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2016 (4) TMI 827 - KARNATAKA HIGH COURT

2016 (4) TMI 827 - KARNATAKA HIGH COURT - TMI - Exemption u/s 11 denied - transfer of fund for subsequent distribution to the members before payment of tax - whether the respondent society is managing its activity on behalf of its members in the most beneficial way by selling the products manufactured by the members? - members of the Respondent-Society are 'Maliks' who are owners of land (Agar) on which salt is manufactured - Held that:- 'Income' is defined under Section 2(24) of the Act and it .....

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the members before payment of tax is not a 'deductible expenditure' in computation of business income of the Assessee-Co- operative Society and further that the income declared after disbursement of profits is not logical and has no relevance to determination of taxable profit under the Income Tax Act.

Revenue collection augments State exchequer. A prosperous treasury is a means for development leading to good living of citizenry. Income Tax one of the tributaries which flows into St .....

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ndulges in such enterprise on behalf of members of the society and tax demand on the entire income would run counter to cooperative movement.

There can be perhaps no disagreement with the proposition that Co-operative movement is benevolent to its members. Nonetheless, an ideology however lofty does not ipso facto exempt such entity from the solemn duty and sacrosanct obligation of obeying the law of the land nor does it insulate the entity from the vigour of penal actions in case of .....

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antial question of law: Whether the Tribunal is right in law, considering the facts and circumstances of the case in holding that the respondent society is managing its activity on behalf of its members in the most beneficial way by selling the products manufactured by the members, without appreciating that the assessing authority has clearly brought on record that there is no active participation of members in its activities and the respondent society is carrying a commercial activity for the p .....

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f the Society; (ii) The members of the Respondent-Society are 'Maliks' who are owners of land (Agar) on which salt is manufactured. The Society was formed inter alia to acquire from the 'Maliks' the rights and to manufacture salt and its by-products; (iii) In terms of the Bye-laws and other arrangements, the individual pieces of lands belonging to the members vested with the Society. Society purchased and installed necessary plants and machinery to manufacture salt and other by-p .....

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uction of ₹ 50,000/- under Section 80P(2)(c)(ii) of the Income Tax Act, 1961 ('the Act' for short) as per the Profit and Loss account; (vi) A notice under Section 148 was issued on 25.3.2013. Respondent-Society filed its reply stating that the income filed on 30.10.2006 declaring a total income of Rs.NIL for the assessment year 2007-08 was correct and the same may be treated as its income. The case was taken up for scrutiny and a notice under Section 143(2) of the Act was issued. A .....

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t there was no certificate by the Chartered Accountant to the effect that the statement was drawn as per the Audit Report under Section 44AB of the Act. The Chartered Accountant was summoned and a statement was recorded. To a specific question as to whether transfer to 'Distribution Pool Fund Account' is considered as expenditure, the Chartered Accountant had refused to answer and sought time to furnish an explanation. Subsequently, an explanation was sent by him by an Email. The Assessi .....

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y, liable to pay an Income Tax of ₹ 47,35,050/-. After adding surcharge, cess, interest etc., the Assessing Authority held that Assessee Society was liable to pay a total amount of ₹ 87,41,889/-; (viii) On appeal by the Assessee, the first Appellate Authority namely, the Commissioner of Income Tax (Appeals), by his common order dated 2.4.2014, placing reliance on the judgment of the Hon'ble Supreme Court in the case of M/s. Radhasoami Satsang, Saomi Bagh, Agra v. Commissioner of .....

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e ITAT, Shri Y.V. Raviraj, vehemently contended that a plain reading of Bye-laws and particularly Bye-laws 4(a), (b), (c), (d) & (k) would make it amply clear that the Assessee-Society had acquired 'Maliks' rights to manufacture salt from the members. Society had also installed suitable plant and machinery to manufacture salt and its by-product. It is not in dispute that the entire quantity of salt and the by-product are sold by the Society. Thus, Society having acquired the 'Mal .....

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Society was required to get the accounts audited under Section 44AB of the Act. The fact that the Chartered Accountant refused to answer the questions and particularly, the relevant question with regard to the status of funds transferred to the Distribution Pool Fund Account and subsequently, forwarding his explanation in tune with the stand taken by the Society is a sufficient piece of evidence to conclusively infer that the Chartered Accountant had serious reservations with regard to such tran .....

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error in accepting the arguments of the Assessee. Amplifying his argument, he submitted that a plain reading of the order passed by the ITAT would show that the Society's argument was in two folds. Firstly, that, initially the Society was for the limited purpose of selling the products manufactured by the members in a profitable way. Secondly, that there was no change in position and the Society was functioning with the same purpose even during the assessment years in question. He submitted .....

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juristic person was carrying on the business both 'manufacturing' and 'selling' salt and its' by-products. It was transferring funds to the Distribution Pools Fund and offered only the remaining income to tax. Therefore, the orders passed by the CIT and ITAT are unsustainable in law and deserve to be set aside. Accordingly, he prayed for allowing this appeal. 8. Per contra, Shri Ashok A.Kulkarni, learned Counsel for the Assessee-Society supporting the impugned judgment of th .....

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e philosophy of Co-operative movement is to augment community resources with an aim and objective to achieve maximum benefit to the members of the Society. Therefore, the Society was justified in transferring the funds to the Pool for further distribution among the members. This practice was in vogue for several years and to be precise, even prior to the Karnataka Co-operative Societies Act coming into force. Therefore, a notice under Section 148 and all proceedings thereon by the Assessing Auth .....

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dismissal of the appeals. 10. We have given our careful consideration to the rival contentions urged at the bar, perused the records and the rulings cited. At the outset, it is relevant to peruse the Bye-laws of the Society. Chapter-III of the Bye-laws deals with the interpretations. 'Malik' and 'Agar' are defined as under: Malik - means a person owning jointly or severally jointly or having an interest in agar in the Nagarbail Saza, Sanikatta on the date of the Registration of .....

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lt in the nagarbail Saza, Sanikatta and to manufacture salt and other by- products in these areas on Co-operative basis. (c) to consolidate and remodel the salt works so as to manufacture salt and by-products economically and on a scientific basis, and to manufacture table salt and high purity salt. (k) to purchase and instal suitable plant or any other machinery required in connection with the manufacture of salt and by-products or any subsidiary works undertaken. (l) to pay on behalf of the me .....

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-XI with the Managing Committee. In terms of Chapter XIII, a Chairman, a Vice Chairman and a Manager shall be the officers of the Society. Under Clause-75, these officers are subject to control of the Managing Committee. Chapter- XVII deals with expenses. It is noticed that deduction towards depreciation of machinery, building, etc. as determined in accordance with the expert advise is described under the head 'expenses'. The General Body is authorised to distribute the 'net profits& .....

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he Bye-law to transfer the fund to the Distribution Pool for onward payment to the members. The provisions made towards depreciation of machinery, building etc. are sufficient indications to infer that the Bye- laws were framed with clear intention in mind to acquire the 'Malik' rights of the persons who were holders of land ('Agar'), to manufacture and sell salt and its' by-products. 13. It is not in dispute that the assessee-Society is in control of the lands and paying the .....

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contend that the doctrine of res-judicata does not apply to the income tax proceedings. He has relied upon the following passage in support of his contentions. We are aware of the fact that, strictly speaking, res judicata does not apply to income- tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other .....

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notice under Section 147 of the Act and adjudicated after hearing the Assessee- Society. 16. Learned Counsel for the Assessee-Society has placed reliance on the following judgments in support of his contentions: 1. Commissioner of Agricultural Income Tax v. M.L.Bagla [1971] 80 ITR 173: Placing reliance on the following portion of the above judgment at page 175; ……… The High Court, agreeing with the view, observed that the association of individuals holding property was liabl .....

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venue deserves to be rejected. The facts in the above case are that an owner of a large area of land which he had leased out in favour of two persons and for a certain period of time both lessees had appointed a common Manager for cultivation of land. The question which fell for consideration was whether in the facts of that case, two owners could be assessed as an association of individuals. The Manager of the lessees was acting as their agent. In contrast, in the instant case, the Assessee - S .....

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elves into an association of individuals for promotion of a joint enterprise to earn income, profits or gains. It is to be noted that, in the above case, the family properties of an H.U.F. consisting of Manjappa Gowda, his wife and five children out of whom four were minors were divided by metes and bounds and being managed by Manjappa Gowda himself. In the facts of the said case, this Court has recorded a finding in the following terms: There is no evidence that all the members including the fo .....

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ice and Canara Public Conveyance were operating buses in a particular route under an agreement and sharing the profits. The Assessing Authority considered the same as a joint venture. However, the Appellate Authority upheld the contention of the Assessee that the two limited companies had already been assessed in respect of their share of profit for the assessment year under consideration and accordingly, allowed the appeal in favour of the Assessee. In contrast, in the instant case, for the ass .....

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ng the members of the Society was offered to tax. Therefore, the ratio of the said judgment cannot be made applicable to the facts of this case. 4. Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. Commissioner of Income Tax, reorted in (1997) 227 ITR 172: Learned Counsel for the assessee has relied upon following two sentences in the said judgment to substantiate his argument: it is difficult to follow this reasoning. If a person borrows money for business purposes but utilises that money t .....

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ent of profit made by a company or value of assets of the company. But when the question is whether the receipt of money is taxable or not or whether, certain deductions from that receipt are permissible in law or not, the question has to be decided according to principles of law and not in accordance with the accounting practice. 17. A careful analysis of the rival contentions urged by the Revenue, the Assessee and perusal of records, leads us to infer and deduce that; (a) that no person other .....

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mount distributable among the members is transferred to a Distributable Pool Fund Account before offering to the income to tax. 18. 'Income' is defined under Section 2(24) of the Act and it includes profits and gains. The above facts lead us an irresistible inference that the 'Agar' (the land) belonging to the 'Maliks' is used to manufacture salt and its by-product and the same is sold by the Assessee-Society itself. In the course of its business, Society earns 'profi .....

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