Producers Union Ltd. Vs. Assessing Officer. - Court Judgment

Excerpt:
per shri k. r. dixit, judicial member - the first ground in the assessees appeal involves certain questions of considerable importance and also a very large addition of nearly rs. 5.5 crores.2. briefly, the assessee is an apex co-operative society in which other co-operative societies are members. in those member co-operative societies individual producers of milk are members, who supply milk to their co-operative societies and who in turn supply milk to the assessee. the assessee sells this milk to the consumers and makes payment for the milk to its member societies on the basis of a certain price per unit called kilofat which is revised from time to time. the assessee made a payment of rs. 5,47,69,105 to is member societies at the end of the accounting period by way of additional price.....

Judgment:
Per Shri K. R. Dixit, Judicial Member - The first ground in the assessees appeal involves certain questions of considerable importance and also a very large addition of nearly Rs. 5.5 crores.

2. Briefly, the assessee is an apex co-operative society in which other co-operative societies are members. In those member co-operative societies individual producers of milk are members, who supply milk to their co-operative societies and who in turn supply milk to the assessee. The assessee sells this milk to the consumers and makes payment for the milk to its member societies on the basis of a certain price per unit called kilofat which is revised from time to time. The assessee made a payment of Rs. 5,47,69,105 to is member societies at the end of the accounting period by way of additional price and it is this payment which is the subject matter of the main controversy before us.

3. The ITO noticed that the following payments, inter alia, were made during the year :- Payments were made according to the following prices for the period mentioned below :- The ITO enquired of the assessee how these prices were decided, as stated by him, several times but he did not get any definite reply. He noticed that on the last day of the accounting period the assessees board of directors by a resolution sanctioned an additional payment at the rate of 12.5% and 15% of what the members were paid from April to February in respect of buffalo milk and cow milk respectively. He has noted that the resolution does not spell out the necessity or justification for making such payment and also how the aforesaid percentages i. e., 12.5% and 15%, were decided upon. The ITO asked the assessee to explain the basis of this payment and the computation thereof. It is unnecessary to give details regarding the several letters in which these enquiries were made. Suffice it to say that the assessee ultimately by its letter dated 5-1-1987 gave certain replies, the relevant extracts of which are given below. : "The establishment of the co-op. movement is based on the principle of pooling system of the price of agricultural commodities prevailing in the market... The apex body decides the purchase price of milk on provisional basis. These price are changing from season to lean season depending upon the market conditions, which is also changing from time to time. The prices had to be provisional and so they have got to be such that the farmer is attractive to give the continuing supply of milk.

Normally the final price is decided looking to the overall market conditions prevalent during the year. In the co-operative sector as the pooling of the prices of flush and the lean season is in existence, the farmers continue to supply milk to the co-op. society in the villages at the provisional prices, as they are assured of market of their milk production throughout the year. In flush season when the products is available in plenty hence the traders exploit them by offering a very uneconomical/low price and in result they are exploited by the traders and thus traders are always at an advantage. During the lean season when there is more demand and hence due to shortage of milk availability in lean season traders offer higher prices to the producer and in result our milk supply would reduce. But it is only in the co-op. system that they have the faith as they know that even during the flush season all the milk production will be processed and sold and hence they accept the system of pool price from the co-op. union, where they themselves are the policy makers and decision makers also through three tier system under the co-operatives, through their elected representatives.

Normally before the close of the year in the month of March, or even twice or thrice during the year, the board of directors determines final price to be paid for milk supplied by the societies for a period for which a resolution is passed after proper notice and agenda being circulated to all members.

You will thus please find that the final price has been paid to the co-operative societies only in the month of March and not in the months of July-August as stated by you in you letter i. e., in the month of March before the books of account are closed and adjusted and profits determined. The union therefore denies having distributed any profits amongst its member co-op. societies but paid final price to member co-op. societies on the basis of the quantity of milk supplied by them.

We deny having distributed any percentage of profit to member societies who supplied milk to us...

The final price is determined by the board keeping in mind the market price milk prevailing in our region and keeping in mind the supply and flow of milk.... If the price is not paid at the prevailing market rate, the member societies would stop supplying milk to us they will be tempted to sell the milk to other persons paying them higher price...." The assessee, vide its letter dated 23-1-1987, inter alia stated : "Taking into consideration the overall position of market price of buffalo milk, the final price was determined and allowed to the supplier of milk at the rate of 47.02 per kilo fat of buffalo milk supplied during the year and on the same line Rs. 21.18 per kilo fat of cow milk supplied during the year, which was taken as a base for allowing 12.5% of total price of grade I quality buffalo milk and 15% of grade I quality of cow milk purchased during the year." Together with that letter the assessee also enclosed a list of Directors who had attended the meeting on 31-3-1984. The ITO, after noting the contents of the above letter, has made a remark that he accepts the position that market price is to be paid but that his question was : "How did the Board decide on 31-3-1984 that the prevailing market price on 1-4-1983 (i. e., one full year earlier) was 12.5% higher than Rs. 41 per kg. fat in case of buffalo milk and was 15% higher than Rs. 18.10 per kg. fat in case of cow milk ?" The ITO wanted the information on the basis of which the said market price was arrived at. He has noted than when 14 persons attended the Board meeting and specified the above percentages then they must be having the figures of prices offered by other purchases of milk in that region. He has further noted that the assessees apprehension that the suppliers would be tempted to sell milk to other persons showed that the assessee must have surveyed the market and gathered data regarding prices offered by others. When that was so he has posed the question : why was the assessee not making available that data Since the assessee had spoken of prevailing market prices he has also queried-prevailing when He has put forward two alternative meanings of this expression : (a) price prevailing at the time when the Board took the decision but that could not determine the price in April, 1983; and (b) price prevailing when the milk was purchased : then why was it not paid at the time of the purchase If the higher price was prevailing earlier why were the suppliers paid less throughout the year and why did the suppliers accept a price lower by 15% The ITO quoted from the assessees letter dated 7-3-1987 that the purchase price depended upon seasonal production, availability of milk depending on monsoon conditions during the year, prices of fodder, agricultural conditions within the state and other states, purchase price of milk by private traders, availability of milk throughout India, competitive market values of milk products available in the market. He then commented that the assessee has tried to be as general as possible and noted that these complex factors were discussed by the Directors without reducing anything in writing. He has crystallised these factors into the following questions : - What was the purchase price of milk by private traders within the district and in the adjoining districts His comment was that if these factors were really taken into account by the Directors then the data would have been put before the Board and if that was so why was it not supplied to the ITO.4. Since, according to the ITO, the assessee had failed to supply the relevant facts and figures regarding the market conditions, he tried to ascertain the facts himself. He has mentioned the case of one Ambica Dairy Farm where the price offered for buffalo milk was Rs. 26 per kg.

fat from 1-4-1983 to 4-11-1983 and Rs. 40 per kg. fat from 5-11-1983 to 31-3-1984. From this he has drawn the inference that because of this huge difference between the price paid by the assessee and that paid by the said Ambica Dairy Farm the assessee was not producing the required data regarding market price. The ITO has then addressed himself to the question why the assessee has raised the price by 12.5% and 15% on the last day of the accounting period. He has noted that although the assessees turnover had more than doubled from the assessment year 1979-80, the net profit had increased only from Rs. 15 lakhs to Rs. 20 lakhs. Together with this he has noted that if the increase of 12.5% had not been given the net profit would have been Rs. 38.53 lakhs. He has concluded that the net profit had been kept at Rs. 20 lakhs i. e., an increase of Rs. 1 lakh or 2 lakhs only per year by giving the increase of exactly 12.5% on the price and not 12 or 13 or 10%. This, according to him was done by the assessee for evasion of income-tax and the price adjustment was postponed till the last day of the accounting period for the purpose of adjusting the profit of the whole year and the profits have been distributed to the suppliers of milk in the guise of price increase.

5. The Commissioner has confirmed the ITOs order on this point on the ground that there must be some data on the basis of which the price increase had been granted but that the assessee had not produced any facts or figures to show the basis thereof. He has distinguished the decision of the Andhra Pradesh High Court in the case of Armoor Co-operative Marketing Society v. CIT [1987] 167 ITR 565 on the ground that in that case there were directions from the Registrar of Co-operative Societies advising the assessee that a good proportion of the profit made by the assessee should be paid back to the cultivators as bonus but in the present there was no such compelling circumstance nor was there any prior title to the income and, therefore, according to the Commissioner, this was an application of income by the assessee.

He has distinguished the decision of the AAC in the case of Kaira Distt. Milk Producers Union on the ground that the facts in that case were different. According to him the assessee was not under obligation to make the additional payment and even if there was a "self-generated obligation" the discharge of that obligation would not entitle the assessee to deduction because that was an obligation to apply income which had already accrued to the assessee. He has relied upon the decision of the Supreme Court in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367.

6. On behalf of the assessee Shri N. A. Palkhiwala (who first advanced arguments on this point) submitted that the approach of the ITO was totally wrong and that the ITO had failed to appreciate that this was a case of a co-operative society. He explained that the purchase of the assessee was to obtain the best price for the milk supplied by the actual producers and to eliminate the middle man. He pointed out that the assessee ensured that the benefit reached the consumer. In that connection he referred to the preamble to the Co-operative Act emphasising that it was the purpose of the co-operative movement to promote self-help among the members, majority of whom were poor farmers. He submitted that the ITO had passed an unstatable and ridiculous order and that if this assessment was upheld it would adversely affect the suppliers, many of whom were poor people, and the co-operative movement generally. He supplied two sets of figures - one showing the comparative position of payments made by similar societies and the other showing payments made by the assessee over a period of years. The former is as follows : Referring to the former he said that the payment made by the assessee was reasonable, that the assessee could not pay less looking to the payments made by others and that if this was not done the suppliers would be tempted to sell the milk to others. Referring to the letter tabulation he submitted that the price paid this year was reasonable.

He also referred to the circular dated 27-1-84 wherein it has been specifically mentioned that the prices fixed were ad hoc/provisional and that the final price increase/decrease will be decided and shall be intimated. On this basis he submitted that the prices paid earlier were provisional and that it was revised from time to time. He pointed out that in the assessment year 1982-83 the prices were revised as many as 8 times. He then said that although the circular mentioned decrease in prices that was never done because lower price was paid earlier which permitted increase in price later on so that there would not be any disappointment or discontent to the suppliers. He said that the assessee had fully explained its stand in its letter dated 5-1-1987 to the ITO and that the insistence by the ITO regarding the data for market price was unreasonable. He submitted that from past experience the assessee had a good idea as to the market price and that the "Market price is the market price". Further he relied upon the decision of the Andhra Pradesh High Court in the case of Armoor Co-operative Marketing Society (supra) and the decision of the AAC in the case of Kaira District co-operative Milk Producers Union Ltd. for the assessment year 1960-61. He submitted that the department had not appealed against the said decision of the AAC and that it was accepted by it. According to him in that case even bonus payment was held to be allowable and so it was fully applicable to the present case.

7. In a forceful reply, Shri R. P. Bhatt, learned counsel for the revenue, submitted that the arguments for the assessee, in substance, were, that because the assessee was a co-operative society the provisions of the I. T. Act were to be ignored and that the assessment was to be made with a different approach taking into account the Co-operative Act. This, according to him, could not be done. He submitted that we were concerned here with an income-tax assessment and that the Act had to be applied. He then read out in extenso the orders of the ITO and the Commissioner duly emphasising various portions thereof and adopting the reasoning therein. He finally stated that no evidence had been led and no case had been made out to show the necessity of making the last payment purporting to increase the "price". He submitted that in this process ultimately it was the consumer who paid and who suffered.

8. Shri. J. P. Shah, in rejoinder, made a reference to the two sets of tablets showing the price paid by the others and to that paid by the assessee in other years, he submitted that taking that into account the assessee could not pay less. He said that the assessee had paid the final price of Rs. 47.02 while the average of the price paid by the other came to Rs. 47.72 so that the assessees price was lower than that average price. According to him the average price showed the market price. He pointed out that the price from 1-3-1982 to 20-12-1983 was Rs. 41 and the final price for the assessment year 1983-84 was Rs. 45.73 and so the assessee had to pay the price of Rs. 43 from 2-12-1983 to 31-1-1984 and Rs. 46 from 1-2-1984 to 31-3-1984. He reiterated that these prices had to be paid because in the neighbouring areas belonging to the other co-operative societies similar or higher prices were paid as pointed out above and that otherwise the assessee would not get continuous supply of milk. He submitted that for the assessment year 1982-83 no action had been taken under sec. 263 or under sec. 40A (2) and so the price of Rs. 45.73 had been accepted by the ITO as reasonable.

9. The argument advanced by Mr. Palkhiwala is both a novel and an important argument. We are to have a different approach in the case of a co-operative society having the aim of eliminating the middle man so as to help the original supplier. We are also to bear in ming that this is ultimately the case of the poor farmers for whose benefit the co-operative society has been started and that it is the co-operative movement which is at stake here. There are cases where sometimes extra legal submissions are made but this one had the added factor of poverty of the farmers in whose case the sympathy of the Tribunal is sought to be aroused. It is this factor which gives certain special importance to this case.

10. Now, it is entirely true that the assessee is a co-operative society having the laudable object of helping the producers (many of whom might be poor farmers) in marketing the milk and eliminating the middle mans profit. But it is equally true that the assessee is a taxable entity under the Income-tax Act and no special provisions are made in that Act for assessing it. The arguments on behalf of the assessee ultimately came to this that the assessee was merely a body which tries to get the best price for the producers and after deducting its expenses it pays the sale proceeds to the producers and so the question of the assessee making any profit and distributing it does not arise. This substantially means that the sale price to the consumer was the cost price of the assessee. This is the second novel and special feature of this case which gives it importance. Regarding this argument it must be said that this has never been the case of the assessee earlier. On the other hand, it had always been its case that it was the market price which was being paid to the producers. Even Mr.

Parikhwala, in the course of his arguments, stated that the assessee, by reason of its general awareness of the market conditions and past experience knew what the market price was and regarding the ITOs query for data regarding the market price he stated that "the market price is the market price". Therefore, this stand that what was paid to the suppliers was the market price was maintained. Further, it is a part of the process of assessment to ascertain the cost to the assessee in order to know its income and profits. In the court of the hearing we were informed that the assessee was distributing dividend. The assessee also manufactured and sold milk products such as butter, cheese and milk powder. When that was so the cost to the assessee is known and the cost must precede the sale price obtained by the assessee. That is why the ITO wanted to know the market price which was supposed to be paid by the assessee and the data on which the market price was supposed to be paid by the assessee and the data on which that market price was arrived at. The assessee failed to supply that information. On the other hand, the ITO has cited the instance of one dealer whose price was Rs. 26 per kg fat for buffalo milk from 1-4-1983 to 4-11-1983 and Rs. 40 per kg fat from 5-11-1983 to 31-3-1984. At the time of hearing that was sought to be explained by questioning the quality of that milk but we are unable to share this doubt. The instance cited by the ITO also uses the same unit. i. e., per kg fat. Actually the burden was on the assessee to prove the market rate. It did not do so and it was the ITO who produced the evidence to the contrary. There is no reason why an adverse inference should not be drawn against the assessee and the ITOs evidence should be disregarded. It may be only one instance but it is some evidence, nevertheless. It is true that the assessee has relied upon on the payment made by other similar societies as shown in the table above. But their method of calculating the payments to be made is the same as that of the assessee. If the case of any one of them is taken up separately, the payment made by the assessee might be cited to support the payment made in that case. Therefore, that will not help the assessees case. In all of them whats is undeniable is the manner of arriving at the quantum of payment to be made i. e., not with reference to a known market price at the time of purchase by the assessee but with reference to the price realised by the assessee subsequently. That is why those instances are inherently defective and cannot be taken into account here.

11. This payment has been made at the end of the accounting period. The assessee has tried to explain it by saying that the "final price" is paid, not in July or August when the accounts are closed and profits determined but in March. That is not convincing. In the end of March the financial position may not be known to the last naya paisa but it would certainly be known sufficiently to enable the assessee to give a "price" increase not by 12% or 13% but exactly by 12.5%. As the time passes, the receipt and expenditure would be known more and more and the assessee can know how much it can pay. End of the accounting period is relevant only from that angle because we are here concerned only with the payment made at that time. Moreover the payment is made as the "price" of an earlier period. In other words, the assessee after knowing its expenses and the resulting financial position decides what the price was at an earlier point of time. In this connection the reasoning of the ITO is quite sound. He has shown that in spite of considerable increase in the turnover from assessment years 1979-80 to 1984-85, the profit has moved up very little. He has in effect shown that the profit has been kept at a low figure just by increasing the "price".

12. The fact of the matter is that the assessee, finding the surplus amount with itself has chosen to distribute it amongst its suppliers with the result that the revenue has claimed its share in it. It could have chosen not to charge such high prices to its consumers and given them some benefit but it has not done so. The producer members have to sell the milk only to their society. Therefore, the consumers are exposed to a market where suppliers are limited who can demand high prices. Mr. Palkhiwala has overlooked these aspects. He has espoused the cause of the suppliers who might be poor farmers but overlooked the fact that in this case the interest of the consumers (many of whom might be poor people) is also involved. Therefore, in this matter the only way and the right way is to decide the issue before us without being affected by any of the class interests involved.

13. Regarding the AACs decision in the case of Kaira District Co-operative Milk Producers Union (supra), the reasoning in that case, in our view, states no more than the arguments advanced on behalf of the assessee in this case. He has called the assessee in that case a pooling agency and stated that the member societies known that the final price they get will depend upon the realisation made by the assessee. In that case a payment made at the end of the accounting period was allowed by the AAC on the ground that the member societies expected a fair and reasonable return which resulted in payment made to them and the business aspects of the matter, viewed as a whole, clearly indicated that the payment was an allowable expenditure. He has distinguished an earlier decision of the Tribunal where such payment was disallowed on the ground that (a) the payment was debited to milk purchase account not termed bonus by the assessee. It was the ITO who treated that sum as bonus, (b) the amount was paid after the close of the accounting period in the case before the Tribunal whereas in the case before him it was paid before close of the accounting year and (c) the decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521, delivered after the Tribunals decision, made it necessary to reconsider the law applicable to the case before him. So far as the AACs approach regarding the assessee as a pooling agency is concerned that has been considered above. Regarding the point (a) above in the AACs order, debiting to milk purchase account is not important. Entries in the assessees books are not material. The nature of the payment has to be decided on objective criteria. Regarding point (b) above what is relevant is not whether the payment was made before or after the close of the accounting period but whether it was made at a time when the financial position of the assessee would be known to the assessee so that it could distribute the surplus after deducting the expenses from the total collection by way of sale proceeds. Regarding point (c) above, the AAC has not shown how the Supreme Court decision in the case of Poona Electric Supply Co.

Ltd. (supra) was applicable to the case before him. In that case there was a statutory compulsion on the assessee to retain part of the sale proceeds to be returned to the consumers and that is why the Supreme Court held that that amount did not from part of the assessees real profits. This is not the situation here.

14. In this connection the further argument that the above decision of the AAC had not been appealed against and so was accepted by the department has also to be considered. We find it difficult to accept this argument. What is this acceptance It is not as if the revenue has declared that it accepts the principle or the reasoning of the decision for all cases and has given an undertaking never to appeal in another similar case. It is also not as if the revenue has put its stamp of approval on that decision. The same applies to Shri. J. P.Shahs arguments regarding the revenues omission to take action under sec. 263 read with section 40A (2). A decision may not be appealed against for various reasons which is not the concern of the opposite party. It is the right and option of a litigant to appeal against an adverse decision or the omission to appeal against the decision no conclusive inference can be drawn that the principle or reasoning of that decision has been accepted for all time to come and for all other cases. Further, the fact that this mode of payment has been accepted by the ITO earlier cannot be decisive. The assessee cannot say that it should be continued to be accepted, in spite of mistake. There is no vested right in error.

15. The decision of the Andhra Pradesh High Court in Armoor Co-operative Marketing Societys case (supra) is not applicable here because in that case the State Government had virtually compelled the assessee to pay back a good portion of the profit made by the assessee society to the cultivators as bonus. The High Court had observed that the assessee society was bound to carry out the policy directions issued by the Registrar of co-operative societies and so no society could afford to flout or ignore a policy decision taken by the State Government.

16. What was the necessity of making the payment The assessees case is that others have been paying at similar rates and that in the past such rates were paid by the assessee that in this year a higher rate had to be paid. It was submitted that if this rate was not paid, the producer will sell the milk to others and so the assessee would not be able to get a continuous supply of milk. So far as the payment by other similar societies concerned, as has been pointed out above, the manner of arriving at the payment was the same as in this case; the modus operandi of the other similar societies being the same. Therefore, the payments made by the other do not establish any market rate. Indeed there is no market so far as the transactions of these societies are concerned; the suppliers not being free to sell to any one other than their society. In the bye-laws of the society there is a provision that if milk is supplied to any else by a member-producer a penalty of Rs. 100 can be imposed and in case of such repeated default even the defaulter could be expelled from the society. Therefore, the risk of the member selling to any one else is not serious. So far as the rated paid by the assessee in the past are concerned, again the same difficulty arises i. e., the manner of arriving at the payment is the same as in this year. It may be true that similar payments have been made in the past by the assessee and similar payments have been made by other societies also but the question is whether it is the "price" which has been paid. That fundamental problem remains. It is true that there was a Circular stating that the earlier payment was a provisional price, but the character of that payment is not decided by the fact that it has been made to the supplier or what it is called. We are here concerned with the payment which is claimed as deduction by way of cost to the assessee. When that question is considered we cannot overlook the fact that the payment has been made at the end of the accounting period when the total collection by way of sale proceeds and the expenses are known fairly well. In fact, the assessee has been making payments at higher and higher rates as the year progressed which shows that the increases are given as the financial position of the assessee becomes more and more clear to it. The essential point is that the rate of payment increase with the financial position of the assessee and not with the market price. As stated above the payment made by other similar societies cannot be taken into consideration as proof of the market price. Therefore, there is no satisfactory evidence regarding the market price produced by the assessee but evidence to contrary has been produced by the Income-tax Officer. The assessee, looking to its financial position, fixes the prices as on an earlier date. It is because of this co-relation of the relation of the rate of payment with the financial position of the assessee coupled with the failure to produce satisfactory evidence of the market price, that the claim of the assessee cannot be accepted. Therefore, both the Income-tax Officer and the Commissioner are right when they say that in reality the payment is distribution of profits in the form of price.

17. We do not wish to concern ourselves with considerations for poor suppliers or poor consumers or the co-operative movement. If that must be done, the Legislature must do so. We must maintain a neutral stand.

18. In the light of the above, we uphold the order of the Commissioner on this point.

19. The next ground is that the Commissioner erred in restoring the two claims of the assessee, namely, expenses for cattle feed facilities and expenses for veterinary facilities to the ITO for detailed examination.

This ground is now infructuous in view of the ITOs order giving effect to the Commissioners order whereby the assessees claim for deduction was allowed.

20. The fourth ground is that the Commissioner erred in confirming the disallowance made by the assessing officer of group insurance premium amounting to Rs. 9,34,006. The Commissioner had confirmed the disallowance on the ground that the farmers for whom the insurance had been taken were not members of the assessee society nor were they connected with its day to day activities and that there was no obligation on the assessee to take out such policies and incur the expenditure. Before us a copy of the rules of the Group Insurance Scheme has been supplied which shows that the benefit of that scheme was given to farmers who supplied milk for not less than 180 days in a year and the quantity was not less than 200 litres in one year and that the farmer should be a member of a society which was a member of the assessee-society. Before us it was pointed out that this claim had been allowed for all the years in the past and further that the expenditure in respect of insurance for cattle had been allowed. It was submitted that both, the cattle who produce the milk and the farmers who supply it constitute the supply line and the maintenance of that supply line was in the interest of the assessee. The decision of the Andhra Pradesh High Court in the case of CIT v. Vazir Sultan Tobacco Co. Ltd. [1987] 35 Taxman 294 was relied upon where the assessee had claimed deduction in respect of an amount paid to a trust for affording higher education to the needy children of the assessees employees. The High Court held that "although it was true that the assessee was not under obligation to make that payment but that it was well settled that the measures which were ultimately designed to further the objects of the assessee could be treated as business expenditure, so long as the connection between the expenditure and the object was real and not remote and illusory." According to the High Court, "in the instant case there was a nexus between the expenditure and the object which could not be said to be illusory or remote." On the other hand, the learned Standing Counsel submitted that the connection between the objects of the assessee and the benefit given was illusory and remote inasmuch as the farmers were not members of the assessee society. In our view it is not the formal connection but the real connection which is to be seen. The actual and ultimate suppliers of milk were the farmers and it was in the assessees interest to obtain continuous supply from them.

Therefore, this ground is allowed.

21. The fifth ground is that the Commissioner erred in confirming the disallowance made by the assessing officer for depreciation and investment allowance on plant and machinery received in kind from the Indian Dairy Corporation. This ground has been decided against the assessee by the Tribunal in ITA No. 1872/Ahd. /86. Therefore, consistently with that decision of the Tribunal this ground is rejected.

21A. The 6th ground is regarding the disallowance of advertisement expenses. It is not pressed and is accordingly rejected.

22. The 7th ground is that the Commissioner erred in confirming the disallowance of a sum Rs. 50,441 being contribution made by the assessee to Gujrath Rajya Sahakari Education Fund. This ground has been decided against the assessee in ITA No. 1872/Ahd. /86. Consistently with that decision this ground is rejected.

23. The 8th ground is that the Commissioner erred in confirming the disallowance made by the assessing officer of a sum of Rs. 12,000 under section 80VV. The assessee had incurred the following expenditure.

Rs. 3,000 to Shri J. P. Shah for hearing before the Tribunal. Rs. 17,000 Out of the total amount of Rs. 17,000 the ITO allowed Rs. 5,000 under sec. 80VV and disallowed the balance. He held that this balance could not be allowed u/s 37(1) because of the operation of section 80VV. The assessee filed a copy of the bill of M/s C. C. Chokshi & Co. The assessee has submitted that the fees have been paid to the Chartered Accountants M/s C. C. Chokshi & Co. for consolidated services rendered by them and that, therefore, provisions of section 80VV had no application. Since this is a consolidate bill, in our view, half the expenditure should be considered as having been incurred in respect of proceedings before the income-tax authority or the Income-tax Tribunal or court and, therefore, covered under sec. 80VV. Out of the consolidated amount Rs. 14,000, Rs. 7,000 must be taken to be covered u/s 80VV. The bill of Shri J. P. Shah is also covered under that section. The total, therefore, comes to Rs. 10,000. Out of this Rs. 5,000 would be allowed u/s 80VV. Over and above this Rs. 7,000 would be allowed because it is not covered u/s 80VV. The total allowance would be Rs. 5,000 plus Rs. 7,000 and the disallowance would be Rs. 5,000.

This ground is partly allowed.

24. The 9th ground is that the Commissioner erred in holding that the assessees claim u/s 80P (2) (e) should be restricted to 90% of the receipts on storage charges from the Indian Dairy Corpn. Thus the assessees grievance is regarding the reduction by 10% while the departments grievance is the allowance to the extent of 90% which is the only ground in the departments appeal. The assessee had stored butter belonging to the Indian Dairy Corporation and received an amount of Rs. 5,38,626 as warehouse charges. This entire amount was claimed as deduction. The ITO held that the expenses related to this income must be reduced from it. Since the assessee had not given any data regarding these expenses, he made an estimate. He observed that storage was a part of the assessees business and so no separate entries were made regarding the expenses for storage of this butter. Thereafter he has observed as follows : "In such a situation the ratio which the overall expenses bear to the overall receipts will be applied to the rent receipts to arrive at the expenses related to these receipts. In other words, the amount of rental income which becomes eligible for deduction will be that part of the net profit of the assessee which is attributable to rent receipts.

Net profit of the assessee is Rs. 20,17,619 and the overall receipts are Rs. 88,22,147. The deduction available is : The Commissioner has observed that it would be sufficiently if an amount of 10% of the gross receipt may be estimated to be the expenditure incurred by the assessee in respect of the storing of the butter and the balance of 90% would be qualify for deduction u/s 80P (2) (e). In our view 10% estimated by the Commissioner is a reasonable one. His order on this point is confirmed. Therefore, on this point the assessees ground is rejected. The departments appeal is dismissed.

25. The 10th ground is that the Commissioner erred in holding that the levy of interest u/s 215 was justified. The assessee had filed a return of nil income and its case was that since no tax was payable the assessee was no liable to pay interest under section 215. It relied on the decision of the Gujarat High Court in the case of CIT v. Bharat Machinery & Hardware Mart [1982] 136 ITR 875. The Commissioner has distinguished that decision on the ground that it was concerned with levy of interest under sec. 217(1) (a) owing to difference between the returned income and the assessed income because of certain additions made by the ITO. However, the Tribunal, Ahmedabad Bench B in the case of ITO v. Maneklal Harilal Spg. & Mfg. applied the said decision of the Gujarath High Court in the case of levy of interest u/s 215. Therefore, consistently with that decision of the Tribunal we can consider the applicability of that decision of the Tribunal we can consider the applicability of that decision to the present case. Now, for the earlier years no addition based on facts similar to the addition of Rs. 5,47,69,105 has been made and so the assessee could be said to be under the bona fide belief that this year also no such addition will be made.

The other additions also could not have been anticipated. Therefore, the levy of interest under sec. 215 would not be justified.

26. Interest u/s 216 has also been levied by the ITO and the Commissioner has confirmed it. This is the subject matter of ground No.11. The assessee has relied upon the same arguments and also upon the decision of the Gujarath High Court in the case of CIT. v. Nagari Mills Ltd. [1987] 166 ITR 292. We find from the ITOs orders that he has not given any positive finding that the assessee had under estimated the advance tax payable by it. Therefore, for the same reasons as for ground No. 10 and applying the above decision of the Gujarat High Court, we hold that interest u/s 216 cannot be levied. Accordingly ground Nos. 10 & 11 are allowed.

27. The last ground of appeal is that the Commissioner erred in not deciding the ground regarding the deduction of a sum of Rs. 5,04,412 being the amount transferred to reserve fund account as per the provisions of section 67 of the Gujarath Co-operative Societies Act, 1967. The Commissioner has sent back the matter to the ITO for his decision. In the grounds of appeal, the assessee has also relied upon the decision of the Madhya Pradesh High Court in the case of Keshkal Co-operative Marketing Society Ltd. v. CIT [1987] 165 ITR 437. At the time of hearing before us the assessees counsel relied upon this decision and submitted that since this was the only decision it should be followed. The Standing Counsel submitted that there are no facts on the basis of which this decision can be applied. The Commissioners order shows that this was taken as an additional ground before him. The ITOs order does not show any discussion regarding this issue. We agree with the contention of the learned Standing Counsel and hold that the Commissioner was right in directing the ITO to examine the issue and give a decision according to law. This ground is rejected.

28. In the result, the assessees appeal is partly allowed and the departments appeal is dismissed.

Per Shri R. M. Mehta (Accountant Member) - I have perused the order passed by my learned brother, the Judicial Member. I am in agreement with him in respect of all the ground raised in the appeals with the exception of the main and important issue of "Final Price" paid for procuring milk. It is the case of the assessee that the payment of Rs. 5,47,69,105 represents the "final price" paid for the milk supplied by various Primary Milk Co-operative Societies over the entire previous year beginning 1-4-1983 and ending on 31-3-1984 and is allowable as a deduction. The case of the tax authorities on the other hand is that is a case of "profit adjustment". According to the assessing officer the payment is "not guided by any commercial principles and therefore, is not allowable as an expense u/s. 37(1)".

2. I do not propose to repeat either the facts or the arguments advanced by the parties since these have been ably dealt with by my learned brother. I will only refer to these wherever necessary.

3. The assessee is a Co-operative Society (hereinafter referred to as "Society") established under the Gujarat Co-operative Societies Act.

Its members are Primary Co-operative Milk Producers Societies situated in the various villages of Mehsana District. These numbers around 889 during the period villages of Mehsana District. These primary societies it turn comprise of individuals who supply milk to the Primary Societies which then supplies it to the assessee. The individuals who are members of the Primary Societies number around 2,20,000 during the period under consideration.

4. The "Society" came into existence on 8-11-1960 and its main object as stated in clause 4.1 of the bye-laws is as under : "The main object of the Union is to carry out the activities for economic and social development of the agriculturists, by efficiently organising processing and marketing of agriculture and allied produce." The achieve the aforesaid main object the Society envisages various activities but it would suffice if the following are mentioned : 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 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." To develop the affiliated societies to the utmost in its power by raising the standard of general and co-operative knowledge among their members and office-bearers and its application to business methods, and to assist other milk schemes, technically, administratively or in marketing of milk and milk products 5. Clause 9 details the obligations cast on the member societies. They are bound to sell the milk etc., through the society and are liable to penalty for any willful failure to abide by this condition.

6. Clause 35.0 gives the constitution of the Board of Directors as follows : (b) 1 (one) representative of other societies and individual members..." (d) 1 (one) nominee each (in total three representatives) whose term of appointment can be changed every year from the financial institutions like Gujarath Industrial & Investment Corporation, Indian Dairy Corporation/National Dairy Development Board, Mehsana District Central Co-operative Bank Ltd., till the moneys borrowed from them are repaid.

(f) 1 (one) representative of the Gujarat Co-operative Milk Marketing Federation Ltd." 7. Clause 54 gives the manner in which the profits are to be distributed. The relevant portions are extracted as under : 54. At the annual general meeting the gross profit earned in previous year shall be announced and the following deductions shall be made : (6) Contribution to staff provident fund and gratuity fund after above provisions under 54(A) - the balance of profit if any, shall be provided for the following : (7) Provisions for bonus to employees not exceeding three months salary.

(9) Provision for capital redemption fund @ 10% on preference share capital.

54 (B) - The balance of net profits which then remains shall be divided as under : (2) The contribute towards Gujarat State Co-operative Education Fund in terms of rule 31 of Gujarat Co-operative Societies Act.

(3) Out of the remaining profit dividend shall be distributed on the paid up share capital as per provisions of Co-operative Act and Rules and as decided by the Annual General Meeting.

(C) The balance of profit if any shall be transferred to General Fund which can be used with the approval of General Body meeting either for distribution among the members supplying milk and milk products or for utilising for Research and Development work or for dividend equalisation or for charity fund or for Co-operative training and promotion purposes." 8. In view of the aforesaid background it is apparent that the "society" is strictly not a profit making organisation but an institution that has the welfare of its members at heart inasmuch as it has cast upon itself the task of obtaining for them the best possible price for the milk supplied by them.

9. At the outset I purpose to deal with the allegation of "tax evasion" against the assessee by the tax authorities. I am of the view that this is not well founded and borders on "uncharitable". There is no evidence with the department to make such a charge. It has probably overlooked the fact that the "Society" is managed by a Board of Directors which includes not only the representatives of affiliated societies but also the nominees of various financial institutions, the Registrar of Co-operative Societies as well as the Indian Dairy Corporation, National Dairy Development Board and the Gujarat Co-operative Milk Marketing Federation Ltd. In such a set up it is high impossible for any person or set of persons to engage themselves in activities which are not above board.

10. The question of "tax evasion" would come up in a case where "personal gain" to an individual is envisaged but in the case of the "Society" it can be ruled on altogether since the management is by the Board of Directors and the motive is to benefit the "not so well off" members of various Primary Societies. This also becomes clear from the stipulation in the bye-laws to the effect that even the balance in the "General Fund" could be utilised for distribution amongst the members.

11. It may also be pointed out that the accounts of the Society are duly audited by a Special Auditor appointed by the Registrar of Co-operative Societies and the primary duty of this functionary is to ensure the propriety and genuineness of each item of expenditure. In this connection I would refer to the observations of the assessing officer to the effect that profits show a nominal upward trend whereas the sales have increased manifold. There is also an allegation of design and purposeful intent in "maintaining" the profit at a particular figure. According to me these allegations are baseless and not supported by any evidence. They are mere surmises and conjectures.

In case the turnover has increased the expenses have also shown an appreciable upward trend.

12. In respect of the year under consideration the ITO has failed to notice that huge additions to the tune of Rs. 5,07,86,915 were made towards "Fixed Assets". This not only led to an increased claim on account of depreciation to the tune of Rs. 1,58,36,628 as against Rs. 57,13,363 in A. Y. 1983-84 but also hiked up the deduction on account of investment allowance (addition of Rs. 2.71 crores towards plant & machinery) from Rs. 8.96 lakhs in A. Y. 1983-84 to Rs. 68.14 lakhs in the year consideration. The other items of expenditure and income on the other hand maintained a normal upward trend in between A. Y.1983-84 and 1984-85.

13. In case the increase claim on account of depreciation and investment allowance is ignored the profit would go up many times.

These figures also belie the revenues charge of "maintained" figure of profit from year to year.

14. The ITO has disbelieved the explanations given by the assessee during the course of the hearing on the ground that facts and figures were not furnished to show how the prices had been fixed from time to time. I am of the view that where the Board of Directors are seized of the matter a decision could be taken orally by considering the relevant facts (already mentioned in the letters dated 5-1-1987 and 23-1-1987 to the ITO) (see para-3 of the order of the learned Judicial Member).

After all this was not the first time that such a payment had been sanctioned by the Board. It was a practice being consistently followed all along in the past from year to year. It was also expected that the persons constituting the Board were intelligent and qualified persons who were well versed with the job in hand which included major and important decisions such as price fixation. As an example one need refer only to the price of Rs. 47.02 per kilo fat (after payment of the additional price) which is lower than the average price paid by other.

Milk Producer Unions in the State of Gujarat (see para 6 of the order of the learned Judicial Member).

15. A chart furnished by the assessee during the course of the hearing shows that in A. Y. 1980-81 the prices of buffalo milk were raised 8 times before the final price was fixed at Rs. 28/35. In A. Y. 1981-82 the prices were raised 4 times with the final price being fixed at Rs. 32/26. The corresponding figures for A. Y. 1982-83 and 1983-84 were 8 times and NIL; The final prices being Rs. 41/48 & Rs. 45/73 respectively. In the assessment year under consideration viz. 1984-85 the revision was made thrice and the final price fixed at Rs. 47/02.

16. The aforesaid figures not only show a steady upward trend from Rs. 28/35 in A. Y. 1980-81 to Rs. 47.02 in A. Y. 1984-85 but also indicate an appreciable degree of reasonableness and accuracy in the fixation/revision from time to time. It would suffice to say that the department has accepted a final price of Rs. 45/73 in A. Y. 1983-84 but refuses to accept a final price of Rs. 47.02 for A. Y. 1984-85.

A similar situation prevails in respect of the prices pertaining to "Cow Milk".

17. I would now proceed to narrate the sequence of events relating to the payments made during the year under consideration. There were three Circulars dated 26-2-1982, 20-12-1983 and 27-1-1984 respectively whereby "provisional prices" were determined covering the entire period from 1-4-1983 to 31-3-1984. The relevant portions of one of the circulars dated 27-1-1984 are as under : "This is inform all the milk producing co-operative societies that with effect from the morning of 1-2-1984 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 1-4-1983 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." 18. The fixation of the final prices was included in the agenda (item No. 7) for the Board of Directors meeting to be held on 31-3-1984 for which notice was issued on 24-3-1984. The following resolution was passed at the said meeting.

"The milk purchase prices paid to the milk producing co-operative societies during the year have been provisional. It is hereby resolved that the final prices be paid to co-operative societies to enable them to pay, to their milk producers on good milk supplied by them during the period April, 1983 to February, 1984, at the rate on the provisional price paid for good quality buffalo milk supplied at 12.5% and on good quality cow milk supplied at the 15.5% and accordingly the final price for the current year is decided/fixed." 19. The assessee passed the following journal entry to implement the decision of the Board of Directors to pay the additional amount (towards the final price) to the Primary Societies :- Narration : Being the entry for the final purchase price paid to milk co-op. societies who supplied good milk for the period April 83 to February, 1984 @ 2.5% on buffalo milk and @ 15.5% on cow milk for the year 1983-84 as per the Board of Directors resolution No. 8 dated 31-3-1984." 20. The Directors made the following observations in the statement submitted at the Annual General Meeting : During the year 1983-84, our union has procured approximately 17.61 crore kg. milk which is 21 lacs kg. more than the previous year. Of the total milk procured approximately 80.6% was of buffalo milk and 19.4% was of cow milk. As compared to the 3.33 crore kg. of cow milk last year, it was 3.42 crore kg. this year. Though the union provided services, like cans, acid, alcohol, artificial insemination, extension and training, members insurance, cattle insurance etc. to societies either free or at concessional rates, we have been able to pay Rs. 47.02 per kg. for good quality of milk, which is higher by Rs. 1.29 p.

per kg. fat in comparison to the last years purchase price. Thus the purchase price of milk was quite satisfactory." "In view of the circumstances mentioned above and considering the fact that the milk purchase prices in the North and South have been less than what is paid to the farmers in Gujarat. It is matter for concern, as to up to what extent, we can increase and maintain the ever increasing trend in the purchase price of milk. It is time that we realise limitation in this area of pricing and give a serious thought to the per animal increase in milk production." 21. The Government Auditors have taken note of the activities of the assessee and the payment position for the supply of milk as under :- "Main activity and aim of the Union is to see that milk producers of the district get better milk prices...." "Keeping in view the above aims, Mehsana District Milk Producers Union Ltd. has undertaken vide spread development activities. The milk producers of the district are integrated by the Union through affiliated co-operative societies and has collected the milk produced by their cattle and from this milk, by manufacturing and selling ghee, powder, casein etc. and by this it has led to give maximum possible purchase price of milk." "(i) The milk collected and processed and sold by the Union with a view to give supporting milk prices to the milch animals owners are as under : The milk collected by the Union consists of 80% of buffalo milk and 20% of cow milk.

The Union has done activity of cow-Insemination and especially in this way it has developed improved cow generation ratio.

In spite of the lower production of milk in the district as compared to the last year the union has collected more milk. Milk producers are inspired to supply more and more milk because the Union is giving higher prices every year and also rendering other services to the milch animals owners." 22. The revenue has tried to make out a case for "tax evasion" against the assessee on the ground that a sum of Rs. 5,47,69,105 has been diverted with a view to reduce the taxable income and consequently the tax payable to the Government. The following position emerges from the chart appended at page 47-A of the assessees paper book : "Mehsana District Co-operative Milk Producers Union Ltd., Mehsana.

384.002 23. It is apparent that the average payment towards "final price" to each individual who has supplied the milk comes to Rs. 248.95 which is lower than the average of Rs. 285.75 and Rs. 255.22 for A. Y. 1983-84 and 1982-83 respectively. It is rather strange that an average payment of Rs. 248.95 per person over a period of one year is viewed as a "tax evasion Scheme".

24. A few words at this stage about the "sample" collected by the ITO about the prices prevailing with a private dairy in Mehsana for the relevant period. I am of the view that this example does not advance the revenues case inasmuch as a private dairy operates on a very small scale and does not have large overheads as would be the case of the assessee. The quality of the milk is also bound to differ. An examination of the figures collected by the ITO shows that the price per kilo fat of buffalo milk from 1-4-1983 to 4-11-1983 was Rs. 26 when it suddenly jumped to Rs. 40 from 5-11-1983. This sudden jump could only be attributed to various market conditions the most important being the demand and supply position and the quality. This in fact is what the assessee explained in the various letters addressed to the ITO. Moreover a comparison has to be made with the price paid by other similar societies and not a private dairy. It is also not clear from the orders of the authorities below whether the assessee was confronted with the case of the "private dairy".

(1) The system of making a "final payment" at the end of the year has been consistently followed all along in the past and accepted by the department.

(2) The price arrived at after making the final payment is not only reasonable as compared to the prices paid in the immediately preceding asst. years but also compares favourably with the prices paid by other large societies in the same period in the State of Gujarat. It is actually lower.

(3) The "genuineness" and "bonafides" of the payment have not been challenged.

(4) There is no material with the department to take the view that it is a "profit adjustment" and not the payment of "final price". The case of the revenue has proceeded on assumptions and presumptions and on a wrong understanding of the relevant facts and figures.

(5) The assessee is a society working under the superintendence of various govt. organization. Even the Board of Directors is constituted on these lines. In such a case the charge of "tax evasion" and "managed profits" is not only not justified but not borne out by facts and figures. To substantiate a charge of "tax evasion" the onus lies heavily on the department and this they have not been able to discharge.

(6) The fixation of "provisional prices" over a particular period is intimated to the "suppliers" from time to time and it is clearly stated in the circulars that the "Final Price" is payable at the end of the year "considering the amount realised". This not only arouses an expectation in the minds of the suppliers to receive something at the end of the year but also creates a definite and positive liability against the assessee.

(7) The payment of the "final price" does have a relationship with the ultimate realisations and the profit earned by the society but this by itself does not convert the payment into a "profit adjustment". These factors only serve as a guide in the price fixation since the ultimate aim is to obtain the best possible price for the milk procured and pass it on to the suppliers.

(8) A similar system of payment of "final price" has been adopted by other societies in the State of Gujarat and accepted by the tax authorities.

(9) No action has been taken by the department to revise the completed assessments of earlier years where similar payments on account of "final price" have been made. (A statement at the bar to this effect was made by the assessees counsel).

(10) The payment of Rs. 5,47,69,105 distributed over 2,20,000 members of the primary societies works out to Rs. 248.95 per person as against figures of Rs. 5,48,64,234 and Rs. 285.75 respectively for asst. year 1983-84 (the latter figures have been accepted by the department).

(11) The "comparable case" relied upon by the department was in fact not "comparable" and was not even put across to the assessee to meet it.

26. In the final analysis I would hold that the payment of Rs. 5,47,69,105 towards "final price" for procuring milk is an allowable deduction.

Per Shri K. R. Dixit, Judicial Member - A difference of opinion has arisen amongst the Members who constituted the Bench. The following point of difference is referred to the Honble President of the Income-tax Appellate Tribunal under section 255(4) of the Income-tax Act, 1961 : Per Shri Ch. G. Krishnamurthy, president, Third Member -This is a matter coming out of an appeal taken up for hearing by Ahmedabad Bench C of the Income-tax Appellate Tribunal. As there was a difference of opinion between the learned Members, the matter has been referred to me as a Third Member under section 255(4) of the Income-tax Act, 1961. The difference of opinion is :- The difference of opinion is very widely framed. I have heard Shri N.A. Palkhiwala for the assessee and Shri R. P. Bhatt for the department and I have perused the orders passed by my learned colleagues as well as the departmental authorities. My opinion is that the assessee is entitled to the deduction of the sum as a part of the purchase price paid for the milk purchased and it is not in any sense of the term a distribution of the profits.

2. The assessee is a co-operative society established under the Gujarat Co-operative Societies Act. Its members are primary co-operative milk producing societies situated in various villages in Mehsana district.

The number is around 889 in the period under consideration. These primary societies in turn are constituted by individuals, who supply milk to the primary societies. The primary societies then supply the milk so collected from its individual members to the assessee society which is an apex society as far as the district of Mehsana is concerned. The individuals, who constituted these primary societies numbered about 2,20,000 during the year under consideration. The assessee society came into existence 8-11-1960. Its main object, as stated in clause 4.1 of the bye-laws is : "The main object of the Union is to carry out the activities for economic and social development of the Agriculturists, by efficiently organising, processing and marketing of Agricultural and allied produce." To achieve the aforesaid main object of the society, the society had undertaken several other activities, one of which was of procuring milk. Clause 4.2, sub-clause 2.2, mentions the arrangements the arrangements that the assessee society had made for the procurement of the milk and its disposal : "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 & Investment Corporation, Indian Dairy Corporation, National Dairy Development Board, Mehsana District Central Co-operative 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 distribution of profits also was provided in clause 54 of the Articles, which in particular provided that after providing for all the expenses, bonus, provision for income-tax, provision for the payment of the payment of the dividend on the paid up share capital as per the provisions of the Co-operative Societies Act and Rules as decided by the annual general meeting and the balance of profit, if any, is to be transferred to the general fund, which can be used with the approval of the general body meeting either for distribution among the members supplying the milk and milk products or for research and development work or for divided equalisation or for charity fund or for Co-operative training and promotion purposes. Thus the distribution of profits is subjected to very strict control and it has to be in the stipulated channels. As seen the stipulated channel was if it is to be distributed among the members supplying milk and milk products, it has to be out of general fund and that too after the approval of the general body meeting. In other words, nothing can be distributed to the members supplying the milk except by the approval of the General Body in their annual general meetings.

3. As I have mentioned a short while ago, the assessee society sells the milk supplied to it by its members to the consumers. It makes payment for the milk supplied to it by the members societies on the basis of a price per unit called "Kilo Fat". This price is not stationery for the entire year but it is ambulatory and is revised from time to time depending upon several factors, which included the fact contents of the milk supplied. The milk supplied was both buffaloes as well as cows milk. For the period from 1-4-1983 to 20-12-1983 the prices fixed were Rs. 41 per kilo fat and 18.10 per kilo fat respectively for buffaloes and cows milk. It was revised to Rs. 43 and Rs. 19.10 per kilo fat with effect from 21-12-1983 and that continued till 31-1-1984. Again on 1-2-1984 the price was revised to Rs. 46 per kilo fat and Rs. 20.35 per kilo fat respectively and that continued to the end of the accounting year, namely, 31-3-1984. Thus the price was revised three times in the accounting year. The total amount paid on the basis of these purchase prices was Rs. 48,36,21,076. I may also state here that the revision of the prices was made through circulars issued on different dates i. e. 26-2-1982, 20-12-1983 and 27-1-1984 respectively. These circulars provided that the prices determined were only provisional e. g. in the circular dated 27-1-1984, by which the price was revised to Rs. 46 and Rs. 20.35 per kilo fat respectively for buffaloes and cows milk, circular read as under : "This is to inform all the Milk Producing Co-operative Societies that with effect from the morning of 1-2-1984 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 1-4-1983 the prices for milk fixed 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 31-3-1984, for which notice was issued on 24-3-1983, passed the following resolution : The milk purchase prices paid to the producing Co-operative Societies during the year have been provisional. It is hereby resolved that the final prices be paid to Co-operative Societies to enable them to pay, to their milk producers on good milk supplied by them during the period April 1983 to February 1984, at the rate on the provisional price paid for good quality buffalo milk supplied at 12.5% and on good quality cow milk supplied at the 15.5. % and accordingly the final price for the current year is decided/fixed." Pursuant to this resolution, the extra price payable was calculated and was paid which came to Rs. 5,47,69,105. This was adjusted in the books of account and this amount was claimed as a deduction.

4. The Income-tax Officer did not allow the assessees claim for the deduction of this extra price paid as he was of the opinion that this was not actually extra price paid for the milk but only distribution of profits, which could not be allowed as a deduction. His reasons were : (a) The resolution passed by the Board of Directors on 31-3-1984 was blissfully silent about the reasons and about the necessity of and justification for such additional payments and it also does not show how the figures of 12.5% and 15.5. % were arrived at.

(b) Despite several requests made, the assessee society had not furnished the required information as to how these amounts were arrived at.

(c) Even though the Board of Directors explained that the final price was determined keeping in mind the market price of milk prevailing in the region and also the supply and demand, there was no material before the Board of Directors to decide on 31-3-1984 how the prevailing market rate was ruling to justify the increase of 12.5% and 15.5% respectively of buffalo and cow milk.

(d) If the contention of the assessee society that prevailing market rate was paid to the suppliers of the milk, there was no reason why a less rate was paid to the suppliers from the beginning of the accounting year and how the suppliers accepted a lower rate throughout the year.

(e) The market price of the milk in Mehsana was much lower than even the regular price paid by the assessee society. There was, therefore, no need to pay any additional price. To substantiate this point of market price being lower, the Income tax Officer made a reference to the price charged by another trader called M/s Ambika Dairy Farms Highway, Mehsana, who charged Rs. 26 per kilo fat for buffaloes milk from 1-4-1983 to 4-11-1983 and Rs. 40 from 5-11-1983 to 31-3-1984.

Compared to these prices paid by Ambika Dairy Farms Highway, the price paid by the assessee society was much higher. Therefore there was no need to pay still higher prices at the end of the year by calling it additional price determined on the basis of the market rates.

(f) A comparison of the assessees book results over a period of 5-6 years in the past showed that even though the turnover was steadily maintained by passing off the extra money earned to the suppliers by way of additional price the net profit ranging between 0.38% to 0.23%.

(g) He arrived at the conclusion that to arrive at the profit margins of the earlier years, the excess money was paid off and it was that excess money that worked but to 12.5% and 15.5% respectively on buffalo and cow milk. Thus the assessee had adopted a scheme for evasion of income-tax.

(h-i) The Income-tax Officer also noticed that for the month of February, 1984 the price paid was Rs. 51.75 for buffalo milk and 23.40 for cow milk but that rate slipped down to Rs. 46 and 23.35 respectively for the next month of March, 1984 and there was no reason as to why the prices had slipped down.

(j) He also referred to the fact that while the average purchase price was higher in the last year at Rs. 45.73, it was Rs. 41 for this year and there was no reason as to why a lower price was paid to start with.

5. For these reasons the Income-tax Officer arrived at the conclusion that the payment of Rs. 5.47 crores was not guided by any commercial considerations and therefore not allowable as an expense under section 37(1) of the Income-tax Act, 1961. He also invoked the provisions of section 40A (2). It was for these reasons that the Income-tax Officer disallowed the claim of the assessee. I have tried to summarise all, the points that were mentioned by the Income-tax Officer in his order as supporting his conclusion.

6. There was then an appeal before the Commissioner (A). The Commissioner (A) upheld the view of the Income-tax Officer, by repeating the same contentions that were urged before the Income-tax Officer. The assessee society relied upon a decision of the Andhra Pradesh High Court in the case of Armoor Co-operative Marketing Society (supra), whereby the High Court held that if there is a policy decision issued by the Government, that policy decision has to be implemented by the society and that if in the implementation of that policy certain amounts became payable, those amounts should be allowed as a deduction.

The Commissioner (A) observed that unlike in the case before the Andhra Pradesh High Court, there were no such policy directions given by the Govt. of Gujarat in the case of the assessee society and therefore there were no compelling circumstances, which could have led to an adjustment of the price for upward revision of the same and the resultant additional payment. He therefore came to the conclusion that the assessee society had no liability on the last day of the accounting period to declare an additional payment nor was there any anterior title to make any such additional payment. It therefore resulted in an application of income by way of apportionment of profits. He also laid emphasis on the fact that the assessee societys silence to inform the Income-tax Officer as to how those percentages were arrived at, proved beyond any shadow of doubt that the assessee society was embarking upon a scheme of avoidance of tax by syphoning off its profit to the primary societies after they accrued to the assessee society. Another decision in the case of Kaira District Co-op. Milk Producers Union Ltd. was also relied upon where a similar point was decided by the Appellate Asstt.

Commissioner in favour of the assessee. The Commissioner (A) declined to place reliance upon this decision on the ground that the facts were distinguishable. He went to the extent of remarking that the obligation to pay the additional purchase price was a self generated obligation and the payment made in discharge of such an obligation would not entitle the payment to deduction.

7. The there was an appeal to the Tribunal and after the arguments addressed to it by both the sides, the learned Judicial Member held in favour of the department while the learned Accountant Member held in favour of the assessee. The main argument addressed before the Tribunal was that the prices originally paid were only provisional, that there was an undertaking to pay the final price at the end of the year taking into account the results of the trading in the year as a whole and that in any case the assessee society being a co-operative society, the purpose was to obtain the best price for the milk supplied by eliminating the middle-man and helping the producers and by this process the assessee society ensured that the benefit reached the consumers. To bring home this point, reliance was placed upon the preamble of the Co-operative Act, the genesis of the co-operative movement in the country, which is to promote self help among the members. Reliance was also placed upon the comparative position of payments made by similar societies and others showing payments over a period of years, which showed that the variation of price is a normal incident in this kind of business and final payments were made in the assessees case also on the last day and such payments were being allowed as a deduction by treating them as part of the purchase price, as the assessees prices were reasonable and that the assessee could not pay less than the others, in which case the producers would have supplied milk not to the assessee society but to the other adjoining societies.

8. The learned Judicial Member did not agree with any of these arguments. According to him since co-operative societies were taxable under the Income-tax Act, no special treatment could be given to them.

According to the learned Judicial Member, the incomes of the co-operative societies also have to be arrived at on the basis of the principles applicable to other taxable entities. The argument that the assessee was merely a body, which tried to get the best price for the producers and after deducting its expenses, it paid the sale proceeds to the producers and so the question of the assessee society making any profit and distributing it to the producers did not arise was not accepted. He was of the firm opinion that the assessee mist have disclosed the basis for arriving at the additional price on 31-3-1984, the last day of accounting year, and if the assessee society had not disclosed the basis, the Income-tax Officer was not obliged to accept it as a payment made for the purpose of the business. He was also of the opinion that on the basis of the citation of the instance given by the Income-tax Officer, the price paid by the assessee was far more and therefore no further payment was called for. On all the other points, he agreed with the Income-tax Officer and also with the reasoning of the Commissioner (A) I do not think it is necessary for me to refer to the reasons given by the Commissioner (A) as well as the Income-tax Officer that he was not prepared to accept the contention of the assessee society that the prices determined at the end of the year was a business requisite and not an apportionment of profits and that there was an obligation on the part of the assessee society to make the final payment as the prices earlier fixed were only provisional. I would, however, prefer to reproduce the final conclusion of the learned Judicial Member : "The essential point is that the rate of payment increases with the financial position of the assessee and not with the market price. As stated above the payment made by other similar societies cannot be taken into consideration as proof of the market price. Therefore, there is no satisfactory evidence regarding the market price produced by the assessee but evidence to the contrary has been produced by the Income-tax Officer. The assessee, looking to its financial position, fixes the price as on an earlier date. It is because of this correlation of the rate of payment with the financial position of the assessee coupled with the failure to produce satisfactory evidence of the market price, that the claim of the assessee cannot be accepted.

Therefore, both the Income-tax Officer and the Commissioner are right when they say that in reality the payment is distribution of profits in the form of price." 9. The learned Accountant Member, on the other hand, has given ample reasons as to why he disagreed with the view expressed by the learned Judicial Member. He first of all mentioned that in a society like the one before us, which is governed and controlled by governmental agencies brought into existence for the purpose of securing benefit to the suppliers of milk as well as the consumer of milk at reasonable price by eliminating the middleman, the question of avoidance of tax or tax evasion would not arise because tax evasion would arise only when there was some personal gain and there could not be a personal gain in a society of this nature. The accounts of the society were audited by special auditors appointed by the Registrar of Co-operative Societies and he did not point out that the payments made were not genuine or did not form part of the purchase price. Referring to the argument of the department that the assessee society was trying to maintain an even keel of profit, he pointed out that in this accounting year there were additions of Rs. 5 crores to the fixed assets, which led to a higher claim for depreciation and investment allowance and if they were taken into consideration, there would be variation in the profit margin which the Income-tax Officer had over looked. As the payments made this year as well as in the earlier years were subject to revision several times depending upon the market conditions and as there was an obligation to determine the final price at the end of the accounting year and in view of the specific mention in the circulars issued fixing the prices that they were only provisional and would be raised at the end of the year, the revision made at the end of the year in keeping with these obligations could not have been viewed with suspicion and be labelled as distribution of profits. He also relied upon the report furnished by the Govt. auditors where they have categorically pointed out with reference to the account for the year under appeal that inspite of the lower production of milk in the district as compared to the last year, the Union (the assessee society) had collected more milk. Milk producers were inspired to supply more and more milk because the Union (the assessee society) was giving higher price every year and also rendered other services of the much animal owners. From this report he drew the inference that payment of higher price was a necessary commitment for the carrying on of the business by the assessee society and the milk price paid had to be compared with the prices paid by other societies. He also referred to the average final price paid to the primary societies over a period of 5 years starting from the assessment year 1980-81 and ending with the assessment year under appeal and found that while the average purchase price paid to the primary societies in 1983-84 was Rs. 280.75, the average purchase price paid in the assessment year under appeal was only Rs. 248.95, which showed that what was paid was much lower including the final payment made and therefore there could not be any suspicion about this payment as being normal incident of business and the theory that it was apportionment of profit was wrong and ill advised. He was also not prepared to place realise on the sample collected by the Income-tax Officer as the assessee in that case was a small trader with a different variety of milk. His final conclusion was that the final price paid does have a relationship with the ultimate realisations and the profit earned by the assessee society and that does not by itself convert the payment into a profit adjustment except that it served as a guide in the ultimate price fixation. Having accepted the final payment made in the earlier year as reasonable, no different view should have been taken in this year.

10. Shri N. A. Palkhiwala appearing for the assessee and Shri R. P.Bhatt appearing for the department addressed elaborate arguments to me each side relying upon those orders which were favorable and in support of their views. Shri N. A. Palkhiwals submitted that the final price determined was always based upon the market conditions and the trading conditions during the entire period and that final price has to be determined always at the end of the year and the learned Judicial Member had not properly appreciated this position while the learned Accountant Member had appreciated this position in the proper prospective. The theory adumbrated by the learned Judicial Member that the price paid by the assessee society being higher than the price paid by other, it led to the conclusion that what was paid on the last day was the profit distribution, was an untenable proposition and was against the practice adopted by the assessee society in the past and also similarly placed societies and also against the undertaking given by the assessee society to its members at the time of fixing the prices. The prices fixed originally were only ad hoc prices and the suppliers supplied the milk in the expectation that something more would be paid to them at the end of the year and that something more would compensate them adequately so that they are not put to any loss.

He pointed out that section 40A (2) did not apply at all.

11. The learned counsel for the department, on the other hand, submitted that there were no compelling circumstances to make the final payment and even if it was assumed that there were compelling circumstances, there were no conditions in existence compelling the assessee society to fulfil those obligations. Therefore the payment was made ex-gratia and in the absence of any inputs to judge as to how those amounts were arrived at, it could only mean that those amounts were paid in order to maintain the profit level by syphoning of the excess. Therefore, there was no business necessity. The assessee society should have shown the material to prove that what was determined to be paid represented or at least approximated to the market price. That evidence was either withheld or was lacking and therefore the conclusion drawn by the department argued, that the assessee society had no object of profit making. He relied upon a decision of the Gujarat High Court in the case of CIT v. Navsari Cotton & Silk Mills Ltd. [1982] 135 ITR 546 in this connection.

12. The learned counsel for the assessee in reply submitted that had the increase not been allowed, the rate paid would have come to Rs. 41 per kilo fat, which was lower than Rs. 45.75 paid in the previous year and no supplier would agree to receive such a low price unless there was an expectation firmly embedded in it that the prices ultimately paid at the end of the year would not be lower than the price received in the earlier years. The assessee society could not also over look the escalation in the prices of inputs so as to reduce the price from Rs. 45.75 per kilo fat paid in the previous year to Rs. 41 per kilo fat paid in the year under appeal disallowing the additional price. He relied upon in particular the notice dated 24-3-1984 calling for the meeting of the Board of Directors, where the agenda included as one of the items to fix the final milk purchase price for the current year. He also referred to the statement showing the provisional and final purchase price paid in all the previous years commencing from 1979-80 to the year under appeal, which showed that the revision of price was taking place very frequently and the prices were being adjusted at the end of the year by making a final payment. The final payment made this year came to Rs. 47.02 as against Rs. 45.73 made in the previous year.

13. I have considered the arguments so assiduously put forward before me and the opinions expressed by my learned brothers as also the orders passed by the learned Commissioner (A) and the Income-Tax Officer, each one of whom appeared to have taken great pains to buttress their views.

As I have mentioned in the beginning of this order, I did not find any difficulty in reaching the conclusion that what prompted or prevailed with the department to come to this conclusion was a suspicion that the assessee could not have paid such a huge amount on the last day of the accounting year with a view to benefit the suppliers of milk by way of purchase price except that it was a mode of distribution of profits with a view to reduce the profits. This suspicion got fortified by the assessees inability to supply the data as to how the percentages were fixed in the resolution passed on 31-3-84. Another factor that prevailed with the department all along was that when the price paid by any trader was so low as Rs. 41 per kilo fat, there was no need to pay a further higher price. The same arguments also prevailed with the learned Judicial Member but in my opinion what is relevant and clinching is the undertaking given by the assessee society while purchasing the milk by issuing various circulars from time time revising the prices. From the circulars issued one of which was extracted above, it is as clear as day light on a bright sunny day that the prices fixed were only ad hoc and provisional and that the final price would be fixed at the end of the year. What does this mean if not an obligation taken by the assessee society to adjust the prices at the end of the year. Merely because an adjustment had taken place at the end of the year that should not by itself become suspect, which appears to me to be the sole cause for the entire exercise that was undertaken by the department in this case. When an undertaking was given by the assessee, society to the members that they were fixing a provisional price at that time and that they would revise the price at the end of the year either upward or downward, it becomes an offer made to the societies to purchase the milk subject to those conditions and when the milk was supplied by the primary societies accepting those conditions, it became a sort of contract or an agreement between the assessee society and the primary societies that the prices paid would be provisional and that the final price would be paid at the end of the year. This contract or agreement has legal implications. It become enforceable at law. The assessee society had incurred an obligation to adjust the prices at the end of the year although the quantum of the adjustment was left undecided and open and was at the discretion of the Board of Directors. If the Board of Directors do not discharge this obligation, any aggrieved party can go to a court of law and sue the society to enforce the obligation. The Board of Directors would be committing a breach of contract if they do not enforce this part of the obligation. That was the reasons why every year the final prices were being adjusted and were being paid to the suppliers. The suppliers by this practice adopted by the assessee society developed a certain amount of confidence and trust in the undertakings given by the assessee society. But for the trust so created and the faith that had developed in the minds of the primary societies, the primary societies would not have agreed to supply the milk to the assessee society at prices lower than the prices fixed in the earlier year. They are aware and full confident and reposed absolute faith in the assessee society that the assessee society would sell the milk and milk products in such a way as to minimise the profits and pay a higher price for the milk supplied. By keeping the amount of the final price to be paid uncertain at the beginning of the year the advantage that would accrued by this process would be two fold and would work out to mutual advantage. The primary society i. e. the members would not only strive to maintain the quality of milk the required that contents but would also try to improve upon it with a view to get higher price at the end of the year.

In other words the quality of milk is maintained and is never allowed to dilute or deteriorate, thereby the members would get a higher price and that is their expectation and advantage. And the assessee society would always get good quality of milk. It would therefore be able to command a good price for the milk and thereby pay more price to the suppliers. Thus there is mutual advantage. It was this aspect that the Govt. auditors had commended in their report, which was noticed by the learned Accountant Member and had referred to in the earlier part of this opinion. Thus the mechanism adopted by the assessee society is working to the advantage of both and is not without a purpose and commercial expediency. That apart as I mentioned earlier, there is a compelling obligation which the Board of Directors have to discharge.

The circulars issued earlier on the basis of which the suppliers were induced to supply milk at provisional prices in the expectation of getting higher price at the end of the year and the revision of those prices made from time to time, as often as 8 times in some of the previous years and three times in this accounting year, amounted to creation of a contractual obligation the responsibility of performing which was squarely on the management (i. e.) on the Board of Directors.

Therefore the rule laid down by the Andhra Pradesh High Court in the case of Armoor Co-operative Marketing Society (supra) is clearly applicable and in my opinion it is not correct to say that the principles laid down by the Andhra Pradesh High Court were not applicable to the facts of this case. As rightly pointed out by the learned Accountant Member the average price paid to the primary societies this year was far less than the price paid in the previous year including the additional price. It is unthinkable that the primary society would agree to supply the milk to the assessee society at prices far lower than the price paid to them in the earlier years i. e.

as against Rs. 285.75 paid in the previous year the price paid this year was only Rs. 248.95, still lower than that. That only shows that the conditions in the year under appeal were not so favorable as to pay them a higher price than in the previous year. It is also to be noted that in the assessment year 1980-81 there was a final payment made of Rs. 51 lakhs, which was allowed. Similarly payments of Rs. 19.34 crores, Rs. 4.64 crores and Rs. 5.48 crores were paid in the assessment years 1981-82, 1982-83 and 1983-84 respectively and were allowed. This was the business practice regularly employed by the assessee in all the previews years and was accepted by the department as genuine and when that was so, there is no reason to deviate from that practice in the year under appeal particularly when the situations were just similar and were not shown to be different at all. The department should not have deviated from this practice adopted by the assessee in all the previous years without appreciating the expediency. More importantly assuming that this was not made, then the rate that would have been paid to the primary societies would have been only Rs. 41 per kilo fat as against Rs. 45.75 and a little higher than paid by the other societies. Would the suppliers agree to such a lower rate These facts and the fact that this was the practice adopted by the assessee society in each of the earlier accounting years and the fact that there was an obligation undertaken by the assessee society to make the final payment at the end of the year depending upon the market conditions and the surplus realised and the fact the payment was approved in a meeting of the Board of Directors as in the earlier years, proves that the payment made was nothing but a part of the purchase price of the milk supplied to the assessee society and in no manner a distribution of profits. In the ultimate analysis any payment made would be a part of the profits and could thus be described as distribution of profits but that is different. We have to differentiate between the purchase price, the sale price and the profit. It is open to a business undertaking to pay a little more to its suppliers in order to ensure suppliers so long as it was making good profits and because a part of the profit so earned or expected was paid towards purchase price, it could not by itself be said that the amount so paid was distribution of profits. I am also unable to subscribe to the view that merely because the price paid by the assessee society was higher than the price paid by the other societies, the excess paid was only by way of distribution of profits.

Neither in fact nor in law, this proposition has got roots. Not can it be said as pointed out by the learned Judicial Member, that the prices paid by other similar societies do not reflect the ruling market price.

In other words, market price cannot mean the price paid by solitary individuals carrying on business as suppliers of milk to the house hold on a minor scale as compared to the large scale of supplies made by similar societies. Therefore reliance upon the evidence that the income-tax Officer claimed to have collected as representing the market price do not, in my opinion, reflect the market price in contradistinction to the prices paid by the other similarly situated societies. In fact it is the eventual financial position that will determine the final prices and therefore eventual financial position has to invariably have a correlation to the rate of payment to be fixed at the end of the year and this factor cannot be dismissed as insignificant. I may also point out here that according to the Articles of Association governing the assessee society, which was referred to earlier, the profit remaining after making all adjustments has to be transferred to the general fund and the manner in which the general fund has to be used had also been laid down and any payment can be made out of the general fund only by the approval of the general body meeting and unless the general body meeting approves any payment for distribution among the members supplying the milk, no distribution of profit is possible. Here there is no approval of the general body meeting for the distribution of profits.

14. For these reasons and for the reasons given by the learned Accountant Member, I am inclined to agreed with the view expressed by the learned Accountant Member and hold that the sum of Rs. 5,47,69,105 paid was only part of the purchase price determined at the end of the year payable to the primary societies and not distribution of profits at all and the mere inability of the assessee society to explain as to how that amount was arrived at cannot convert the nature of these payments, which is nothing but an additional purchase price into distribution of profits. The determination of percentages must be left to the wisdom of the Board of Directors and merely because the mechanics for arriving at the figure was not furnished, no adverse view can be taken against the assessee society. Even if the percentages adopted were such as to keep the profits at a pre-determined level, still the nature of the payment does not get converted into distribution of profits. The lone instance relied upon by the Income-Tax Officer, in my opinion, does not advances the case of the Revenue. In this context the past practice adopted by the assessee society and approved by the department over a period of years cannot be jettisoned as irrelevant.

15. The matter will not go before the regular bench for deciding the case according to majority opinion.