Income Tax Appellate Tribunal - Pune
Shivamrut Dudh Utpadak Sah. Sangh ... vs Deputy Commissioner Of Income Tax on 3 December, 1998
ORDER
B.L. Chhibber, A.M.
1. A short but vital issue involved in this appeal is whether the provisions of s. 40A(2)(a) are applicable to the case of a co-operative society.
2. The assessee is a co-operative society engaged in collection and sale of milk by collecting it from the primary milk societies and supplying it to the Government Milk Dairy. For chilling the milk, the assessee society has to use ice. During the course of assessment proceedings, the AO noted that the assessee-society had purchased ice from M/s Shivratna Ice Factory and M/s Dhavalsingh Ice Factory, Akluj. These factories are owned by Shri P. S. Mohite Patil, who is the brother of Chairman Shri Rajsingh M. Patil of the assessee-society. On enquiries made with ice factories located at Akluj, the AO found that the rate of ice for supply to the dairies was ranging from Rs. 90 to Rs. 110 per M.T. The assessee-society had paid average rate of Rs. 175 per M.T. to the ice factory owned by Shri P. S. Mohite Patil. Accordingly, the AO invoked the provisions of s. 40A(2)(a) of the Act and made an addition of Rs. 3,73,535, on account of alleged excess payment to the brother of the Chairman of the assessee-society.
3. On appeal, the CIT(A) confirmed the action of the AO.
4. Shri S. N. Doshi, the learned counsel for the assessee submitted that the provisions of s. 40A(2)(a) are not applicable to the case of a co-operative society as the co-operative society does not find mention in the said section. Under s. 2(31) there are seven entities, "Persons" and those entities do not include a co-operative society. Any person not falling within the seven categories enunciated under the definition of "Person" may also be an assessee by itself. There can be a person falling within the category of "BOI" or 'Artificial juridical person". Referring to the different sections of the Act, the learned counsel proceeded to point out the distinction between AOP and a co-operative society and submitted that since the co-operative societies have been kept out of the purview of s. 40A(2)(a) the authorities below were not justified in invoking the provisions of s. 40A(2)(a) of the Act. On merits of the case, the learned counsel submitted that the assessee had paid price of ice ranging from Rs. 130 to Rs. 150 per M.T. to other ice factories at Solapur, Phaltan and Pandharpur. He submitted that the rates quoted by the AO were ex-factory rates on which the assessee-society paid Rs. 50 to Rs. 70 as transport charges. He further submitted that the price was paid after calling for the quotations. It was beneficial for the assessee to purchase ice even at a little higher rate from Akluj where the dairy of the assessee-society was situated, because transporting ice from Solapur, Phaltan and Pandharpur would further cause loss to the society by melting of ice during the process of transportation.
5. Shri Adhir Jha, the learned Departmental Representative strongly supported the order of the authorities below. He submitted that the status is that of a BOI or AOP and the words "AOP" do find mention in s. 40A(2)(a) and accordingly, the AO was justified in invoking the provisions of s. 40A(2)(a) of the Act.
6. We have considered the rival submissions and perused the facts on record. A plain reading of s. 40A(2)(a) reveals that the provision applies to "any person referred to in cl. (b) of this sub-section" and in sub-s. (b) the persons mentioned are a company, firm, AOP or HUF. Thus, it is very clear that in its wisdom the legislature specifically left out a "co-operative society" from the purview of s. 40A(2)(a). A co-operative society enjoys a special status with its own individuality and distinctness in the scheme of IT Act. A co-operative society is a voluntary AOP, it is an economic institution formed for social purpose and not motivated by entrepreneurial profits. In other words, it is a democratic organisation owned and controlled by those utilising the services. It is distinct from AOP. While a Co-operative Society is defined in the Act there is no definition of AOP in the Act. The Hon'ble Supreme Court in the case of CIT vs. Indira Balkrishna (1960) 39 ITR 546 (SC) had an occasion to go into the definition of AOP in the absence of definition in the Act. According to the Hon'ble Apex Court, the word "associate" means "to join in common purpose, or to join in an action". Therefore, "AOP" as used in s. 3 of the Indian IT Act, 1922, means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which impose a tax on income, the association must be one the object of which is to produce income, profits or gains. As against the above definition of AOP as stated above a co-operative society is a voluntary AOP not motivated by business consideration. The IT Act itself distinguishes between AOP and a co-operative society in the following manner :
(a) Sec. 2(19) of the Act defines a co-operative society. There is no definition of AOP in the Act.
(b) The rates of income-tax prescribed for a co-operative society are different from the rates applicable to AOP.
(c) A co-operative society having been mainly formed on doctrine of mutality, s. 80P prescribes various exemptions or deduction in respect of income which arise applying the principles of mutality. No such exemption is available to an AOP.
(d) Co-operative societies are distinctly referred to in various sections of the Act, e.g., ss. 2(18)(ad), 2(24)(vii), 27(iii), 36(1)(i)(a), 40(na), 45(3), 80-I(a)(5), 80-I(6)(i), 80L(1)(ii), (vi), (via), (viii) and (ix), 80P, 139(1)(b)(i), 193(ii)(b), 194A(i), (v), (vi), 269T and 269UA. In these sections, the co-operative society is given treatment separate from AOP establishing its distinctness.
7. In the light of above discussion, we do not agree with the argument of the learned Departmental Representative that a co-operative society may be treated at par with an AOP. Since the co-operative society has been specifically excluded by the legislature from the purview of s. 40A(2)(a), we hold that the authorities below were not justified in invoking the provisions of s. 40A(2)(a) of the Act to the case of the assessee.
8. In view of our finding in the preliminary ground, it is not necessary for us to go into the merits of the case. We, therefore, decline to adjudicate on the merits of the case argued by the learned counsel for the assessee. This ground accordingly succeeds and the assessee gets relief of Rs. 3,73,535.
9. The next grievance of the assessee is that the learned CIT(A) is not justified in confirming the addition of Rs. 17,536 on account of guest house expenses. At the time of hearing, this ground was not pressed. The same is accordingly dismissed.
10. The next grievance of the assessee is that the learned CIT(A) is not justified in confirming the function expenses of Rs. 25,822. The assessee-society claimed a sum of Rs. 52,644.65 on account of Sabha Samarmbh expenses. Details of these expenses were furnished before the AO. The AO disallowed 50 per cent of such expenses with cryptic remark as "for want of proof and treated as not for business purposes". On appeal, the CIT(A) confirmed the addition made by the AO.
11. Shri S. N. Doshi, the learned counsel for the assessee drew our attention to the details of such expenses and submitted that the expenses were incurred for annual general meeting and were in the nature of business expediency. He alternatively argued that the disallowance made by the AO at 50 per cent was on the higher side. The learned Departmental Representative supported the orders of the authorities below.
12. After hearing both the parties and after going through the details of the expenses incurred, we hold that a disallowance of 25 per cent would meet the ends of justice. The AO is accordingly directed to restrict the disallowance to 1/4th.
13. The next grievance of the assessee is that the learned CIT(A) is not justified in confirming the addition on account of non-refundable deposits of Rs. 71,529 and interest thereon amounting to Rs. 17,383. During the year under appeal, the assessee co-operative society collected from its members a sum of Rs. 71,529 as non-refundable deposits and paid interest of Rs. 17,383. The AO held that the liability towards non-refundable deposits and interest thereon was not allowable in view of Supreme Court decision in the case of CIT vs. Bazpur Co-operative Sugar Factory Ltd. (1988) 172 ITR 321 (SC). On appeal, the CIT(A) confirmed the action of the AO reiterating that the decision of the Hon'ble Supreme Court in the case of Bazpur Co-op. Sugar Factory Ltd. (supra) was applicable to the facts of the case of the assessee-society.
14. Shri S. N. Doshi, the learned counsel for the assessee submitted that the liability was created by a special resolution passed in the meeting held on 28th September, 1986 (a copy of which is placed at p. 1 of the paper-book) and the liability was a statutory liability and was allowable in view of the decision of the Special Bench of the Tribunal in the case of Shri Chhatrapati S. S. K. Ltd. vs. Dy. CIT (1992) 43 TTJ (Pune)(SB) 90 : (1992) 198 ITR 78 (AT)(SB). The learned Departmental Representative strongly supported the orders of authorities below.
15. We have considered the rival submissions. We find that both the authorities below have not gone into the nature of liability. Without appreciating the facts of the case, they simply rushed to apply the decision of the Hon'ble Supreme Court in the case of Bazpur Co-op. Sugar Factory Ltd. (supra). This fact is admitted by both the parties before us. In our opinion, it will be in the fitness of things if this issue is restored to the file of the AO. He is directed to go into the nature of liability vis-a-vis the resolution passed by the members of the society and then readjudicate upon the issue after giving an opportunity of being heard to the assessee.
16. In the result, the appeal is allowed in part.