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

PER S. BALAKRISHNAN, Accountant Member :

The captioned two appeals are filed by the Revenue against the

orders of the Ld. Commissioner of Income Tax (Appeals)-3,

Visakhapatnam in appeal No.1248/2013-14/CIT(A)-3/VSP/2020-

21, dated 7/10/2020 [ITA No. 243/Viz/2020] and appeal No.

654/2014-15/CIT(A)-3/VSP/2020-21, dated 7/10/2020 [ITA No.

244/Viz/2020] arising out of the orders passed U/s. 143(3) of the

Income Tax Act, 1961 [the Act] for the AYs 2011-12 and 2012-13.

The assessee has raised Cross Objections for the AY 2011-12 and

2012-13. Since the issues involved in both the appeals of the

Revenue are identical, these appeals are clubbed, heard together

and disposed off in this consolidated order.

grounds of appeal and therefore, for the sake of convenience, we

shall first take up the ITA No. 244/Viz/2020, AY 2012-13 as a lead

appeal.

3 ITA No. 244/Viz/2020 (AY 2012-13)

Ld. CIT(A)-3, Visakhapatnam.

its return of income for the AY 2012-13 admitting a total income

of Rs. 90,39,400/-. The assessee is a Producer Company as

defined U/s. 581E of the Companies Act, 1956 and is in the

business of procuring milk from farmers through Cooperative

Societies which are situated in the villages of North Costal

Districts of Andhra Pradesh viz., Srikakulam, Vizianagaram,

Visakhapatnam, East Godavari and West Godavari. The case was

selected for scrutiny and statutory notices U/s. 143(2) and 142(1)

of the Act were issued and served on the assessee along with the

detailed questionnaire calling for various details in connection

with the scrutiny proceedings. In response to the notices, the

Authorized Representative of the assessee-company appeared

from time to time and furnished the information called for during

the course of scrutiny proceedings. The Ld. AO, on examination

of the submissions made by the Ld. AR found that the assessee

debited an expenditure of Rs. 1,65,72,145/- towards “limited

4 return on share capital” which is calculated at 1% of share

capital of Rs. 165,72,14,500/-. The assessee has disclosed this

expenditure under Finance Costs. The Ld. AO also observed that

the said expenditure has not been claimed in earlier years and

has been claimed during the impugned assessment year only.

The Ld. AO then required the assessee to furnish the explanation

regard the allowability of the said expenditure. The assessee in

its letter dated 9/2/2015 has furnished the explanation citing

the provisions of Companies Act, 1956 are applicable to the

Producer Companies. The assessee further submitted that as per

the provisions of section 581E of the Companies Act, 1956, and

duly authorized by the Articles of Association the members may

receive limited return on the share capital contributed by the

Members. The Ld. AR further submitted that this is a charge to

the P & L Account and the amounts have been paid by way of

limited return to the Members of the company are to be from the

profits of the company. Therefore, the said expenditure is

considered as Finance Cost in the P & L Account and claimed as

expenditure. The Ld. AO rejecting the explanation of the

assessee disallowed and added back Rs. 1,65,72,145/- to the

total income of the assessee. Further, on verification of the

submissions, the Ld. AO also noticed that the assessee company

5 has debited an amount of Rs. 146,06,81,638/- to the P & L

Account towards withheld price against the procurement of milk

and kept the said amount as a liability in the balance sheet. It

was explained to the AO that the withheld price is over and above

the price paid to the suppliers of milk against milk procured from

them. The Ld. AO required the assessee to furnish the details for

allowability of the said expenditure. In response, the assessee’s

Representative in his written submissions dated 9/2/2015

submitted the reply to the Ld. AO stating that the milk producers

were paid every fortnight as per the adhoc price decided by the

Board of Management from time to time subject to the final price

fixed by the General Body on the recommendation of final price

made by the Board of Management. Therefore, the differential

price of Rs. 146,06,81,638/- was paid on 31/3/2012 to the milk

producers. It was also submitted before the Ld. AO that the

Articles of Association as well as the Companies Act, 1956

empowers the assessee-company to pay additional price /

withheld price to the suppliers of milk as per the following

calculation:

The differential price / withheld price for the year Rs. 146,06,81,638/- Less: Amount transferred to MP & EEH & MW Rs. 15,00,00,315/- Trust as per the resolution passed in the general body meeting

6 Balance paid to Societies directly Rs. 131,06,81,323/-

Further, it was also explained to the Ld. AO that donation was

given to Employee’s Educational Health and Medical Welfare

Trust (MPEEH & MW) in which all the Members of the assessee-

company are members and beneficiaries of the Trust. The Ld. AO

observed that the Revenue is in appeal before the ITAT on similar

issue for the earlier assessment year. The Ld. AO further

observed that out of the withheld price of Rs. 146,06,81,638/-,

the assessee has paid Rs. 15,00,00,315/- to the Trust and paid

the balance amount of Rs. 131,06,81,323/- to the suppliers of

the milk after the close of the financial year. Therefore, the Ld.

AO disallowed a sum of Rs. 15,00,00,315/- which represents the

part of the withheld price not paid to the suppliers but was paid

as donation to the MPEEH & MW Trust thereby disallowed the

same. Further, the Ld. AO also noted that the assessee has

purchased Pedestal Fans for Rs. 12 lakhs and woolen shawls of

Rs. 2,90,000/- aggregating to Rs. 14,90,000/- and included the

same in the General Body Meeting expenses. The Ld. AO

disallowed the said expenditure as it is not related to the

business of the assessee. Aggrieved by the above additions, the

assessee filed an appeal before the Ld. CIT(A).

submissions and the provisions of the Companies Act, 1956 and

allowed the appeal of the assessee. Aggrieved by the order of the

Ld. CIT (A), the Revenue is in appeal before us by raising the

following grounds of appeal:

“1. The Ld. CIT(A) erred in deleting the addition towards limited return on share capital when the limited return on share capital needs to be given out of reserves and cannot be debited to P & L Account as expenditure. 2. The Ld.CIT(A) erred in deleting the addition towards limited return on share capital stating that it is legitimate business expenditure when the same is not in the nature of expense / expenditure and is available to members only on the basis of available profits. 3. The Ld. CIT(A) erred in deleting the disallowance made by the AO towards withheld price / additional price wherein the same is only application of income as the company makes payment towards additional price / withheld price of milk procured out of profit and therefore, the same cannot be debited to P & L Account as an expense and not an allowable deduction. 4. The Ld.CIT(A) erred in deleting the disallowance made by the Ld. AO towards General Body expenses based on business expediency wherein distribution of gifts are not encouraged in AGM to curb cooperate misdoing and is against established practice of corporate governance. 5. Any other ground of appeal that may arise at the time of hearing.”

on share capital at 1% on the share capital amount paid to the

farmers is identical to the dividends and cannot be a charge to

the P & L Account. The Ld. DR further submitted that it cannot

8 be construed as a Finance Cost as claimed by the assessee. The

Ld. DR also further submitted that the limited return is an

appropriation of the profit and it cannot be claimed as interest.

The Ld. DR relied on the following case laws:

(i) Krishak Bharati Cooperative Ltd vs. CIT [2014] 45 taxmann.com 437 (Delhi); (ii) Commissioner of Income Tax-IV, Ahmedabad vs. Shree Rama Multi Tech Ltd [2018] 403 ITR 426 (SC); (iii) Commissioner of Income Tax, Bangalore vs. GMR Industries Ltd [2020] 122 taxmann.com 8 (Karnataka)

The Ld. DR therefore pleaded that the order of the Ld. AO be

upheld.

submitted that the assessee-company is a special category

company under the Companies Act and is covered by the Part-IXA

of the Companies Act, 1956. The Ld. AR referred to the

provisions of section 581E(3) of the Companies Act, 1956 and

stated that as per these provisions, the limited return has been

paid to the Members of the assessee-company. The Ld. AR

further submitted that the above provision of the Companies Act,

1956 operate on cooperative principles. It was further submitted

that this section of the Companies Act, 1956 refers to Members

and not as shareholders. The Ld. AR vehemently argued that the

9 limited return on the share capital is a charge to the P & L

account as per the provisions of the Companies Act, 1956.

Countering the arguments of the Ld. AR, the Ld. DR referred to

the provisions of the Companies Act, 1956 available U/s. 581A(c)

wherein the term “limited return” is defined as follows:

““Limited return” means the maximum dividend as may be specified by the articles.”

The Ld. DR therefore pleaded that since it is treated as dividend

as per the definition of section 581A of the Companies Act, 1956,

it cannot be termed as a charge to the P & L Account and claimed

as an expenditure in the P & L Account.

submissions of the Ld. AR and the orders of the Ld. Revenue

Authorities. Admittedly, the Board of Management of the

Producer Company (assessee-company) has authorized payment

of 1% limited return on the share capital to its Members which

was as per the Articles of Association of the assessee-company.

It is pertinent here to refer to section 581E of the Companies Act,

1956 which is extracted herein below for reference:

“581E. (1) Subject to provisions made in articles, every Member shall initially receive only such value for the produce or products pooled and supplied as the Board of Producer Company may determine, and the withheld price may be disbursed later in cash or in kind or by allotment of

10 equity shares, in proportion to the produce supplied to the Producer Company during the financial year to such extent and in such manner and subject to such conditions as may be decided by the Board. (2) Every Member shall, on the share capital contributed, receive only a limited return: Provided that every such Member may be allotted bonus shares in accordance with the provisions contained in section 581ZJ. (3) The surplus if any, remaining after making provision for payment of limited return and reserves referred to in section 581ZI, may be disbursed as patronage bonus, amongst the Members, in proportion to their participation in the business of the Producer Company, either in cash or by way of allotment of equity shares, or both, as may be decided by the Members at the general meeting.”

As per the above provisions, subsection-2 authorizes the Producer

Company to make the provisions of limited return to every member on

the share capital contributed. Further, it is also required to extract

section 581A(c) of the Companies Act, 1956 for the sake of brevity

wherein the term “limited return” has been defined.

“581A(c) "limited return" means the maximum dividend as may be specified by the articles;”

From the plain reading of the above definition, we are of the considered

view that the limited return is nothing but a maximum dividend payable

/ paid to the Members of the Producer Company as authorized by the

Articles of Association and hence it cannot be considered as an

expenditure and claimed as expenditure. It is not a charge to the P & L

Account but only an appropriation of the profit and hence the Ld. AO has

11 rightly disallowed the same. We therefore allow the Grounds No. 1 & 2

raised by the Revenue.

With respect to Ground No.3, the Ld. DR relied on the order of the 9.

Ld. AO. Per contra, the Ld. AR submitted that this is has already been

covered in the assessee’s own case for the AY 2010-11 by the Coordinate

Bench decision in ITA No. 288/Viz/2014 (AY: 2010-11), dated

27/09/2017. He therefore pleaded that the order of the Ld. CIT(A) be

upheld. Countering the arguments of the Ld. AR, the Ld. DR submitted

that the Revenue has filed an appeal before the Hon’ble High Court of

Andhra Pradesh against the order of the Coordinate Bench of the

Tribunal referred by the Ld. AR and the case is pending before the

Hon’ble High Court of Andhra Pradesh. The Ld. DR therefore pleaded

that subject to the decision of the Hon’ble High Court of Andhra Pradesh,

this issue may be decided.

on record and the orders of the Ld. Revenue Authorities on this issue.

We find that the assessee-company has paid withheld price to the milk

suppliers even in the earlier assessment years and the same was allowed

by the Ld. AO. The Coordinate Bench of the Tribunal in the assessee’s

own case for the AY 2010-11 (supra) has allowed the appeal of the

12 assessee thereby directed the Ld. AO to delete the addition of payment of

withheld price made to the milk producers. However, as pointed out by

the Ld. DR, the Revenue is in appeal before the Hon’ble High Court of

Andhra Pradesh contesting the order of the ITAT. In this connection, we

hereby direct the Ld. AO to decide this issue based on the outcome of the

decision of the Hon’ble High Court of Andhra Pradesh, in order to avoid

multiplicity of litigation. Accordingly, this ground raised by the Revenue

is disposed off for statistical purposes.

expenditure incurred during the General Body meeting by way of

payment of gifts to the Members of the Producer Company, the Ld. DR

relied on the of the Ld. AO.

Per contra, the Ld. AR submitted that due to heavy competition

from other milk producers, the assessee-company in order to retain its

milk producers / suppliers has paid certain gifts amounting to Rs.

14,90,000/- during the Annual General Meeting. It was further

submitted that these expenditure was incurred only to the suppliers and

it can be considered as a business promotion expenditure. It was also

further submitted in order to retain the Members / milk producers, the

assessee-company has incurred these expenditure which is purely in the

13 nature of business promotion. He therefore pleaded that the order of the

Ld. CIT(A) be upheld.

available on record. Admittedly these amounts of gifts were distributed

at the time of AGM which is being gifted to the milk producers who were

also Members of the assessee-company. We also find that these gifts are

made to the Members who were also suppliers of milk and are also

shareholders of the assessee-company. Hence we are of the considered

view that these expendituresare in the nature of business promotion

expenditure which shall be allowed as deduction U/s. 37 of the Act. We

therefore find no infirmity in the order of the Ld. CIT(A) on this ground

and hence no interference is required. Thus, the Ground No.4 raised by

the Revenue is dismissed.

purposes.

ITA NO. 243/Viz/2020 (AY: 2011-12)

CIT(A)-3, Visakhapatnam.

“1. The Ld. CIT(A) erred in deleting the disallowance made by the Ld. AO towards general body expenses based on business expediency wherein distribution of gifts are not encouraged in AGM to curb corporate misdoing and is against established practice of corporate governance. 2. The Ld. CIT(A) erred in deleting the disallowance made by the Ld. AO towards withheld price / additional price wherein the same is only application of income as the assessee company makes payment towards additional price / withheld price of milk procured out of profit and therefore the same cannot be debited to P & L Account as an expense and not an allowable deduction. 3. Any other ground of appeal that may arise at the time of hearing.”

appeal are identical to that of the Grounds No. 4 and 3 of the ITA

No. 244/Viz/2020, AY 2012-13 which is adjudicated herein

above. Since the grounds are identical, our decision given while

adjudicating the Grounds No.4 and 3 mutatis mutandis applies

to the Grounds No.1 & 2 of the Revenue’s Appeal in ITA No.

243/Viz/2020. Accordingly, Ground No.1 raised by the

Revenue is dismissed and Ground No.2 raised by the Revenue

is disposed off for statistical purposes. Ground No.3 is

general in nature and needs no adjudication.

statistical purposes.

CO Nos. 18 & 19/Viz/2023 (In I.T.A. No. 243 & 244/Viz/2020) (Assessment Year : 2011-12 & 2012-13)

assessee has raised the following grounds of Cross Objection for

the AY 2011-12:

“1. The Ld. CIT(A) is justified in deleting the addition of Rs. 11,12,844/- made by the Assessing Officer towards disallowance of expenditure incurred towards distribution of compliments at the Annual General Body Meeting. 2. The Ld. CIT(A) is justified in deleting the addition of Rs. 37,47,23,250/- made by the AO towards disallowance of additional purchase price paid by way of allotment of equity shares to Members (Rs. 30,02,05,218) and by way of payment to Milk Producers and Employees Education, Health and Medical Welfare Trust (Rs. 7,45,18,020).

Objection for the AY 2012-13:

“1. The Ld. CIT(A) is justified in deleting the addition of Rs. 14,90,000/- made by the Assessing Officer towards disallowance of expenditure incurred towards distribution of compliments at the Annual General Body Meeting.

16 4. Any other ground of cross objection that may be raised at the time of hearing.”

Pronounced in the open Court on 30th November, 2023.

Sd/- Sd/- (दु�वू�आर.एलरे�डी) (एसबालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखासद�य/ACCOUNTANT MEMBER

Dated : 30.11.2023 OKK - SPS

आदेशक���त�ल�पअ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee–M/s. Sri Vijaya Visakha Milk Producers 1. Company Limited, Visakha Diary, BHPV Post, Nathayyapalem, Visakhapatnam, Andhra Pradesh – 530012. (ii) M/s. Sri Vijaya Visakha Milk Producers Company Ltd, Visakha Diary, BHPV Post, Akkireddypalem, Visakhapatnam. राज�व/The Revenue –The Assistant Commissioner of Income Tax, 2. Central Circle-2, Pratyakshakar Bhavan, Sector-8, MVP Double Road, Visakhapatnam, Andhra Pradesh – 530 017. (ii) Income Tax

17 Officer, Pratyakshakar Bhavan, MVP Double Road, Visakhapatnam, Andhra Pradesh – 530017. 3. The Principal Commissioner of Income Tax, आयकरआयु�त (अपील)/ The Commissioner of Income Tax 4. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, �वशाखापटणम/ DR,ITAT, 5. Visakhapatnam गाड�फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam