1. Several ounds have been raised by the assessee challenging the orders of the learned CIT(A) Kolhapur, but the main dispute relates to the confirmation of additions of Rs. 2,24,84,410 and Rs. 1,22,11,637 for the asst. yrs. 1991-92 and 1992-93, respectively, being the rate of difference on the sale of yarn distributed amongst the members by the assessee-society.
2. The assessee is a co-operative society which was formed on 18th June, 1974 and registered under the Maharashtra State Co-op. Societies Act. The society was formed by 3015 members consisting of 3012 weavers owning power-looms and 3 weaver societies. The Maharashtra Government also contributed substantially by way of share capital as well as arranging the finance by way of soft loans etc. The shareholding pattern is as under: The main object of the society for which it was formed is mentioned in bye-law No. 7 of the society which reads as under: 7The object of the mill shall be to promote economic interest of its members by undertaking spinning, dyeing, sizing, weaving and manufacturing of textile materials of all kinds and supply of yarn of all types to the weavers and others. When the yarn is supplied to the weaver members, the same shall be supplied at reasonable price consistent with economic working of the mill.
To attain the above object, the mill was competent to do several activities including the following: (b) to purchase cotton and/or man-made fibre and carry on ginning, spinning, sizing, weaving, bleaching, mercerizing, dyeing, printing and other allied processes and to sell the finished material so manufactured.
(i) to enter into contract with co-op, societies, Government owned companies/corporations or individuals or others for purchase and sale of raw material and finished products of the mill and its members and to appoint agents on payment of salary and commission for such purchases and sale and to open depots for such sales, if necessary.
Bye-laws 63 and 64 prescribed the basis for allotment of products amongst members: 63. The board shall in pursuance of the policy of rational distribution of yarn or such other produce as it may specify, draw up, from time to time, a scheme for. its distribution among the various members eligible therefor. While drawing up such a scheme, the board shall have regard primarily to the active loomage of the members so eligible and in appropriate circumstances also the shares held by them.
64. The allotment shall be made, if necessary, through the co-operatives, a federation of the co-operatives, or through any other organization/individual as may be determined by the board. In the event of any allottee not accepting, within a specified period, the allotment made to it, the managing director shall reallocate the product among the other eligible members. Any surplus will be disposed of in such manner as the managing director may deem fit.
3. During the course of assessment proceedings, the AO noted that the assessee had deducted sums of Rs. 2,24,94,410 and Rs. 1,22,11,637 for the asst. yrs, 1991-92 and 1992-93, respectively from the total sales of yarn and mentioned that the sums represented the compensation for surrender of the quota rights. The assessee-society had been supplying the yarn to its members since 1979 at a price slightly above the cost but below the market price. The quota and its price was being fixed by a sub-committee of the board of directors. The quota was distributed amongst the members by issue of the quota slips. Sometimes the members were selling the quota slips in the market. The members approached the mill with the representation dt. 9th Nov., 1989 and requested it to sell the quota allotted to them in the market and pass on the rate difference between the quota price and the market price to them. The assessee passed a resolution in its general body meeting on 12th Nov., 1989 resolving to sell the quota yarn on behalf of the members and distribute the rate difference to its members. Before the AO the assessee contended that there was a clear legal obligation on the assessee to pay to each member the surplus arising out of the quota rights allotted to them. This legal obligation arose simultaneously or, in other words, even before the receipt of money and, therefore, the assessee did not have any title to the income relatable to the quota rights which at all the material times really vested in the members.
The AO rejected the contentions raised before him for the following reasons: (i) The activity of the assessee-society to sell on behalf of the member mills yarn and distributing the profits as rate difference is beyond its object and this is not the purpose for which it is established and no permission is obtained from any Government authorities.
(ii) The resolution passed by the members authorizing the assessee-society does not create obligation on the assessee-society to sell goods on behalf of the member mills instead of distributing the quota. It does not create any overriding obligation on the society.
(iii) The society is allocating more type counts of yarn on quota when the quota was distributed however, after the system of paying rate difference, the mill started allocating yarn of 14 different counts/varieties. By doing so, it is trying to distribute profits without paying any taxes.
(iv) The assessee-society has started distributing the rate difference only from November, 1989 and not from earlier period on the basis of representations received from the member mills. This is nothing but a colourable device to avoid payment of income-tax to siphon out its profits to members without payment of tax.
(v) Some of the member mills who were examined were not having even the looms to make use of the yarn allotted to them.
(vi) While distributing the rate difference, the assessee has deducted only the direct expenses for sale of yarn and indirect expenses have not been reduced.
The AO accordingly made the above two additions in the respective assessment years.
4. The assessee appealed to the learned CIT(A), Kolhapur, who confirmed the additions made by the AO for the reasons given by the AO in the impugned order. The CIT(A) also rejected the contention of the assessee requesting for admission of additional evidence. Aggrieved by the additions made, the assessee-society is in appeal before this Tribunal.
5. Shri S.E. Dastur, senior advocate appearing on behalf of the assessee-society first summarized the facts and then submitted that the main activity carried on by the assessee-society is to manufacture yarns of certain counts, varieties depending upon the needs of the members and the textile industry. It mostly produced 2-3 counts (i.e.
345, 405, 605) of yarn in bulk (at the most 75 per cent). The commercial production of the assessee-society started in 1977 and in the first few years of its existence, its products were being sold directly in the market. Having achieved its objective of establishing a credible presence in the market, the assessee thereafter switched over to a system known as "quota system" for the benefit of its members.
Under the quota system, the board of directors chalked out monthly quota to be allotted to its members. Depending upon the manufacturing pattern and schedule of the assessee mill and the type of yarn manufactured from time to time, the board of directors of the assessee mill would allot a quota of yarn of different counts as per shares held by each member. Under the quota system, the member could lift the quota allotted to him at the price determined by the board of directors. The price was determined by the board of directors by generally fixing it at a price consistent with the cost of production and prevailing market price. However, as the entire production of the mill was to benefit the members of the assessee-society, the price fixed would always be lower than the market price but nevertheless would be consistent with the economic working of the mill. In other words, yarn of specified count, type and variety would be allotted to various members of the assessee-society at confessional price fixed from time to time. The procedure followed was explained with the examples as well as actual quota slips issued. Shri Dastur also drew our attention to the resolution of the board of directors as well as the yarn quota committee (placed at pp. 129 to 135 of the paper book) as was prevailing in 1979 onwards. As per the procedure followed, the quota slip used to be sent to the various members who would then utilise the quota and procure yarn from the assessee-society, if the count and quality, type and variety were suitable to the requirements of the member. In the event the quota was for count, type and variety which was not suitable to the member, he would sell, transfer or assign the quota slip to any other interested person, whether member or not. Such other person would then utilise the quota and purchase the yarn of the count, type and variety specified in the quota slip at confessional price fixed.
6. According to Shri Dastur, with the experience of few years, working of the system resulted in certain difficulties. It was noticed that considering the installed spindle capacity and number of members, it was not possible to distribute the yarn amongst the members in such a manner that every member would get the quantity required by him in requisite quality, Shri Dastur drew our attention to the letter issued by the Ichalkaranji Power Looms Co-op. Society dt. 18th Dec, 1993 and the submissions made by the assessee-society before the AO vide letters dt. 5th Jan., 1994 and 22nd Jan., 1994 (placed at pp. 114 to 123 of the paper book). From the technical details furnished by the Power Loom Association, it was pointed out that for running of set of four looms, the minimum quantity required of 405 count was 437 kgs. if he was to manufacture the cloth in economic quantity. However, the society, on the basis of its production could allot very meagre quantity, i.e., approximately 15 kg per share of particular count etc. Our attention was drawn to the quota slip distribution placed at pp. 147 to 151 of paper book. Shri Dastur submitted that the result was that the members were sometimes forced to sell the quota slips issued to them to the traders and yarn brokers. The yarn brokers would then consolidate the quota slips and resell the same both to the members of the assessee-society and others according to the type, quality and count of the yarn. As a result of third party getting involved in this system, the real benefit which was to accrue to the members was getting diverted to the traders, who on one hand, would not give reasonable price for the quota slips issued and on the other hand, after cornering the quota slips, the yarn speculate and rise price resulting in huge profits accreting to such traders, brokers instead of members of the assessee-society. Our attention was drawn to the appeal submitted by the members to the society (pp. 12 and 17) and submissions made before the AO (pp. Ill and 112).
7. Shri Dastur brought to our notice that since 1986, due to recession in the textile market, the yarn rates were higher than the rate of cloth and therefore, there was poor demand for the yarn allotted by the assessee-society. Therefore, even though the society declared the quota at a particular rate, members did not lift the same. Due to non-lifting of yarns by the members, the stock levels of the yarn with the mill used to go very high due to which, it had to suffer loss in two ways, loss on account of depressed market as well as interest on the funds blocked in the stocks lying with the assessee-society. Therefore, the society had to discontinue the quota slips in some years, i.e., 1986-87 till October, 1989. During this period, the assessee-society was selling the yarn in the open market by auction. However, if the members wanted to purchase, they were given discount of upto 10 per cent and this continued upto October, 1989.
8. In view of the difficulties experienced, submitted Shri Dastur, as the main object of the assessee-society, i.e., safeguarding the interest of its members, was not being met, various members proposed that a new system be adopted. A formal request was made by the members that the assessee-society should sell the yarn quota allocable to the members, on their behalf at the market price and the difference or the surplus between the quota rate and monthly average sale rate, i.e., market rate should be distributed amongst the members. Our attention was drawn to the letter received from the members dt. 9th Nov., 1989 signed by 97 members, passed at the annual general meeting held on 12th Nov., 1989 wherein more than 550 members were present (pp. 12 to 20 of the paper book).
9. Shri Dastur also pointed out that the Government nominees, nominees of financial institution and Government auditor were also present at the said annual general meeting. It was pointed out that the new system would be advantageous from all points of view of members and real objective of the society would be achieved. It was felt that this will also help members, as they could purchase the variety, quantity and count of yarn from the open market at the market price which would be more than compensated by the rate difference paid by the assessee-society to its members. In other words, the objective of the assessee, i.e., promoting the economic interest of its members by sale of yarn at concessional price to its members would be achieved in the real sense. As per the requisition of the members after the detailed debate, resolution was passed on 12th Nov., 1989. As per this resolution, the assessee-society was authorized to sell the quota yarn allocable to the members at a market price and the difference between the market price and the quota price was to be distributed amongst the members.
10. Pursuant to the said resolution of the general body, every month, the yarn sales committee carries out a two-fold exercise. It first determines the "quota right distribution kgs." that each member is entitled to depending on his shareholding. It also decides on the 'quota right distribution rate'. Thereafter, it sanctions the sale of the said yarn of member's quota right through the mill's sales depot as well as through agents and authorizes the credit of the difference into the individual members account.
11. Shri Dastur submitted that the similarity between the old method and the new method is that in both there is a determination of the member's quota entitlement depending on the expected production of yarn and the number of shares held. In both methods, there is also a determination of the quota price. The difference is only that while in the former method, the quota used to be physically distributed amongst the members, the quota is now sold on behalf of the members and the difference is distributed amongst the members. The changeover from the 'quota distribution' system to the 'quota price distribution' system was effected to benefit the assessee and its members. According to the learned counsel, the new system overcomes problems of the earlier system and there were genuine commercial benefits. Our attention was drawn to the various resolutions of the yarn sale committee placed at pp. 29 to 40 of paper book and also the credit of the quota right difference to the account of each member at pp. 67 to 69 of the paper book.
12. As regards the observations of the AO that no permission had been obtained from any other Government authorities or the bye-laws do not permit the assessee-society to carry on the activity of sale of yarn on behalf of the member mills, Shri Dastur pointed out that the main object of the society is to promote the economic interest of its members. For this purpose, the society can carry on any activity including "purchase, sale of raw materials and finished products of mills and its members and to appoint agents etc..." "and when the yarn is supplied to the weaver members, the same shall be supplied at a reasonable price consistent with the economic working of the mill." According to the learned counsel, this itself goes to show that the bye-laws permit the society either to distribute the yarn to the members to buy/sell raw materials and/or finished goods. It was also pointed out that the Government is the major shareholder in the society. All the major decisions have necessary approval from the Registrar of Co-op. Societies. It was pointed out that in all these years including upto 2001, there was no objection or complaint from any authority and also that the Government auditors who have audited the accounts have not pointed any violation of the bye-laws or rules. Shri Dastur drew our attention to the provisions of the Co-op. Societies Act and the rules and the role of the Registrar of Co-op. Societies and auditor etc. and pointed out that when the assessee started the production in the initial years in August/September, 1977, the entire production was sold in the market. Once the quality was established in the market and customers' confidence was developed, the assessee-society started distributing the quotas to the member mills.
This distribution of quotas to the member mills was accepted by the Department as well as all other authorities as part of the obligation of the society as well as permissible within its objects, However, while distributing the yarns as per the quota to the member mills, it was supplied at a reasonable price keeping in mind the economic working of the mill. The objective was the yarn supplied to the members should cover the cost plus some marginal profit. As against this, some yarn was also sold in the market at market rates so that the society is able to recover sufficient funds for creating reserves as well as repayment of bank loans and for ensuring that if the yarn is supplied to outsider at sufficient profit, it can give the yarn at the lower rates to the member mills.
13. As regards the observation of the AO that the assessee-society had no authority as per the objects or obligation or as per the resolution to sell on behalf of all the members yarn of the quota allocated to the member mills, Shri Dastur pointed out that how there is a difference between the distribution of yarn amongst the members (who in turn would buy and consume themselves or buy and exchange or sell to make it useful to them) or alternatively, the society collectively on behalf of all the member mills, sell the yarn quota (allocable to the members) through agent to outsiders and distributes the surplus as per their quota, who in turn use such surplus for their benefits. The purpose by both methods was to ensure the benefit to the members. The learned Counsel emphasised that if the earlier method was legally acceptable to the Department, merely because 'form' of operating system was changed, so as to maximise benefits to the members, how that could be objected.
14. As regards the observation of the AO that quota had been reduced though the production had gone up and that in between the years, i.e., 1986-87 to 1988-89, no quota or yam difference was distributed, Shri Dastur submitted that as mentioned above, as per the system followed by the society, the quota was offered to the members at certain price which was keeping in mind the economic working of the society. If, therefore there is not much difference in the cost of production of yarns in the market price, there was hardly demand from the member mills to purchase the quota and either sell or utilise themselves.
There used to be always a time limit given to members each month to lift the quota. If the quota was not lifted, the society had to sell the yarn in the open market. He submitted that during the years 1986-87 to 1988-89, it would be noticed from the chart enclosed at p. 65 of paper book that since there was no much difference in the (sic) and the market price, every month there used to be stock carried forward by the society as it was not lifted by the members though offered, and in the process, the society was suffering further loss due to the interest on stock carried by them. The society could not have supplied the yarn to mills at a price below the cost as it would result into further loss to the society and it would not have been economic working. That is the reason, pointed out Shri Dastur, why the society had discontinued distributing the quota amongst the member mills. Only when again the market prices of the yarn improved after the recession during the earlier 3 years, the society decided to start distributing the quota amongs the member mills in the year 1989. Shri Dastur pointed out that it was not correct on the part of the AO to make allegation that it was a device of the society to siphon off the profits to members to reduce the tax liability. If it was so, he should have made similar allegations even for the years 1981-82 to 1985-86 when the yarn was distributed amongst the member mills. If this aspect is removed from the mind that this was a tax planning device, the matter would be crystal clear that whether the society distributes the yarn amongst the members or distributes the surplus, it is one and the same. Shri Dastur pointed out that the monthly minutes of the committee, detailed working of determination of cost of production, price for the quota, distribution of surplus amongst the members, crediting surplus to the account of individual members and payment to individual members was submitted to the AO and he has not found any objection or deficiency in the procedure and the only thing he objected was the basis. Shri Dastur further submitted that the change in the basis of distribution of quota to distribution of surplus of the quota was specifically at the request of the member mills as per special resolution passed by them and this change was necessitated for the benefit of members and not in the interest or for the benefit of the assessee-society. Since the interest of the members was a paramount consideration, the procedure was changed and it was for valid commercial reason. He further submitted that the surplus, being the difference between the quota price and the market price which is realised by the assessee-society is not the income of the assessee-society at all but the income of the assessee-society's members who in terms of the resolution clearly have a right to the income even before the income is received by the assessee-society.
According to the learned counsel, the society cannot lay claim to the difference between the market price and the quota price, because the assessee-society merely receives the contributions and holds the same for and on behalf of the members of the assessee-society without having any interest therein. They are thus in possession of the funds as agents of the individual members within the meaning of Section 182 of the Contract Act. According to the learned counsel, where an income is received by an agent, he receives it for and on behalf of the principal and in support of this contention, he placed reliance on the judgment of the Bombay High Court in the case of CIT v. Y.S. Desale and the decision of the Hon'ble Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT .
15. Without prejudice to the above, Shri Dastur submitted that, if the society is not treated as an agent, then the principle of diversion of overriding title will be applicable. In this respect, he drew our attention to the decision of the Bombay High Court in the case of CTT v. Shri Chattrapati SSK Ltd. and Ors. . He further (iii) CIT v. M.D. Manohar Rao (1985) 48 CTR (AP) 13 : (1985) 155 TIR 696 (AP) Shri Dastur then drew our attention to the report of the statutory auditors appointed by the Registrar of Co-operative Societies and submitted that they have accepted the method adopted by the assessee.
Further, the accounts are placed before the Government authorities and no objection had been raised (pp. 154 to 155A of the paper book).
16. As regards invoking of principle/ratio laid down by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO , Shri Dastur pointed out that if there is a commercial reason or justification of any transaction entered into, the ratio laid down in McDowell case cannot be applied. In this respect, he placed reliance on the Supreme Court in the case of CWT v. Arvind Narottarh (Individual) , Union of India and Ors. v.Playworld Electronics (P) Ltd. and Anr. (1990) 184 ITR 306 (SC), Gujarat High Court in the case of Banyan & Berry v. CIT and Mumbai Tribunal in the case of WTO v. S.B.Garware (HUF)(1986) 24 TTJ (Bom) 73 : (1986) 15 ITD 711 (Bom). He submitted that the change was for commercial reason and accordingly, the ratio laid down by the Hon'ble Supreme Court in the case of McDowell (supra) is not applicable. Shri Dastur further submitted that the individual members had offered the yarn difference to tax and had been assessed (pp. 186 to 189 of the paper book, which was filed as additional evidence). This shows that the object was not tax planning.
Further, if the amount is assessed again in the hands of the assessee, there will be double assessment.
17. As regards the objection of the AO that some of the member mills have confirmed to him that they do not even own or did not own at any time the looms for manufacture/weaving of cloth, Shri Dastur pointed out that these allegations do not seem to be correct for two reasons, (i) no weaver can become a member of the mill unless he submits the declaration that he owns... (number) of looms at... (place), (ii) no opportunity was given to the assessee to cross-examine these people which the AO has claimed to have given statements that they never owned any looms. Shri Dastur pointed out that in fact the person referred by the AO, Shri S.M. Jadhav and other six persons named by him are the owners of the looms as can be seen from the certificate/permits issued to them by the Government of Maharashtra. Our attention was invited to pp. 158 to 185 of the paper book.
18. As regards the CIT(A)'s action of not admitting the additional evidence, Shri Dastur submitted that the learned CIT(A) was not justified in ignoring the evidence furnished before him. The learned Counsel submitted that the AO almost on the last date of the hearing merely showed the statements recorded of the 7 members and asked the assessee's representative to comment. Though it was specifically pointed out by the assessee's representative that unless the person owns power-looms, he cannot become member. He therefore wanted time to verify the records and reply to the AO. Without waiting for the reply or without giving opportunity, the AO had proceeded to conclude that there are many members who do not own any power looms and therefore, taking support of that, he justified his conclusion that distribution of yarn rate difference is nothing but distribution of profits. Shri Dastur pointed out that the circumstances in which the assessee was asked to reply cannot be treated as fair and sufficient opportunity to the assessee to furnish evidence and, therefore, when such evidence which is purely supporting evidence to the submissions made, should have been admitted by the learned CIT(A). He also pointed out that the full assessment was open to the CIT(A) and, therefore, for the fair and proper assessment, he should have considered all evidence before him.
In this regard, reliance was placed on the following cases: (i) Smt. Mohindar Kaur v. Central Government and Ors.
; The learned Counsel reiterated that the additional evidence is brought on the record only to show that only the persons who own the power looms can become members of the society. Without admitting that these members do not own power loom, he pointed out that it is not possible for the society to do policing in each year against each member to find out whether each member owns and uses the power looms or not. Shri Dastur, therefore, concluded saying that the society has to rely on the written declaration made by the members.
19. Shri Rajkumar, learned CIT-Departmental Representative strongly supported the orders of the authorities below and reiterated that the rate difference is the income of the assessee-society and it should be taxed in the hands of the society only. He re-emphasised the arguments advanced by the AO and confirmed by the CIT(A). According to the learned CIT-Departmental Representative, though the object of the society is to supply the yarn to its members, the society has converted itself into a business organization of manufacturing and selling yarn.
The so-called payment of rate difference is nothing but payment of profit. Shri Rajkumar further submitted that the society is not the agent of the members under the bye-laws. The obligation is created by the resolution, which is against the bye-laws. The society has abdicated its main object and relegated itself into a business organization. According to Shri Rajkumar, the society is a consumer society; its bye-laws do not authorize the society to sell the yam in the market. Bye-law 7(1) merely authorizes the sale by the society of the members' finished products, but not of their raw materials. Shri Rajkumar pointed out that there is only sharing of profit, but no sharing of loss by the members and this makes it a distribution of profits by the assessee. The learned CIT-Departmental Representative drew our attention to bye-law 12(c)(4) and submitted that it requires every member/shareholder to sign an agreement to purchase yarn to the extent offered to him. However, from asst. yrs. 1986-87 to 1989-90, there were no sales to members on quota basis and hence the assessee suffered losses. The learned CIT-Departmental Representative further pointed out that the commission of Rs. 13,45,465 paid to the mills' agents has been deducted but not the other selling expenses. The fact that the other selling expenses have not been deducted shows that the sales were in its own right as owner. In conclusion, Shri Rajkumar re-emphasized that the society has acted like any other corporate body and, therefore, what it has distributed is nothing but dividend and therefore, the income earned on the sale of yarn and distributed as 'rate difference' is nothing but application of income. He also submitted that the obligation is nothing but self-created obligation imposed by the assessee on itself. Therefore, it cannot be treated as diversion by overriding title. In support of this contention, he relied upon the judgment of the Hon'ble Supreme Court in the case of Motilal Chhadami Lal Jain v. CIT . According to Shri Rajkumar, it is not diversion of income at source but application of income and in support of this contention, he placed reliance on the decision of Bombay High Court in CIT v. Smt. Kamal C. Mahboobbani . Shri Rajkumar also submitted that merely because the income is taxed in other hands does not necessarily mean that the income should not be taxed in the hands of the recipient. He also mentioned that the decisions relied upon by Shri Dastur are distinguishable on facts and therefore, do not prove the case of the assessee. As regards whether the ratio laid down by the Hon'ble Supreme Court in the case of McDowell (supra) is applicable to the facts of the case, the learned CIT relied upon the orders of the authorities below.
20. We have considered the detailed and exhaustive submissions made by Shri S.E. Dastur, senior advocate and Shri Rajkumar, the learned CIT-Departmental Representative. We also may place on record the appreciation of the assistance given by both of them and in bringing out the various aspects of the case. We have gone through the detailed order of the learned CIT(A) as well as that of the AO. If we look to the background and the purpose of formation of the society, it is clear that it is formed for the benefit of the members of the society, i.e., who are power-loom owners. The fact that the Government has more than 50 per cent of the shareholding and has contributed finance to a substantial extent itself goes to show that the Government wanted to encourage cooperative movement for the benefit of the power-loom owners. In this society the power-loom owners have joined together for obtaining yarn at concessional price and the required quantity of the required count. This has been brought out in the bye-laws of the society. Therefore, if there is any action taken by the society to improve the benefits to the members, or economical conditions of the members, it can be treated as it is in the interest of the members of the society. Earlier, almost upto 1985 the society was distributing yarn amongst the various members as per their shareholding in the society. This has been accepted by the Revenue as a legal and acceptable activity of the assessee and no fault was found in the same.
With the difficulties faced and with the practical experience gained when it was noticed that the distribution of quota yarn was not really and directly benefiting the members, but intermediaries were taking advantage of their position, at the request of the members, the society agreed in 1989 to sell the yarn quota allocated to the members for and on their behalf collectively and distribute the surplus over the quota yarn price determined therefrom amongst the members. Therefore, in substance it cannot be said that there is any difference in the system or the mechanism. Under both the systems, the realizations from the yarn have been utilized by the members. As far as the society is concerned, the profit it used to get under both the systems have remained the same. Therefore, it cannot be said that by distribution of yarn difference there is a distribution of profit by the society. We are of the considered view that in principle there is no difference in the system followed by the assessee, even though the modalities of the distribution of yarn had changed. The change in the basis of distribution of 'quota distribution' system to the 'quota price distribution' system was specially at the request of the member mills as per the special resolution passed by them and this change was necessitated for the benefit of members and not in the interest or for the benefit of the assessee-society. Since the interest of the members was a paramount consideration, the procedure was changed and it was for valid commercial reason. Therefore, because the procedure was changed, it cannot be a ground for alleging that it was a device to avoid tax.
We are therefore of the considered view that in principle there is no difference in the system followed by the society even though the modalities of the distribution of yarn had changed. Therefore, no fault can be found so as to change the basis of taxability of the society.
21. We agree with the submissions made by Shri Dastur that this case is squarely covered by the decision of the jurisdictional High Court in the case of CIT v. Y.S. Desale (supra) and the decision of the Supreme Court in the case of Poona Electric Supply Co. Ltd. (supra). In the case of Y.S. Desale (supra), the Hon'ble Bombay High Court was concerned with the taxability of the income earned, which was received by the promoter of the co-operative society. It was observed as under: If the true character of the three promoters is considered in the right perspective, it would appear that they were really nominees or agents of the entire body of the proposed shareholders entrusted with the task of taking the necessary steps for the formation and registration of the proposed co-operative society. If they were agents and there was a statutory obligation on them to deal with the funds of the proposed society in the manner prescribed by the Maharashtra Co-operative Societies Act, it would be impossible to treat the deposit made in the banks as made expressly with the object of earning income. If the promoters had not acted in the manner that they have done, then they would have exposed themselves to the penal provisions of the Maharashtra Co-op. Societies Act as will be clear from the provisions of Section 146 thereof. Clauses (d) and (e) of Section 146 which are relevant, read as follows: (a) any person collecting share money for a society in formation, does not within a reasonable period deposit the same in the State Co-operative Bank, or a Central Co-operative Bank, or an Urban Co-operative Bank, or a Postal Savings Bank; or (b) any person, collecting the share money for a society in formation, makes use of the funds so raised for conducting any business or trading in the name of a society to be registered or otherwise.
These provisions will, therefore, show that if the promoters had chosen to use the funds of the proposed society in any other manner for the purpose of conducting any business or otherwise, the penalty provision in Section 146 would have been attracted. Under Section 147 contravention of the provisions of Section 146, Clause (d), is made punishable with fine which may extend to 500 rupees and contravention of the provisions in Clause (e) is made punishable with imprisonment for a term which may extent to one year, or with fine or with both. Thus, the promoters were merely fulfilling the statutory obligation when they deposited the moneys in the banks as required by law and it would be too much to hold that this amounted to income-producing activity. Consequently, in our opinion, the Tribunal was right in taking the view that the three promoters were neither an AOP nor a BOI and the answer to the first question has to be in the affirmative i.e. income is not to be taxed in the hands of the promoters.
In the case of Poona Electric Supply Co. Ltd. (supra) decided by the Hon'ble Supreme Court, the assessee-company carried on the business of distribution of electricity under a licence issued by the Government.
By Section 57(1) of the Electricity (Supply) Act, 1948, the provisions of Schedules VI and VII of that Act were deemed to be incorporated in the licence. Schedule VI imposed a duty on the licensor to so adjust his rates for the sale of electricity by periodical revision that his clear profits in any year did not, as far as possible, exceed the amount of "reasonable return". If the clear profit in any year of account was in excess of the amount of reasonable return, one-third of such excess, not exceeding 7-1/2 per cent, of the amount of reasonable return, was at the disposal of the licensee; one half of the excess had to be either distributed in the form of proportional rebate on the amounts collected from the sale of electricity and meter rentals or carried forward in the accounts of the licensee for distribution to the consumers in future in such manner as the State Government might direct. During the accounting years relevant to the asst. yrs. 1953-54 and 1954-55 the assessee set apart the sums of Rs. 42,148 and Rs. 77,138, respectively (which were under the provisions of the Act distributable to the consumers) and credited these sums to the "consumers' benefit reserve account"; and claimed deduction of these sums in computing its profits liable to income-tax. On these facts, the Hon'ble Supreme Court held as under: (i) that the amounts credited by the appellant during the accounting years to the 'consumers' benefit reserve account', being a part of the excess amount paid to it and reserved to be returned to the consumers, did not form part of the appellant's real profits; and to arrive at the taxable income of the appellant from the business under Section 10(1) of the Indian IT Act, 1922, the amounts had to be deducted.
That, as the appellant had adopted the mercantile system of accounting, the amounts so reserved for future payments were deductible in computing the income, profits and gains from the appellant's business for the relevant years, since the liability had accrued in those years.
The Supreme Court further held that income-tax is a tax on the real income, i.e., in the case of a business, the profits arrived at on commercial principles subject to the provisions of the IT Act. The Hon'ble apex Court further held that there is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. It was further held that there is a distinction between real profits ascertained on commercial principles and profits fixed by statute for a specified purpose.
22. As has been pointed out in detail above, the society was under legal and contractual obligation as per directions of the members for whom yarn was sold to handover the profits to them. The society merely received the proceeds as agent of the members. The income has never reached to the society as its income. We, therefore,. agree with the submissions that the rate difference distributed by the society cannot be taxed as the income of the assessee-society.
23. Even looking from different angles even if we hold that the society is not an agent of the members, still it will have to be held that there is a diversion of income by overriding title. In this respect, reliance placed by Shri Dastur on the ratio laid down by the Hon'ble Bombay High Court in the case of Chhatiapati SSK Ltd. (supra) and host of other decisions is well-founded. In Chhatrapati SSK Ltd. (supra) the Hon'ble Bombay High Court was considering the taxability of amount collected by the sugar co-operative society. The Court observed as under: A trading receipt means the assessee's own money which can be put to any use. In our view, as regards the deposits towards area development, cane development and hutment fund, the principle of diversion of income by overriding title would squarely apply. The various directions given by the State Government show that the Karkhana is required to deduct from the cane price the above amounts towards the said funds. It is clear case of diversion of income at source by overriding title. As stated above, in every matter, the Court has to examine the nature and the quality of the receipt. As stated hereinabove, the Court has to see the facts of each case.
There is a difference between an amount which a person is obliged to apply out of his own income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by obligation, income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation which is self-imposed, after such income reaches the assessee, then, such income is taxable.
Diversion of income by overriding title can be created by a contract between two parties before the income reaches the hands of the assessee. These are the basic principles which are required to be kept in mind. In the case of CIT v. Madias Race Club , the assessee was a company carrying on the business of horse racing. At the instance of the Government, the assessee was asked to conduct races for two days on behalf of the Chief Minister's Relief Fund and for one day on behalf of the Beggars' Rehabilitation Fund. The assessee' claimed that the net collections for the above three days were not assessable as income in its hands as the assessee had no power to deal with the said collections. The Department did not accept the claim of the assessee. The matter came by way of reference to the High Court which took the view that the obligations are there in every case but it is the nature of the obligation which is the decisive factor.
Where by the obligation, income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation, after such income reaches the assessee, then, it is taxable. On the facts, looking to the nature of the obligations, the Madras High Court came to the conclusion that the collections for charitable purpose effected during three days under the instructions of the Government were not taxable as it was a case of diversion of income by overriding title. Therefore, the real question in all the above matters is whether the income has accrued to the assessee and whether the profits on the scheme form the income of the assessee. Applying the above test to the facts of this case, we hold that the deductions, i.e., deposits made by the Karkhana on account of area development fund, cane development fund and hutment fund do not constitute trading receipt. We are of the view that as regards these funds the Karkhana acted as an agent and collections were made as per the directions of the Government to be spent on the purposes specified by the State Government and that the collections were made by way of retention of money from the cane price payable and hence they are not trading receipts. To that extent, we agree with the view of the Tribunal. In the case of Somaiya Orgeno Chemicals Ltd. v. CIT this Court has laid down that what was necessary was to see whether there was diversion at source and whether the assessee had lost domain and control over the amount so diverted.
Similar view has been taken in CTT v. Crawford Bayley & Co. (supra), Savita Nagpal v. CIT (supra), CIT v. Manohar Rao (supra) and CIT v.Tosh & Sons (supra). Even from this angle, as elaborated above, income will have to be treated as diverted to the members by overriding title and therefore cannot be taxed in the hands of the society.
24. Coming to the arguments of the learned CIT-Departmental Representative, for the reasons mentioned above, we do not agree with the submissions made by Shri Rajkumar that it is a self-imposed obligation and it is nothing but distribution of profit or sharing of profit. As pointed out, there is a difference between a co-operative society and the corporate body of a company. Society is formed collectively by the members for their own benefit which is not the case in the case of a company. Similarly, if the Revenue has accepted in earlier years that distribution of yarn amongst the members is legally permissible, how does it make a difference when there is a distribution of sale proceeds to members on the sale of yarn as per directions of the members. As regards invoking of principle/ratio laid down by the Hon'ble Supreme Court in McDowell (supra), we find that the ratio is not applicable to the facts of the case before us. It is only if there is a commercial reason or justification of any transaction entered into, the ratio laid down by the apex Court in McDowell (supra) cannot be applied, as held by the Supreme Court in the case of Arvind Narottam (supra), Playworld Electronics (P) Ltd. (supra), Gujarat High Court in Banyan & Berry (supra) and Mumbai Tribunal in the case of S.B. Garware (supra). In our opinion, switching over from distribution of yarn quota to sale of yarn/yarn quota allotted to the members on their behalf is for commercially valid justification and was with a view to maximise the benefits to the members of the society for which it was formed.
Therefore, it cannot be treated as a paper transaction or a colourable device to avoid tax.
25. In the light of above discussion, we hold that the rate difference distributed amongst the members by the society of Rs. 2,24,84,410 in the asst. yr. 1991-92 and of Rs. 1,22,11,637 in the asst. yr. 1992-93 cannot be treated as income of the assessee-society. To that extent, we reverse the orders of the learned CIT(A) and the AO.27. Before considering the proposed order in its entirety I had to seek clarification from the learned AM with respect to dealing with and outcome of the request for admission of additional evidence, as sought for by the assessee vide application dt. 3rd Oct., 2000. The learned AM gave his reply as under:Ichalkaranji Co-op. Spinning Mills Ltd., Ichalkaranji v. Dy.
CIT Spl. Range, I, Kolhapur (ITA Nos.
Please refer to your D.O. No. 1. Ad(ATPN)/02 dt. 16th May, 2002 on the above subject. In this connection, I have to state that though the assessee's representative requested vide application dt. 3rd Oct., 2001, for admitting additional evidence in the abovenoted appeal cases, it was not pressed. The only contention placed before us was that the CIT(A)'s action of not admitting the additional evidence was not justified and this feeble contention of the learned Counsel I have recorded in para 18 of the proposed order. In any case, we have not admitted any additional evidence as requested by the assessee because the appeals can be decided even without admitting additional evidence. The annexures to your letter are returned here i.e., order in ITA Nos. 92 and 93/Pune/1995 for asst.
yrs. 1991-92 and 1992-93 and assessee's application dt. 3rd Oct., 2001 along with annexures.
28. Since additional evidence as sought to be admitted has not been admitted by the learned AM as per the proposed order and clarified as above, I fully agree and concur with his conclusions in not admitting the additional evidence but I have my own reasons for the same which are given as under: 3. The assessee sought to get admitted the following additional evidence:(1) Copies of application from 7 members along with the 158-185evidence showing that they owned the looms (original andEnglish translation)(2) Copies of the IT returns of some of the members to show 186-189that income received by way of rate difference was offered fortaxation The first set of papers viz. page Nos. 158 to 185 as annexed to the paper book sought to be admitted as additional evidence before the first appellate authority were refused on the ground that the case1 of the assessee is not covered by exceptional clause under Rule 46A of the IT Rules or otherwise it could be admitted. As regards second set of papers, the same were sought to be admitted for the first time before the Tribunal but in respect to the entire additional evidence sought to be admitted, the assessee has not been able to establish before the Tribunal that as to how the case of the assessee falls under the exceptions as contained in Rule 46A of the IT Rules. The assessee has also not adduced any material or evidence which could prove that the documents sought to be admitted remained to be filed before the lower authorities either for lack of opportunity being allowed or for any other valid reasons when the AO has specifically observed in the order of assessment that statements of seven of the members of the assessee-society (named in the assessment order) were recorded which were duly shown to the assessee during the course of assessment proceedings and a chance was also given to comment on such statements which was not availed of by the assessee as no reaction came from the assessee's side. So at the stage of the second appeal, assessee's assertion that proper opportunity was not given to it, is of no consequence, especially in the absence of any affidavit having been filed to contradict such stand of the AO or otherwise to substantiate such claim made during the course of arguments before the Tribunal.
Moreover, Rule 29 of the ITAT Rules does not confer any right on the parties to appeal to produce any additional evidence either oral or documentary before the Tribunal. Such a right has been specifically taken away by prohibiting the production of additional evidence by the parties. Therefore, the question of party claiming a right to adduce additional evidence cannot arise. The power has been vested only in the Tribunal to require production of any document or evidence if it is of the opinion that it is necessary to do so to enable it to pass order or for any other substantial cause, which is found to be not there in the case in hand. Therefore, request for admission of additional evidence of the assessee is rejected and documents sought to be admitted as additional evidence would obviously be ignored for the purposes of present appeal.
29. Now coming to the merits of the case, being not in agreement with the findings and conclusions as drawn by the learned AM, in the proposed order, and while recording my dissent in this regard, I give my reasons for the same as under: 30. So far as the facts of the case with regard to this issue are concerned, I find that those have appropriately been recorded by the learned AM in the proposed order and for the sake of brevity these are not being repeated and I adopt the same as such. As regards arguments of the learned Counsel for the assessee are concerned, those too are found to be appropriately recorded and are being adopted as such. As regards arguments of the learned CIT-Departmental Representative are concerned, except reliance indicated to have been placed on Bombay High Court decision as reported in CIT v. Smt. Kamal C. Mahboobbani relating to the admission of additional evidence under Rule 29 of the ITAT Rules which is neither appropriate nor relevant to the issue in hand, I adopt all other arguments as recorded in the proposed order.
31. After hearing both the sides, considering the material on record, orders of the authorities below, case law cited and relevant provisions of the law and the documentary evidence to which attention of the Bench was drawn, I find that it is the case of the assessee that the sum deducted from the total sales of yarn represent the compensation for the surrender of quota rights. The assessee had been supplying the yarn to its members since 1979 at a price slightly above the cost but below the market price. The quota and its price was being fixed by a sub-committee of the board of directors. The quota was distributed amongst the members who were selling the quota slips in the market. The members approached the mill with the representation dt. 9th Nov., 1989 and requested it to sell the quota allotted to them in the market and pass on the rate difference between the quota price and the market price to them. The assessee-society passed a resolution in its general body meeting on 12th Nov., 1989 resolving to sell the quota yarn on behalf of the members and distribute the rate difference to its members. The assessee contended that there was a clear legal obligation on the assessee to pay to each member the surplus arising out of the quota rights allotted to them. This legal obligation arose simultaneously or in other words, even before the receipt of money and therefore, the assessee did not have any title to the income relatable to the quota rights which at all the material times really vested in the members.
32. It is the case of the Department that the AO rejected all the contentions as raised before him on the ground that from the events that have taken place over the years it is clear that the object of the company was to supply yarn to its members but the society has converted itself into a business organization of manufacturing and selling and the so-called payment of rate difference is nothing but payment of profit. Since the society is not an agent of the members under the bye-laws, therefore, the obligation, which is self-created through resolution, is totally against the bye-laws. The society has abdicated its main object and relegated itself into a business organization. The society is a consumer society, its bye-laws do not authorize the society to sell the yarn in the market. Bye-law 7(1) merely authorizes the sale by the society of the members' finished products but not of their raw material. There is only sharing of profit but no sharing of loss by the members and this makes it a distribution of profits by the assessee. Bye-law 12(c)(4) requires every member/shareholder to sign an agreement to purchase yarn to the extent offered to him. However, from the asst. yrs. 1986-87 to 1989-90 there was no sales to members on quota basis and hence the assessee suffered losses. It was further observed by the AO that commission of Rs. 13,45,465 paid to mill's agents has been deducted but not the other selling expenses. The fact that the other selling expenses have not been deducted shows that the sales were in its own right as owner. As the assessee has acted like any other corporate body and therefore, what it has distributed is nothing but dividend and therefore, the income earned on the sale of yarn and distributed as rate difference is nothing but an application of income. It is also opined by the AO that the obligation is nothing but self-created obligation imposed by the assessee on itself.
Therefore, it cannot even be treated as diversion of income by overriding title. It cannot be said to be even diversion of income at source but application of income and merely income is taxed in other hands does not necessarily mean that the income should not be taxed in the hands of the recipient. Therefore, entire receipts on account of sale of yarn is a trading receipt of the assessee and no part of it could be deducted by naming it as so-called rate difference because it neither has any statutory authority for excluding that income from the total income of the assessee nor it was diverted at the stage before reaching to the assessee. Hence its exclusion is unwarranted and at the most, it is a colourable device and ratio of the decision in the case of McDowell (supra) becomes applicable and as such diversion of income, on account of rate difference, cannot be given benefit of and is liable to be taxed in the hands of the assessee.
33. It is also the case of the Department that 7 of the members whose names have been given in the assessment order were examined on oath after summoning them by the AO. The statements, so recorded by the AO, were shown to the assessee's representatives and were given an opportunity to comment on such statements. Assessee has not submitted the comments on facts given in the statement. The AO noticed from the few statements recorded that ... some of the members are not holding any power looms at any point of time; some of them are having power looms which they have let out to others and hence not utilizing the yarn allocated to them; and some of them were occasionally utilizing the yarn allocated to them on the power looms run by them and most of the time they were selling the quota slips in the open market on premium. One thing common with all the above three categories of members is that whenever the quota was allocated to them through slips they were selling the same in the open market at a premium. Some of the members do not know the very term 'rate difference' and they do not know how it is worked out. One of the members Shri S.M. Jadhav has stated that he is holding 10 shares from the inspection (inception) of the mill and he never owned power looms at any point of time and he has been getting the quota slips which he had been selling in the market at premium. This is a case where quota is allocated to a member who is not a weaver. Again some of the members do own power looms but they are not running the power looms themselves and have let out their looms to others, have also been allocated quota slips.
Bye-law No. 63. which deals with allotment of products reads as follows: ... The board shall in pursuance of the policy of rational distribution of yarn or such other products as it may specify, draw up from time to time a scheme for distribution amongst the various members eligible therefor. While drawing up such a scheme, the board shall have regard primarily to the active loomage of the members so eligible and in appropriate circumstances also the shares held by them....
16.02 From the statements of the few members recorded and summarized above it is clear that the mill society has been allocating the quota yarn to those members also who are not weavers themselves and also to those members who are not running the looms themselves which is contradictory to Bye-law No. 63 of the society. It is pertinent to note here that the act of allocating the quota of its major counts by the mill society itself on behalf of the members and passing the difference between quota price and selling price to its members is more convenient for the members who are of the type mentioned above. They need not have to bother about anything and they will be getting their share in the profit, by virtue of their shareholding. Moreover, by the present system the assessee-society will be allocating only such type of yarn which is running in the market fetching more price than the quota price and the profit to the members is assured. The society can manipulate this allotment in such a way that the members will always be benefited. This is already evident from the very act of the assessee-society in allocating more types/counts of yarn on quotathat is from asst. yrs.
1981-82 to 1985-86 it has allotted on quota only 3 count types (34 s carded, 40 s combed and 60 s combed) whereas after they started the system of paying rate difference the mill has been allocating yarn of 14 different counts/varieties (please see Annex. II). By so doing the assessee has been distributing its profit without paying any taxes.
34. On the basis of above given details, AO further noted that the assessee has used this device of paying the rate difference to members for avoiding its income-tax liability. It was further noted that of all the years, this device has been brought to use in this year, because, assessee would be having surplus profit after adjusting all its carry forward business losses, depreciation and investment allowance and as a result it would be liable to pay income-tax. They had started this practice from November, 1989 on the basis of the representation received from the members who never bothered about this earlier, because the mill was running in losses. Since the mill has earned huge profit during the year which the society cannot distribute fully amongst the members because of its Bye-Laws and Co-operative Societies Act, they have used this method to distribute its profits amongst its members and hence it is a colourable device to avoid payment of income-tax.
35. Against the abovenoted facts and conclusions as arrived at by the AO assessee has not come forward either to show that it applied for seeking cross-examination of the members whose statements were recorded by the AO or by giving other details and leading evidence in this regard, it could prove that the opportunity as required has been denied to the assessee. Simply making an assertion about not giving a chance to cross-examine a person or to provide opportunity to the assessee to represent, its case without giving minimum details, such as what is the date when the statements were recorded, what was the subsequent date fixed for inviting objections from assessee with regard to such statements etc. the same cannot be accepted. From the material on record, the details contained in the assessment order passed by the AO and in the absence of any specific request made for cross examination, the assessee's plea in this regard cannot be accepted. It is also worth mentioning that against such categorical finding of the AO with regard to showing statements of the members and seeking comments of the assessee on those statements and assessee's offering no comments and moreover assessee has not even controverted the same by filing affidavit or otherwise substantiated its plea before the first appellate authority or before this Bench. Therefore, under the circumstances, plea of the assessee is liable to be rejected and inference drawn by the AO in this regard are found to have been properly upheld by the learned CIT(A) whose decision is liable to be further confirmed.
36. So far as resolution dt. 12th Nov., 1989 is concerned, it is found that on the basis of representation made by 93 out of 3015 members consisting of total 3012 weavers, said resolution was passed by the general body meeting and on that basis, the rate difference on account of sale of quota yarn of members has been deducted from the income of the assessee and it was claimed as. exempt by taking the plea that the income has been diverted at source before it could reach to the assessee, hence, by overriding title, the same cannot be taxed as income of the assessee, besides sale having been effected on behalf of the members of the assessee-society, therefore, the difference between price fixed, which is slightly above the cost price, and the sale price received, is the income of the members to be shared in accordance with their shareholding.
37. Keeping in view entirety of the facts, other relevant material and basis and reasoning as given by the authorities below and noted above, it is observed that since the bye-laws of the society do not contemplate such arrangement neither there is any statutory obligation to divert any part of income of the assessee nor society is authorized to create a trust, therefore, the decision of the society to apply a portion of what it received as sale consideration could not be regarded as an instance of diversion by overriding title when amount received by the assessee and allowed by it to be paid to the members of the society. Moreover, diversion of income has taken place after and not before the income had reached the assessee.
38. So far as case law cited and relied upon by the learned Counsel for the assessee of jurisdictional High Court in the case of CIT v. Shri Chhatiapati SSK Ltd. is concerned, same is found to have held similar type of issue involved in favour of the Department rather than in favour of the assessee wherein it has been opined that principle of diversion of income by overriding title would squarely apply where various directions given by the State Government show that the Karkhana is required to deduct from the cane price the amounts towards certain funds. It has further been held that in every matter the Court has to examine the nature and quality of the receipt. The Court has to see the facts of each case. There is difference between the amount, which a person is obliged to apply out of his own income and an amount, which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by obligation income is diverted before it reached the assessee, it is deductible, but where the income is required to be applied to discharge an obligation which is self imposed, after such income reaches the assessee, then, such income is taxable. In the instant case, it is the self-imposed obligation created by the assessee itself. Therefore, ratio of this decision is fully applicable to the facts of the present case and as such the same has rightly been taxed. It will be worth mentioning latest decision of the Supreme Court of India in the case of State Financial Corporation v. Jagdamba Oil Mills AIR 2002 SC 834 which held that "Courts should not place reliance on the decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed". Further, it was held that "circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.
Disposal of cases by blindly placing reliance on a decision is not proper." 39. Yet in another case, the Madras High Court in the case reported in CIT v. Madias Race Club where the assessee was asked to conduct races for two days on behalf of the Chief Minister's Relief Fund and for one day on behalf of the Beggars' Rehabilitation Fund. The assessee claimed that the net collections for the above three days were not assessable as income in its hands as the assessee had no power to deal with the said collections. The Department did not accept the claim of the assessee. The matter came by way of reference to the High Court, which took the view that the obligations are there in every case but it is the nature of the obligation, which is the decisive factor. Where by the obligation, income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation, after such income reaches the assessee then it is taxable. In the instant case, the income has come to the assessee first and then it claimed deduction. So applying the ratio of this decision such difference in price is part of the trading receipt and as such taxable.
40. To the same effect, in another case, CIT v. Madras Race Club (2002) 175 CTR (Mad) 264 : (2002) 255 CTR 98 (Mad); Hon'ble Madras High Court has opined that when assessee is under statutory obligation and the rule is framed by an assessee for its own internal management, same cannot be elevated to the level of a statutory rule and what is received for benevolent purposes could not be regarded as instance of diversion by overriding title when the amounts received by the club and allowed by it to be used by the fund were not amounts, which had been paid voluntarily with the object of making those payments for charitable purposes. Diversion of the income took place after and not before the income had reached the assessee. So applying ratio of this decision, receipts coming into the pocket of the assessee before discharging any self-created obligations is nothing but taxable in the hands of the assessee.
41. Yet, in another case, CIT v. Salem Co-op. Sugar Mills Ltd. (1997) 138 CTR (Mad) 352 : (1998) 229 ITR 284 (Mad) the Madras High Court held that the position would be contrary where the assessee collected the amount under the statutory obligation and in the case in hand there was no statutory obligation in regard to difference claimed to be exempt.
So, no deduction could be made on account of overriding title. This view has been taken by the Karnataka High Court in the case of CIT v.Pandavapura SSK Ltd. (1992) 198 ITR 690 (Kar).
42. So far as diversion of income by overriding title is concerned, while explaining the decision rendered in the case of CIT v. Sitaldas Tirathdas , the Supreme Court in Moti Lal Chhadami Lal Jain v. CIT The expressions 'reaches the assessee' and 'has been received' have been used by the Supreme Court in the case of Sitaldas Tirathdas (supra) not in the sense of the income being received in cash by one person or another. What the Court emphasized is the nature of the obligation by reason of which the income becomes payable to a person other than the one entitled to it. Where the obligation flows out of an antecedent and independent title in the former (such as, for example, the rights of dependants to maintenance or of coparceners on partition, or rights under a statutory provision or an obligation by a third party and the like), it effectively slices away a part of the corpus of the right of the latter to receive the entire income and so it would be a case of diversion. On the other hand, where the obligation is self-imposed or gratuitous, it is only a case of application of income.
43. From the ratio of the abovenoted decisions, it emerges that income of the assessee can be said to be deductible by overriding title and as such is not taxable if it is diverted either in order to execute any directions issued by the State Government, or because of any statutory requirement or other legal obligations, or the same is diverted before it could reach the assessee. But if any income is applied to discharge obligation after it is received or it is diverted in order to discharge the self-created obligation, then it is taxable income and no deduction can be allowed.
44. Now adverting to the facts of the present case, it will be worth noting that the so-called obligation of the assessee is self-created, without having any statutory sanction, liable to be discharged after having received by it and is also beyond the scope of the bye-laws.
Therefore, the rate difference has rightly been taken as part of the trading receipt and claim of deduction is found to have justifiably been rejected by the authorities below. Their action being in conformity with law is liable to be upheld.45. So far as assessee's counsel's strong reliance on the decision in the case of Poona Electric Supply Co. v. CIT : CIT v.Y.S. Desale , the issues relate to statutory obligations and the ratio of these decisions cannot be held to be applicable to the facts of the present case.
46. Therefore, in view of facts and circumstances of the case and case law cited and discussions as held above, I uphold the orders of the authorities below and dismiss the grounds taken by the assessee in this regard for both the years.
As there is a difference of opinion between the Members on the Bench, following point of difference is being referred to Hon'ble President for hearing on such point or for nominating the Third Member or to pass such orders as the Hon'ble President may deem fit and proper: Whether, in view of the facts and circumstances of the case, the order of CIT(A) of confirmation of addition made on account of disallowance of deduction claimed of Rs. 2,24,84,410 and Rs. 1,22,11,637 for the asst. yrs. 1991-92 and 1992-93 respectively on rate difference is justified or not.
1. As there arose a difference of opinion between the Members, the Hon'ble President referred the following question under Section 255(4) of the IT Act, 1961, for my opinion as Third Member: Whether, in view of the facts and circumstances of the case, the order of CIT(A) of confirmation of addition made on account of disallowance of deduction claimed of Rs. 2,24,84,410 and Rs. 1,22,11,637 for the asst. yrs. 1991-92 and 1992-93 respectively on rate difference is justified or not? 2. While framing the assessment order, AO noticed, assessee has shown sale of yarn worth Rs. 33,86,68,146 and Rs. 40,43,43,556 for the asst.
yrs. 1991-92 and 1992-93 respectively. Out of this, assessee claimed deduction at Rs. 2,24,93,410 for asst. yr. 1991-92 and Rs. 1,22,11,637 for asst. yr. 1992-93, being compensation for surrender of quota rights/rate difference. Assessee was asked to explain the nature of the deduction from the sale of yarn and was asked again to explain why this should not be treated as assessee's income. It was submitted, assessee, a co-operative society was formed with the main object of promoting economic interest of its members by undertaking spinning, dyeing, sizing, weaving and manufacturing of textile material and to supply yarn of all types to its members, weavers and others. Assessee commenced production in 1977. Having established the credible presence in the market, assessee switched to a system known as "quota system", under which the directors fixed certain quota to be allotted to its members and by this method allotted certain quota of yarn of different counts to its members as per share they held. Under this system, they could lift the allotted quota and normally the prices were fixed much below the market price but a little above the cost of production. The procedure followed was that a quota slip would be sent to various members, who would then utilise the quota and procure yarn from the assessee if the count and quality were suitable to the requirements of the members. If it was not suitable, they would sell the quota to anyone whom they liked. This system though worked, created certain difficulties. Considering the installed spindle capacity, a number of members were not in a position to get the quantity of yarn required by them. Hence, they were forced to sell the quota in the market and by selling in the market, third parties intervened and the maximum benefits were not available to the members as the third parties siphoned off the profit. To overcome this difficulty, members proposed a new system, i.e., assessee should sell the yarn quota allocable to the members in the open market for and on behalf of the members and the difference between the sale price and the price fixed for allotment should be made available to the members instead. A resolution was passed to this effect in the annual general meeting on 12th Nov., 1989.
Hence, it was submitted, under this system, though assessee sold the yarn for and on behalf of its members, it had no right over the profit element. The assessee was acting as an agent and it had no interest therein. All that happened is that instead of members appointing different agents and getting the yarn sold through them, assessee sold it for and on behalf of the members and the amount was distributed to them in cash; whereas previously the product itself was given to them according to the available quota.
3. Assessee was asked again to give details of total number of shareholders, shares held by them and the number of power looms owned by the members. The details were furnished. There were total 3029 members, number of shares held by them were 16600 and number of power looms were 9500. The monthly production of yarn was around 4 lakhs kgs.
It was submitted monthly quota was so negligible that it could not satisfy even a fraction of yarn requirement of the members.
4. AO also noticed that the assessee mainly produced 2-3 counts in bulk (70 to 75 per cent) of 34s, 40s and 60s counts. The expected yam production of major counts ascertained in advance every month and the quantity of yarn as per share was decided by dividing the same by 16623 shares held by the weaver members. In some years the quota of yarn was not distributed. Yarn price in the market is directly related to demand for cloth and sometimes yarn rate happened to be higher than the rate of cloth due to low demand in the cloth market. Many of the members, due to this, did not lift their quota yarn and it often caused piling up of yarn with the assessee.
5. Taking clue from bye-law No. 7, which is the object of the mill, i.e., that the society was established with the basic purpose of promoting economic interest of the members and to supply them yarn. AO observed, assessee is a consumer society, which manufactures and supplies yarn for their benefit. It is the main object of the assessee.
AO, considered the resolution passed in the annual general meeting on 12th Nov., 1989 objectively and came to the conclusion that now the assessee has turned itself into a business organization of' manufacturing and selling yam and thus gone back from its main object of supplying yarn to its members, whose business interest was to be protected by the assessee. AO noticed, for the first two years immediately after coming into existence, there was no sale of yarn to its members by the assessee. From 1981-82 to 1985-86, i.e., for five years, assessee supplied yarn on quota basis. From 1986-87 to 1989-90, there was no quota yarn supply. Again in 1990-91, assessee allotted quota yarn to its members, but from November, 1989 onwards the assessee itself sold the yarn. AO noticed, from 1981-82 to 1985-86 when the assessee supplied yarn to its members on quota, there was a steep rise in production every year; whereas there was a steep fall in the sale of yam to its members on quota during those years. Assessee was again asked to explain why there was no sale of yarn to its members on quota basis during 1986-87 to 1989-90. It was explained, the rate depends on demand for cloth in the market; and if the quota was declared at a particular rate and there was no demand for cloth in the market, the members were reluctant to lift it; hence it piled up with the assessee.
This was the reason for stopping quota distribution. Assessee was again asked, how the assessee could sell the yarn in the market whereas bye-laws does not sanction such a thing. The reply was, the members requested the assessee to sell the quota allocable/allotted to them on their behalf. AO held, bye-law No. 7(i) authorizes the assessee to sell only the finished products of the mill and its members.
6. AO further noted, the members were not getting sufficient quantrty of yarn of particular counts allotted to them to use the same for their business and as a result they were forced to exchange/sell it in the open market and the same circumstances existed even prior to 1989, i.e:, before the members making their representation to sell yarn directly in the market and to pay them the difference. AO came to the conclusion that the members came to know that in fact when there was no demand from the members and they were reluctant to lift the quota allotted to them, society was making a huge profit out of the sale of these unlisted quota and when they came to know of this, the members insisted for such a sale on their behalf. He further noted, the resolution speaks of only excess of average selling rate over the quota price to its members and there is no mention of loss, if any, incurred by the mill being recovered from the members. In other words, the members were only interested in the profit.
7. AO, vide para 16 of his order records that some seven persons were called, who were holding shares and were examined on oath. The statements recorded from seven persons were shown to the assessee to comment and the assessee has not made any comments. He further noted, some of the members summoned stated that they were not holding any power-looms at all at any point of time; some of them have power-looms but let it out to others, hence not utilised the yarn allotted to them; some of them occasionally used the yarn but most of the time they were selling the quota slips in the open market on a premium; and some of them were not even aware of the term "rate difference", which assessee claims that led to the resolution, etc. AO concluded that the society can always manipulate this kind of allotment in such a way that its members will always be benefited.
8. From the above facts, AO came to the conclusion that the compensation paid to the members on surrender of quota rights is an application of its income and a device to reduce its tax liability. The assessment years under consideration have been chosen to make this kind of manipulation by the assessee because, after adjusting all carry forward business losses, depreciation, investment allowance, etc. still there is a huge tax liability. AO held, a consumer society cannot embark upon to sell its own products on behalf of its members. Its primary duty is to cater to the occupational needs of its members, which in the present case is spinning the yarn and supplying the same to its members for their consumption on active looms. He held, no doubt assessee can sell its products if its members do not consume them but it cannot allot the same to its members, yet hold the same on their behalf and sell it on their behalf, as it is beyond the purview of its bye-laws. He particularly noted that the figures arrived at by the assessee were after making commission payments to mill's agents. Except for this expense of commission, no other expenses have been deducted while considering the rate difference. Hence the AO rejected the claim of the assessee. Aggrieved by the above order, assessee approached the first appellate authority.
9. CIT(A) held, the only pertinent point to be decided by him as to whether the members had any legal right of asking for the quota and whether the assessee was permitted by the Co-operative Societies Act and by its own bye-laws to sell the quota allotted to the members in the open market and pay to them the rate difference. He held, "it would be paramount to note that during this year, the appellant had earned substantial profits. The bye-laws of the appellant's society as well as the Maharashtra Co-op. Society Act, imposes restriction on the distribution of the profit beyond a certain percentage'. He further noted, assessee-society's bye-law No. 12(c)(4) provides that "while becoming a member/shareholder, one has to execute an agreement to purchase yarn from the mill to the extent offered by it. Therefore, the bye-laws had caused the obligation not upon the appellant's society but on the members to lift/purchase the yarn allotted to them by the mill.
No evidence has been produced to show that during the years 1986-87 to 1989-90. the quota was offered to the members and they refused to lift.
It is a case where the legal and contractual obligation was flouted by the members and not by the society. The members were required to lift the quota and the appellant had sufficient stock of the yarn required by the members. As the members had flouted the bye-laws of the appellant, representation dt. 9th Nov., 1989 is against the bye-laws of the appellant so also the resolution No. 14, dt. 12th Nov., 1989. The defaulting persons cannot ask for any compensation or rate difference and cannot refuse to lift their quota in certain years and insist for the same in certain years. Further, the bye-laws of the appellant did not permit it to market its own yarn on behalf of the members, it being a consumer society." He further noted, no direction from the Registrar of Co-op. Societies was taken for selling the quota allotted to its members in the market. Further, taking note of the fact that the quotas were being allotted to members who had no looms or where looms were given on hire and quota slips were being also sold in the market.
CIT(A) held, assessee has done something against the bye-laws of the society by acting on behalf of the members and also the members had no right to ask the assessee to sell the products and to pay them the profit made out of such sale. In other words, the CIT(A) agreed with the AO that this was a device to siphon off the profits to its members without incurring liability to income-tax. The object of the existence of the assessee itself is to supply yam to its members whereas the assessee indulged in an activity contrary to the bye-laws and Maharashtra Co-op. Societies Act. Hence, he upheld the orders of the AO for the years under consideration. Aggrieved by the above order, assessee approached the Tribunal.
10. The order of the CIT(A) was assailed by the assessee before the Tribunal, firstly, on the ground that with few years of experience, the working of the system resulted in certain difficulties. That is to say, it was not possible to distribute the yarn amongst the members in such a manner that every member would get the quantity required by him/them of required count, It was noticed that for running of set of four looms, the minimum quantity required of 40s count was 437 kgs if it was to manufacture the cloth economically. However, the society was producing meager quantity, approximately 15 kg per share of particular count. There were certain recessions in the textile market. Sometimes yarn was costlier than the cloth; hence, there was poor demand for the yarn allotted by the assessee-society to its members. Sometimes the quotas were not lifted under these circumstances. The stock piled up, which caused loss to the assessee on account of depressed market as well interest on funds blocked with the society. To overcome the difficulties experienced and to safeguard the interest of the members, on the basis of the request from the members, the assessee-society decided to sell the "yarn quota" allocable to its members in the market and the difference between the cost price with slight profit element and the market price realised was made available to its members. This was on the basis of the request by 97 members and a resolution passed in the annual general meeting. Government nominees, nominees of financial institutions and Government auditors were present in the meeting and therefore the reasoning of the Revenue authorities that the assessee flouted the bye-laws, not obtained permission from the Registrar of Co-operative Societies, etc. is not of much relevance. It was further submitted, between the old method and the new method there is a clear determination of the member's quota entitlement depending on the expected production of yarn. There is no manipulation. The only difference is while in the former method the yarn quota was physically distributed to the members now it is sold on behalf of the members at their request and distributed the profit. The Registrar of Co-operative Societies has approved the decision. No objection or complaint was raised by any authority and, the Government appointed auditors certified that no bye-law has been violated. The Revenue has accepted the distribution of quota system as well in the past. Objecting to the finding of the Revenue authorities that the assessee-society had no authority as per the object or obligation or as per the resolution to sell on behalf of the members the yarn quota allotted, it was contended that actually there is no difference in both methods in effect. The only difference is earlier, most of the members had to sell it directly in the market and now it is done through the assessee, which is beneficial to the members because atleast siphoning off the profit by agents/third parties is not taking place. It is not a device of the society to divert the profits to its members and a device to reduce the tax liability. The interest of the members is of paramount importance.
The procedure adopted to make the yarn available directly or to sell it in the market on their request and to give the profit to members does not make any difference.
11. By no stretch of imagination it could be presumed that the society could lay claim to the difference between the market price and the quota price. In any case, assessee was not selling it as its product.
Assessee was selling it on behalf of its members and therefore the fund was in the possession of the assessee as agent of the members within the meaning of Section 182 of the Contract Act, it was contended.
Assessee relied upon the decision of the jurisdictional High Court in the case of CIT v. Y.S. Desale for the above proposition and the decision of the Hon'ble Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT . If the assessee could not be treated as the agent, then the principle of diversion of overriding title, it was contended, is clearly applicable.
Assessee again relied upon the following decisions:CIT v. A. Tosh & Sons (P) Ltd. 12. Objecting to the conclusion of the Revenue authorities that it is a device to save tax and beyond the boundary of genuine tax planning and thereby invoking the principles laid down by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO , it was contended that assessee was motivated by a commercial reason and there is justification for the transaction done by the assessee and therefore the ratio laid down in the case of McDowell & Co. Ltd. (supra) does not apply; assessee relied upon the decisions of the Hon'ble Supreme Court in the case of Arvind Narottam (Individual) : andUnion of India v. Playworld Electronics (P) Ltd. Gujarat High Court in the case of Banyan & Berry v. CIT and the decision of the Tribunal in the case of WTO v. S.B. Garware (HUF)(1986) 24 TTJ (Bom) 73 : (1986) 15 ITD 711 (Bom).
13. Objecting to the finding of the Revenue authorities that some members have stated that they do not own now or did not own at any point of time the looms for manufacture/weaving of cloth, it was submitted, this allegation is unfounded and unacceptable for two reasonsfirstly, none could be a member unless he submits the declaration that he owns a loom and secondly, no opportunity was given to the assessee to contradict the statement given by the said parties.
14. It was further contended, assessee tried to submit additional evidence before the CIT(A), but the CIT(A) ignored this evidence furnished before him without justification. The statement was shown to the assessee on the last day of the hearing and assessee submitted, unless the person certified that he owns the loom, nobody could be a member. To verify the genuineness of the statement alleged to be made by seven persons, it was submitted, the verification of records is necessary and for that purpose the assessee sought time. The request was not accepted.
15. On the other hand, the learned CIT-Departmental Representative submitted before the Bench, the assessee-society converted itself into a business organization of manufacturing and selling yarn. The payment of profit out of the sale of yarn is nothing but application of its income, defrauding the Revenue. The society abdicated its main object and flouted the bye-laws. The assessee-society had not obtained permission from the Registrar of Co-operative Societies. Every member/shareholders were to agree to lift the yarn offered to them.
Some members violated the above agreement. Request of such members to pass a resolution and acceptance of the same by the assessee is contrary to the bye-laws of the society. Learned Departmental Representative also contended that this was also not diversion of income by overriding title. For the above proposition, he relied upon the decision of the Hon'ble Supreme Court in the case of Motilal Chhadami Lal Jain v. CIT and also the decision of the jurisdictional High Court in the case of CIT v. Smt. Kamal C.Mehboobbani and submitted, merely because the income is taxed in one hand, it does not necessarily mean that the income should not be taxed in the hands of the recipient.
16. In the light of the above arguments, the learned AM came to the conclusion that the rate difference distributed amongst the members for the asst. yrs. 1991-92 and 1992-93 cannot be treated as income of the assessee-society, whereas the learned JM held otherwise.
17. Before coming to the above conclusion and for taking a different view, the JM wrote a letter dt. 16th May, 2002, seeking clarification from the AM as to whether assessee's request for admission of additional evidence vide application dt. 3rd Oct., 2001 has been accepted or not. AM, vide letter dt. 20th May, 2002 replied, the admission of the additional evidence was not pressed. The only contention taken before the Bench was that the CIT(A)'s action of not admitting the additional evidence was unjustified and contentions has been recorded in para 18 of the order. The AM also replied that the additional evidence has not been admitted. Since the additional evidence was not admitted as clarified, learned JM agreed and concurred with the conclusion, but for a different reason.
18. The additional evidence sought to be admitted is clarified in para 3 of learned JM's order as under: (1) Copies of application from 7 members along with the Page No.158-185 evidence showing that they owned the looms (original and English translation).
(2) Copies of the IT returns of some of the members to Page No. 186-189 show that income received by way of rate difference was offered for taxation.
19. It was noted by the learned JM, with regard to the first set of evidence, that the CIT(A) refused to admit it as it was not covered by exception clause under Rule 46A of IT Rules. Coming to the second set of evidence, which was sought to be admitted for the first time before the Tribunal, the learned JM held, assessee could not adduce any material or evidence to prove that the documents sought to be admitted remained to be filed before the lower authorities either for lack of opportunity being allowed or for any other valid reason, when the AO has specifically observed in the assessment order that statements from seven members of the assessee-society (named in the assessment order) were recorded, which were duly shown to the assessee during the course of assessment proceedings and a chance was also given to comment upon such statements. Assessee did not avail the opportunity. JM held, at the stage of second appeal, assessee's assertion that proper opportunity was not given to it is of no consequence, especially in the absence of any affidavit having been filed to contradict the stand of the findings of the Revenue authorities. He further noted, Rule 29 of the ITAT Rules does not confer any right on either of the party to produce any additional evidence, either oral or documentary, before the Tribunal. Learned JM held, "such right has been taken away by prohibiting the production of additional evidence by the parties".
Therefore, he held, the question of any party claiming a right to adduce additional evidence cannot arise. Power has been vested only in the Tribunal to require production of any document or evidence, if it is of the opinion that it is necessary to do so to enable the Tribunal to pass order or for any other substantial cause, which is not there in the case in hand, Therefore, he rejected the request for admission of additional evidence.
20. Coming to the resolution dt. 12th Nov., 1989, which was passed on the basis of representation made by 93 members out of 3015 members, consisting of 3012 weavers, learned JM held that the bye-laws of the society do not contemplate such arrangement, neither there is any statutory obligation to divert any part of the income of the assessee, nor the society is authorized to do such activities. Therefore, the decision of the society to apply a portion of what it received as sale consideration could not be regarded as an instance of diversion by overriding title, when in fact the amount is received by the assessee and willingly paid it to the members of the society. JM held, diversion of income has taken place after and not before the income had reached the assessee.
21. Coming to the decision relied upon by the assessee in the case of CIT v. Shri Chhatrapati. SSK Ltd. and Ors. , learned JM came to the conclusion that this decision is rather in favour of the Department than the assessee, because it has been held that principle of ' diversion of income by overriding title would apply where various directions given by the Government that the karkhana is required to deduct from the cane price the amount towards certain funds. The learned JM held, the Court has to appreciate the facts in each case. He held, there is a difference between the amount, which a person is obliged to apply out of his own income and an amount, which by the nature of the obligation, cannot be treated as part of the income of the assessee. If the income is diverted before it reaches the assessee, it is deductible. Where the income is applied by assessee's own volition, then, such income is to be taxed. In the instant case, he held, it is self-imposed obligation created by the society itself.
Hence JM decided the issue in Revenue's favour.
22. To come to the above conclusion JM relied upon the decision of the Hon'ble Supreme Court in the case of State Financial Corporation v.Jagdamba Oil Mills should not place reliance on the decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed", Learned JM also relied upon the decisions of the Hon'ble Madras High Court in the case of CIT v. Madras Race Club and CIT v. Madras Race Club (2002) 175 CTR (Mad) 264 : (2002) 255 CTR 98 (Mad) to come to the above conclusion. I had reason to believe that none of the parties cited and (supra) before the Bench because AM has not made, any reference to these decisions]. Learned JM also relied upon the decision of the Hon'ble Supreme Court in the case of Motilal Chhadami Lal Jain (supra), to hold that there was no overriding title in the instant case of the assessee as the obligation is self-imposed or gratuitous and it does not flow out of an antecedent and independent title of any third party.
23. In the light of the above discussion, the learned JM held, the rate difference collected by the assessee and subsequently passed on to its members has rightly been taken as a part of the trading receipt and the claim of deduction was justifiably rejected by the Revenue authorities.
24. There is no dispute with regard to narration of facts by the learned AM.25. The difference of opinion is with regard to the issue of admission of the additional evidence. No separate question has been referred to me on this point, which requires to be adjudicated by me, as Third Member.
26. Shri Dastur, learned senior counsel for the assessee submitted, this issue is necessarily to be adjudicated. Without deciding this point, Third Member cannot decide the question referred to, properly and judiciously. Because- (a) in the order of the learned AM, in para 18, there is no clear-cut finding that the additional evidence has been admitted. On the other hand, from the manner in which the issue has been discussed, it is clear that the additional evidence has been admitted and appreciated by the learned AM. (b) Only in the letter dt. 20th May, 2002, the learned AM has stated that the additional evidence has not been admitted on the ground that the same was not pressed. Shri Dastur submitted, the letter cannot form the basis of a decision of the learned AM because- (4) the letter is not an amendment to the learned AM's order as the procedure for the same has not been followed; (5) the letter is contrary to the manner in which the issue has been discussed by the learned AM in his order; and (6) even the learned JM does not state that the issue was not pressed.
(c) The letter is based on a misconception, that the issue was not pressed by the assessee. This impression is one-sided and wrong because- (1) the learned JM does not dismiss the application on the ground that it is "not pressed". He dismissed it on merits. The learned JM's discussion on the issue also shows that the issue was pressed by the assessee; and (2) assessee's counsel, chartered accountant and representative have stated in affidavit that the issue was forcefully argued. Shri Dastur submitted, in order to do justice to the assessee, the additional evidence requires to be examined by the Third Member because- (i) AO's case is that as the assessee's members are not loom owners, distribution of difference by the assessee is a pure financial reward to the shareholders; (ii) Learned JM has laid stress on the point that the assessee did not controvert the AO's statement that some members were not loom owners; (iii) The issue goes to the root of the matter and the Tribunal is the final fact-finding authority, it is essential that the Third Member should admit the said evidence and decide on merits.
27. Shri Dastur further submitted that the evidence, viz,, order sheet now produced, i.e., during the hearing before the Third Member, in spite of repeated requests, was not made available to the assessee. The order sheet now presented definitely shows that on the last day of the hearing, i.e., on 25th March, 1994, which is also the date of the order, assessee was merely shown some statements. It is not certain from the order sheet, which statements were shown to the assessee; whether they were the same statements of seven persons whose statements were alleged to be recorded during the assessment proceedings; and whether there was anything in the statements adverse to the assessee, which would induce the assessee to ask for cross-examination. Shri Dastur submitted, relying upon the Third Member decision in the case of Khopade Kisanmo Manikiao v. Asstt. CIT (2000) 69 TTJ (Pune) (TM) 135 : (2000) 74 ITD 25 (Pune) (TM), that once the issue is identified in the reference, the Third Member has the power to consider the entire material, the reasoning and the conclusion recorded by both the Members as well the contentions advanced by the parties before the Third Member. Hence he submitted, Third Member has the power to admit any new evidence, which is necessary to dispose of the question referred to.
28. Shri Dastur further invited my attention to ground No. 7 before the Tribunal. Assessee did press seriously the admission of the new evidence. The view expressed in the letter to the contrary is incorrect. In this ground the assessee objected the non-admission of evidence regarding the looms owned by the members, which proves conclusively that only weaver members holding power loom permit/licence can become the members of the society. This ground reads as under: On the facts and in the circumstances of the case, the learned Dy.
Commissioner of Income tax (Dy. CIT)- 7. was not justified in not admitting the evidences regarding the looms owned by the members by which it was conclusively proved that only weaver members holding power loom permit/licence can become members of the society and observed that since the appellant-society had not availed of the opportunity to examine the 7 members, the appellant cannot produce such evidence at the appellate stage without appreciating that only during the course of hearing, the Dy.
CIT had asked the representative to see the statement recorded without giving appropriate opportunity.
29. Shri Dastur submitted, assessee produced the evidence before the CIT(A). He refused to accept it. So, for the first time, the grievance of the assessee of not admitting the additional evidence arose before the Tribunal and a specific ground was urged. As such, the letter written by the learned AM that the ground was not pressed seriously and the learned JM's objection of the very admission is also incorrect.
Further, Shri Dastur submitted, it is a Government certificate. The objection of the learned JM is that the assessee has not filed any affidavit to contradict the stand of the AO that opportunity was given to the assessee but it was not availed. Particularly, Shri Dastur brought my attention to p. 7 of the order of the Hon'ble jurisdictional High Court in the case of Smt. Prabhavati S. Shah v. CIT . It reads as under: On a plain reading of Rule 46A, it is clear that this rule is intended to put fetters on the right of appellant to produce before the AAC any evidence, whether oral or documentary, other than the evidence produced by him during the course of the proceedings before the ITO, except in the circumstances set out therein. It does not deal with the powers of the AAC to make further enquiry or to direct the ITO to make further enquiry and to report the result of the same to him. This position has been made clear by Sub-rule (4) which specifically provides that the restrictions placed on the production of additional evidence by the appellant would not affect the powers of the AAC to call for the production of any document or the examination of any witness to enable him to dispose of the appeal.
30. Shri Dastur submitted, at least the CIT(A) should have called for report on the basis of the observation of the Hon'ble jurisdictional High Court, which is binding on him. Hence, Shri Dastur submitted, first of all, CIT(A) should have accepted the evidence in the circumstances and the learned AM has already taken cognizance of the evidences, as clearly brought out vide paras 17 and 18 of his order and the reply of the learned AM, after passing the order, denying the fact that he has admitted the additional evidence is incorrect. Shri Dastur further objected to the reasoning given by the learned JM for not admitting the additional evidence. He further submitted, the Third Member has ample power to admit the additional evidence, even if it is not before the Division Bench, if it is necessary for the disposal of the appeal, being the final fact-finding authority.
31. Objecting to the above contention with regard to the power of the Third Member to admit the additional evidence, Shri Satya Prakash, the learned CIT-Departmental Representative submitted, the power of the Third Member is restricted to the questions referred to. The learned Departmental Representative submitted, there is no talk of any evidence whether admitted or not admitted. Only the counsel's contentions are recorded in paras 17 and 18 of the order. The learned Departmental Representative submitted, since both the members admit that they have not admitted the additional evidence, the evidence now produced before the Tribunal cannot be entertained by the Third Member. For the above proposition, he relied upon the Third Member decision of the Tribunal in the case of Niraj Petrochemicals Ltd. v. ITO (2000) 68 TTJ (Hyd) (TM) 152 : (2000) 73 TID 1 (Hyd) (TM). In this case the Third Member held, once specific differences are referred to Third Member and referral order does not express any difference at all, in identifying difference between members, Third Member cannot alter questions referred to him or cannot modify questions and/or reframe questions instead of original questions referred. Again, relying upon the Third Member decision of the Tribunal in the case of H.P. Agro Industries Corporation Ltd. v. Dy. CIT (1999) 64 TTJ (Chd) (TM) 850 : (1999) 69 ITD 89 (Chd) (TM), learned CIT-Departmental Representative submitted, the Third Member has to agree for the reasons either given by either of the Members constituting the Division Bench or for different reasons, should arrive at the same conclusion, concurring with one of the Members, He cannot have a third opinion on a point of difference referred to him. Thus he submitted, the additional evidence now sought to be produced, vide paper book pp. 157 to 189 should be ignored.
32. In his rejoinder Shri Dastur submitted, it is not necessary to refer a separate question as to whether additional evidence has been admitted or not admitted. This is an integral and unavoidable fact to be decided by the Tribunal to dispose of the appeal and the question referred to. Shri Dastur submitted, the contention of the learned CIT Departmental Representative that the issue of additional evidence is not before the Third Member, as there is no dissenting on this, is incorrect. A plain reading of the learned AM's order shows that he has accepted the additional evidence especially as he refers, at Page 19, the decision of the Hon'ble Allahabad High Court in the case of Suit Mohindar Kaur v. Central Government and the decision of the jurisdictional High Court in the case of Smt. Prabhavati S. Shah v. CIT (supra), without any adverse comment. Shri Dastur reiterated, the letter dt. 20th May, 2002 written by the learned AM, after passing the order dt. March, 2002, need to be ignored. The decision cannot be amended except to the extent permitted by Section 254(2). He also invited my attention to p. 1284 of Mulla on the CPC. Vol. No. II. Shri Dastur reiterated, hence definitely there is a difference of opinion on this point as well. Shri Dastur submitted, the case referred by the learned Departmental Representative in the case of Jan Mohammed v. CIT and in the case of A.N. Seth v. CIT 33. Learned senior Counsel Shri Dastur brought my attention to Section 152 of the Mulla on the CPC Act V of 1908, Vol. I, which reads as under: Amendment of judgments, decrees or ordersClerical or arithmetical mistakes in judgments, decrees or orders or errors arising therein from any accidental slip or omission may at any time be corrected by the Court either of its own motion or on the application of any of the parties.
34. Shri Dastur, learned senior counsel submitted, no amendment took place as contemplated in this section. The order has not been amended subsequently in the due process of law. Mere writing of letter subsequently and internal exchange of letters between Judges/Members will not obliterate the effect of the discussion taken already in the order. The same view has been accepted by the Hon'ble Supreme Court in the case of Samarendra Nath v. Krishna Kumar Hon'ble Supreme Court held "once a judgment is signed by the Judge, it cannot be altered or added to except as provided for by Section 152 or on review." Allahabad High Court held, the Third Member was competent to decide only the point referred to him and he could not himself formulate a new point on which he could base his decision. The Court further held, "moreover, after the decision of the Third Member on the point or points referred to him, the case should go back to the original Tribunal because the Third Member has not been given any right to decide the appeal. Consequently the case has never been properly disposed of by the Tribunal and there is no order of the Tribunal from which the reference under Section 66 of the Indian IT Act could arise".
36. The case of the assessee is that there is a difference of opinion between the two Members as to whether the additional evidence has been admitted or not. Hence, the contention of Shri Dastur that there is no need of reference of a separate question is to be accepted because in order to answer the question referred, this point is to be decided first.
37. The learned CIT-Departmental Representative's reliance in the case (supra) is also of no much relevance. This was a case wherein the Members arrived at the same conclusion but for different reasons. Referring to the above, the Hon'ble Delhi High Court held, "therefore, if the Members agree on the conclusion on a point, but differ in the reasoning or reasons for arriving at the conclusion, the provision in the subsection does not apply, and the question of any reference to one or more of the other members does not arise". Coming to the instant case of the assessee, whether the evidence has been admitted or not is a fact to be ascertained so as to arrive at the right conclusion with regard to the question referred before the Third Member.
38. Coming to the case reported in (1999) 64 TTJ (Chd) (TM) 850 : (1999) 69 ITD 89 (Chd) (TM) (supra), Shri Dastur submitted, the Third Member is empowered to arrive at the same end result for a different reason/route. Hence, this decision is in assessee's favour. Referring to the decision of the Hon'ble Calcutta High Court in the case of Kali Charan Ram Chander v. CIT , Shri Dastur submitted, the Tribunal is not debarred from asking the AAC to look into evidence even if the assessee did not ask for it in order to do substantial justice.
Shri Dastur submitted, this decision is in assessee's favour and for the above relied upon the decision of the Hon'ble jurisdictional High Court in the case of Smt. Prabhavati S. Shah v. CIT (supra).
39. I have heard the rival submissions. I am of the view that the Third Member is empowered to consider any fact, essential to decide the issue referred to the Third Member. Coming to the instant case of the assessee, there do exist a difference of opinion between the two Members as to whether the additional evidence sought for to be produced by the assessee was admitted or not. Of course, after the discussion of the issue in the order of the learned AM, there is no specific mention that the additional evidence has been admitted. But he has discussed the points and also taken note of the decisions, which are in assessee's favour. On the contrary, for the reasons recorded in detail, the learned JM has rejected assessee's claim that additional evidence not to be admitted. A separate question has not been referred to the Third Member.
40. In the case of Khopade Kisanrao Manikrao v. Asstt. CIT (supra), discussing the scope of jurisdiction of the Third Member, it has been observed as under: The argument of the Department that the powers of the Third Member in a reference under Section 255(4) is confined to the questions regarding the points of dispute contained in the reference, cannot be accepted.
A plain reading of Section 254 does not leave one in doubt that the jurisdiction of the Third Member is in regard to the point of difference and the framing of the question for a reference under Section 255(4) need not be equated with a reference to the High Court under Section 256. Under Section 256 the High Court, till recently, had advisory jurisdiction in regard to any question of law arising out of the order of the Tribunal and referred to the High Court for its opinion. In the case of the reference under Section 255(4) to the Third Member, the object is to resolve the difference in opinion on any point which arises in the course of deciding of an appeal. Therefore, the jurisdiction of the Third Member is not limited to the language of the question(s) framed in the reference but it extends to the entire sum and substance of opinion on the specified point(s). The questions are framed in accordance with rules for identifying the dispute but it is well settled principle of law that the rules cannot restrict the scope of the powers conferred under the statute. Therefore, the rules do not have the effect of curbing the scope of power of the Third Member conferred upon him under Section 255(4). The Supreme Court in the case of Saiyad Mohammad Bakar El-Edroos v. Abdulhabib Hasan Arab JT (1998)(3) SC 76, 81 held that procedural law is not to defeat the very object which is sought to be achieved and that it is always subservient to the substantive law. As nothing can be given by a procedural law what is not sought to be given by a substantive law, similarly nothing can be taken away by the procedural law what is given by the substantive law. Section 255(4) confers the power of reference to the Third Member in regard to the dispute arising between two Members of the Bench. Therefore, the rules cannot restrict the scope of the powers of the Third Member to the question(s) framed under the Rules. Once the issue is identified in the reference, the Third Member has the power to consider the entire material, the reasoning and the conclusions recorded by the Members as well as the contentions advanced on behalf of the parties and record his findings in such a manner that the difference of opinion amongst the Members can be decided by a majority view. It is not necessary for the Third Member to restrict himself to the language of the questions framed de hors the context, reasoning and the findings recorded by the respective Members in regard to the point of dispute.
Therefore, I am of the view that the Third Member is competent to consider all the points argued by the contending parties and to come to a conclusion.
41. If non-consideration of an argument defeats the very purpose of justice, the Tribunal cannot shut its eye and defeat the very purpose.
Here we have to see the circumstances. Assessee was shown some statement on the last day of the hearing before the AO. On the very same day the order was also passed by the AO. AO writes in the order sheet, "during the course of assessment proceedings the following members of the society were summoned and were examined on oath". Then he gives the names of the persons and number of shares they held. He proceeds further "these statements recorded were shown to the assessee's representatives and were also given an opportunity to comment on the statements so recorded. The assessee has not submitted its comments on the facts given in the statements". From the above it does not come out whether the statements were taken on the last day or not. But the AO clearly writes that he had shown the statements to the assessee. Mere showing a statement recorded is not full opportunity. To have a meaningful opportunity to comment on the statement recorded, assessee should have provided a copy. The case sheet, in spite of the request, according to the assessee, was not made available at the time of first hearing before the AO. It is now produced before me.
42. In the case sheet dt. 25th March, 1994, it is stated that the statements recorded from some others in this connection was shown to Shri S.R. Shah and Shri Kakade in the last hearing. On 25th March, 1994 the statement recorded from Shri Jadhav, a member of ICOSPIN holding 10 shares, was shown. It makes clear that the copy was not given. From the case sheet recording it is clear that the statement recorded was shown on earlier occasion and also on the last day. Mere showing is not proper opportunity. There is violation of principles of natural justice. As rightly contended by Shri Dastur, the first opportunity available to the assessee was before the CIT(A). Assessee has taken a specific ground as well, viz., ground No. 7. The CIT(A), at p. 12 of his order records that the copies were shown to the assessee to comment. He records further "on this occasion, the appellant failed to avail any opportunity to cross-examine the said seven members. He did not even bother to mention before the AO that Shri S.M. Jadhav, one of the members had four looms as claimed before me. No such evidence was produced before the AO. The evidence now produced before me during the course of hearing in this regard is not admitted as it is not covered by any exceptional clause of Rule 46A".
43. At p. 157 of the paper book is a letter dt. 3rd Oct., 2001 stating that additional evidence in respect of confirmation of seven members about their holding of looms was placed before the CIT(A) but he has not admitted it. At p. 159 of the paper book is a certificate issued by Government of Maharashtra, Office of the Director of Handlooms, Power looms and Co-operative textiles and State Textile Controller, MS, Nagpur dt. 26th Oct., 1982, stating that Shri S.M. Jadhav is holding four looms and permit number is given, So also regarding other members.
44. The learned JM rejected these evidences on the ground that the assessee simply made an assertion about not giving a chance to cross-examine a person or to provide opportunity to the assessee to represent its case without giving minimum details, such as what is the date when the statements were recorded etc. and also on the ground that the assessee has not filed any affidavit explaining the circumstances, requesting to take into evidence the additional evidences and to consider the same by the CIT(A). I have, hereinabove, recorded the decisions relied upon by Shri Dastur, which state that it is not always necessary to file an affidavit, particularly if it is a public document, just like the one issued by any Government. Here I should state that the reasons given by the learned JM for not admitting the additional evidence is incorrect. Therefore, I agree with the view taken by the learned AM and find considerable force in the arguments of Shri Dastur that the evidence has in fact been taken note of by the learned AM, particularly in view of the decisions he cited in support of taking additional evidence, though specifically he had mentioned to that effect.
45. Now the question arises whether the subsequent clarification given by the learned AM in response to the letter written by the learned JM that he had not admitted the additional evidence can be acted upon. I have already hereinabove referred, particularly the decision of the Hon'ble Supreme Court in the case of Samarendra Nath v. Krishna Kumar (supra) (para 34), wherein the Hon'ble Supreme Court held, once a judgment is signed by the Judge, it cannot be altered or added to except as provided for by Section 152 of CPC or on review.
46. Coming to the decisions relied upon by the learned Departmental Representative regarding additional evidence, particularly the decision reported in (1999) 64 TTJ (Chd) (TM) 850 : (1999) 69 ITD 89 (Chd) (TM) (supra), I do not find this decision further revenue's case. In this case the Third Member held, Section 255 of the IT Act, 1961, empowers the Third Member in law to arrive at a conclusion of the two members constituting the Division Bench, although he may do it by a different route and what is necessary is that he must agree with one of its Members constituting the Division Bench. With reference to this, I have to say that there do exist a difference of opinion between the two Members with regard to the admission of the additional evidence. I have already held in the preceding para that the learned AM, as rightly contended by Shri Dastur, has admitted the additional evidence, impliedly. Even otherwise I have held that the Third Member has the power to take into evidence the additional evidence, if it is very essential to dispose of the question referred to the Third Member on merits, provided the additional evidence was at least tendered before the original Bench.
47. Coming to the decision relied upon by the learned Departmental Representative in the case of Nira) Petrochemicals Ltd. v. FTO (supra), the Third Member held, wherein specific differences are referred to Third Member and the referral "order" does not express any difference at all, in identifying difference between the Members, Third Member cannot alter the questions referred to him and cannot modify the questions and/or reframe questions and then decide reframed questions instead of original questions. In that case the assessee argued that the real difference between the two Members had not been correctly brought out through the question referred to, and therefore assessee contended, the Third Member should alter/modify the questions so as to answer the issue correctly. In the instant case of the assessee, there is no such question arises. There is no question of altering or reframing the question referred to. The only question is to answer the question referred to, the Third Member has the power to consider the entire facts borne out of the records of the Tribunal. In other words, the question is whether out of the two Members who appreciated the facts decided the issue in accordance with the facts borne out of the record or correctly applied the law to the issue on hand.
48. The decision relied upon by the learned Departmental Representative in the case of Jain Irrigation Systems Ltd. v. By. CIT (2003) 79 TTJ (Pune) (TM) 347 : (2003) 86 ITD 243 (Pune) (TM) has no application in the instant case of the assessee. That was a case wherein there was no difference of opinion between the two Members on a particular point.
49. Hereinabove I have also noted that without consideration of additional evidence, answering the question referred to the Third Member will tantamount to failing to do justice and will amount to non-consideration of entire facts. Whether the Division Bench has considered the evidence or not, the Third Member has to consider the relevance of the evidences. It is difficult to hold that this is any new evidence. The issue was before the CIT(A) and before the Division Bench as well. The only dispute is whether the Division Bench admitted the additional evidence or not. Be that as it may, if it is admitted or not admitted by the Division Bench, but if the Third Member feels that the circumstances warrant the admission, he has the power to admit the additional evidence; otherwise he will be failing to answer the question properly. Therefore, I admit the additional evidence since it is very essential to dispose of the question referred to.
50. Shri Dastur submitted, the assessee is in fact acting as an agent on behalf of the members and he relied on the decision of the learned AM. He further submitted, the effect of the resolution passed in the annual general meeting and the yam sales committee is that there is first a determination of the "quota right distribution kgs" that each member is entitled to, depending on his shareholding and the "quota right distribution rate". Then, there is sale of yarn of member's quota right by the mill's sales depot, through agents. In selling the quota yarn in the market, the assessee is acting as the agent of the members.
The amount of sale proceeds (to the extent of difference) are received by the assessee on behalf of its members. The assessee has no right to receive the said funds by its own. Shri Dastur submitted, in the case of Y.S. Desale (supra) the promoters were nominated by the executive committee for a limited purpose of registering a co-operative society and the promoters collected a large amount from the persons who were to become members. There was a delay in formation of the society and the amounts were deposited in the bank as required by law to avoid penal provision of the Co-operative Societies Act. Question aroseinterest on deposits as to whether to be assessed in the hands of the promoters as an AOP or BOI. The Court held, title to income vested in contributors right from the very beginning. The Court further observed "when income is received by an agent, he receives it for and on behalf of the principal and there is no question of any overriding title. Since the promoters received the income as agents of the shareholders within the meaning of Section 182 of the Indian Contract Act, 1872, and the promoters did not have any title to the income, which really vested in the shareholders, there was no question of any overriding title of the shareholders because, even initially, the title to the income proportionate to the contribution of share capital vested in shareholders themselves and the promoters were merely acting as agents". The Hon'ble Bombay High Court in this case followed the decision of the Hon'ble Supreme Court in the case of CIT v. Indira Balkirshna .
51. In the instant case of the assessee the question is whether the society had right of its own to appropriate the income as it deemed fit. By no stretch of imagination it could come to such a conclusion.
The very object of the society mentioned in bye-law No. 7 specifically states that the object of the mill is to promote the economic interest of its members by undertaking spinning, dyeing, sizing, weaving and manufacturing of textile materials of all kinds and to supply yarn of all types to the weavers and to others. When the yarn is supplied to the weaver-members, the same need be supplied at reasonable price consistent with the economic working of the mill. To attain these objects, the mill is competent to do several activities, including purchase of cotton and/or man-made fibre and carry on ginning, spinning, sizing, weaving, bleaching, mercerizing, dyeing, printing and other allied processes and to sell finished material so manufactured.
Assessee is further empowered to enter into contract with co-operative societies, Government owned companies/corporations or individuals or others for the purchase and sale of raw materials and finished products of the mill and its members and to appoint agents on payment of salary or commission for such purchase and sale and to open depots for such sales, if necessary. In the reasoning given by learned JM to reject assessee's contentions, vide para 32, he clearly states "it is the case of the Department that the AO rejected all the contentions as raised before him on the ground that from the events that have taken place over the years it is clear that the object of the company to supply yarn to its members but the society has converted itself into a business organization of manufacturing and selling and the so-called payment of rate difference is nothing but payment of profit. Since the society is not an agent of the members under the bye-laws, therefore, the obligation, which is self-created through resolution, is totally against the bye-laws. The society has abdicated its main object and relegated itself into a business organization. The society is a consumer society; its bye-laws do not authorize the society to sell the yam in the market. Bye-law No. 7(i) [not 7(1)] merely authorizes the sale by the society of the members' finished products but not of their raw material'. I find, this observation of the learned JM is not correct. Clause 7(i) reads as under: 7. The objects of the mill shall be to promote the economic interest of its members by undertaking spinning, dyeing, sizing, weaving and manufacturing of textile materials of all kinds, and supply of yarn of all types to the weavers and to others. When yarn is supplied to the weaver-members the same shall be supplied at reasonable price consistent with the economic working of the mill. For the purpose of attaining the objects, it shall be competent to the mill- (i) to enter into contract with co-operative societies, Government owned companies/corporations or individuals or others for the purchase and sale of raw materials and finished products of the mill and its members and to appoint agents on payment of salary or commission for such purchase and sale and to open depots for such sales, if necessary.
52. A reading of the above makes it clear that the assessee, in order to attain the object, can not only market the finished products of mill and its members, it is also empowered for the purchase and sale of raw materials of its members.
53. The learned JM also came to a wrong conclusion, particularly placing strong reliance on Clause 12(iv) of the bye-laws, which reads as under: (c) He registers with the mill, his power looms with full particulars of the permit issued by the Textile Commissioner in that behalf and L-4 licence situated in the area of operation of the mill and gives a written undertaking to the mill that- (iv) He executes an agreement in the form prescribed by the mill to purchase yarn from the mill to the extent offered by it and also to use his looms as directed by the mill and to dispose of cloth produced on such looms as per the mills' instructions.
54. The above quoted clause only means if the yarn is offered, the members has to accept the offer. It does not prevent the members, as they have done in the instant case, whereby they requested to pass a resolution to sell it in the market. There is no prohibition as such.
Hence the reasoning of the learned JM to this effect is incorrect.
55. As rightly contended by Shri Dastur, the object of formation of the society is to promote the economic interest of its members by doing acts specified and also the society is empowered to do such other works, which will boost the economic interest of the members. This is particularly clear from Clause 7(k), which reads as under: (k) to soil or otherwise dispose of the whole or any part of its business, assets and/or undertakings, its factory buildings, plant and machinery and lands for the benefit of the mill with prior approval of the Ichalkaranji Mill and the Registering Authority.
It further states, vide Clause 7(n), "to do such other things as are incidental or conducive the attainment of all or any of the above objects". The main object, as contended by Shri Dastur, is to attain and keep the interest of its members.
56. From the facts stated hereinabove, it is clearly established that the yarn counts supplied to its members were comparatively few and they were not having the required counts to use in their mill. So they were to sell it in the open market. To overcome this difficulty, they approached the assessee by way of a request by certain members and subsequently a resolution was passed by the society to that effect.
Hence, Shri Dastur's contention that the assessee was acting as an agent is to be accepted. I agree with the finding of the learned AM on this point. This view is also supported by the decision of the Hon'ble jurisdictional High Court, relied upon by the learned AM in the case of Y.S. Desale (supra).
57. Corning to the decision relied upon by the learned Departmental Representative in the case of ITO v. Bachu Lal Kapoor , it was held that the income should be assessed in the handsreal hands. On the facts, this decision does not support the Revenue, It is already noted that the assessee was selling yarn for a fixed price, i.e., a little above the cost price in the market and the difference between the two on the basis of the resolution passed in the meeting. Assessee had no right or control' over the yarn. It belongs to its members. According to both the members, the yarn once offered is to be accepted by the members. If that is the position, then the authorization of the assessee to sell it in the market and the performance of that duty by the assessee can only be treated as act of an agent because the assessee had no control or the right over the sale proceeds. Looking from any angle, I am of the view that the finding given by the learned AM is correct, vide para 22 that "the society was under legal and contractual obligation as per directions of the members for whom yarn was sold to handover the profits to them. The society merely received the proceeds as agent of the members. The income has never reached to the society as its income".
58. The difference tried to be made out by the Revenue, as rightly noted by the learned AM, in fact is not relevant. The change in the basis of distribution of "quota distribution system" to "the quota price distribution system" at the request of the member mills as per the special resolution passed was for the benefit of the members and not in the interest or for the benefit of the society. The object clause specifically points out that the assessee is duty-bound to do things for the benefit of the members. The bye-laws quoted hereinabove clearly indicate that not only the finished products, but the assessee could also sell the raw materials even if it is in the best interests of the members.
59. Reliance was placed by Shri Dastur in the case of Arvind Nawttam (Individual)(supra); Playwotid Electronics (P) Ltd. (supra); and Banyan & Beny cited supra, for the proposition that the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) does not apply if there is a commercial reason or justification of any transaction entered into. In the case of Arvind Nawttam (supra) the Hon'ble Supreme Court held "where the true effect on the construction of the deed is clear, appeal to discourage tax avoidance is not a relevant consideration". In the case (supra) the Hon'ble Supreme Court held "tax planning may be legitimate provided it is within the framework of law. Colourable device cannot be part of tax planning". From the facts narrated above, it is very difficult to come to the conclusion that the sale of yarn at the instance of its members is a device to reduce the tax liability of the assessee. The assessee is a co-operative society formed for the benefit of the members and acting on resolution of the majority, cannot be treated as a mere device to avoid tax. In the case (supra) the Hon'ble Gujarat High Court held that the decision in the case of McDowell & Co. Ltd. (supra) was solely for the purpose of reducing the tax liability and it was not a transaction in reality of receiving a price lower than the one which it was making. In view of the above, the Hon'ble Gujarat High Court distinguished the decision in the case of McDowell & Co. Ltd. (supra) observing "the Court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of the legitimacy or genuineness of the act. The principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection within the framework of law, unless the same falls in the category of colourable device". In the instant case of the assessee it is very difficult to come to a conclusion that the act of the assessee is mere device to reduce the tax liability.
60. One of the main reasons why the AO held it is a device to dodge tax and also the reason by the learned JM to uphold that view is that out of the seven persons questioned, some including Shri S.M. Jadhav, had never owned power-looms at any point of time; some other members were not even aware of the very term "rate difference" and they do not know how it worked out. From the above facts AO came to the conclusion that the assessee-society was allocating quota yarn to those members who are not weavers themselves and also to those members who are not running the looms themselves, which is contrary to bye-law No. 63 of the society. The additional evidence brought on record disproved the very finding. Even otherwise, if the society violated the bye-laws, it does not lead to a conclusion that violation itself is a device to defraud the Revenue. It is to be ascertained from the facts. I fully agree with the finding arrived at by the learned AM.61. The alternative contention of the assessee is that even assuming the view that the society is not acting as an agent on behalf of the members, then the resolution created an unconditional and absolute obligation on the society to pass over a portion of the sale proceeds to the members, this is diversion of the receipts by overriding title.
In support of the above, Shri Dastur relied upon the following decisions:CIT v. Champa Properties (P) Ltd..
62. Even coming to the alternate contention, in any case it is diversion of income by overriding title, is to be accepted and the reasoning given by the learned JM to come to a different conclusion that it is not diversion of income by overriding title and his finding that the case (supra) is not applicable in the instant case of the assessee because in the instant case of the assessee it is self-imposed obligation created by the assessee whereas in the case of Shri Chhatrapati SSK Ltd. and Ors. (supra) it was not so, is incorrect. A careful reading of the decision of the Hon'ble jurisdictional High Court in the case of Shri Chhatrapati SSK Ltd. and Ors. (supra) will clearly show that the real issue is whether the income has accrued to the assessee and whether the profit on the scheme form income of the assessee. In the instant case of the assessee the yarns at no time belonged to the assessee. The members were entitled for certain items. They were not picking up the entitled material as they found it uneconomical. In the above circumstances, some of the members requested and at their insistence, a resolution was passed just to sell it in the market by the assessee, and the profit made out of it to be handed over to its members instead of the yarn itself. Assessee had never controverted it, So there is no (sic) diversion of income. In view of the above, I also concur with the finding of the learned AM on the point.
63. The matter will now go before the regular Bench for deciding the appeals in accordance with the opinion of the majority.C.L. Sethi, J.M. 28th April, 2006 1. In this case, the appeals filed by the assessee for the asst. yrs.
1991-92 and 1992-93 were heard by the Division Bench of the Tribunal.
As a result of difference of opinion between the members in regard to the following grounds of appeals, the issue was referred to the Third Member Whether, in view of the facts and circumstances of the case the order of CIT(A) of confirmation of addition made on account of disallowance of deduction claimed of Rs. 2,24,84,410 and Rs. 1,22,11,637 for the asst. yrs. 1991-92 and 1992-93, respectively on rate difference is justified or not? 2. The learned AM of the Bench came to the conclusion that tho rate difference distributed among the members for the asst. yr. 1991-92 and 1992-93 cannot be treated as income of the assessee-society whereas the learned JM held otherwise that the rate difference collected by the assessee and subsequently passed on to its members has rightly been taken as a part of the trading receipt and the claim of deduction was justifiably rejected by the Revenue authorities.
3. The Hon'ble Vice President (Mumbai Zone), Shri K.P.T. Thangal as a Third Member vide his order dt. 30th March, 2006 agreed with the view of the learned AM on the issue referred to him.
4. Thus, by majority view we hold that the rate difference distributed amongst the members by the assessee-society of Rs. 2,24.84,410 for asst. yr. 1991-92 and of Rs. 1,22,11,637 for the asst. yr. 1992-93 cannot be treated as income of the assessee-society and accordingly to that extent; the orders of the AO and the C1T(A) are set aside. No other issues were involved in these appeals filed by the assessee.
5. In the result, the appeals filed by the assessee for both the asst.
yrs. 1991-92 and 1992-93 are accordingly allowed.