Income Tax Appellate Tribunal - Delhi
National Agricultural Co-Operative ... vs J.C.I.T. S.R. And Acit on 25 January, 2008
Equivalent citations: [2008]304ITR303(DELHI)
ORDER
N.V. Vasudevan, Judicial Member
1. All these three appeals are by the assessee. ITA 1915/Del/2002 is an appeal by the assessee against the Order dt. 28.3.2002 of CIT(A)-XXVI, New Delhi relating to the A.Y. 1996-97. ITA 1916/Del/2002 is an appeal by the assessee against the order dt. 28.3.2002 of CIT(A)-26, New Delhi relating to A.Y. 1997-98. ITA 2876/Del/03 is an appeal by the assessee against the order dt. 31.3.2003 of CIT(A)-26, New Delhi relating to the A.Y. 1998-99.
2. Ground Nos. 1 to 5 in all the three appeals relate to the claim of deduction Under Section 80 P(2)(a)(iii) of the Act. These grounds were not pressed by the ld. counsel for the assessee and consequently the same are dismissed as not pressed.
3. Ground Nos. 6 and 7 in ITA 1915/Del/02 and 1916/Del/02 and ground Nos. 6 to 9 in ITA 2876/Del/03 is with regard to the claim for deduction Under Section 80 HHC of the Act. At the time of hearing these grounds were not pressed by the ld. counsel by the assessee and consequently these grounds are dismissed as not pressed.
4. Ground No. 8 to 18 in ITA 1915 & 1916/Del/02 and ground No. 10 and 11 in ITA 2876/Del/03 relate to the denial of claim for deduction of interest liability claimed by the assessee. The facts and circumstances under which the aforesaid grounds of appeal arise for consideration in all the three A.Ys are identical. The assessee is a registered Cooperative Society under the Multi State Cooperative Societies Act, 1984. It is an Apex level Cooperative Organisation and has several cooperatives as its members. The object of the assessee is to organize, promote and develop marketing, processing and storage of agricultural and forest produce, distribution of agricultural machinery, inter state and intra state import and export, whole sale trading and rendering technical advise to is members. In the course of its business the assessee agreed to sell to M/s Alimenta SA Switzerland 5 M.T. Indian HPS groundnut Kernels Javas 75/80 Count per Ounce of current crop 1979-80 (hereinafter referred to as 'ground nut"). The price per metric ton was agreed at a sum of $ 765 FOB stowed Saurasthra ports. As per the terms of the agreement dated 12.1.1980 it was specifically agreed that other terms and conditions as per FOSFA 20 contract terms will apply. As per the FOSFA 20 Contract terms in the event of any dispute between the authorities the matter will be referred to arbitration.
5. As per the terms of the contract the assessee had to complete the entire shipment during February/March/April, 1980. The assessee completed shipment of only 1900 M.T. within the stipulated time. By an addendum to the original contract dt. 18.8.1980, the assessee agreed that the balance quantity of 3100 M.T. would be shipped during November, December, 1980 all other terms and conditions of the contract remaining unchanged.
6. Due to freak weather conditions in the growing areas for the kernels in early 1900 there were insufficient kernels, supply more than 1000 MT. The Indian Ministry of Agriculture vide their letter dt. 1.12.1980 directed the assessee not to export the ground nuts for the reason that in view of the drought conditions in the country as well as world wide there was shortage of supply of ground nuts which resulted in the prices of ground nuts going up almost three times. The Ministry therefore directed that no exporter can undertake to export ground nuts. These directions of the Government were binding on the assessee and therefore they could not fulfill the remaining part of contract with M/s Alimenta. In accordance with the terms of the agreement arbitration proceedings were initiated. Arbitrators were FOSFA (Federation of Oil Seeds and Fat Association Ltd) who sat at London to adjudicate the dispute between the assessee and M/s Alimenta. By an award dt. 18.11.1989. The arbitrators passed the following award.
We AWARD that Sellers shall pay to Buyers within 14 days from the date of this Award the sum of US $ 4,681,000 (Four Million Six Hundred and Eighty One Thousand United States Dollars) being the difference between the contract price of US $ 765 per metric tonne plus US $15 per metric tonne for double bags and the settlement price US $ 2275 plus US $ 15 per metric tonne for double bags as damages with interest thereon at the rate of 10.5% from 13 February, 1981 to the date of this Award.
7. The assessee preferred the appeal before the Appellate Forum against the award of the arbitrators. This appeal was dismissed. Slight modification in the terms of the award of the arbitrators the terms of the award of the Appellate authority were as follows.
We hereby award that:
Sellers shall pay to buyers within 14 days from the date of this award the sum of US $ 4,526,000 (Four Million Five Hundred and Twenty Six Thousand Untied States Dollars) being the difference between the contract price of US $ 765 per metric tonne plus US $ 15 per metric tonne for double bags and the settlement price of US $ 2,225 plus US $ 15 per metric tonne for double bags as damages with interest thereon at the rate of 11.25% per annum from 13 February, 1981 to the date of this Award.
The award of the Appellate authority is dt. 14.9.1990.
8. M/s Alimenta filed an application Under Section 5 of the Foreign Awards (Recognition and Enforcement) Act, 1961 before the Hon'ble High Court for a decree in terms of the award of the Appellate authority. The application was filed on 8.7.1993. M/s Alimenta apart from seeking a prayer for a decree in terms of the award as modified by the Appellate Authority also prayed for future interest at 18% p.a. from the date of the award till payment/realisation. We have already noticed that the appellate authority while confirming the award of the arbitrators had awarded interest from 13th February, 1981 till the date of the Appellate award viz., 14.9.1993. There was no direction in this award to pay future interest. The Hon'ble Delhi High Court by its judgement and decree dt. 28.1.2000 passed a decree in terms of the award of the appellate authority. The Court further directed the assessee to pay interest at 18% p.a. from the date of the award of the appellate authority till the date of the realisation.
9. For the A.Y. 1996-97, 1997-98 and 1998-99 the assessee filed return of income. While computing the income the assessee claimed as a deduction a sum of Rs. 3,94,37,780/= in A.Y. 1996-97. This sum consisted of the expected liability by way of damages for breach of contract by assessee with Alimenta and interest thereon worked out at 11.25% on the award of the Appellate Authority. In A.Y. 1997-98 the assessee claimed as a deduction only the interest liability which was worked out @ 11.25% on award amount as given by the appellate authority. In the A.Y. 1998-99 the assessee had claimed interest liability payable to Alimenta as per the award of the appellate authority at 11.25% P.A, In all the three A.Ys the liability had not been provided for in the books of accounts and was claimed as a deduction only in the computation of income. According to the assessee the amount payable as damages as well as interest for the period from the date of award of the Appellate Authority till the date of payment is an ascertained liability and the same should be allowed as a deduction. It may be clarified here that in A.Y. 1996-97 though the assessee claimed damages and interest payable to Alimenta as a deduction but before the CIT(A) it turned out that after the decree passed by the Delhi High Court the assessee had claimed the damages payable as a deduction in A.Y. 2000-2001 and the same was allowed by the A.O. Therefore only interest liability being interest at 11.25% on the damages awarded under the Arbitration award payable for the three A.Ys is in dispute in these appeals. The A.O. in A.Y. 1996-97 rejected the plea of the assessee by following his order on similar issue in A.Y. 1995-96. In A.Y. 1995-96 the assessee had made a claim for deduction on account of interest and damages payable to Alimenta. The claim was made in a revised return. The AO rejected such a claim on the ground that these revised return was not filed within time as contemplated in law. This order was followed by the AO in A.Y. 1996-97 to 1998-99 also. The CIT confirmed the order of the AO in all the three A.Ys. The reasoning adopted by the CIT(A) is primarily that the liability can be claimed only after the decree was passed by Hon'ble Delhi High Court. According to the CIT(A) the liability would accrue to the assessee only after decree of Hon'ble Delhi High Court. In this regard the CIT(A) also observed that as per the award of the Appellate authority there was no direction to pay interest after the date of the Award. The CIT(A) noticed that the interest claimed in the three AYs is interest payable after the date of the award. According to CIT(A) the interest payable for the aforesaid three A.Ys crystalised as a liability to the assessee only on the decree of the Hon'ble Delhi High Court and not at any point of time earlier to the said decree.
10. To complete the narration of facts, we may also mention that as against the decree of the Hon'ble Delhi High Court the assessee had preferred an appeal before the Division Bench and in the said proceedings had prayed for stay of operation of the decree pending disposal of the appeal by the Hon'ble Delhi High Court. The execution of the decree has however been stayed on the condition of the assessee furnishing a guarantee for the amounts due.
11. The ld. counsel for the assessee submitted that as far as interest payable for the period subsequent to the date of the award of the appellate authority it is a continuing liability and that such interest accrues for the period till the discharge of the debt by the assessee. It was therefore contended by him that the rate of interest at 11.25% on the principal amount awarded by the Appellate authority can reasonably be said to have accrued as a liability to the assessee and is allowable as a legitimate business deduction. In this regard the ld. counsel for the assessee also submitted that M/s Alimenta filed an application for passing decree in terms of the award of the Appellate authority as early as 8.7.1993 before the Hon'ble Delhi High Court. In this application M/s Alimenta had made a specific prayer for grant of interest at 18% p.a. after the date of the award. The claim so made by M/s Alimenta and the possibility of such claim being allowed was duly taken into account by the assessee and the assessee conservatively claimed as a deduction interest at 11.25% p.a. on the award for all the three A.Ys in question and claimed the same as a deduction. The ld. counsel principally placed reliance on the decision of the Hon'ble Supreme Court that in the case of Rama Bai v. CIT 181 ITR 400 (S.C.). In the case of Ramabai (supra) the question that arose for consideration was as to whether interest on enhanced compensation for land compulsorily acquired under the Land Acquisition Act awarded by the Court on a reference or further appeal can be taken to have accrued not on the date of the order of the Court granting enhanced compensation but as having accrued year after year from the date of delivery of possession of the land till the date of such order and that such interest cannot be assessed to income tax in one lump sum in the year in which the order is made. The Supreme Court answered the above issue in the affirmative and in favour of the assessee. The ld. counsel submitted that on the same principle the interest expenditure in the present case which pertains to the period from the date of the award of the arbitrator (Appellate authority) till the date of passing of a decree by the Hon'ble Delhi High Court should be allowed as a deduction in the relevant A.Ys to which the interest pertains. Reliance was also placed by the ld. counsel on the decision of the Hon'ble Delhi High Court in the case of Faslika Electric Supply Co. Ltd. v. CIT 143 ITR 551 (Delhi). In the aforesaid decision the dispute was with regard to interest payable on award of an arbitrator where there was an acquisition of electric supply undertaking by the Punjab government under the Punjab Electricity Supply Act, 1939. The Hon'ble Delhi High Court in the aforesaid decision had laid down that interest payable on acquisition was a liability that arose by virtue of the provisions of Indian Electricity Act, 1910 and therefore would accrue from the date of taking possession of the electricity supply undertaking on acquisition and should be taxed on an year to year basis, and cannot be taxed in one lump some. Another proposition laid down in the aforesaid decision was that an award of an arbitrator which is not filed in the Court and made of rule of Court has no force or validity. Further reliance was placed on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. 82 ITR 363 (S.C.) for the proposition that liability to pay an amount notwithstanding its denial by an assessee will not stop the liability from being treated as accrued. A reference was also made to the decision of the Hon'ble Supreme Court in the case of Calcutta Co. 37 ITR 1 (S.C.) for similar proposition.
12. In the course of arguments it was suggested by the Court that since the assessee has not accepted the decree of the Hon'ble Delhi High Court, it has gone on further appeal against the same whether the liability of the assessee can be said to be still disputed and therefore not considered as having accrued as a liability to the assessee. In response to such query the ld. counsel relied on the decision of the Hon'ble Supreme Court in the case of Central India Electric Supply Co. v. CIT 244 ITR 54 (S.C.) wherein it has been laid down that the fact that the judgement or a decree of Civil Court passed on the award was pending for consideration in appeal before the High Court that will not be a good ground to contend that there was no accrual of income till the disposal of the appeal by the Appellate forum.
13. It was submitted by the ld. counsel for the assessee that since interest liability is relatable to a particular A.Y. the same should be permitted to be claimed by the assessee.
14. The ld. D.R. submitted that the question for consideration in the present appeal is as to when the liability of assessee can be said to have crystallized. Drawing our attention to the award of the Appellate authority in the arbitration proceedings dt. 14.9.1990 the ld. D.R. submitted that the award granted interest on the damages awarded from 13.2.1981 till the date of the award namely 14.9.1990. It was pointed out by him that after 14.9.1990 there was no liability on the part of the assessee to pay interest as per award of the Appellate authority. It is only on 28.1.2000 when the Hon'ble Delhi High Court passed a decree in terms of the award of the arbitrator and also grant interest from the date of the award of the Appellate authority till the date of payment that the liability of the assessee for paying interest after 14.9.1990 can be said to have crystallized or become ascertained or accrued. It was submitted by him that the assessee follows a mercantile system of accounting and therefore it is only in January, 2000 after the decree of the Hon'ble Delhi High Court that the liability accrued to the assessee. As on the last date of all the three A.Ys involved in these appeals there was no accrual of liability and therefore the assessee can not claim deduction of the same. It was pointed out by him that the decision in the case of Central India Electric Supply Company (supra) relied upon by the ld. counsel for the assessee clearly lays down the proposition that the liability can be said to have accrued or arisen only when an arbitration award is made a Rule of Court. The ld. D.R. also drew attention of the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. 245 ITR 428 (S.C.) wherein the Hon'ble Supreme Court has laid down that a business liability must definitely arise for being allowed as a deduction. Further reliance was placed on the following decisions.
i. 73 ITR 53 (S.C.) Metal Box Co. of India v. their workmen ii. 294 ITR 451 (Delhi) CIT v. Woodward Governor India (P) Ltd.
15. We have considered the rival submissions. The facts narrated above are not in dispute. The question that needs to be decided is as to when the liability to pay interest for the period after 14.9.1990 the award of the arbitrator (Appellate authority) can be said to have accrued as a liability to the assessee. Admittedly as per the award of the Appellate authority interest was payable on the sum awarded by the assessee only up to the date of the award of the Appellate authority. It is no doubt true that M/s Alimenta filed an application before the Hon'ble Delhi High Court for a decree in terms of the award on 8.7.1993. In this application they had also prayed for future interest on the amount of award from the date of award by the Appellate authority till date of payment by the assessee. The assessee however disputed its liability including liability to pay interest after the date of the award of the Appellate authority. Therefore as on the last date of the assessment year 1996-97 to 1998-99 there was no legal liability on the part of the assessee to pay interest. It cannot be said that there was any liability in presenti on the part of the assessee till such time the Hon'ble Delhi High Court passed a decree which was only on 28.1.2000 after the end of the Accounting Year. The same cannot be claimed as a deduction in the aforesaid A.Ys.
16. With regard to the reliance placed by the ld. counsel on the decision of Hon'ble Supreme Court in the case of Ramabai (supra), we are of the view that the said principle has been laid down in the context of accrual of interest income in the case of interest on compensation and enhanced compensation payable on compulsory acquisition of land. The principle applicable in such cases are that interest is payable on compensation and enhanced compensation as per the provisions of the Land Acquisition Act. Therefore income would accrue every year irrespective of its quantification by the Authority acquiring the land and the Appellate forums in the Land Acquisition Act. It is under those circumstances that interest was considered as having accrued from year to year and was directed to be taxed year after year from the date of the delivery of possession till the date of the order awarding enhanced compensation. In the present case as we have already noticed there was no liability to pay interest after the award of the arbitrator (Appellate authority) and such liability arose only after the decree of the Hon'ble Delhi High Court . The case of Faslika Electric Supply Co. Ltd. (supra) also stands on the same footing. Interest was payable statutorily from the date of disposition. The case of Kedarnath Sheet Manufacturing Co. Ltd. (supra) is again a decision rendered in the context of statutory liability to sales tax and therefore cannot apply to the facts of the present case. The law is well settled that an assessee cannot claim to deduct an item of liability which is not accepted by him, but which, on the contrary is disputed by him. It is also equally well settled that liability is deductible only when it crystallizes into an ascertained liability. Such crystallization as we have already held takes place only on the Hon'ble High Court passing a decree and awarding interest after the date of the award of the Appellate Authority The decision in the case of Central India Electric Supply Co. Ltd. is with reference to the question regarding time of accrual of income. The amount brought to tax by the Revenue was the undisputed portion of the liability under the award of an Arbitrator which was made a Rule of Court. Hence, the ratio laid down therein would therefore be not of any assistance to the case of the assessee.
17. In the facts and circumstances of the present case we are of the view that the liability did not crystallize in the three A.Ys namely A.Y. 1996-97 to 1998-99 and therefore the assessee cannot claim the same as a deduction. The liability crystalized in A.Y. 2000-01. We therefore find no grounds to interfere with the orders of the Revenue authorities. Consequently ground Nos. 8 to 10 in ITA 1915 & 1916/Del/02 and ground Nos. 10 and 11 in ITA 2876/Del/03 are dismissed.
18. Ground No. 12 and 13 in ITA 1916/Del/02 and ground No. 16 to 18 in ITA 2876/Del/03 relate to the grievance of the assessee with regard to computation of deduction Under Section 80P(2)(d) of the Act. The facts material for adjudication of this ground are as follows. The assessee has claimed deduction Under Section 80P(2)(d), amounting to Rs. 83,64,000/=. The assessee was asked to show cause as to why indirect expenses of business should not be proportionately set off against the gross receipts of interest and dividend eligible for this deduction. The assessee did not file any reply. The AO referred to the decision of the Apex Court in the case of Sabarkantha Zilla Kharid Veehan Sangh Ltd. v. CIT (203 ITR 1027) and concluded that as laid down in the said decision, it is only on the net receipts after deducting expenses from the gross receipts of interest that deduction Under Section 80P(2)(d) should be allowed. The details of the interest receipts are given at page No. 167 of the assessee's paper book and they are as follows.
Deduction Under Section 80P(2)(d)
Interest received from Cooperative Society Rs. In lakhs
1. HARED, Ambala 55.93
2. MARKFED, Ropar 10.96
3. RAJFED, Jaipur 1.96 A. HIRAKAPOR TCMS Ltd., Bangalore 2.66
5. KSKF Ltd., Bangalore 0.27
6. Rubber Mark, Cochin 3.73
7. Madras Coop. Spinning Mills, Indore 0.12
8. Srivilli Putor Coop. Spinning Mill, Indore 0.47
9. IFFCO, New Delhi 0.54
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Rs. 83.64
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The A.O. computed the proportionate expenses to be deducted while allowing the deduction as follows.
Gross Eligible Receipts
---------------------------- × Admn. Expenses Total Receipts 83,64,000
--------------- × 6,16,97,109 = Rs. 19,19,077/ = 2,68,89,72,930
19. Before the CIT(A) the assessee contended as follows. The Federation has received Rs. 83.64 lacs as interest and dividend from different cooperative societies on the funds provided to them for purchases of goods to be made on behalf of NAFED. The sales of such goods purchased are effected by these societies on account of NAFED partially and the balance is sold by them directly. In respect of funds provided by NAFED to those cooperative societies for purchases and also belated remittance of sales proceeds by those cooperative societies, a charge termed as interest was collected by NAFED. Such transaction is a part and parcel of the transactions of purchase, sales and sales realizations. Therefore, such interest is one limb of the profit of the composite business transactions and therefore such receipts are profits of the business. It was further submitted that the charges received are not by way of putting aside surplus monies with those societies, These receipts have arisen in respect of funds utilized in purchases of food grains and also actual receipts of sales proceeds by NAFED. It was also pointed out that when the deduction Under Section 80 HHC was claimed, all the direct and indirect expenses had already been charged to the total sales turnover of Rs. 268.90 crores. Therefore any further allocation of indirect expenses would not be proper.
20. The CIT(A) held that interest received by the assessee from the other cooperatives under joint venture is directly arising out of sale proceeds and therefore it is to be treated as part of business receipts. That though it is termed as interest, its character is different from the interest received on investments/deposits. He therefore held that the interest received was to be treated as business receipt and not as interest on investment. He however noticed that deduction Under Section 80 HHC have already been allowed on these receipts and, therefore, deduction Under Section 80P(2)(d) cannot be again allowed on the very same income. The CIT(A) however noticed that out of the aforesaid interest income a sum of Rs. 54,000/= was dividend received by the assessee from IFFCO and this sum was eligible for deduction Under Section 80P(2)(d) of the Act. He upheld the order of the AO with regard to the principle of allowing deduction only on the net receipts. The formula applied by the AO in this regard was upheld by the CIT(A).
21. Before us the limited prayer of the ld. counsel for the assessee was that the deduction on account of expenditure on the basis of the formula applied by the A.O. will not be appropriate and that the expenses for making the investment which yielded the dividend has to be identified with reference to the branch from which the investments arose and thereafter expenditure should be allocated on a reasonable basis. The ld. counsel suggested disallowance of 1% or 2% of the dividend income. The ld. D.R. pointed out that when called upon, the assessee did not put forth any basis of allocation and even before the CIT(A) the assessee did not give any basis of allocation. In the circumstances he submitted that the order of the CIT(A) should be up held.
22. In our view the matter should be sent back to the AO for a fresh consideration. In our view it would be most appropriate to identify the expenditure connected with the earning of the dividend income and that the same should be deducted in arriving at the net receipts eligible for allowances Under Section 80P(2)(d) of the Act. The method adopted by the AO in our view will not be appropriate and will not reflect the nexus between the expenditure and the dividend income. The AO will identify the branch from which these investments were made and will consider the nature of expenses that would probably be incurred in such branch and thereafter apportion the expenditure.
23. In A.Y. 1998-99, the CIT(A) while deciding this issue upheld the order of the A.O. for the reasons given by the CIT(A) in A.Y. 1997-98. We have seen the break-up of the component of interest income in A.Y. 1998-99 which is placed at page No. 298 of assessee's paper book. The same is as follows.
Interest received from Co-Op. Societies
Name of the Co-Op. Society Amount - Rs.
1. MARKFED, Bhatinda 29.79
2. SPINFED, Bathinda 22.48
3. COOP TOUR, Delhi 0.64
4. N.C.B.I., Delhi 0.45
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Rs. 53.36
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It was pointed out by the ld. counsel that a sum of Rs. 45,000/= received from NCBI, Delhi is dividend and, therefore, in respect of this income similar direction should be given as it was given in A.Y. 1997-98. We are of the view that similar direction should be given in respect of the aforesaid sum and the matter is remanded to the A.O. for this purpose with a direction to follow the directions as were given in A.Y. 1997-98.
24. Ground No. 14 and 15 and ground No. 13 to 15 in ITA 1916/Del/02 and ITA 2876/Del/03 relate to the disallowance by the revenue authorities of the claim of the assessee for deduction on account of rebate given to members. In the revised computation of income the assessee has claimed deduction of Rs. 15038756 being rebate to members on purchase. The assessee was asked to show cause as to why this amount should not be disallowed on the following grounds.
a) As per reasons given in the order Under Section 143(3) for A.Y. 1995-96
b) As Under Section 61(ii) of the MSCS Act, this is an appropriation of profits for a fund. Hence, this was disallowable Under Section 40A(9) of the Act
c) That the expenditure was determined after 31.3.97.
The assessee submitted that the expenditure was incurred as per the requirement of Section 61(ii)(c) of the Multi State Co-operative Societies Act, 1984 (MSCS Act), read with bye law 39(ii)(b). This rebate had been awarded by the General Body recommendation held in the F.Y. 1997-98. The AO held that a perusal of the said section of the MSCS Act clearly shows that rebate was to be given to the members out of the profits of the society. According to the AO, it is, therefore, clear that the said rebate is not only an appropriation of the profits but is also a sum which has been determined in the F.Y. 1997-98, and is, therefore, clearly not allowable in the current year.
25. On appeal by the assessee the CIT(A) confirmed the order of the AO for the reason that the aforesaid payment was an appropriation of profits and also for the reason that the payment in question was approved only in the next F.Y. The CIT(A) also held that the provisions of Section 40A(9) were applicable.
26. The ld. counsel for the assessee at the outset submitted that the provisions of Section 40A(9) were not applicable to the case. He pointed out that the amount in question was paid to Member Federation with whom the assessee was carrying on business transactions. Our attention was drawn to Clause 39 of the bye laws of the assessee which provides for distribution of rebate to members as decided by the Board of Director. It was, therefore, submitted by him that it was not a payment by the assessee as an employer. We agree with the above submissions and hold that the provisions of Section 40A(9) are not applicable because the rebate has not been given by the assessee as an employer.
27. With regard to the question whether the rebate allowed could be said to be appropriation of profits and with regard to the question whether there was accrual of this liability during the P.Y. in question, the ld. counsel primarily placed reliance on the decision of the Hon'ble A.P. High Court in the case of CIT v. TTD Co-Operative Stores Ltd. 232 ITR 109 (A.P.) The Court in the aforesaid decision has held that payment of rebate was an expenditure wholly and exclusively incurred for the purpose of business and was allowable as a deduction. It was also submitted by him that the rebate allowed to members relates to transactions between the assessee and its members in the P.Y. relevant to A.Y. 1997-98 and, therefore, the same should be allowed as a deduction on the principle of mercantile system of accounting.
28. The ld.D.R. submitted that the point of time at which the expenditure crystallised is relevant for deciding whether the expenditure should be allowed as a deduction. He pointed out that board resolution approving the rebate to the members was passed only on 29.12.1997. He pointed out that the assessee in the present case had filed the return on 31.10.1997 even before the approval by the Board of Directors. He therefore submitted that no liability can be said to have crystallised during the P.Y. It was also submitted by him that as per the provisions of the Cooperative Societies Act, the above payment of rebate to the members is an appropriation of profits and can not be said to be an item of an allowable expenditure in computing the profits of the assessee.
29. We have considered the rival submissions. The nature of rebate given to the members is that while purchasing produce of its member it pays a higher sum to them. It is paid in recognition of the patronage which the members show towards the assessee. The payment of rebate is clearly dependent on the quantum of profits. This is clear from the agenda of the meeting of the general body a copy of which is placed at page No. 182 to 186 of assessee's paper book. The agenda clearly mentions the fact that it was an item of business with regard to disposal of net profit earned by the assessee. It is not in dispute that as per the provisions of the Multi State Cooperative Societies Act, 1984 net profits of a Society have to be utilized only in the manner prescribed by the said Act read with bye laws of a Society. Under bye law 39 of the assessee distribution of profits in the form of rebate to members is to be approved by the Board of Directors. As already mentioned the Board of Directors in the A.G.M. held on 29.12.1997 approved the payment of rebate to members.
30. We are of the view that the nature of rebate is such that it cannot be said to be an appropriation of profits. It is more in the nature of commission or incentive and is an allowable deduction while computing income. The rebate allowed to the members goes to increase the purchase price of the assessee and consequently will also reduce it's profits. It is only after taking into account such rebate that true profits of the Assessee can be arrived at. The fact that the rebate given only at the end of the year is again not decisive. The ascertainment of the rebate will relate back to the date of purchase and the purchase price will stand increased in the Trading A/c. Therefore, even the liability can be said to have accrued to the Assessee during the P.Y. The rebate relates to the transactions of the P.Y. and is, therefore, allowable as a deduction. The decision of the Hon'ble A.P. High Court in the case of Tirumala Tirupathi Devasthanam Cooperative Stores Ltd. (supra) squarely supports the plea taken by the assessee. We, therefore, hold that the assessee would be entitled to claim the aforesaid sum as a deduction in the relevant P.Y. relevant to A.Y. 19917-98 and 1998-99. The AO is directed to allow relief to the assessee accordingly.
31. The only surviving ground is ground No. 12 and 15 by the assessee in ITA No. 2876/Del/03. The assessee claimed a sum of Rs. 1,13,80,021/- on account of exgratia payment to the employees. The assessee had shown this amount as payable in the books of accounts. In A.Y. 1995-96 on a similar claim the AO referred to the provisions of the Multi State Cooperative Societies Act, 1984 and the bye laws of the assessee and concluded that these expenses are payable only on approval of the General Body Meeting and, therefore, the liability of the assessee cannot be said to have accrued to the assessee till such time the General Body Meeting approves these expenses. The AO further held that under the provisions of Section 36(1)(ii) of the Act such deduction can be allowed only when actually paid.
32. On appeal by the assessee the CIT(A) upheld the order of the AO. Before us the ld. counsel for the assessee pointed out that in A.Y. 1996-97 the CIT(A) allowed similar claim of the assessee holding that it was in the nature of bonus and should be allowed on the basis of the actual payment, subject to the provisions of Sections 43B of the Act. We are of the view that the matter should be remanded to the AO for a fresh consideration for a decision, in accordance with the decision of the CIT(A) in the A.Y. 1996-97. The order of the CIT(A) is accordingly set aside and the issue is remanded to the A.O. for fresh consideration. The issue with regard to allowing of interest Under Section 234B of the Act in A.Y. 1998-99 is only consequential and the AO is directed to give consequential relief. In the result, ITA 1915/Del/2002 is dismissed, ITA 1916/Del/2002 and ITA 2876/Del/2003 are partly allowed.
In the result, ITA 1915/Del/2002 is dismissed, ITA 1916/Del/2002 and ITA 2876/Del/2003 are partly allowed Order pronounced in the Open Court on