AJMER SAHKARI UPBHOKTA WHOLESALE BHANDAR LTD.,AJMER vs. ITO, AJMER

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES (SMC), JAIPUR Jh fot; iky jko] U;kf;d lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JUDICIAL MEMBER vk;dj vihy la-@ITA No. 989, 990,991 & 992/JP/2016 fu/kZkj.k o"kZ@Assessment Year : 2009-10, 2010-11,2011-12 & 2013-14 cuke Ajmer Sahkari Upbhokta Income Tax Officer, Vs. Wholesale Bhandar Ltd. Ward 1(2), Apna Bazar, Parao, Ajmer. Ajmer. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAAAA0383R vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri G.C. Jain (Adv.) jktLo dh vksj ls@ Revenue by : Smt. Poonam Rai (D.CIT) lquokbZ dh rkjh[k@ Date of Hearing : 29/11/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 30/11/2017 vkns'k@ ORDER

PER: VIJAY PAL RAO, J.M. These four appeals by the assessee are directed against for four separate orders of ld. CIT(A), Ajmer dated 24.08.2016 for the A.Y. 2009- 10, 2010-11, 2011-12 & 2013-14 respectively. 2. There is delay of 06 days in filing of all four appeals. The assessee has filed a petition for condonation of delay and which is supported by an affidavit. The assessee has also filed the affidavit of the counsels/

2 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

representatives to explain the delay in filing the appeal. I have heard the

ld. AR as well as ld. DR on the condonation of delay of 6 days in filing the

appeals. The assessee has explained that due to non availability of the

consultant who was busy in time barrowing audit work and because of the

busy scheduled the appeals could not be filed within the period of

limitation. Hence, there is a delay of 6 days caused due to engaging the

other consultant for preparing and filing of the appeal. This reason of

delay has been supported by the affidavits of the assessee signed by its

General Manager as well as the affidavit of the representative. Having

considered the rival submissions and careful perusal of affidavits filed by

the assessee I am satisfied that the assessee was having reasonable

caused for not filing the appeals within the period of limitation.

Accordingly, the delay of 6 days in filing these appeals is condoned.

The assessee has raised the common grounds in these appeal. The ground

for the A.Y. 2009-10 reads as under:-

“1. The learned Commissioner of Income Tax (Appeals) grossly erred-in-law and on facts in confirming disallowance of Rs. 5,67,425.00/-, in respect of contribution to reserve fund, made by the Income Tax Officer, Ward 1(2), Ajmer. 2. The learned Commissioner of Income Tax (Appeals) grossly erred-in-law and on facts in confirming disallowance of Rs. 23030.00/-, in respect of deduction under section 24(a). 3. The order confirmed by the learned Commissioner of Income Tax (Appeals) is bad-in- law, based on surmises & conjectures, arbitrary

3 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

& capricious, injudicious, against the settled principles of law, as such the same deserved to be amended.”

and to rectify the said mistake the assessee filed an affidavit in which clarified that the date written in the verification as 05th November, 2015 is actually 5th November, 2016 and due to typographical mistake which was wrongly mentioned as 5th November, 2015. Having regard to the

facts and circumstances of the case, it is apparent that this mistake in the date of verification is a typographical mistake and written as 5th November, 2015 instead of 5th November, 2016. It mistake is otherwise apparent

because the orders of the ld. CIT(A) are dated 24.08.2016 and therefore, it is impossible to verify the appeals on 5th Novermber, 2015. Thus, the

explanation and rectification of the assessee vide affidavit dated

23.10.2017 is accepted.

General reserve fund. The assessee is a Cooperative Societies registered

under the Rajasthan Cooperative Societies Act, 2001. During the

assessment year, the AO noted that the assessee has debited an amount

of Rs. 5,67,425/- for the A.Y. 2009-10 in the profit and loss account being

reserve fund. The similar amounts though the quantum varies were found debited in the profit and loss account under the head reserve fund. The

4 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

AO asked the assessee to explain how the reserve fund can be allowed to

be debated in the profit and loss account. The assessee explain that as per

section 48 of the Cooperative Societies Act, 2001, the society is required

to transfer minimum 25% of profit to reserve fund being created. Thus,

the assessee contended that since it is requirement of the statute and not

in the control of the assessee, therefore, the said transfer of 25% of the

profit to the reserve fund is allowable deduction. The AO did not accept

this contention of the assessee and given the reasons that the assessee do

not fall in any of the specified entities Under section 36(1)(viii) of the Act

and therefore, the amount transfer to the reserve fund is not an allowable

deduction. The AO has further observed that on the basis of the status

being a consumer Cooperative Societies the assessee has already claimed

deduction of Rs. 1,00,000/- U/s 80P (2) (c) (i) of the Act which was

allowed. Hence, the Assessing Officer disallowed the claim of the assessee

for all these four years. On appeal, the assessee has reiterated its

contention and also relied upon the decision of Hon’ble MP High in case of

Keshkal Cooperative Marketing Society Ltd. vs. Commissioner of Income

165 ITR 437 (MP). The ld. CIT(A) was not imxpressed with the argument

of the assessee and confirmed the disallowance made by the AO on the

ground that it is an appropriation of profit and not expenditure and

therefore, the same is not allowable claim.

5 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

as per the provisions of section 48 r.w.r. 69 of Rajasthan Cooperative

Societies Act the assessee’s society is required to transfer a sum

equivalent to 25% of profit to the reserve fund which is at the disposal of

Registrar of Cooperative Societies and not in the control of the assessee

cooperative society. Therefore, the amounts transfer to reserve fund for

these four years are in the nature of charge to the profit of the assessee

as not available with the assessee to use as per the discretion of the

assessee Cooperative Society. Further, these funds were then the transfer

to the bank FDRs and all these records have been produced before the

authorities below to show that the fund transfer to the reserve fund is

beyond the control of the assessee’s society and therefore, the same

ceased to remain with the assesee. The assessee cannot withdraw the said

fund without prior permission of Registrar of Cooperative Societies and for

specific purpose. Thus, the 25% of the profit to the reserve fund account

does not really become the income of the society in the sense in which the

income is understood. The amount transferred to the reserve fund created

under statutory regulation at the instance of the Registrar Cooperative

Societies is an amount diverted at source by overriding charge created

under the Act. Therefore, it is statutory obligation of the society and the

same is liable to deduction in view decision of Hon’ble MP High Court in

6 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

case of Keshkal Cooperative Marketing Society Ltd. vs. Commissioner of

Income 165 ITR 437. The AR has also relied upon the following decisions:- • CIT vs. Pandavapura Sahakara Sakkare Kharkane Ltd. 198 ITR 690

(Kar). • CIT vs. Pandavapura Sahakara Sakkare Kharkane Ltd. 174 ITR 475. • Cochin State Power and Light Corporation ltd. vs. CIT 97 ITR

(Bombay). • CIT Vs. Darbhanga laheriasarai Electric Supply Corporation Ltd. 169

ITR (Patna)

specifically allowed the deduction in the nature of transfer of reserve fund

u/s 36(1)(viii) then the assessee undisputedly not following in the specified

entities as per the said provision is not illegible for any deduction on

account of transfer of the amount to the reserve fund. The ld. DR has

further contended that it is in fact appropriation of profit and not an

expenditure for earning the profit, therefore, this claim of the assessee is

not allowable. Alternatively the ld. DR has submitted that even as per the

provision of section 48 of Rajasthan Cooperative Societies Act what is to

be transferred in the reserve fund is 25% of net profit and not 25% of

gross profit as claimed by the assessee. The ld. DR has further contended

that as per the details filed by the assessee regarding the transfer of the

7 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

amount to the reserve fund and then to the bank FDRs the assessee has

withdrawn various amounts from the FDRS account and therefore, this

claim of the assessee is contrary to the record that once the transfer to the

general reserve is beyond the control of the assessee. The ld. DR has

referred to page nos. 10, 15 & 17 of the paper book and submitted that

the assessee has withdrawn a sum of Rs. 65,00,000/- from the fixed

deposit account during the month of May, 2010 and further Rs.

20,00,000/- in the month of September, 2014. Similarly a sum of Rs.

4,02,799/- was withdrawn in the month of March, 2013. Thus, the ld. DR

has pointed out that there are various withdrawals by the assessee from

the reserve fund/ FDRs account. The ld. DR has submitted that even the

assessee has not complied with the provisions of Rajasthan Cooperative

Societies Act and therefore, the claim is not allowable.

from the provisions of Rajasthan Cooperative Societies Act, the bye- laws

of the assessee also require a transfer of 25% of the profit to reserve

fund. He has further submitted that the amount transferred to reserve

fund is equivalent to 25% of the net profit. The ld. AR has further

submitted that the withdrawal from the fixed deposit account is not from

the amount which relates to the reserve fund but it was the fixed deposit

8 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

made by the assessee over and above the amount transferred to the

reserve fund.

material on record it is noted that as per section 48(1) of the Rajasthan

Cooperative Societies Act, 2001, the Cooperative Society is required to

transfer 25% of the profit to the reserve fund within such period as may

be prescribed. For ready reference section 48 of Rajasthan Cooperative

Societies Act, 2001 is reproduced as under:-

“Section 48 (1) A cooperative society shall, out of its net profit and within such period as may be prescribed: a) transfer to the reserve fund, such twenty five percent of its profits and within such period as may be prescribed; b) credit one portion of the profits, as may be prescribed to the cooperative education and training fund constituted under the rules; c) credit such portion of the profits as may be prescribed in the bye- laws, in the fund created under bye-laws to meet out the losses, if any , and d) Pay dividend to members on their paid up share capital at such rate, as may be prescribed; (2) the balance of the net profit may be utilized for all or any of the following purposes namely: a) payment of incentive to member…. b) constitution of, or contribution to, such special fund as may be specified in the bye-laws; c) donations of amount not exceeding 10% of the net profit d) payment of bonus to employees.”

9 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

Therefore, it is statutory provision which contemplates the transfer of 25%

profit of the Cooperative Societies to the reserve fund. However, neither

the AO nor ld. CIT(A) has proceeded to examine the provisions of

Rajasthan Cooperative Societies Act, 2001 requiring the assessee to

transfer the profit equivalent 25% to the reserve fund. Further, the

correntness of the quantum as claimed by the assessee and also the

deposit in the FDRs as well as withdrawal of the amount has not been

examined and verified by the authorities below.

required under the statute the issue has been considered by the Hon’ble

MP High Court in case of Keshkal Cooperative Marketing Society Ltd. vs.

Commissioner of Income (supra) in paras 11 to 16 is as under:- “11. It is settled law that in order to claim deductible amount from the income, it must fulfill two essential conditions, viz., ( i)that the amount must be laid out wholly and exclusively for the purpose of the business, and (ii)that it should not be expenses of capital nature. Both these conditions must be complied with before the assessee claims deduction from the income. In the instant case, as stated aforesaid, the said amount of Rs. 1,66,763 does not comprise income of the assessee on account of its being diverted under the statutory provisions of section 43(2), then certainly, in our opinion, the assessee can claim deduction under section 37(1) which reads as under : "(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or

10 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'." 12. The view taken in Poona Electric Supply Co. Ltd.'s case (supra) was followed by the Bombay High Court in Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334 and reiterated by the Supreme Court in CIT v. Travancore Sugars & Chemicals Ltd. [1973] 88 ITR 1. Further, in CIT v. Bombay State Road Transport Corpn. [1977] 106 ITR 303 (Bom.), it has been held that the contributions made under a legal obligation cast upon a statutory organization under a statutory provision, the sum will have to be allowed as deduction in computing its profits. 13. Therefore, in the instant case also, the deduction as claimed by the assessee-society amounting to Rs. 1,66,763 is allowable deduction, as the said amount does not comprise income of the assessee because the same having been diverted under the provisions of section 43(2) and can only be invested or utilised in such manner and on such terms and conditions as may be laid down by the Registrar in this behalf, as required under clause (2) of section 44. As such the said amount is not available for the use of the assessee-society at its option. Therefore, the real test for such deductible sum is that if by making statutory deposits, the assessee loses control over the said amount, being not available for its use, then such amount is certainly deductible from the income as con templated under sections 36 and 37. 14. On behalf of the revenue, Shri B.K. Rawat, the learned counsel, relying upon the decision of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), argued that the said amount is not liable to deduction. In Vazir Sultan Tobacco Co. Ltd.'s case (supra) , the main question raised was whether amounts retained or apportioned or set apart by the concerned assessee-company by way of making provisions (a) for taxation, (b) for retirement gratuity, and (c) for proposed dividends from out of profits and other surplus, could be considered as 'other reserves' within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 for inclusion in the capital computation of the company for the purpose of levying super

11 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO

tax. Their Lordships of the Supreme Court remanded Vazir Sultan Tobacco Co. Ltd.'s case (supra) as was found that there was no sufficient material on record regarding whether the appropriation made by the Vazir Sultan Tobacco Co. towards gratuity reserve was based on any actuarial valuation of whether it was appropriation of an ad hoc amount. Such is not the position in the instant case wherein section 43(2)(a) specially speaks of 'transfer of an amount not less than 25 per cent of such profits to the reserve fund' and according to section 44(2) the said amount is not available for the use of the assessee and thus the facts of Vazir Sultan Tobacco Co. Ltd.'s case (supra) referred to by the revenue, are quite distinguishable from the facts of the instant case, hence, of no avail to the revenue. 15. From the discussion aforesaid, our answer to question No. 2 is in the affirmative, in favour of the assessee that the amount required to be transferred to the reserve fund under the statutory provisions, is liable to be deducted as business expenditure. 16. We, therefore, answer the questions of law referred to us thus : Question No. 1 is answered in favour of the revenue that under the facts and circumstances of the case the activity of purchasing paddy from the members, milling it and selling the same did not amount to the marketing of the agricultural produce of the members as contemplated under section 80P(2)(a)(iii ) of the Income-tax Act, 1961. Question No. 2 is answered in favour of the assessee that under the facts and circumstances of the case the amount of Rs. 1,66,763 required to be transferred to the reserve fund under section 43(2) of the Societies Act was an allowable deduction either as a business expenditure or having been diverted by an overriding title. There will be no order as to costs in this reference.” Therefore, on principles this issue is covered by the decision of the Hon’ble

MP High Court in case of Keshkal Cooperative Marketing Society Ltd. vs.

12 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO Commissioner of Income (supra). No contrary precedent has been brought

to the notice of the Tribunal. Accordingly by following the decision of the

Hon’ble MP High Court the AO is directed the allowed the claim of the

assessee subject to the verification of the quantum being 25% of net profit

and further to verify whether the assessee has complied with the

provisions of Rajasthan Cooperative Societies Act or not by considering the

withdrawal from the said amount transfer to the reserve fund and then to

FDR. Needless to say while verifying the factual details the AO to give

opportunity to the assessee.

In the result, the appeals of the assessee are partly allowed.

Order pronounced in the open court on 30/11/2017.

Sd/- ¼ fot; iky jko ½ (VIJAY PAL RAO) U;kf;d lnL; @Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 30 /11/2017 *Santosh आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- Ajmer Sahkari Upbhokta Wholesale 1. Bhandar Ltd. Apna Bazar, Parao, Ajmer. izR;Fkh@ The Respondent- The ITO, Ward 1(2), Ajmer. 2. vk;dj vk;qDr@ CIT 3. vk;dj vk;qDr¼vihy½@The CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5.

13 ITA 989 to 992/JP/16_ Ajmer Sahkari Upbhokta Wholesale Bhandar Ltd. Vs. ITO xkMZ QkbZy@ Guard File (ITA No. 989 to 992/JP/16) 6.

vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत