TMI Blog2005 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... MEHTA., MS. H. N. DEVANI. JUDGMENT The judgment of the court was delivered by D.A. Mehta J.-The Income-tax Appellate Tribunal, Ahmedabad Bench "B", has referred the following question for the opinion of this court under section 256(1) of the Income-tax Act, 1961 ("the Act"), at the instance of the Commissioner of Income-tax, Gujarat-I, Ahmedabad: "Whether, the Appellate Tribunal is right in law and on facts in deleting the addition to the extent of Rs. 5,47,69,105 being the alleged additional price towards purchase of milk, sanctioned on the last day of the accounting year, i.e., March 31, 1984?" The assessment year is 1984-85 and the relevant accounting period is the financial year ended on March 31, 1984. The assessee, a co-operative society, filed its return of income on August 31,1984, returning nil income. However, after making various additions and disallowances, the Assessing Officer framed an assessment under section 143(3) of the Act on March 18, 1987, on a total income of Rs. 8,01,67,335. Out of the various additions/disallowances, the only issue which falls for consideration is payment of Rs. 5,47,69,105 made to other co-operative societies, who are members o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than those paid by the assessee. Thus, in the light of these factors considered together, the Income-tax Officer made the disallowance. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), for the reasons stated in his order dated March 22, 1988, confirmed the assessment order on this point. He distinguished the decision of the Andhra Pradesh High Court in the case of Armoor Co-operative Marketing Society v. CIT [1987] 167 ITR 565, which was cited by the assessee before him on the ground that in the said case, the Registrar of Co-operative Societies had advised the assessee in that case to pay back a good proportion of profit made by the assessee to the cultivators as bonus, but in the present case there was no such compulsion. The Commissioner of Income-tax (Appeals) also distinguished the decision of the Appellate Assistant Commissioner in the case of-Kaira District Milk Producers' Union which was relied upon by the assessee as being identical on facts by stating that the facts were different. According to the Commissioner of Income-tax (Appeals), the payment was in the nature of application of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -society for fixation of purchase price was the same and such practice had been accepted and approved by the Department over a period of years, and the same could not be termed as irrelevant without there being any distinguishing features. Mr. Tanvish U. Bhatt, learned standing counsel appearing on behalf of the applicant, submitted that before an expenditure could be allowed under section 37(1) of the Act, it was necessary for the assessee to establish that the conditions prescribed by the said provision stood fulfilled. That even if it is accepted that the expenditure was not in the nature of expenditure falling within sections 30 to 36, was not in the nature of capital expenditure and was not personal in nature, the assessee was yet required to establish that expenditure was laid out or expended wholly and exclusively for the purpose of the business or profession. That the term "wholly" denoted quantum of the expenditure while the term "exclusively" denoted the motive or the justification or the basis for the expenditure. That once the respondent had failed to justify incurring of the expenditure, it was not entitled to any deduction thereof. In other words, there being no bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-society with special reference to sub-clause 2.2 to emphasise that the main object of the assessee-society was to make arrangement for disposal of milk and milk products of its members by procuring the same from its members and dispose of the same so as to obtain the best advantage. It was, therefore, urged that if the aforesaid object was borne in mind it was apparent that the assessee-society had merely acted in furtherance of the said object. That the payment for the year under consideration when compared with the immediately preceding year reflected that overall only 3 per cent, more purchase price was paid when compared to the purchase price of the immediately preceding year. Mr. Shah placed reliance on the decisions in the cases of (i) Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC); (ii) Taraben Ramanbhai Patel v. ITO [1995] 215 ITR 323 (Guj) and (iii) Lalludas Children Trust v. CIT [2001] 251 ITR 50 (Guj) for the proposition that in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, the question of allowability of purchase price could not have been agitated. That the facts in the earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-society had made for the procurement of the milk and its disposal: Clause 4.2, sub-clause 2.2: 'To make arrangements for the disposal of the milk and the milk products of its members or of the members of its affiliated societies, on commission basis or to purchase the milk and milk products of its members or the members of its affiliated societies either on cash or on credit as the circumstances permit and dispose of them to the best advantage. Also to purchase milk from private sources in case the supply from members falls short of the demand.' The affairs of the assessee-society are regulated, controlled and supervised by a board of directors, twelve of whom are drawn from the affiliated societies, one representative of other societies and individual members, one nominee of the Registrar of Co-operative Societies, one nominee each of the financial institutions like Gujarat Industrial and Investment Corporation, Indian Dairy Corporation, National Dairy Development Board, Mehsana District Central Cooperative Bank Ltd. The managing director is the ex officio member. One member is also drawn from Gujarat Co-operative Milk Marketing Federation Ltd. The manner of distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different dates, i.e., February 26, 1982, December 20, 1983 and January 27, 1984, respectively. These circulars provided that the prices determined were only provisional, e.g., in the circular dated January 27, 1984, by which the price was revised to Rs. 46 and Rs. 20.35 per kilo fat respectively for buffaloes and cows milk, the circular read as under: 'This is to inform all the Milk Producing Co-operative Societies that with effect from the morning of February 1, 1984, the milk purchase price per kilo fat will be as under till the next change is intimated to you ... The prices fixed above are ad hoc/provisional from April 1, 1983, and the prices for milk fixed as above are provisional. After considering the amount realised by the union of the milk received from the societies at the end of the years, the final price increase/decrease will be decided and shall be intimated.' It was in pursuance of this undertaking to fix the final price increase or decrease that the board of directors of the assessee-society at its meeting held on March 31,1984, for which notice was issued on March 24, 1983, passed the following resolution: 'The milk purchase prices paid to the milk producin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be decided at the end of the year and shall be intimated. In other words, the assessee had put out a promise by way of the aforesaid circulars creating an obligation for itself and a corresponding expectation qua the supplier societies. The contention raised on behalf of the Revenue that the circular merely created an obligation without any overriding charge and was not binding but depended upon the exercise of volition and discretion of the assessee does not merit acceptance. As can be seen from the circular, the circular creates an obligation to fix a final price that may be revised upwards, may be revised downwards, but fixation of a final price is a must. The only discretion that can be read from the circular is as to the quantum of the final price, in other words, the rate at which the final price is fixed. The concept of charge, is misplaced, in the circumstances. A charge in legal parlance means securing a debt or an obligation by offering a security in the nature of some property or a guarantee like bank guarantee. Hence, this contention does not carry the case of the Revenue any further. The proposition that the payment in question amounted to application of income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r loss. On such dormant profit or loss undoubtedly taxable profits, if any, of the business will be computed, but dormant profits cannot be equated to profits charged to tax under sections 3 and 4 of the Indian Income-tax Act, 1922. The concept of accrual of profits of a business involves their determination by the method of accounting at the end of the accounting year or any shorter period determined by law. '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. In the case of a partnership, where the accounts are to be made at stated intervals, the right of a partner to demand his share of the profits does not arise until the contingency which by operation of law or under a covenant of the partnership deed gives rise to that right has arisen." Therefore, applying the aforesaid principles, it is not possible to state that merely because the board resolved to fix the final purchase price and pay on the last da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure, namely, whether the amount claimed as a deduction was actually incurred or not? In the present case, admittedly, the payment in question has been treated as a bona fide and genuine payment as recorded by the Tribunal. Applying the aforesaid settled principles laid down for the purpose of determining allowability of the expenditure under either of the provisions, namely, section 28 or section 37 of the Act, it is not possible to state that the assessing authority was justified in making the disallowance. In fact the Assessing Officer, Commissioner of Income-tax (Appeals) and the Judicial Member have confused themselves. On the one hand, the Assessing Officer states, the payment of additional purchase price is disallowed under section 28 or section 37 of the Act, and also simultaneously states that it would amount to adjustment of profits, without determination as to whether at the point of time when the additional purchase price was paid profits had accrued or arisen in the hands of the assessee. The over emphasis on the aspect of the basis or the data for fixing the final price by the board of directors created a situation whereunder the authorities lost sight of the ..... 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