

the

final

purchase

price

and

pay on the last day

the

accounting

period

would

not

amount

to Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

-14-

application of profits.

The Court also noted that

the

profits to be assessed have to be the "

real

profits " and are required to be determined on the

ordinary

principles

commercial

trading

and

commercial accounting. The Court further noted as

under :

The expenditure in question cannot be

termed

be application of

income

absence

of any evidence as to accrual of

profits

light

settled

legal

position;

(b) The payment of additional/final price

made

the last day of the

accounting

year is allowable under section 28 of the

Act

being

necessary

deduction

for

ascertaining

the

real

profits

principles of commercial accounting and ;

(c)

The

payment

question

alternatively

allowable under section 37

the

Act having been incurred

wholly

and

exclusively

for

the

purpose

business

carried

on by the assessee

light

of the evidence which has come

record ;

13.

Coming to our case, (as we have noted this is

not

the

case of distribution of profits) as

the

amount

paid was not out

the

profits

ascertained

at the annual general meeting.

It is

not paid to all shareholders.

The amount which is

the

subject matter is paid to members who

supply

milk

and

in some case also to non-members.

The

payment

is for the quantity of milk supplied

and Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:50

-15-

terms of the quality supplied.

The commercial

expediency

for

payment

of this

price

are

the

market

conditions,

and the need to procure

more

milk

from

the

members and

non-members

the

assessee.

To our mind, therefore, the amount paid

stretch of imagination can be said

dividend to the members or shareholders or payment

in the form of bonus as bonus also has to be paid

from the accrued profits.

14.

the light of our discussion, we

are

agreement with the views taken by the tribunal and

the

question at present has to be answered in the

affirmative in favour of assessee and against the

the revenue. Appeals dismissed.

{ R.S.Mohite, J } R.S.Mohite, J } R.S.Mohite, J }

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