TMI Blog2017 (11) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... seller member in cash or through allotment of equity shares in proportion to the milk supplied during the financial year to such extent as may be decided by the Board. We find that the assessee company as per section 581 of the Companies Act and also Articles of Association, passed the resolution dated 05/10/2009 and equity shares are issued. Therefore, the Assessing Officer is not correct in saying that it is a tax avoidance device adopted by the assessee to avoid the payment of tax. The ld. CIT(A) by considering all the details has correctly decided that out of withheld price, equity shares issued is in accordance with law. Insofar as contribution paid to the trust is concerned, as per Memorandum of Association of Companies Act, it is under obligation of the assessee to establish schools, colleges, training centres & hospitals. Accordingly, the assessee has already established hospital and educational institutions and out of withheld price some portion is paid to the trust and same is received by the trust. Nowhere the Assessing Officer doubted the transaction. The only doubt expressed by the Assessing Officer is that the above payments are only made to avoid taxes. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of selling milk and milk products. The assessee-company was originally registered in the year 1977 under AP State Cooperative Societies Act, 1964, for the purpose of procuring milk trhough milk societies which are established in various villages of Visakhapatnam, Srikakulam and Vizianagaram districts. The milk societies were formed as societies with the milk producers as its members and in turn, societies become the members in the assessee-company. Subsequently, the assessee-company has been converted as Sri Vijaya Visakha District Milk Producers Mutually Aided Cooperative Union Ltd., under AP State Mutually Aided Cooperative Society Act, 1995, which was further been converted into Producers company in the year 2006 and registered under the Companies Act 1956 as M/s. Vijaya Visakha Milk Producer Company Ltd. The main objective of the company is to procure milk from farmers through the societies situated in village of Srikakulam, Vizianagaram, Visakhapatnam, East Godavari and West Godavari Districts of Andhra Pradesh. The suppliers are the members of the assessee-company, from which milk is being procured every day. The milk procured from farmers through their cooperative societi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Godavari 01/06/2009 ₹ 315/- ₹ 111/- 09/03/2010 -do- 01/03/2010 4. From the above, the Assessing Officer has noted that the assessee has been making upward revision of the procurement price of milk from time to time. The Assessing Officer also noted that none of the circulars mentioned that the procurement price declared was an adhoc price and that the circulars do not give any indication of any additional price or bonus price to be paid at a later date. Therefore, the Assessing Officer took the view that the price declared in the circular is final and not adhoc. The Assessing Officer further noted that the payments made as per the price declared in the circular for the purchases during the year was as follows:- Procurement price as per circulars Buffalo Milk ₹ 1,75,34,54,590/- Cow Milk ₹ 1,13,10,63,892/- Total ₹ 2,88,45,18,482/- However, the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prevailing and agreed to be paid as on that day/period. The said circulars did not contain even a whisper about any such amount as withheld nor did the circulars assure the suppliers of any additional payments. Thus, the additional price is on the own violation of the assessee and there is no obligation on the part of the assessee since there is no express request or demand from the suppliers. Moreover, there is no arithmetic or statistical basis for fixing/determining the additional price. In view of this, the additional price appears to be absolutely unreasonable and highly disproportionate even going by the principles of commercial prudency and expediency domain over which lies with the assessee. On query raised by the Assessing Officer, the assessee has filed the details of the milk price. The relevant portion of the Board resolution No. 12 dated 31/08/2010 is extracted below:- .......... D: From-out of the withhold price amount of C (Srikakulam, Vizianagsram and Visakhapatnam Districts), considering the request made by the Members and authorization given by them, it is resolved to allot equity shares equivalent to the value of ₹ 59/- per-KG Fat of Buffaloe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee employing a device to increase its capital without paying taxes which are due to the exchequer. The Assessing Officer further observed that the amount debited to the profit loss account as withheld price of milk is added to capital unilaterally by the assessee and not at the instance of the suppliers who in fact had not made may such demand/request/application. Hence, this cannot be considered as paid to the supplier against the suppliers, least to ensure continuous suppliers. 8. In view of the above, the Assessing Officer held that so much of the amount that is debited to the profit loss account under the grab of purchases but not actually paid, is a device employed by the assessee to increase its capital without paying the taxes which are due to the exchequer. The Assessing Officer has also considered the decision in the case of Shahabad Cooperative Sugar Mills Ltd. Vs. CIT (226 ITR 582) and Budhewal Cooperative Sugar Mills Ltd. Vs. CIT (316 ITR 461) and held that the alleged expenditure of ₹ 41,23,18,509.91 and ₹5,72,83,783.48 = ₹ 46,96,02,293/- claimed as withheld price but in fact is taken to capital / contributed to trust on own volitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Registrar of Companies. Further we enclose herewith Journal entries passed in the month of March as regular accounting practice for providing withheld price payable for the accounting years 2007-08, 2008-09 and 2009-10, and also enclose copies of journal entries and bank payment vouchers which are passed at the time of release of withheld price subsequently for the financial years 2007-08, 2008-09 2009-10. 10. The ld. CIT(A) has forwarded the additional evidence filed by the assessee to the Assessing Officer for his comments vide his office letter dated 31/12/2013. The Assessing Officer filed his report dated 10/03/2012. On the Assessing Officer‟s comments, the assessee has filed its written submissions dated 21/03/2014 and 25/03/2014. The ld.CIT(A) has considered and admitted as additional evidence. 11. It was submitted before the ld. CIT(A) that the main object of the assessee company is to procure milk from farmers through the milk cooperative societies situated in village of Srikakulam, Vizianagaram, Visakhapatnam, East Godavari and West Godavari Districts of Andhra Pradesh. The suppliers are the members of the assessee company from whom milk is being procured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted to the producers company. Therefore, the assessee company with a view to provide substantial amounts to the suppliers at the end of the year and with a view to bring in sense of participation among the suppliers retains a part of the consideration and would be paying at the end of the year either in cash or in kind. 14 It was submitted that the assessee company in retaning a part of the sale price is supported by the clause 10(b) of the Article of Association of the assessee company according to which, each member shall receive initial payment as may be determined by the Board for the produce/products. Every member shall receive withheld price (remaining price) which will be disbursed in cash or in kind or by allotment of equity shares in proportion to the quantity of milk supplied to the assessee company. 15 It was submitted before the ld. CIT(A) that as per section 581 of the Companies Act, the Articles of Producer Company shall stipulate how the consideration for the produce delivered by a member shall be settled and paid. Every member (producer or farmer) shall initially receive such value for the produce supplied as the Board of Producers Company may determine. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) existing arrangements which had been made by the society prior to conversion, (c) fiscal and other concessions granted to erstwhile society. ( ii) To own, establish, organize dairies and carry on the business of procuring, handling, processing, preserving, packaging, marketing, selling and export of all kinds of milk and products. ( iii) To make donations either in cash or kind for such objects or causes as may be directly or indirectly conductive to nay of the company's objects or otherwise expedient. ( iv) To serve the members of the company by procuring milk and other produce from them at the cost as determined by the Board from time to time and also rendering veterinary services to the cattle, development of fodder and relative allied services and to strengthen the socio and economic development of the members of the company and import of goods or services for the benefit of members and to take up such welfare measures for the benefit on its members and employees. ( v) To establish, run, administer, manage schools, colleges, training centres, universities in the field of animal husbandry, dairy development, run, own, manage, administer diagnost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national or international level so as to serve the interest of its members and the community its serves. [ Section 581 E and 581D ] The Articles of a Producer company shall stipulate how the consideration for the produce delivered by a member will be settled and paid. Every member shall initially receive such value for the produce supplied as the Board of the Producer Company may determine. Price withheld The price withheld may be disbursed to the seller-member in cash or by allotment of equity shares in proportion to the produce supplied during the concerned financial year to such extent as may be decided by the Board. [ Section 581R ] Subject to the provisions of the Act and the Articles of the company, the Board of Directors of a Producer Company shall exercise all such powers and to do all such acts and things as the company is authorized to do. The powers of the Board include the following: ( a) Determination of the dividend payable; ( b) Matters regarding withheld price to be done as per provision in the Article. Board shall exercise certain powers only after approval at General Meetings. The following powers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of the company. b. Providing for common facilities. c. Distributing amongst members as may be admissible in proportion to their respective participation in the business as may be determined by the Board. d. Providing for education of members or employees or others on mutual assistance principles. e. The Board may allot from time to time equity shares of the company to its members for consideration other than cash in lieu of the sale proceeds of the produce or products supplied by the members of the company. f.The Benefits to members as mentioned in Articles 10(a) to (e). Clause-15 of the Articles of Association relevant to our discussion reads as under:- 15 The Board of Directors of the company shall exercise such powers and functions, at its meeting which are authorised by the Act and these Articles. The Board can exercise powers like: a. Determination of dividend payable. b. Determination of quantum of withheld price and recommend patronage to be approved at general meeting. Clause-26 of the Articles of Association relevant to our discussion reads as under:- 26. The company may make donation or subscription to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 305.00 ₹ 330.00 West Godavari Dist Cow (Total solids) ₹ 105.00 ₹ 114.00 Similar resolutions to the above effect dated 30/05/2009 and 22/03/2010 were also filed. 23 From the above, it was submitted before the ld. CIT(A) that it is a normal practice to pay adhoc price initially and to pay the withheld price at the later end of the year. The Authorized Representative for the assessee further referred to the resolutions passed on 28/02/2007, 06/02/2008, 27/12/2008 05/10/2009 to show that the payment of withheld price is decided in the Board meeting every year. He also furnished details of the shareholders of the company as on 31/03/2010 and as on 31/03/2011 to show that the withheld price has been ultimately disbursed as equity shares to the shareholders. For the purpose, he also filed Form No.2 of the companies Act wherein the details of the allotment of shares to the tune of ₹ 41,20,66,000/- was given. The Board resolution held on 12/10/2010 resolving to allot 824132 additional shares to 976 shareholders @ 500/- per sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent date. It is noted that the same definition is incorporated in the Articles of Association of the assessee-company. As per section 581E of the Companies Act, the Articles of a producer company shall stipulate how the consideration for the produce delivered by a member will be settled and paid; and every member shall initially receive such value for the produce supplied as the Board of the producer company may determine. The section further provides that the price withheld may;, be disbursed to seller-member in cash or by allotment of equity share in proportion to the produce supplied during the concerned financial years to such extent as may be decided by the Board. Thus, the concept of 'withheld price' is not alien in the conduct of business of a producer company. In this context, it is relevant to refer to the Articles of Association of the assessee-company, the relevant extract reads as under:- 10. The Board of Directors may determine from time to time the benefits that may be conferred on members by way of Limited return, Patronage Bonus and determination of withheld price and such other benefits as the Board may deem nor interest of members of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also provides liquidity to the company and cultivates indirectly saving habit among the milk producers. It was also submitted that the M/s. Milk Producers Employees Educational Health and Medical Welfare Trust (MPEEHMWT) provides educational and medical facilities to the members and employees of the assessee-company and it has approval u/s 12A of the I.T. Act, 1961. It was also submitted that the trust runs a hospital and educational institutions to cater to the needs of the milk producers and employees of the assessee company. I find merit in these submissions. It is also noted that the final price/withheld price is determined in the board resolution after discussion with the members. Hence it cannot be said that the withheld price or its mode of payment are decided unilaterally by the assessee-company. In the light of the above discussion I do not agree with the, view taken by the AO that the payment made by way of allotment of shares or contribution to Trust is without commercial basis. 7.22 The next issue for consideration would be whether the payment of price by allotment of shares would amount to employing a device by the assessee company to increase its capital witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions made. It is seen that in the case of Shahabad Cooperative Sugar Mills Ltd the increase in cane sugar price was found to be beyond the price fixed by Government and the transaction was found to be not bonafide. Out of increase of ₹ 20 per quintal only ₹ 2/- was paid to the members. In the case of Budhewal Cooperative Sugar Mills Ltd, there was unilateral enhancement of price which the members were not aware, no payment was made to the farmers, the bye-laws relating to fixation of additional sugar cane price was not complied with and was not in accordance with the formula provided in the bye-laws there was no cash payment to the sugar cane producers indicating that the sole purpose was to enhance the capital, the additional price was fixed-in only those years when the assessee had earned huge profits. However in the assessee's case the facts are different. The payment of procurement price by way of initial payment and additional price/withheld price is in accordance with the articles of association, substantial portion of the withheld price was paid to the milk producers; the amount transferred to the equity account has resulted in actual allotment of shares to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount from the coffers of the company. Thus, in my view, the principle laid down in the decision of CIT Vs. Mehsana District Cooperative Milk Producers Union Ltd would apply to the assessee's case. 7.25 In the light of the above discussion, I am of the view that the AO is not justified in making the disallowance of ₹ 46,96,02,293/-. Accordingly the AO is directed to delete the impugned addition of ₹ 46,96,02,293/-. The grounds raised in this regard are allowed. 26 On being aggrieved, the revenue carried the matter in appeal before the Tribunal. 27 Ld Departmental Representative has submitted that the assessee company already paid amounts to the members of the society, who supplied milk to the assessee and subsequently assessee has paid certain amounts to the suppliers and also issued equity share and certain amounts diverted to trust. It is a device employed by the assessee to increase its capital without paying the taxes, which are due to exchequer. It has further been submitted that withheld price paid to the farmers/milk producers subsequently is a clear device adopted by the assessee to avoid the payment of taxes which is not permissible in law. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he suppliers are the members of the assessee-company, from which milk is being procured every day. The company has been working on the cooperative principles even after it was registered under the Companies Act as Producer Company. In the assessment order, the Assessing Officer has noted that the assessee procures buffalo and cow milk from milk producers, the price of such milk is paid by the assessee at the end of each fortnight based on the price published in the circulars issued. The assessee company paid amounts as per the price declared in the circular for the purchasing during the year as follows:- Procurement price as per circulars Buffalo Milk ₹ 1,75,34,54,590/- Cow Milk ₹ 1,13,10,63,892/- Total ₹ 2,88,45,18,482/- However, the assessee company has debited to the profit loss account for price procured much higher by an amount of ₹ 96,60,12,828/-. On query, it was explained to the Assessing Officer that in addition to the above procurement price, the milk producers were also paid additional price/withheld price on 28/03/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the milk suppliers, taken to capital contribution and also contribution to the trust, which is not allowable expenditure hence, liable to the disallowed. Accordingly, the addition of ₹ 46,96,02,293/- was added to the total income of the assessee. 33. On appeal before the ld. CIT(A), the assessee has filed an additional evidence such as Board resolutions in respect of withheld price for the Assessment Years 2007-08, 2008-09, 2009-10 2010-11 and other relevant documents and the ld. CIT(A) called the comments of the Assessing Officer vide letter dated 03/12/2013 and the Assessing Officer has also filed its report dated 10/03/2014. On the comments of the Assessing Officer, the assessee filed written submissions dated 21/03/2014 2503/2014. The ld. CIT(A) by considering section 581E 581D, 581R 581S and also Articles of association of the company 10(a) to 10(f) and also clause 15 of the Articles of Assocaition has observed that the concept of withheld price as defined by the Companies Act that withheld price means part of the price due and payable for goods supplied by any member to the producer company; and as withheld by the producer company for payment on a subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has allotted the shares from the withheld price to the tune of ₹ 41,20,66,000/-. Copy of Form No.2 filed with Registrar for such allotment was filed and payment to the contribution made to the Trust of ₹ 5,72,83,783/-, bank statement also filed, which shows receipt of the said amount. The amount is utilized by the trust to expand the hospital facilities provided to the members of the company. The ld. CIT(A) came to a conclusion that withheld price paid to the members by way of equity shares and also contribution to the trust, cannot be said to be excessive and also cannot be said that this practice is to avoid the tax. We find that the ld. CIT(A) has considered the objects of the assessee company and also the provisions of Companies Act section 581E, 581D, 581R 581S and Articles of Association of the assessee particularly 10 15, he came to a conclusion that withheld price paid by the assessee company to the milk suppliers is according to law. We also gone through the provisions of Articles of Association and also paper book at page Nos. 53 to 64 and find that assessee company decided the withheld price after resolution passed by the Board of Directors and accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Companies Act and also Articles of Association followed by Board resolution. The Assessing Officer is not correct in saying that the assessee adopted device for avoidance of tax. We further observe that once the milk suppliers having shares in the company, they will be having a feeling of supplying milk to their own company. Therefore, the assessee company will be able to procure milk from the milk producers continuously. Therefore, allotment of equity shares to the milk producers for the above reason has to be considered as business expediency. So far as case-laws relied on by the Assessing Officer are concerned, they have no relevancy to the facts and circumstances of the case. Keeping in view of the above, we find no infirmity in the order passed by the ld.CIT(A) and uphold the same. C.O.No. 43/VIZ/2014 35 In the assessment order, the Assessing Officer has noted that the assessee company purchased podwer plant machinery from M/s. LYNJEF International Pvt. Ltd., Australia, in the year 2003 for ₹ 4,90,41,337/-. However, the plant was not erected and kept idle for six years and in the Financial Year 2009-10, the same was sold off to Ranger Foods Pvt. Ltd., Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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