The Ludhiana Distt. Co-op Milk Producer Union Ltd.,, Ludhiana v. DCIT,, Ludhiana

ITA 875/CHANDI/1995 | 1991-1992
Pronouncement Date: 14-02-2012 | Result: Partly Allowed

Appeal Details

RSA Number 87521514 RSA 1995
Bench Chandigarh
Appeal Number ITA 875/CHANDI/1995
Duration Of Justice 16 year(s) 7 month(s) 25 day(s)
Appellant The Ludhiana Distt. Co-op Milk Producer Union Ltd.,, Ludhiana
Respondent DCIT,, Ludhiana
Appeal Type Income Tax Appeal
Pronouncement Date 14-02-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 14-02-2012
Date Of Final Hearing 24-01-2012
Next Hearing Date 24-01-2012
Assessment Year 1991-1992
Appeal Filed On 19-06-1995
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B CHANDIGARH BEFORE SHRI H.L.KARWA VICE PRESIDENT AND SHRI MEHAR SINGH ACCOUNTANT MEMBER ITA NO. 874 & 875/CHD/1995 A. Y: 1988-89 & 1991-92 THE LUDHIANA DISTT.COOP. V DCIT SPL.RANGE MILK PRODUCER UNION LTD. LUDHIANA. MILK PLANT JAGRAON ROAD LUDHIANA. PAN: (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI HARI OM ARORA RESPONDENT BY : SMT. JAISHREE SHARMA DATE OF HEARING : 24.01.2012 DATE OF PRONOUNCEMENT : 14.02.2012 ORDER PER MEHAR SINGH AM THE PRESENT APPEALS FILED BY THE ASSESSEE ARE DIREC TED AGAINST THE ORDER DATED 30.03.1995 PASSED BY THE LD . CIT(A) U/S 250(6) OF THE INCOME-TAX ACT 1961 (IN SHORT 'THE AC T'). 2. IN ITA NO.874/CHD/1995 (A.Y. 1988-89) THE ASSES SEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THAT THE IMPUGNED ORDER HAS BEEN PASSED BY THE LD. CIT(A) WITHOUT PROPER APPLICATION OF MIND AS SUCH IT IS NOT SUSTAINABLE IN LAW AND FACTS OF THE CASE. 2. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN LAW A ND FACTS OF THE CASE IN CONFIRMING AOS ACTION IN RE-OPENING THE ASSESSMENT BY ISSUING NOTICE U/S 148 OF THE IT ACT 1961. PROVISIONS OF SECTION 147 AND 148 OF THE IT ACT 1961 HAVE BEEN MISCONSTRUED AND MISAPPLIED IN THE APPELLANTS CASE. 2 3. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN CONFIRM ING ADDITION OF RS.46 19 200/- MADE BY THE DCIT ON ACCOUNT OF PAYMENT OF COMMISSION TO COOP. SOCIETIES. THE FACTS OF THE CASE AND LAW APPLICABLE HAVE NOT BEEN CONSIDERED PROPERLY WHICH HAS RESULTED IN ERRONEOUS ORDER AND UNTENABLE CONCLUSION. 4. THAT THE FINDING OF THE LD CIT(A) THAT THE APPEL LANT HAS NOT BEEN ABLE TO MAKE OUT A CASE THAT THE EXPENDITURE WAS A BONAFIDE BUSINESS EXPENDITURE RELATING TO THE YEAR IS MISPLACED UNTENABLE AND CONTRARY TO LAW. THE EVIDENCE AND MATERIAL ON RECORDS HAVE BEEN IGNORED TO BE CONSIDERED PROPERLY BY THE AUTHORITIES BELOW WHICH HAS MADE THE ORDER ERRONEOUS AND BAD IN LAW. 5. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN CONFIRMI NG THE ACTION OF THE AO REGARDING ADDITION OF RS.1 70 817/- ON ACCOUNT OF DEDUCTION CLAIMED U/S 80P(2)(IV). PROVISIONS OF SECTION 80P(2)(IV) OF THE INCOME-TAX ACT 1961 HAVE BEEN MISCONSTRUED AND MISAPPLIED IN THE APPELLANTS CASE. 6. THAT THE ORDER IS CONTRARY TO LAW AND FACTS OF T HE CASE AND IT DEVOID OF JUDICIOUS AND RATIONAL APPROACH. THE ADDITIONS AND DISALLOWANCES CONFIRMED ARE BASED ON SURMISES AND CONJECTURES. 3. IN THE COURSE OF PRESENT APPELLATE PROCEEDINGS LD. 'AR' STATED THAT GROUND NO. 1 IS GENERAL IN NATURE. THE REFORE WE DEEM IT FIT NOT TO ADJUDICATE THE ISSUE RAISED IN T HIS GROUND OF APPEAL BEING GENERAL IN NATURE. 4. LD. 'AR' FURTHER CONTENDED IN THE COURSE OF PRES ENT APPELLATE PROCEEDINGS BEFORE THE BENCH THAT GROUN D NOS. 3 2 & 5 ARE NOT PRESSED BY HIM. CONSEQUENTLY GROUND N OS. 2 & 5 ARE DISMISSED AS NOT PRESSED. 5. GROUND NOS. 3 4 & 6 ARE INTER-CONNECTED AS STA TED BY THE LD. 'AR'. THE LD. 'AR' CONTENDED THAT LD. CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE ADDITION OF RS.46 19 200/- MADE BY THE DY. COMMISSIONER OF INCOME-TAX ON ACCOUNT OF PAYMENT O F COMMISSION TO COOPERATIVE SOCIETIES. LD. 'AR' FU RTHER CONTENDED THAT THE AMOUNT REPRESENTS DIFFERENCE PA ID BY THE ASSESSEE COMPANY TO VARIOUS MILK PRODUCING SOCIETI ES FOR THE SUPPLY OF MILK DURING THE RELEVANT PERIOD. 6. LD. 'AR' FILED THE FOLLOWING DETAILS ON THE DATE OF HEARING I.E. 24.01.2012 : LUDHIANA DISTT.COOP.MILK PRODUCERS UNION LTD.LUDHI ANA S.NO. PARTICULARS AMOUNT A.Y. 1991-92 A.Y. 1992-93 (RS.) (RS.) 1. SALE OF MILK 164423312/- 250225504/- 2. SALE OF MILK PRODUCT 304226144/- 175095050/ - & OTHER SALES ------------------------------------------------ --------------------------------------------------- --- TOTAL SALES 468649456/- 425320554/- ------------------------------------------------ --------------------------------------------------- --- 3. MILK PRICE DIFFERENCE 7643690/- 4147789/- 4. OUT OF THREE 70% PAID IN CASH/BANK 75% PAID IN CASH/BANK 30% IN SHARES 25% IN SHARES 5. RETURNED INCOME 665740 896950 6. NO. OF COOP SOCIETIES NO. AMOUNT NOS . AMOUNT TO WHOM PAYMENT MADE A) MEMBERS 420 5629177 404 3025744 B) NON MEMBERS 264 2014513 242 1122045 ----------------------------------- --------------------------------------------------- ---- TOTAL 684 7643690 646 4147789 ------------------------------------------------- ----------------------------------------- 7. IT WAS ALSO STATED BY THE LD. 'AR' THAT THE ISSU E IN THIS APPEAL IS COVERED BY THE DECISION OF THE GUJRAT HIG H COURT IN THE CASE OF CIT V MEHSANA DISTT. COOPERATIVE MILK P RODUCERS UNION (2006) 282 ITR 24 (GUJ) AND THIRD MEMBER DECI SION IN THE CASE OF MEHSANA DISTT. COOP. MILK PRODUCERS UNION V AO (33 4 ITD 6. LD. 'AR' FURTHER STATED THAT THE HON'BLE GUJ RAT HIGH COURT HAS UPHELD THE DECISION OF THE TRIBUNAL IN TH E MATTER. 8. LD. 'DR' ON THE OTHER HAND CONTENDED THAT THE ISSUE IN QUESTION IS COVERED BY THE DECISION OF THE JURISDIC TIONAL HIGH COURT IN THE CASE OF BUDHEWAL COOPERATIVE SUGAR MI LLS LTD. V CIT (2009) 316 ITR 461 (P&H). LD. 'DR' FURTHER CO NTENDED THAT THE THIRD MEMBER DECISION OF THE ITAT WHICH WAS UP HELD BY THE HON'BLE GUJRAT HIGH COURT CITED AND RELIED UPON BY THE LD. 'AR' IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE BEING FACTUALLY DIFFERENT AND DISTINGUISHABLE. LD. 'DR' STATED THAT IN ASSESSEE'S CASE ACCOUNTS WERE CLOSED ON 30.06.1987 AND PROF IT WAS ARRIVED AT ON THAT VERY DATE. THE LIABILITY AROSE AS A RESULT OF RESOLUTION OF THE BOARD OF DIRECTORS PASSED ON 29.07.1988 I.E. APPROXIMATELY 13 MONTHS AFTER THE CLOSE OF THE ACCOUNTING PERIOD ON 30.6.1987. THE DECISION OF THE HON'BLE GUJRAT HIGH COURT IN THE CASE OF CIT V MEHS ANA COOP. MILK PRODUCERS UNION (SUPRA) IS BASED ON CATEGORICA L OBSERVATION THAT THERE WAS NO FINDING THAT PROFITS HAD BEEN ASCERTAINED BY MAKING UP ACCOUNTS IN THAT CASE AND HENCE THERE IS NO QUESTION OF APPLICATION OF PROFITS BY T HE ASSESSEE. 9. WE HAVE CAREFULLY PERUSED THE FACTS OF THE CASE RIVAL SUBMISSIONS AND RELEVANT RECORD INCLUDING THE CASE LAWS CITED BY THE CONTENDING PARTIES. THE BRIEF AND UNDISPUTE D FACTS OF THE CASE AS CULLED OUT FROM THE RELEVANT RECORDS A RE THAT THE AO ON PERUSAL OF THE RECORDS AS ALSO THE BOOKS OF ACCOUNT OF THE ASSESSEE IMPOUNDED DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 1991-92 REVEALED THAT THE 5 ASSESSEE HAD DEBITED IN ITS ACCOUNT BOOKS AN AMOUN T OF RS.46 19 200/- ON ACCOUNT OF PRICE DIFFERENCE. TH E ACCOUNTING YEAR OF THE ASSESSEE ENDS ON 30.06.1987 . THE PRICE DIFFERENCE HAD BEEN CLAIMED TO BE PAID TO VAR IOUS MILK PRODUCING SOCIETIES FOR THE SUPPLY OF MILK DURING THE RELEVANT ACCOUNTING PERIOD. THE DATE OF PAYMENT OF RS.46 19 200/- HAD BEEN STATED TO BE 15.11.1990. I T HAS BEEN CONTENDED THAT RESOLUTION DATED 29.07.1988 H AD BEEN PASSED BY THE MANAGEMENT FOR ALLOWING THE PAYMENT O F SUCH PRICE DIFFERENCE. THE AO AT PAGE 3 OF THE ASSESSMENT ORDER STATED THAT THE ORIGINAL DOCUMENTS PERTAINING TO SA ID RESOLUTION OF THE BOARD OF DIRECTORS ARE ALREADY I N THE CUSTODY OF THE DEPARTMENT. A BARE PERUSAL OF THE S AID RESOLUTION DATED 29.07.1988 AND AN AGENDA ITEM NO. 7 REVEALS THAT THIS DECISION FOR THE GRANT OF PRICE DIFFERENCE TO MILK PRODUCING SOCIETIES HAS BEEN TAKEN AFTER TH E INCOME HAD ALREADY BEEN ACCRUED TO THE ASSESSEE. IT IS AD DED THAT IN THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 19 88-89 DATED 7.3.1994 PASSED U/S 143(3) READ WITH SECTION 147 OF THE ACT IS M ENTIONED METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AS MERCANTILE. IN THE RESOLUTION IT IS C ATEGORICALLY MENTIONED THAT SURPLUS PROFITS HAVE BEEN ACCRUED TO THE ASSESSEE AFTER THE DEDUCTION OF VARIOUS TRADING EXP ENSES AND HENCE OUT THE SAID SURPLUS PROFITS MILK PRICE DIF FERENCE IS TO BE PAID TO VARIOUS PRIMARY SOCIETIES. 10. THE AO VIDE ORDER-SHEET ENTRY DATED 21.2.1994 REQUIRED THE ASSESSEE TO FILE WRITTEN SUBMISSIONS AS TO WHY THE SAID PRICE DIFFERENCE OF RS.46 19 200/- DEBITED IN ITS A CCOUNTS 6 SHOULD NOT BE DISALLOWED BEING AN APPLICATION OF I NCOME ALREADY EARNED BY THE ASSESSEE AS ON 30.06.1987. I N RESPONSE TO THE SAID QUERY THE ASSESSEE FILED SUBMISSION D ATED 28.02.1994 WHEREBY THE ASSESSEE CONTESTED THE PROP OSED DISALLOWANCE. THE ASSESSEE CONTENDED THAT THE SAID EXPENSES HAD BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSE O F BUSINESS WITH A VIEW TO GIVING BEST FACILITIES TO ITS MEMBERS. THE ASSESSEE FURTHER CONTENDED THAT THE BASIC PURPOSE OF THE COOPERATIVE SOCIETY WAS TO PROVIDE S ERVICES TO VARIOUS MEMBERS AND NOT TO EARN PROFITS LIKE ANY B USINESS HOUSE. THE ASSESSEE WAS OF THE VIEW THAT COOPERATIVE SOCIETIES SHOULD BE TREATED ON DIFFERENT FOOTINGS V IZ-A-VIZ ANY OTHER ASSESSEE. IT WAS POINTED OUT THAT THEIR SYSTEM OF MAKING SUCH PAYMENTS ON ACCOUNT OF PRICE DIFFERENC E ON POST-FACTO BASIS IS IN ACCORDANCE WITH THE METHOD AND SYSTEM FOLLOWED BY THE ASSESSEE CONSISTENTLY. THE AO DID NOT ACCEPT SUCH CONTENTION OF THE ASSESSEE AND OBSE RVED THAT EXPENSES CAN BE ALLOWED AS DEDUCTION FROM THE PROFI T & LOSS ACCOUNT WHICH HAD ACCRUED ON THE DATE OF CLOSING O F THE ACCOUNTING PERIOD. THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. THE AO FOUND THAT IN THE PRESENT CASE THE LIABILITY TO PAY PRICE DIFFERENCE HAD NO T ACCRUED TO THE ASSESSEE TILL THE END OF THE ACCOUNTING PERI OD I.E. 30.06.1987. SUCH LIABILITY HAD ARISEN ONLY AS A RE SULT OF RESOLUTION OF THE BOARD OF DIRECTORS PASSED ON 29. 07.1988 I.E. APPROXIMATELY 13 MONTHS AFTER THE CLOSE OF THE ACCOUNTING PERIOD AND CLOSE OF ACCOUNT BOOKS. THE AO OBSERVED THAT IN SUCH CIRCUMSTANCES THE CONTENTION OF THE 7 ASSESSEE THAT THE LIABILITY RELATES TO THE PERIOD E NDEDG ON 30.06.1987 CANNOT BE ACCEPTED BY ANY STRETCH OF IMAGINATION. THE AO FURTHER MENTIONED IN PARA 3 OF THE SAID ASSESSMENT ORDER AS UNDER : 3. ALL THE REASONING AND ARGUMENTS GIVEN BY THE ASSESSEE HAVE BEEN DEALT WITH IN DETAIL WHILE PASSI NG THE ORDER U/S 143(3) DATED 21.1.1994 IN ASSESSEE'S OWN CASE FOR A.Y. 1991-92. THE FACTS AND CIRCUMSTANCES OF THE CASE AND THIS ISSUE ARE ABSOLUTELY THE SAME AS THEY WERE FOR A.Y. 91-92. ALL THE LOGICS REASONING AND LEGAL DECISIONS APPLIED IN THE SAID ASSESSMENT ORDER IN O RDER TO COUNTER THE CONTENTIONS OF THE ASSESSEE ARE APPL ICABLE FOR ASSESSMENT YEAR 1988-89 ALSO. IN VIEW OF ALL TH E FACTS AND CIRCUMSTANCES OF THE CASE THE SAID DEDUC TION OF RS.46 19 290/- CLAIMED BY THE ASSESSEE ON ACCOUN T OF PRICE DIFFERENCE IS HEREBY REJECTED. THE SAID DEDU CTION IS NEITHER IN ACCORDANCE WITH THE ACCOUNTING PRINCI PLES NOR IT IS LEGALLY ALLOWABLE. 10(1) IN VIEW OF ABOVE OBSERVATION OF THE AO WE DE EM IT FIT TO REPRODUCE THE RELEVANT PART OF THE ASSESSMENT OR DER DATED 21.1.1994 PASSED U/S 143(3) OF THE ACT FOR THE ASSE SSMENT YEAR 1991-92: 2. IN ORDER TO ARRIVE AT THE ACTUAL INCOME EARNE D BY THE SOCIETY THE EXAMINATION OF ACCOUNTS WAS MADE KEEPING INTO A CCOUNT THE ABOVE MENTIONED SALIENT FEATURES AND THE FOLLOWING GLARING DISCREPANCIES WARE NOTICED WHICH NOT ONLY POINT OUT THE DEFAULTY SYSTEM OF ACCOUNTANCY BEING FOLLOWED BY THE ASSESSE S BUT HAD THE EFFECT OF SUPPRESSING THE BOOK PROFITS FROM THE POI NT OF VIEW OF INCOME-TAX ALSO. 3. AS PER ANNEXURE-J ATTACHED WITH THE BALANCE-SHE ET FILED ALONGWITH THE RETURN AN AMOUNT OF RS. 1 19 87 211 /- HAS BEEN 8 DEBITED BY THE ASSESSEE UNDER THE HEAD COMMISSION TO SOCIETIES' FURTHER DETAILS OF THE SAID EXPENDITURE IN RESPECT OF EACH MONTH WERE OBTAINED BY MY PREDECESSOR WHICH ARE ALSO PLAC ED ON RECORD AT PAGE 136 OF THE ASSESSMENT RECORDS. PERUSAL OF THE MONTHWISE DETAILS INDICATED THAT THE ASSESSEE WAS MAKING REGU LAR PROVISIONS FOR COMMISSION PAYABLE FROM MONTH TO MONTH AS PER T HE MAXIMUM COMMISSION PAYABLE TO THESE SOCIETIES AND AS FIXED BY THE MILKFED. A S MENTIONED EARLIER THE PAYMENT OF COMMISSION IS GOVE RNED BY THE MILKFED WHICH WAS RS. 1.50 PER KG. FAT FOR THE PER IOD UNDER CONSIDERATION. THE COMMISSION PAYABLE ON THE PUR CHASES MADE THROUGH THESE SOCIETIES WAS ACCORDINGLY CALCULATED BY THE ASSESSEE AND CONSEQUENTLY THE PROVISION WAS MADE. THE TOTAL SUCH COMMISSION PAYMENT DURING THE PERIOD COVERED BY THE ACCOUNTS COMES TO 8S. 43 43 521/-. IN ADDITION TO THAT A SINGLE ENTRY OF RS.76 43 690/- HAS BEEN MADE AT THE END OF THE YEAR UNDER THE HEAD 'COMMISSION TO CO-OPERATIVE SOCIETIES'. THE ASSESSES WAS ASKED TO EXPLAIN AS TO HOW THE SUBSTANTIAL AMOUNT OF RS. 76 43 690/- HAS BEEN DEBITED AT THE END OF THE YEAR AS COMMISSION PAYABLE. AS PE R THE INFORMATION AVAILABLE ON RECORD THE THEN AUTHORISED REPRESENTA TIVE SHRI R.GUPTA C.A. HAD SUBMITTED BEFORE MY PREDECESSOR T HAT THIS AMOUNT WAS DEBITED IN THE PROCESS OF A RESOLUTION PASSED BY THE BOARD OF DIRECTORS IN WHICH IT WAS DECIDED TO DISTRIBUTE THE PROFITS TO THE PRIMARY CO-OPERATIVE SOCIETIES ON THE BASIS OF PER KG. FAT. IT WAS FURTHER EXPLAINED THAT THE AMOUNT WAS DISTRIBUT ED AS AN INCENTIVE TO ITS MEMBERS. THIS WAS VERBALLY EXPL AINED BY THE A.R. AND IT HAS BEEN FOUND MENTIONED IN MY PREDECESSOR'S LETTER DATED 23.1.92 WHICH WAS SERVED UPON THE ASSESSEE ON THE S AME AFTERNOON. AS PER THE LETTER UNDER REFERENCE SH. H.S. OBEROI THE MANAGING DIRECTOR AT THAT TIME HAD ALSO APPEARED BEFORE MY PREDECESSOR AND HAD CONFIRMED THAT THE PROFITABILITY OF THE UNIT WA S ASCERTAINED AT THE END OF THE YEAR AND IT WAS DECIDED UNANIMOUSLY BY THE BOARD OF DIRECTORS TO DISTRIBUTE THE SURPLUS MONEY AS AN INC ENTIVE TO ITS MEMBERS. SHRI OBEROI HAD ALSO CONFIRMED THAT THE SO CIETY WAS NOT UNDER ANY LEGAL OBLIGATION TO MAKE THIS PAYMENT BUT STILL THE 9 PAYMENT WAS MADE FOR THE UPLIFTMENT OF MILK PRODUCE RS WHO ARE POOR PEOPLE IN THE VILLAGES. WHATEVER ADMISSION WAS MADE BY THE MANAGING DIRECTOR AND HIS CHARTERED ACCOUNTANT BEFO RE MY PREDECESSOR WAS DULY CONFRONTED IN WRITING TO THEM IN THIS OFFICE LETTER DATED 23.1.1992. IN REPLY THERETO A LETTER DATED 4.2.92 WAS FILED ON BEHALF OF THE ASSESSEE IN WHICH THE ADMISS ION OF THE MD REGARDING DISTRIBUTION OF SURPLUS MONEY WAS NOT DEN IED MEANING THEREBY THAT THE PAYMENT OF RS.76 43 690/- OUT OF T HE SURPLUS PROFITS WAS ADMITTED BY THE ASSESSEE. THE JUSTIFICATION OF PAYMENT WAS SOUGHT TO BE EXPLAINED ON THE GROUND THAT THE AMOUN T OF RS.76 43 690/- HAS BEEN PAID BY WAY OF ADDITIONAL C OST OF MILK AS THE ORIGINAL PURCHASE PRICE PAID TO MILK PRODUCERS WAS NOT THE FINAL PAYMENT. IN THE SAID LETTER IT HAS BEEN STRESSED T IME AND AGAIN THAT THE PURCHASE PRICE ORIGINALLY DEBITED TO THE PURCHA SE ACCOUNT WAS PROVISIONAL AND THE FINAL PRICE WAS DETERMINED LATE R ON AND THE ENTRY FOR THE SAME WAS MADE RESPECTIVELY ON 31 ST MARCH 1991 AS AGAINST THE SANCTION OF THE BOARD FOR THE SAID PAY MENT APPROVED IN ITS MEETING ON 11.10.1991. A LOT OF CORRESPONDENCE HAS GONE INTO THE CASE REGARDING THE LEGITIMACY OF THE ENTRY OF R S.76 43 690/- UNDER THE HEAD COMMISSION ACCOUNT TO WHICH THE ASSE SSEE HAD CONSISTENTLY BEEN REPLYING THAT THE AMOUNT HAS BEEN PAID AS PURCHASE PRICE DIFFERENCE TO THE MILK PRODUCERS. 4. IN ORDER TO APPRECIATE THE REAL NATURE OF THIS ENTRY I WOULD LIKE TO REFER BACK TO PARA 1 OF THIS ASSESSMENT ORDER IN WHICH THE REFERENCE WAS MADE TO THE CONSTITUTION GOVERNING TH E FUNCTIONING OF THIS SOCIETY. IF WE GO BY THE BY-LAWS GOVERNING TH IS SOCIETY AND CONSEQUENTLY THE RESOLUTIONS PASSED AND APPROVED BY THE BOARD OF DIRECTORS THIS ENTRY CAN NEITHER BE TREATED AS A P URCHASE PRICE DIFFERENCE NOR COMMISSION PAYABLE TO THE PRIMARY CO OPERATIVE SOCIETIES FOR THE REASONS GIVEN HEREUNDER : I) AS PER THE BY-LAWS THE PURCHASE PRICE IS FIXED BY THE MILKFED. WHATEVER THE PRICE WAS FIXED BY THE MILKFED FOR THE PERIOD UNDER CONSIDERATION THE SOCIETY WAS REGULARLY MAKING THE PAYMENT AS PER 10 THAT PRICE. THIS IS SUPPORTED BY THE PURCHASE ACCOU NT BEING MAINTAINED BY THE ASSESSEE IN ITS REGULAR BOOKS OF ACCOUNT. THE FACT THAT THE SOCIETY WAS MAKING THE PAYMENT AS PER THE FIXED PRICE IS ALSO SUPPORTED BY THE AGENDA ITEM NO.18 PASSED BY T HE BOARD OF DIRECTORS IN ITS MEETING DATED 11.10.91 AT PAGE NO. 76 OF THE PROCEEDING BOOK MAINTAINED FOR THAT PERIOD. THIS IS FURTHER CORROBORATED BY THE CONDUCT OF THE ASSESSEE ITSELF THAT THE ENTRY OF RS.76 43 690/- FIRST MADE IN THE PURCHASE ACCOUNT A T JOURNAL PAGE 507 (ENTRY NO.1707) WAS REVERSED BY THE ASSESSEE IT SELF BY MAKING ANOTHER ENTRY AT PAGE NO.509 (ENTRY NO.1717) IN WHI CH THE SAID AMOUNT WAS DEBITED TO THE COMMISSION ACCOUNT. HAD T HE ASSESSEE BEEN UNDER OBLIGATION TO PAY THE SAID AMOUNT TO THE MILK PRODUCERS THIS SHOULD HAVE BEEN SHOWN BY HIM AS PAYABLE BY MA KING A PROVISION IN THE BOOKS ON DAY TODAY BASIS. THERE WA S NO QUESTION OF DETERMINING THE FINAL PURCHASE PRICE IN THE MONTH O F OCTOBER 91 WHEN THE ACCOUNTS AND ACCOUNT BOOKS FOR THE PERIOD UNDER CONSIDERATION WERE CLOSED MUCH BEFORE I.E. ON 31 ST MARCH 1991. AS HAVE BEEN MENTIONED EARLIER THERE IS A BOARD OF DIRECTORS WHO IS SUPPOSED TO GOVERN THE FUNCTIONING OF THE SO CIETY AS PER LAID DOWN BY-LAWS. AS PER SUB-RULE 33 OF THE BY-LAWS TH E BOARD OF DIRECTORS HAVE FULL AUTHORITY TO CARRY OUT THE BUSI NESS OF THE UNIT AND FOR TRANSACTIONS OF THE BUSINESS IT SHALL MEET ATLEAST ONCE IN A MONTH. DURING THE PERIOD UNDER CONSIDERATION THE B OARD OF DIRECTORS WAS REGULARLY HOLDING MONTHLY MEETING IN WHICH THE INCOME AND EXPENDITURE STATEMENT OF EVERY MONTH WAS BEING PUT UP FOR THE APPROVAL OF THE BOARD OF DIRECTORS. IT IS S URPRISING TO NOTE THAT NONE OF THE MONTHLY INCOME AND EXPENDITURE STA TEMENTS THE MENTION OF ALLEGED PRICE DIFFERENCE PAYABLE TO THE MILK PRODUCERS HAS BEEN MADE. IN OTHER WORDS IT WAS NEVER BROUGH T TO THE NOTICE OF THE DIRECTORS THAT THE SOCIETY WILL BE UNDER AN OBLIGATION TO PAY EXTRA AMOUNT OF PURCHASE PRICE TO THE MILK PRODUCER S AS THE PURCHASE PRICE BEING DEBITED IN THE BOOKS WAS NOT T HE FINAL PAYMENT. THE MONTHLY INCOME AND EXPENDITURE STATEME NTS DULY APPROVED BY THE BOARD OF DIRECTORS HAVE BEEN OBTAIN ED FROM THE 11 ASSESSEE VIDE THIS OFFICE LETTER DATED 13.11.1992 A ND ARE PLACED ON RECORD WHICH CLEARLY INDICATE THAT THERE WAS NO OB LIGATION ON THE PART OF THE SOCIETY TO PAY ANY EXTRA AMOUNT TO THE MILK PRODUCERS IN RESPECT OF THE RAW-MATERIAL PURCHASED. THUS THE ACC OUNTS OF THE SOCIETY WERE CLOSED ON 31.3.1991 WHICH WERE SHOWING HUGE AMOUNTS OF PROFITS. THE SAID ACCOUNTS WERE PRESENTE D BEFORE THE BOARD OF DIRECTORS IN ITS MEETING ON 19.6.91 WHICH WERE APPROVED AS SUCH WITHOUT MAKING ANY MENTION OR PROVISION REG ARDING THE ALLEGED LIABILITY OF RS.76 43 690/- IN AGENDA ITEM NO.2. ANOTHER MEETING OF THE BOARD OF DIRECTORS WAS HELD ON 25.7. 91 AND 29.8.91 IN WHICH NO MENTION WAS MADE REGARDING THIS LIABILI TY. IT WAS SUDDENLY BROUGHT TO THE NOTICE OF BOARD OF DIRECTOR S IN THE MONTH OF OCT 91 WHEN THE INCOME TAX RETURN FOR THE ASSESSMEN T YEAR UNDER CONSIDERATION WAS DUE TO THE FILED. SINCE THE SOCIE TY HAD EARNED ENORMOUS PROFITS ON WHICH IT WAS LIABLE TO PAY HEAV Y AMOUNT OF INCOME TAX A DEVISE WAS INVENTED BY THE MANAGEMENT TO DIVERT THE REAL PROFITS BY CREATING AN ARTIFICIAL AND HYPOTHET ICAL LIABILITY IN THE BOOKS OF ACCOUNT. I AM HAPPY TO POINT OUT THAT THE MANAGEMENT HAS NOT MINCED ANY WORDS SO FAR AS THE HUGE PROFITS EAR NED BY THE SOCIETY DURING THE PERIOD UNDER CONSIDERATION IS CO NCERNED. IT HAS OPENLY BEEN CONFESSED IN NOTE TO AGENDA ITEM NO. 18 & 20 THAT THE SOCIETY HAS EARNED HUGE AMOUNT OF PROFITS DURING TH E YEAR 1990-91. IT HAS ALSO BEEN CONFESSED IN NOTE TO AGENDA ITEM N O.20 THAT OUT OF THE EARNED PROFITS THE SOCIETY WANTS TO DISTRIBUTE RS.76 43 000 BY WAY OF PRICE DIFFERENCE TO THE MILK PRODUCING SOCIE TIES. THE INFORMATION PUT UP BY THE MANAGEMENT BEFORE THE BOA RD OF DIRECTORS IN ITS MEETING LEADS TO THE ONLY ONE CONC LUSION THAT THE SOCIETY HAD ENORMOUS PROFITS WHICH WERE DISTRIBUTED AFTER THESE HAVE BEEN RECEIVED BY IT AND ON WHICH IT WAS LIABLE TO PAY INCOME TAX AS ON 31.3.91. AN ATTEMPT HAS BEEN MADE TO SUPP RESS THE PROFITS FOR THE PURPOSE OF TAXATION BY MAKING AN EX-POST FA CTO ENTRY IN THE MONTH OF OCT 91 IN THE BOOKS OF ACCOUNT WHICH WERE ACTUALLY CLOSED IN THE MONTH OF MARCH 91. 12 IF WE RELY ON THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE THIS ENTRY CANNOT BE TREATED AS A PART OF PURCHASE AND THE EXPENDITURE IN THE PROFIT & LOSS ACCOUNT HAS BEEN C LAIMED UNDER THE HEAD COMMISSION TO SOCIETIES AND NOT AS A PART OF THE MANUFACTURING ACCOUNT. THUS THE EXPLANATION OF THE ASSESSEE THAT THE EXPENDITURE MAY BE ALLOWED AS A LEGITIMATE DEDU CTION BY WAY OF PURCHASE PRICE DIFFERENCE IS TOTALLY UNFOUNDED AND UNTENABLE. II) THE SECOND QUESTION ARISES WHETHER THE EXPENDITURE CAN BE TREATED AS COMMISSION TO THE SOCIETIES AND ALLOWED AS SUCH AS CLAIMED BY THE ASSESSEE. THE SAID EXPENDITURE CANNOT BE ALLOWED UN DER THE HEAD COMMISSION TO SOCIETIES FOR THE SIMPLE REASON THAT THE MAXIMUM COMMISSION PAYABLE WAS FIXED BY THE MILKFED FOR THE YEAR UNDER CONSIDERATION AT RS.1.50 PER KG. FAT AND THERE WAS NO OBLIGATION TO PAY ANY EXTRA AMOUNT BY WAY OF COMMISSION TO THE SOCIET IES. INFACT THE PAYMENT OF COMMISSION OVER AND ABOVE THE RATE FIXED WOULD HAVE BEEN IN CLEAR VIOLATION OF THE INSTRUCTIONS ISSUED BY THE M ILKFED. IT WOULD NOT BE OUT OF PLACE TO MENTION HERE THAT THE COMMISSION RA TES WERE REVISED W.E.F. 1.4.91 TORS.2.50 PER KG FAT FROM RS.1.50 PER KG FAT PREVALENT FOR THE PERIOD UPTO 31 ST MARCH 1991. (AGENDA ITEM NO.7 OF THE MEETING OF THE BOARD OF DIRECTORS HELD ON 19.6.91 MAY KINDLY B E REFERRED). IF WE TAKE INTO ACCOUNT THE PAYMENT OF RS.76 43 69 0/- AS A PART OF COMMISSION TO SOCIETIES THE RATE OF COMMISSION PAYABLE WOULD WORK OUT TO 4.25 PER KG FAT WHICH IS ILLEGAL SO FAR AS THE NORMS FIXED BY THE MILKFED ARE CONCERNED. THERE SEEMS TO BE NO JUSTIFICATION IN INCREASING THE COMMISSION FROM RS.1.50 TO RS.4.25 P ER KG FAT IN THE MONTH OF OCT 91 EXCEPT TO EVADE THE LEGITIMATE TAX LIABILITY ON THE SURPLUS PROFITS WHICH WERE SOUGHT TO BE DIVERTED BY CREATING ARTIFICIAL LIABILITY UNDER THE HEAD COMMISSION TO S OCIETIES. 5. IN MY VIEW AN EXPENDITURE CAN ONLY BE ALLOWED A GAINST THE INCOME IF IT CONFORMS TO THE ACCOUNTING PRINCIPLES AND ALSO THE LAW IN VOGUE. THE CLAIM OF RS.76 43 690/- MADE BY THE A SSESSEE DOES NOT CONFORM TO ANY OF THE ACCOUNTING PRINCIPLES FOR THE REASONS DISCUSSED BY ME IN THE FOREGOING PARAGRAPHS. IT CAN NEITHER BE 13 TREATED AS A LIABILITY RELATING TO PURCHASE OF THE RAW-MATERIAL NOR IT CAN BE TREATED AS A LIABILITY ON ACCOUNT OF COMMIS SION PAYABLE TO PRIMARY COOPERATIVE SOCIETIES. THE FACT REMAINS THA T THESE PROFITS HAD ALREADY BEEN EARNED BY THE SOCIETY AT THE END O F THE ACCOUNTING YEAR AS RIGHTLY ADMITTED BY THE ASSESSEE IN ITS NO TE TO AGENDA ITEM NO.20 IN ITS MEETING DATED 11.10.91. IT IS A MERE A PPLICATION OF INCOME WHICH HAS BEEN GIVEN COLOURING OF PURCHASE P RICE DIFFERENCE BY THE ASSESSEE. THIS EXPENDITURE CAN NO WAY BE TRE ATED TO HAVE BEEN INCURRED FOR EARNING THE INCOME. AS PER SECTIO NS 28 TO 43A OF THE INCOME-TAX ACT ONLY THAT DEDUCTION IS ADMISSIB LE WHICH IS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE B USINESS. THE METHOD OF COMPUTING THE BUSINESS INCOME HAS BEEN GI VEN IN THE SCHEME OF THE ACT ITSELF. THE EX-POST FACTO APPROVA L GIVEN BY THE BOARD OF DIRECTORS AT THE LATER DATE CANNOT OVERTAK E AND BY-PASS A LAW PASSED BY THE PARLIAMENT. IF WE ALLOW THIS THIN G TO HAPPEN THERE WILL BE NO SANCTITY OF ANY LEGAL PROVISION. I N THAT CASE ANYBODY AT ANY TIME AT HIS SWEET-WILL WILL PASS A R ESOLUTION TO LEGITIMATE ANY EXPENDITURE SO AS TO WIPE OUT THE TA XABLE PROFITS. I AM REPEATING IT EVEN FOR THE SAKE OF REPETITION THA T THERE WAS NO JUSTIFICATION FOR MAKING THIS CLAIM BY THE ASSESSEE . THE RESOLUTION HAS BEEN PASSED ONLY WITH A VIEW TO WIPE OUT THE PR OFITS AND I AM SURE THERE WOULD HAVE BEEN NO SUCH RESOLUTION HAD THERE BEEN NO TAXABLE PROFITS AVAILABLE WITH THE ASSESSEE. IT HAS BEEN MENTIONED BY THE ASSESSEE TIME AND AGAIN THAT THE ACTUAL BENE FIT HAS GONE TO THE MILK PRODUCERS. I AM AFRAID TO SAY THAT THE EXP LANATION OF THE ASSESSEE IN THIS CONTEXT IS NOT TOTALLY TRUE. THE R ECORD RATHER GOES TO SUGGEST THAT 25% OF THE SURPLUS PROFITS ALLEGEDLY E ARMARKED BY THE ASSESSEE FOR THE PURPOSE OF PRICE DIFFERENCE HAVE A CTUALLY REMAINED WITH THE ASSESSEE BY WAY OF INCREASING ITS SHARE CA PITAL. SUBSEQUENT APPLICATION OF INCOME WHATEVER THE MODE MAY BE DOES NOT ALTER THE CHARACTER OF RECEIPT OF INCOME IN THE HANDS OF THE ASSESSEE. THEIR LORDSHIPS OF THE PRIVI COUNSEL HAVE RIGHTLY OBSERVE D IN THE CASE OF PONDICHERY RAILWAY CO. THAT INCOME ON ITS COMING I NTO EXISTENCE ATTRACTS TAX AT THAT POINT AND THE REVENUE IS NOT C ONCERNED WITH THE 14 SUBSEQUENT APPLICATION OF SUCH INCOME. THE SIMILAR VIEWS WERE EXPRESSED BY THEIR LORDSHIPS OF THE SUPREME COURT I N THE CASE OF M.K.BROS. PVT.LTD. V CIT REPORTED IN 86 ITR 38 (S.C ) THAT INCOME IS LIABLE TO BE TAXED REGARDLESS OF ITS DESTINATION OR DISPOSAL OR WHAT HAPPENS AFTERWARDS. NO TREATMENT METED TO AN INCOME AFTER IT HAS ACCRUED OR ARISEN CAN AFFECT ITS LIABILITY TO BE TA XED. 6. IN VIEW OF THE DISCUSSION GIVEN IN THE FOREGOING PARAGRAPHS IT IS HELD THAT THE ADJUSTMENT OF RS.76 43 690/- MADE BY THE ASSESSEE OUT OF THE SURPLUS PROFITS AVAILABLE WAS A MERE AP PLICATION OF INCOME ON WHICH IT WAS DUTY BOUND TO PAY THE TAX. T HE ADDITION OF RS.76 43 690/- IS THEREFORE MADE TO THE INCOME ALR EADY RETURNED BY THE ASSESSEE. 11. LD. CIT(A) UPHELD THE FINDING OF THE AO VIDE P ARA 3 OF THE APPELLATE ORDER FOR ASSESSMENT YEAR UNDER RE FERENCE PASSED ON 30.3.1995. A BARE PERUSAL OF THE ORDER O F THE CIT(A) REVEALS THAT HE HAD REFERRED TO THE DETAILED APPELLATE ORDER PASSED IN THE ASSESSEE'S CASE FOR THE ASSESS MENT YEAR 1991-92 ON THE ISSUE IN QUESTION AND HENCE THE F INDINGS OF THE AO ON THE ISSUE IN QUESTION WERE UPHELD BY MA KING A REFERENCE TO THE SAID APPELLATE ORDER. CONSEQUENTL Y IT IS PERTINENT TO REPRODUCE FIRSTLY THE APPELLATE ORDER PASSED BY THE CIT(A) ON THE ISSUE IN QUESTION FOR THE ASSES SMENT YEAR IN QUESTION AND SUBSEQUENTLY THE APPELLATE ORDER FOR THE ASSESSMENT YEAR 1991-92 FOR PROPER APPRECIATION OF THE FACTS OF THE CASE ISSUE INVOLVED AND THE RELEVANT FINDIN GS THEREIN. THE RELEVANT PART OF THE APPELLATE ORDER FOR THE ASSESSMENT YEAR UNDER CONSIDERATION IS REPRODUCED HEREUNDER : 3) THE NEXT GROUND OF APPEAL CONCERNS THE ACTION O F THE AO IN HOLDING THAT DEDUCTION OF RS.46 19 200/- 15 CLAIMED ON ACCOUNT OF PRICE DIFFERENCE WAS NOT ALLOWABLE TO THE APPELLANT. THE FACTS ARE THAT THE APPELLANT HAS DEBITED IN ITS ACCOUNTS AN AMOUNT OF RS.46 19 290/- ON ACCOUNT OF PRICE DIFFERENCE. THE ACCOUNTING YEAR OF THE APPELLANT ENDED ON 30.6.87. THE PRICE DIFFERENCE HAS BEEN CLAIMED TO BE PAID TO VAR IOUS MILK PRODUCING SOCIETIES FOR THE SUPPLY OF MILK DUR ING THE RELEVANT PERIOD. THE DATE OF PAYMENT OF RS.46 19 290/- WAS STATED TO BE 15.11.90 THAT IS MU CH AFTER THE CLOSE OF THE ACCOUNTING YEAR. THE AO IN T HE ASSESSMENT ORDER MADE A BRIEF DISCUSSION AND RELYIN G ON A DETAILED DISCUSSION IN APPELLANTS CASE FOR TH E ASSESSMENT YEAR 1991-92 AND BY STATING THAT FACTS A ND CIRCUMSTANCES BEING SIMILAR TO THAT YEAR DISALLOWED THE APPELLANTS CLAIM OF DEDUCTION. 4. THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 91-92 REFERRED TO BY THE AO WAS ALSO A SUBJECT MATT ER OF APPEAL WHEREIN AFTER CONSIDERING ALL THE ARGUMEN TS PUT FORWARD BY THE APPELLANT THE MATTER WAS DECIDE D BY ME AGAINST THE APPELLANT AND IN FAVOUR OF THE DEPARTMENT VIDE APPELLATE ORDER CONTAINED IN APPEAL NO.428/IT/93-94 DT. 30.3.95. THEREFORE ADDITION MAD E FOR THIS ASSESSMENT YEAR IS ALSO CONFIRMED AND THIS GROUND OF APPEAL ALSO STANDS DISMISSED. THE RELEVANT PART OF THE APPELLATE ORDER FOR THE AS SESSMENT YEAR 1991-92 IS REPRODUCED HEREUNDER : 2. THE APPELLANT IS A COOPERATIVE SOCIETY WHICH MANUFACTURES MILK PRODUCTS LIKE GHEE BUTTER MILK CAKE ETC. BY PROCURING RAW-MATERIAL WHICH IS MILK THROUGH TH E PRIMARY MILK SOCIETIES. THE PRICE TO BE PAID BY THE APPELLANT IS FIXED BY THE MILKFED AND CONSEQUENTLY THE COMMISSION PAYABLE TO COOPERATIVE SOCIETIES ON THE PURCHASE OF MILK IS ALSO FIXED Y THE MILKFED. THE W ORKING OF THIS UNIT IS COVERED BY THE BOARD OF DIRECTORS CONS ISTING OF 20 MEMBERS AND IT HAS TO ABIDE BY THE BYE-LAWS WHIC H HAVE BEEN APPROVED BY THE REGISTRAR OF COOPERATIVE 16 SOCIETIES. THE A.O OBSERVED THAT A SUM OF RS.1 19 87 211/- HAD BEEN DEBITED BY THE APPELLANT UNDER THE HEAD COMMISSION TO SOCIETIES. IT WAS ALSO OBSERVED TH AT THESE SOCIETIES HAD BEEN MAKING THE PROVISION OF SUCH COM MISSION PAYABLE FROM MONTH-TO-MONTH AS PER MAXIMUM PRICE FI XED BY THE MILKFED. THIS WAS RS.1.50 PER KG. FAT. THE TOT AL OF SUCH COMMISSION PAID DURING THE YEAR COVERED BY THE ACCO UNTS COMES TO RS.43 43 521/-. IN ADDITION TO THIS A SINGLE ENTRY OF RS.76 43 690/- HAS BEEN MADE AT THE END OF THE YEAR UNDER THE HEAD COMMISSION TO CO-OPERATIVE SOCIETIES. THE APPELLANT WAS ASKED TO EXPLAIN THIS . THE AUTHORIZED REPRESENTATIVE HAD STATED BEFORE THE AO THAT THIS AMOUNT WAS DEBITED IN THE PURSUANCE OF A RESOLUTION PASSED BY THE BOARD OF DIRECTORS IN WHIC H IT WAS DECIDED TO DISTRIBUTE THE PROFITS. IT WAS EXPL AINED THAT AS THE APPELLANT HAD EARNED SUFFICIENT PROFITS IT WAS DECIDED TO DISTRIBUTE THIS AS AN INCENTIVE TO THE MEMBERS. THIS WAS VERBALLY EXPLAINED BY THE AR TO THE A. 0 AND IT FINDS MENTION IN THE ASSESSEE'S LETTER DT.23.1.92. THEN THE MANAGING DIRECTOR SH.H.S OBEROI ALSO APPEARED BEFORE THE A.O AND CONFIRMED THAT THE PROFITABILITY OF THE UNIT WAS ASCERTAINED AT THE END OF THE YEAR AND IT WAS DECIDED UNANIMOUSLY BY THE BOARD OF DIRECTORS TO DISTRIBUTE THE MONEY AS AN INCENTIVE T O ITS MEMBERS . IT WAS ALSO CONFIRMED THAT THE SOCIETY WAS NOT UNDER ANY LEGAL OBLIGATION TO MAKE THE PAYMENT BUT IT HAS BEEN MADE NEVERTHELESS FO R THE UPLIFTMENT OF THE MILK PRODUCERS WHO ARE POOR PEOPLE IN THE VILLAGES. THIS WAS ALSO CONFRONTED TO THE APPELLANT. IN REPLY THIS ADMISSION OF THE MANA GING DIRECTOR WAS NOT DENIED BY THE APPELLANT BUT IT WA S JUSTIFIED THAT THE ADDITIONAL PRICE HAD BEEN PAID FOR THE MIL K AS THE 'ORIGINAL PRICE MADE TO THE MILK PRODUCERS W AS NOT THE FINAL PAYMENT. IT WAS VEHEMENTLY STRESSED BEFORE THE A.Q THAT THE PRICE PAID FOR THE MILK HAD ALL ALONG BEEN PROVISIONAL AND TENTATIVE WAS REGULARLY BEING PAID AND EVIDENCE OF THIS IS IN THE PURCHASE ACCOUN T. HOWEVER AS FAR AS THE ENTRY OF RS.76 3 690/- IS CON CERNED IT WAS OBSERVED THAT THIS SINGLE ENTRY WAS FIRST MADE IN THE PURCHASE ACCOUNT ON JOURNAL PAGE NO. 507(ENTRY NO. 17 1707). THIS WAS REVERSED BY THE ASSESSEE BY MAKIN G ANOTHER ENTRY AT PAGE NO.509( ENTRY NO. 1717) IN WHICH THE SAID AMOUNT WAS DEBITED INSTEAD TO THE COMMISS ION ACCOUNT. THE SAID PRICE HAD NOT BEEN DEBITED ON DAY-TO-DAY BASIS BUT HAD BEEN ONLY DETERMINED TO BE MADE IN THE MONTH OF OCTOBER 1991 THAT IS MUCH AFTER THE CLOSE OF THE BOOKS OF ACCOUNT ON 31.3.91. THE DCIT MENTIONED THAT IN NONE OF THE MONTHLY MEETINGS THE BOARD OF DIRECTORS DISCUSSED THE ENHANCEMENT OF THIS MILK PRICE. IT HAS NEVER BEEN DISCUSSED EVEN THAT THERE WAS ANY OBLIGATION TO PAY ENHANCED PR ICE FOR THE MILK. THE FINAL ACCOUNTS WERE PRESENTED TO THE BOARD OF DIRECTORS IN ITS MEETING ON 19.6.91 WHICH WAS APPROVED AS SUCH WITHOUT MAKING ANY MENTION OR PROVISION REGARDING THE ALLEGED LIABILIT Y OF RS.76 43 690/-. ANOTHER MEETING OF THE BOARD WAS HELD ON 25.7.91 AND 29.8.91 IN WHICH AGAIN THERE WAS NO MENTION REGARDING THIS LIABILITY. ALL OF A SUDDEN ONLY IN THE MONTH OF OCTOBER 1991 IT WAS BROUGHT TO THE NOTICE OF THE BOARD WHEN THE INCOME- TAX RETURN FOR THE YEAR UNDER CONSIDERATION WAS DUE TO BE FILED. AS THE SOCIETY HAD TO PAY HEAVY INCOME TAX ON ITS EARNING THE AO STATES THAT THIS DEVISE WAS USE D TO REDUCE ITS PROFITS IN THE BOOKS OF ACCOUNT. IT HAS ALSO BEEN MENTIONED IN THE RESOLUTION THAT THE SOCIETY HAD EARNED HUGE AMOUNT OF PROFIT DURING THE YEAR 1990- 91 AND THAT OUT OF THESE PROFITS THE SOCIETY WOULD LIKE TO DISTRIBUTE RS.76 43 090/- TO THE MILK PRODUCERS OF THE SOCIETY. INFACT THIS HAS NOT EVEN BEEN SHOWN AS PURCHASE PRICE FOR THE MILK BUT HAD BEEN DEBITED IN THE COMMISSIONER ACCOUNT PAYABLE TO VARIOUS SOCIETIES. THE DCIT FURTHER STATED THAT THIS COULD NOT BE ALLOWED UNDER THE HEAD COMMISSIONER TO SOCI ETIES FOR THE SIMPLE REASON THAT THE MAXIMUM COMMISSION PAYABLE WAS FIXED BY THE MILKFED FOR THE YEAR UNDER CONSIDERATION @ RS.1.50 PER KG. FAT AND THERE WAS N O OBLIGATION TO PAY ANY AMOUNT TO THE SOCIETIES. ACC ORDING TO HIM THIS HAS BEEN DONE CLEARLY IN VIOLATION OF THE INSTRUCTIONS ISSUED BY THE MILKFED. THE COMMISSION RATES WERE REVISED W.E.F. 1.4.91 ONLY TO RS.2.50 PER KG. FAT FROM RS.1.50 PER KG. FAT PREVALENT FOR THE PERIOD UPTO 3 1.3.91. 18 AS FAR AS THIS PAYMENT OF RS.76 43 690/- IS CONCERN ED THE RATE OF COMMISSION WOULD WORK OUT TO RS.4.25 PER KG . FAT WHICH DOES NOT APPEAR TO BE JUSTIFIED AT ALL. ACCORDING TO THE DCIT THIS PAYMENT DOES NOT CONFORM TO ANY PRINCIPLES OF ACCOUNTING. EVEN THOUGH THE ASSESSEE HAS BEEN SAYING TIME AND AGAIN THAT THE ULTIMATE BENEFIT WOULD GO TO THE MILK PRODUCERS IT WAS NOT ENTIRELY TRUE AS 25% OF THE SURPLUS PROFITS ALLEGEDL Y EARMARKED BY THE ASSESSEE FOR THE PURCHASE PRICE HAS ACTUALLY REMAINED WITH THE ASSESSEE BY WAY OF INCREASE IN ITS SHARE CAPITAL. IT WAS THEREFORE A CLEAR CASE OF APPLICATION OF INCOME BY THE ASSESSEE AND IN THIS BEHALF HE RELIED ON THE DECISION OF THE SUPREM E COURT IN THE CASE OF M.K.BROS (P) LTD. V CIT REPORTE D IN 86 ITR 38. 3. THE APPELLANTS COUNSEL REITERATED THE ARGUMENTS MADE BEFORE THE AO AND STATED THAT PRICE BEING PAID FOR THE MILK WAS ALSO TENTATIVE AND FINAL PRICE IS ALWAYS D ECIDED AFTER THE CLOSURE OF THE ACCOUNTS AND THE BOARD OF DIRECTORS MEETING WHEN THE ACCOUNTS WERE TO BE FINALLY PASSED . HE RELIED ON THE DECISION OF ITAT REPORTED IN 83-CTR 1 85 WHEREIN IT WAS HELD THAT THE EXTRA PRICE PAID TO PRIMARY SOCIETIES WAS ALLOWABLE AS A BUSINESS EXPENDITURE. THIS WAS ALLOWABLE AS THE INITIAL PRIC E BEING PAID WAS ADHOC AND PROVISIONAL AND SUBJECT TO FIXATION AT THE END OF THE YEAR. IT WAS ALSO STATED THAT THE CORRESPONDENCE AND THE TRANSACTION OF VARIOUS DOCUMENTS PROVED THAT ALL ALONG THE PRICE FIXED WAS PROVISIONAL AND TENTATIVE. THERE WAS NO FINALITY IN THE PRICE FIXED EARLIER. THE MILK PRODUCERS HAD BEEN CLAIMING FOR HIGHER PRICE FOR SOMETIME AND THIS HAS TO BE PAID BY THE APPELLANT SO THAT IT COULD RECEIVE SUFFICIENT QUANTITY OF MILK FOR ITS PRODUCTION PROC ESS. A COMPARATIVE CHART WAS FILED SHOWING THAT THE PRIC E BEING PAID BY THE APPELLANT WAS LESS THAN THE PRICE BEING PAID BY A PRIVATE COMPANY M/S NESTLE (INDIA) LTD. FOR ITS MILK . 19 4. I HAVE CONSIDERED THESE ARGUMENTS OF THE APPELL ANT AND AM UNABLE TO AGREE WITH THE VIEWS OF THE APPELLANT'S COUNSEL. THE FACTS SHOW THAT THE PRIMARY REASON FOR PASSING THE RESOLUTION IN OCTOBER 1991 TO INCREASE THE COMMISSION PAYABLE TO PRIMARY SOCIETIES WAS MOTIVATED ONLY BY THE FACT THAT THERE WERE HUGE PROFITS HAVING BEEN EARNED BY THE APPELLANT. THE A.O HAS ALSO BROUGHT TO MY ATTENTION THAT THE DECISION OF THE ITAT RELIE D UPON BY THE APPELLANT WOULD NOT BE APPLICABLE AS IN T HE CASE OF M/S MEHSANA DISTT. COOPERATIVE MILK PRODUCERS UNION LTD. THE RESOLUTION TO INCREASE THE PRICE HAD BEEN PASSED WITHIN THE ACCOUNTING YEAR ITSELF WHEREAS IN THIS CASE THE PRICE DIFFERENCE HAD BEEN DECIDED ONLY IN OCTOBER WHEN IT WAS LEARNT THAT THE APPELLANT HAD EARNED HUGE PROFITS. THERE WAS NO JUSTIFICATION FOR DOING SO. VARIOUS CASE-LAWS HAVE ALSO BEEN PUT UP BY THE DCIT NAMELY; OF THE ALLAH ABAD HIGH COURT AND SUPREME COURT TO SHOW THAT NO DEDUCTION COULD BE ALLOWED IN RESPECT OF ANY SUCH LIABILITY; WHICH WAS CREATED BY THE ASSESSEE ITSELF AFTER THE INCOME HAD BEEN EARNED. ON GOING THROUGH THE RESOLUTIONS REGARDING THE INCREASES IN THE PURCHASE PRICE I FIND THAT IN NEARLY ALL THE C ASES INCREASE HAD BEEN MADE PROSPECTIVELY BY THE M.D AND NOT RETROSPECTIVELY EXCEPT IN HIS ORDER DT. 5.6.90 WHEN THE INCREASE WAS MADE EFFECTIVE FROM 1.5.90 AND 23. 5.90 IT IS CORRECT TO STATE THAT THE. FIXATION OF THE P RICE WAS AN ON GOING PROCESS AND WAS INCREASED ON A NUMBER OF OCCA SIONS ON A NUMBER OF OCCASIONS IN THE PRECEDING YEAR. HOWE VER THE PRICE FIXED BY MILKFED CANNOT BE STATED T O BE PROVISIONAL AND AS MENTIONED BY THE A.O THE MILKFE D FIXED THE PRICE TO BE PAID TO THE SOCIETIES @ RS . 1.50 KG. FAT. EVEN ON COMPARING THE PRICE BEING PAID BY THE APPELLANT AND M/S.NESTLE (INDIA) LTD. I FIND TH AT THE EARLIER PRICE BEING PAID WAS ALSO COMPETITIVE AS FOR BUFFALO'S MILK IT WAS RS.75/-PER KG. FAT WHEREAS TH E NESTLE (INDIA)LTD. WAS PAYING ONLY RS.74/- PER KG. FAT IN MARCH 91. OVER AND ABOVE THE APPELLANT WAS SUP POSED TO BE PAYING RS. 1.50 PER KG. FAT AS COMMISSION TO VARIOUS SOCIETIES AND THIS WAS THE COMMISSION WHICH WAS ALLEGEDLY INCREASED TO RS.4.50 PER KG.FAT. HENC E THE APPELLANT HAS NOT BEEN ABLE TO MAKE OUT A CASE THA T THE EXPENDITURE WAS A BONAFIDE BUSINESS EXPENDITURE 20 DURING THE YEAR. THE INCREASE WAS ONLY IN RESPECT OF COMMISSION TO VARIOUS PRIMARY SOCIETIES AND HAD NOT BEEN FIXED BY MILKFED. THEREFORE ADDITION OF RS . 76 43 690/-IS CONFIRMED AND THE APPELLANT FAILS ON THIS GROUND. 12. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF APEX COURT IN THE CASE OF KEDAR NATH JUTE MFG. CO.LTD. V CIT (CENTRAL CAL) 821 ITR 363. WE HAVE CAREFULLY PERUSED THE FACTS AND RATIO OF THE DECISION OF THE HON'BLE SUPR EME COURT CITED AND RELIED UPON BY THE ASSESSEE. THE CORE RAT IO LAID DOWN BY THE HON'BLE SUPREME COURT IS WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEP END ON THE PROVISION OF LAW RELATING THERETO AND NOT ON TH E VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS; NOR CA N THE EXISTENCE OR ABSENCE OF ENTRIES IN HIS BOOKS OF ACC OUNT BE DECISIVE IN THE MATTER. THE HON'BLE SUPREME COURT WAS DEALING WITH A FACT-SITUATION WHERE THE ASSESSEE COMPANY WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING INCURRED A LIABILITY OF RS.1 49 776/- ON ACCOUNT OF SALES TAX DETERMINED TO BE PAYABLE BY THE SALES TAX AUTHORITIES ON THE SALE S MADE DURING THE CURRENT YEAR 1954 THE PREVIOUS YEAR RELEVANT T O THE ASSESSMENT YEAR 1955-56. IT IS HELD BY THE HON'BLE SUPREME COURT THAT THE MOMENT A DEALER MADE EITHER PURCHASE S OR SALES WHICH WERE SUBJECT TO SALES TAX THE OBLIGAT ION TO PAY THE TAX AROSE ALTHOUGH THAT LIABILITY COULD NOT BE ENFORCED (QUANTIFICATION) EFFECTED BY THE ASSESSMENT PROCEED INGS THE LIABILITY FOR THE PAYMENT OF TAX WAS INDEPENDENT OF THE ASSESSMENT. CONSEQUENTLY THE ASSESSEE WHICH FOLLOWED THE MERCANTILE SYSTEM OF ACCOUNTING WAS ENTITLED TO DED UCT FROM THE 21 PROFITS AND GAINS OF ITS BUSINESS LIABILITY THE SA LES TAX WHICH AROSE ON SALES MADE DURING THE RELEVANT PREVIOUS YE AR. THE LIABILITY DID NOT CEASE TO BE A LIABILITY BECAUSE THE ASSESSEE HAD TAKEN PROCEEDINGS BEFORE THE HIGHER AUTHORITIES FOR GETTING IT REDUCED OR WIPED OUT. 13. THE FACTUAL POSITION OF THE PRESENT CASE IS FAC TUALLY DIFFERENT AND DISTINGUISHABLE. IN THE PRESENT CASE NO SUCH LIABILITY HAS BEEN INCURRED BY THE ASSESSEE TO PAY EXTRA COMMISSION OR DIFFERENTIAL PRICE AS CLAIMED BY THE ASSESSEE. THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING AND CLAIMED DEDUCTION OF DIFFERENTIAL PRICE WITHOUT TH ERE BEING ANY OBLIGATION OR PROMISE OR CONTRACT TO MAKE SUCH PAYM ENT. THE BOOKS OF ACCOUNT OF THE ASSESSEE WERE CLOSED ON 30 .06.1987 AND AFTER 13 MONTHS THE POST-FACTO RESOLUTION WAS PASSED BY THE BOARD OF DIRECTORS. THE FACTUAL POSITION OF THE CASE RELIED UPON BY THE ASSESSEE AND RATIO LAID DOWN BY THE HO N'BLE SUPREME COURT IN THE CASE OF KEDAR NATH JUTE MFG. CO.LTD.(SUPRA) SUPPORTS THE CASE OF THE REVENUE AND NOT THAT OF THE ASSESSEE. THE RELEVANT PART OF THE SAID DECISI ON IS REPRODUCED HEREUNDER : HELD THAT THE MOMENT A DEALER MADE EITHER PURCHAS ES OR SALES WHICH WERE SUBJECT TO SALES TAX THE OBLIGATI ON TO PAY THE TAX AROSE. ALTHOUGH THAT LIABILITY COULD NOT BE ENFORCED TILL QUANTIFICATION WAS EFFECTED BY ASSESSMENT PROC EEDINGS THE LIABILITY FOR PAYMENT OF TAX WAS INDEPENDENT OF THE ASSESSMENT. THE ASSESSEE WHICH FOLLOWED THE MERCAN TILE SYSTEM OF ACCOUNTING WAS ENTITLED TO DEDUCT FROM TH E PROFITS AND GAINS OF ITS BUSINESS LIABILITY TO SALES TAX WH ICH AROSE ON SALES MADE BY IT DURING THE RELEVANT PREVIOUS YE AR. THE ASSESSEE WAS ENTITLED TO THE DEDUCTION OF THE SUM O F 22 RS.1 49 776/- BEING THE AMOUNT OF SALES TAX WHICH I T WAS LIABLE UNDER THE LAW TO PAY DURING THE RELEVANT ACC OUNTING YEAR. THAT LIABILITY DID NOT CEASE TO BE A LIABILIT Y BECAUSE THE ASSESSEE HAD TAKEN PROCEEDINGS BEFORE HIGHER AUTHORITIES FOR GETTING IT REDUCED OR WIPED OUT SO LONG AS THE CONTENTION OF THE ASSESSEE DID NOT PREVAIL. FURTHE R THE FACT THAT THE ASSESSEE HAD FAILED TO DEBIT THE LIABILITY IN ITS BOOKS OF ACCOUNT DID NOT DEBAR IT FROM CLAIMING THE SUM AS A DEDUCTION EITHER UNDER SECTION 10(1) OR UNDER SEC TION 10(2)(XV). WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DE DUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING TH ERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HI S RIGHTS; NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN HIS BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN THE MATTER. 14. THE ASSESSEE HAS ALSO REFERRED TO THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF DCIT V SHREE SATPUDA TAPI PARISAR SSK LTD. (2010) 326 ITR 42 (S.C). THE RELEVANT PART OF THE DECISION IS REPRODUCED HEREUNDER : IN DETERMINING WHETHER THE DIFFERENTIAL PAYMENTS M ADE BY THE ASSESSEE A COOPERATIVE SOCIETY MANUFACTURING S UGAR TO THE CANE-GROWERS AFTER THE CLOSE OF THE FINANCIAL Y EAR OR AFTER THE DATE OF THE BALANCE SHEET WOULD CONSTITUT E AN EXPENDITURE UNDER SECTION 37 OF THE INCOME-TAX ACT 1961 AND WHETHER SUCH DIFFERENTIAL PAYMENT WOULD APPLYI NG THE REAL INCOME THEORY CONSTITUTE AN EXPENDITURE OR DI STRIBUTION OF PROFITS THE AO HAS TO TAKE INTO ACCOUNT THE MAN NER IN WHICH THE BUSINESS WORKS RESOLUTIONS OF THE STATE GOVERNMENT THE MODALITIES AND THE MANNER IN WHICH THE STATE ADVISED PRICE (SAP) AND THE STATUTORY MINIMUM PRICE (SMP) ARE DECIDED THE TIMING DIFFERENCE WHICH WILL RISE ON ACCOUNT OF THE DIFFERENCE IN THE ACCOUNTING YEARS ETC. IN A GIVEN CASE IF THE ASSESSEE HAS MADE A PROVISION IN ITS ACCOUNTS THEN THE AO HAS TO ENQUIRE WHETHER SUCH PROVISION IS MADE OUT OF PROFITS OR FROM GROSS RECE IPTS 23 AND WHETHER SUCH DIFFERENTIAL PAYMENT IS RELATABLE TO THE COST OF SUGARCANE OR WHETHER IT IS RELATABLE TO THE DIVISION OF PROFITS AMONGST THE MEMBERS OF THE SOCI ETY. ONE OF THE POINTS WHICH WILL ALSO ARISE FOR DETERMINATION BY THE AO WILL BE ON THE THEORY OF OV ER- RIDING TITLE IN THE MATTER OF ACCRUAL OR APPLICATIO N OF INCOME. THEREFORE IN EACH CASE THE AO HAS TO DECI DE THE QUESTION WHETHER THE OBLIGATION IS ATTACHED TO THE INCOME OR TO ITS SOURCE. THE SUPREME COURT ACCORDINGLY REMANDED THE MATTER TO THE COMMISSIONER(APPEALS) NOT ONLY ON THE APPLICABILITY OF SECTION 40A(2) BUT ALSO THE PRIMARY QUESTION WHETHE R THE DIFFERENTIAL PAYMENT CONSTITUTED AN EXPENSE OR DIST RIBUTION OF PROFITS. 15. WE HAVE CAREFULLY PERUSED THE FACTS AND THE RAT IO LAID DOWN BY THE HON'BLE APEX COURT IN THIS CASE AND FOU ND THAT IN THIS CASE THE HON'BLE APEX COURT HAS LAID DOWN CER TAIN NORMS FOR ADMISSIBILITY OF BUSINESS EXPENDITURE AND THE C ASE WAS REMANDED TO THE CIT(A). THE HON'BLE APEX COURT CATEGORICALLY HELD THAT ONE OF THE POINTS WHICH WILL ALSO ARISE FOR DETERMINATION BY THE AO WILL BE ON THE THEORY OF OV ER RIDING TITLE IN THE MATTER OF ACCRUAL OR APPLICATION OF IN COME. THEREFORE IN EACH CASE THE AO HAS TO DECIDE THE Q UESTION WHETHER THE OBLIGATION IS ATTACHED TO THE INCOME OR TO ITS SOURCE. 16. HAVING REGARD TO THE FACTUAL POSITION OF THE PR ESENT CASE THERE IS NO OBLIGATION ON THE PART OF THE ASSESSEE TO MAKE PAYMENT OF SUCH PRICE DIFFERENTIAL AS ALSO THERE IS NO ACCRUAL OF SUCH EXPENDITURE. IN VIEW OF THE DETAILED FACTUAL P OSITION DISCUSSED IN THIS ORDER THE RATIO OF THIS CASE IS NOT APPLICABLE TO THE FACT SITUATION OF THE PRESENT CASE. HOWEVER IT IS 24 APPARENT THAT THE GUIDELINES LAID DOWN BY THE HON'B LE SUPREME COURT IN SUCH CASES HELP THE CASE OF THE REVENUE AND NOT THAT OF THE ASSESSEE. 17. LD. 'AR' PLACED RELIANCE IN SUPPORT OF HIS CON TENTIONS ON THE DECISION OF THE GUJRAT HIGH COURT IN THE CASE O F M/S MEHSANA COOPERATIVE MILK PRODUCERS UNION (SUPRA). THE RELEVANT PART OF THE SAID DECISION IS REPRODUCED HE REUNDER : HELD THAT THE AMOUNT IN QUESTION HAD GONE OUT OF THE COFFERS OF THE ASSESSEE AND HAD BEEN RECEIVED BY TH E MILK SUPPLYING SOCIETIES. ON THE FACTS THE PAYMENT MADE BY THE ASSESSEE COULD NOT BE TREATED AS A PAYMENT N OT INCURRED FOR THE BUSINESS OF THE ASSESSEE. THE CIRCULARS ISSUED BY THE ASSESSEE FROM TIME TO TIME CREATED AN OBLIGATION TO FIX A FINAL PRICE THAT MAY BE REVISED UPWARDS OR MAY BE REVISED DOWNWARDS BUT FIXATION OF THE FINAL PRICE WAS A MUST. THE ONLY DISCRETION OF THE ASSESSEE WAS AS TO THE QUANTUM OF THE FINAL PRICE. THAT THE BOARD OF THE ASSESSEE RESOLVED TO F IX THE FINAL PURCHASE PRICE AND PAY ON THE LAST DAY OF THE ACCOUNTING PERIOD DID NOT CONVERT THE PAYMENT OF THE FINAL PRICE TO APPLICATION OF PROFITS. THER E WAS NO FINDING THAT THE PROFITS HAD BEEN ASCERTAINED BY MAKING UP THE ACCOUNTS. THEREFORE THOUGH THE RESOLUTION WAS MADE BY THE BOARD TO PAY THE FINAL PRICE ON THE LAST DAY THE GROSS RECEIPTS OF THE ASSESSEE IN WHICH DORMANT PROFITS LAY EMBEDDED COULD NOT BE EQUATED TO PROFITS CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT. THE TRIBUNAL HAD RIGHTLY CONSIDERED THAT FOR THE PAST YEARS IDENTICA L FACT SITUATION PREVAILED AND IN THE ABSENCE OF ANY CHANG E IN CIRCUMSTANCES THE DEPARTMENT COULD NOT HAVE REAGITA TED THE ISSUE. THEREFORE AS THE SUM OF RS.5 47 69 105/ - COULD NOT BE TERMED AN APPLICATION OF INCOME THE PAYMENT OF THE ADDITIONAL/FINAL PRICE ON THE LAST D AY OF THE ACCOUNTING YEAR WAS ALLOWABLE UNDER SECTION 28. IT 25 WAS ALSO ALLOWABLE UNDER SECTION 37 HAVING BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. 18. THE REVISION OF THE PRICES OF MILK BOTH OF BUFF ALOES AND COWS MILK WAS MADE THROUGH CIRCULARS ISSUED ON DI FFERENT DATES FALLING WITHIN THE PERIOD COVERED BY THE REL EVANT ACCOUNTING PERIODS RELEVANT TO THE ASSESSMENT YEAR 1984-85. THE BASIS OF REVISION OF SUCH PRICES MAINLY DEPENDE D ON THE FAT CONTENTS OF THE MILK SUPPLIED. THESE CIRCULARS WER E ISSUED ON DIFFERENT DATES I.E. 26.2.1982 20.12.1983 AND 27.0 1.1984 RESPECTIVELY. IT WAS PROVIDED IN THESE CIRCULARS T HAT THE PRICES DETERMINED WERE ONLY PROVISIONAL. THE CIRCULAR DAT ED 27.1.1984 THROUGH WHICH THE PRICE OF MILK WAS REVI SED TO RS.46/- AND RS.20.35 PER KILO FAT RESPECTIVELY FOR BUFFALOES AND COWS MILK READS AS UNDER : THIS IS TO INFORM ALL THE MILK PRODUCING CO-OPERAT IVE SOCIETIES THAT WITH EFFECT FROM THE MORNING OF 1.2.1984 THE MILK PURCHASE PRICE PER KILO FAT WILL BE AS UNDER TILL THE NEXT CHANGE IS INTIMATED TO YOU. THE PRICES FIXED ABOVE ARE ADDITION HOC/PROVISIONAL FROM 1.4.1983 THE PRICES FOR MILK FIXED AS ABOVE AR E PROVISIONAL. AFTER CONSIDERING THE AMOUNT REALIZED BY THE UNION OF THE MILK RECEIVED FROM THE SOCIETIES A T THE END OF THE YEARS THE FINAL PRICE INCREASE/DECREASE WILL BE DECIDED AND SHALL BE INTIMATED. 19. IN THE PRESENT CASE THE BOARD OF DIRECTORS PAS SED A SINGLE RESOLUTION DATED 29.07.1988 VIDE AGENDA NO.7 AND DECIDED FOR GRANT OF PRICE DIFFERENCE TO THE MILK PRODUCING SOC IETIES. THE ACCOUNTING PERIOD IN THIS CASE ENDED ON 30.06.198 7. THE BOOKS OF ACCOUNT MAINTAINED BY THE APPELLANT FOR HI S BUSINESS 26 ACTIVITIES WERE DULY CLOSED ON 30.06.1987. THUS P ROFIT OF THE RELEVANT YEAR WAS DETERMINED ON 30.06.1987. THE AS SESSEE INCURRED NO LIABILITY PERTAINING TO THE SAID PRICE DIFFERENCE ON 30.06.1987 THE SACROSANCT DATE ON WHICH ACCOUNTING PERIOD ENDED AND AS SUCH THE ASSESSEE CLOSED ITS BOOKS OF ACCOUNT AND FINALIZED ACCOUNTS IN THE FORM OF ASCERTAINMENT OF PROFIT FOR THE SAID PERIOD. IT IS UNDISPUTED FACT THAT SUCH LIABI LITY WAS CREATED AFTER APPROXIMATELY 13 MONTHS OF THE END OF ACCOUNTING PERIOD AND ALSO AFTER THE CLOSE OF BOOKS OF ACCOUNT ON 30.6.1987 THROUGH RESOLUTION PASSED ON 29.07.1988. IT IS TH US CLEAR THAT THE SAID LIABILITY WAS CREATED AFTER 13 MONTHS OF T HE END OF THE ACCOUNTING PERIOD. FURTHER AS IS EVIDENT FROM THE EXCERPTS OF THE RELEVANT ASSESSMENT ORDER PRODUCED IN THIS ORD ER THE DATE OF PAYMENT WAS STATED TO BE 15.11.1990. IN VIEW OF THIS FACTS OF THE CASE RELIED UPON BY THE ASSESSEE ARE FACTUA LLY DIFFERENT AS IN THAT CASE AS DISCUSSED ABOVE THE CIRCULARS WERE ISSUED WITHIN THE ACCOUNTING PERIOD AND NOT AFTER THE END OF THE ACCOUNTING PERIOD. FURTHER CIRCULARS CLEARLY MENT IONED THE STATUS OF PROVISIONAL PRICES VIS--VIS THE FINAL PRICE AS IS EVIDENT FROM THE TEXT OF CIRCULAR EXTRACTED FROM TH E DECISION OF THIRD MEMBER (PAGE 24 REPORTED IN 33 ITD 6 )REPRO DUCED ABOVE. 20. IN VIEW OF THE ABOVE DISCUSSIONS THE CASE LAW RELIED UPON BY THE ASSESSEE IS NOT APPLICABLE TO THE FACTS OF T HE PRESENT CASE. IT IS FURTHER MENTIONED THAT THE CIT(A) IN HIS DETAILED APPELLATE ORDER FOUND THE RATIO OF THIS DECISION R ELIED UPON BY THE ASSESSEE BEFORE HIM AS NOT APPLICABLE TO THE F ACTS OF THE PRESENT CASE. 27 21. IN THE CASE OF MEHSANA DISTRICT COOPERATIVE MIL K PRODUCERS UNION LTD. V ASSESSING OFFICER (33 ITD 6 ) THE BENCH HAD CLEARLY BROUGHT ON RECORD THE FACTUM THAT THE ASSESSEE HAD GIVEN UNDERTAKING TO THE SOCIETY MEMBE RS THAT THEY WERE FIXING A PROVISIONAL PRICE AT THAT TIME A ND THAT THEY WOULD REVISE THE PRICE AT THE END OF THE YEAR EITHER UPWARD OR DOWNWARD IT BECOMES AN OFFER MADE TO THE SOCIETIES TO PURCHASE THE MILK SUBJECT TO THOSE CO NDITIONS AND WHEN THE MILK WAS SUPPLIED BY THE PRIMARY SOCIE TIES ACCEPTING THOSE CONDITIONS IT BECAME A SORT OF CON TRACT OR AN AGREEMENT BETWEEN THE ASSESSEE AND THE PRIMARY SOCIETIES THAT THE PRICES PAID WOULD BE PROVISIONAL AND THAT THE FINAL PRICE WOULD BE PAID AT THE END OF THE YEA R. THIS CONTRACT OR AGREEMENT HAS LEGAL IMPLICATIONS. IT B ECOMES ENFORCEABLE AT LAW. THUS THE ASSESSEE HAD INCURRE D AN OBLIGATION TO ADJUST THE PRICES AT THE END OF THE Y EAR. THAT WAS THE REASON WHY EVERY YEAR THE FINAL PRICES WERE BEING ADJUSTED AND WERE BEING PAID TO THE SUPPLIERS. SIM ILAR PAYMENTS WERE MADE IN THE ASSESSMENT YEARS 1981-82 1982-83 AND 1983-84 AND WERE ALLOWED. THIS WAS THE BUSINESS PRACTICE REGULARLY EMPLOYED BY THE ASSESSE E IN ALL THE PREVIOUS YEARS AND WAS ACCEPTED BY THE DEPARTME NT AS GENUINE. THUS IT WAS EVIDENT THAT THERE WAS OBLIG ATION UNDERTAKEN BY THE ASSESSEE TO MAKE FINAL PAYMENT AT THE END OF THE YEAR. IT PROVES THAT THE PAYMENT MADE W AS NOTHING BUT PART OF THE PURCHASE PRICE OF THE MILK AND IN NO MANNER A DISTRIBUTION OF PROFIT. 28 22. IN THE PRESENT CASE THE ASSESSEE GAVE NO UNDER TAKING TO THE MILK SUPPLIERS THAT PROVISIONAL PRICE OF MILK F IXED INITIALLY WOULD BE REVISED AT THE END OF THE YEAR. THUS TH ERE WAS NO CONTRACT OR AGREEMENT BETWEEN THE ASSESSEE AND THE MILK SUPPLIERS REGARDING REVISION OF FINAL PRICE AT THE END OF THE YEAR. IN FACT IN THE PRESENT CASE THE ASSESSEE IN A SINGLE STROKE AFTER 13 MONTHS OF THE END OF ACCOUNTING PE RIOD AND AFTER THE CLOSE OF ACCOUNTS PASSED A SINGLE ENTRY AND MADE THE CLAIM IN QUESTION. SUCH PAYMENT IS NOT A PART OF P URCHASE PRICE OF MILK. 23. IT IS SIGNIFICANT AND RELEVANT TO HIGHLIGHT HERE TH AT IN THE PRESENT CASE THE ASSESSEE'S AUTHORIZED REPRESE NTATIVE STATED BEFORE THE AO THAT THE AMOUNT IN QUESTION WA S DEBITED IN PURSUANCE OF RESOLUTION PASSED BY THE BO ARD OF DIRECTORS WHEREBY IT WAS DECIDED TO DISTRIBUTE THE PROFITS. IT WAS FURTHER EXPLAINED THAT AS THE APPELLANT HAD EARNED SUFFICIENT PROFITS IT WAS DECIDED TO DISTRIBUTE TH E SAME AS AN INCENTIVE TO THE MEMBERS. THIS FACTUM WAS VERBA LLY EXPLAINED BY AUTHORIZED REPRESENTATIVE TO THE AO A ND IT FINDS MENTIONED IN THE ASSESSEE'S LETTER DATED 23. 1.1992. SIMILARLY THE MANAGING DIRECTOR SHRI H.S.OBEROI A LSO APPEARED BEFORE THE AO AND CONFIRMED THAT THE PROFI TABILITY OF THE UNIT WAS ASCERTAINED AT THE END OF THE YEAR AND IT WAS DECIDED UNANIMOUSLY BY THE BOARD OF DIRECTORS TO DI STRIBUTE THE MONEY AS AN INCENTIVE TO ITS MEMBERS. FURTHER IT WAS ALSO CONFIRMED THAT THE SOCIETY WAS NOT UNDER ANY L EGAL OBLIGATION TO MAKE THE PAYMENT BUT IT HAD BEEN MADE FOR THE UPLIFTMENT OF THE PRODUCERS WHO ARE POOR PEOPLE IN THE 29 VILLAGES. THIS FACTUM WAS ALSO CONFRONTED TO THE A SSESSEE APPELLANT AND IN RESPONSE THE ASSESSEE DID NOT DEN Y THE ADMISSION OF SUCH FACT ADMITTED BY THE MD. IT IS FURTHER PERTINENT TO MENTION HERE THAT THE SAID PRICE HAD N OT BEEN DEBITED IN THE PURCHASES ACCOUNT ON DAY-TODAY BASIS . 24. IN VIEW OF SUCH A FACT-SITUATION OF THE PRESENT CASE THE RATIO OF THE DECISION OF MEHSANA DISTRICT COOPERATI VE MILK PRODUCERS UNION 33 ITD 6 AND THE DECISION OF HON'BL E GUJRAT HIGH COURT IN THE CASE OF CIT V MEHSANA COOPERATIVE MILK PRODUCERS UNION (SUPRA) ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE MATERIAL FACTS AND CIRCUMSTANCES OF THE SAID DECISIONS RELIED UPON BY THE ASSESSEE TO SUPPORT HIS CONTENTIONS ARE DIFFERENT AND DO NOT HAVE RESEMBLAN CE TO THE FACTS AND CIRCUMSTANCES AS OBTAINING IN THE PRESEN T CASE. THEREFORE IN VIEW OF THE RULES GOVERNING THE APPLI CABILITY OF THE JUDICIAL PRECEDENTS THE ASSESSEE HAS FAILED TO SHO W AS TO HOW THE FACT-SITUATION OF ITS CASE FITS IN THE FACT-SIT UATION OF THE DECISIONS SO RELIED UPON. IN THE PRESENT CASE MAT ERIAL FACTS ARE DIFFERENT AND DISTINGUISHABLE. IT IS PERTINENT TO MENTION HERE THAT THE LD. 'AR' MERELY CITED AND RELIED UPON SUCH CASE-LAWS WITHOUT HAVING ANY REGARD TO THE DIS-SIMILARITY OF FACTS AND CIRCUMSTANCES OF THE CASE. 25. LD. 'DR' ON THE OTHER HAND PLACED RELIANCE ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF BU DHEWAL COOPERATIVE SUGAR MILLS LTD. V CIT 316 ITR 461 (P&H ) RELEVANT PART OF THE DECISION IS REPRODUCED HEREUNDER : THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF ADDITIONAL SUGARCANE PRICE AS A BUSINESS 30 EXPENDITURE ALTHOUGH NO PAYMENT HAD BEEN MADE BEFORE THE END OF THE FINANCIAL YEAR AND THE LIABILITY ON ACCOUNT OF SUCH ALLEGED EXPENSE WAS DIRECTLY TAKEN TO SHARE CAPITAL ACCOUNT. THE CLAIM WAS REJECTED BY THE AO AND THE TRIBUNAL. ON APPEAL TO THE HIGH COURT: HELD THAT THE TRIBUNAL AFTER APPRECIATING THE MATE RIAL ON RECORD HAD RECORDED THE FOLLOWING FINDINGS; A) THAT THE ASSESSEE HAD BEEN FIXING THE FINAL PRICE AND CREATI NG ADDITIONAL LIABILITY ON ACCOUNT OF ADDITIONAL SUGARCANE PRICE ONLY IN THOSE ASSESSMENT YEARS WHEN THE ASSESSEE HAD EARNED HUGE PROFITS; B) THAT THE CAPITAL BASE OF THE ASSESSEE HAD BEEN ENHANCED BY MAKING A PROVISION ON ACCOUNT OF ADDITIONAL SUGARCANE PRICE WITHOUT THERE BEING ANY ACTUAL PAYMENT TO THE SUGARCANE GROWERS; C) THAT THERE WAS NO INFORMATION TO THE SUGARCANE GROWERS REGARDING INCR EASE IN PRICE OF ADDITIONAL CANE PRICE AND ALLOTMENT OF SHA RES TO THEM. FURTHER IN SUCH A SITUATION THERE COULD NOT BE ANY APPLICATION MADE BY THE MEMBERS FOR THE ALLOTMENT O F ADDITIONAL SHARES; D) THE RESOLUTION PASSED IN THE MEETING OF THE BOARD OF DIRECTORS WAS RATIFIED SUBSEQUENTLY T HE METHOD ADOPTED FOR ENHANCEMENT OF SUGARCANE PRICE W AS WITHOUT ANY CASH PAYMENT AND THE ENHANCEMENT OF CAP ITAL BASE WAS WITHOUT PAYMENT OF TAXES IN RESPECT OF REL ATED AMOUNT; AND E) THIS ACTION OF THE ASSESSEE TO ENHA NCE THE SUGARCANE PRICE BY CREDITING THE SAME TO SHARE DEDU CTION ACCOUNT WAS UNILATERAL. THE TRIBUNAL ON THE BASIS OF THE ABOVE FINDINGS HAD CONCLUDED THAT THE ACTION OF THE ASSESSEE WAS NOT BONA FIDE AND THIS DEVICE WAS EMPL OYED TO AVOID PAYMENT OF DUES TO THE EXCHEQUER. THE FINDINGS RECORDED BY THE TRIBUNAL WERE FINDINGS OF FACT AND DID NOT GIVE RISE TO ANY QUESTION OF LAW MUCH LESS A SUBSTANTIAL QUESTION OF LAW. THE DISALLOWANCE WAS JUSTIFIED. 31 25(I) THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT SUPPORTS THE CONTENTION OF THE REVENUE. THE HON'BL E HIGH COURT HELD THAT THE DEDUCTION OF ADDITIONAL SUGARCANE PRI CE NOT PAID BY THE ASSESSEE BEFORE THE END OF FINANCIAL YEAR A ND THE LIABILITY ON ACCOUNT OF SUCH ALLEGED EXPENSE WAS DI RECTLY TAKEN TO SHARE CAPITAL ACCOUNT WAS NOT ADMISSIBLE EXPENS ES. IN THE PRESENT CASE ALSO SUCH LIABILITY IN THE FORM OF DI FFERENTIAL PAYMENT NEITHER INCURRED NOR REDEEMED ON 30.6.1987 AS IS EVIDENT FROM THE ABOVE DETAILED DISCUSSION ON THE ISSUE IN QUESTION. 25(II). AS DISCUSSED IN THE FOREGOING PARAGRAPHS OF THIS ORDER IT IS EVIDENT THAT THE IMPUGNED CLAIM MADE B Y THE ASSESSEE IS NOT LEGALLY AND FACTUALLY TENABLE ON T HE FOUNDATION OF STATUTORY PROVISIONS AND ACCOUNTING PRINCIPLES. THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AN D SUCH CLAIM NEVER AROSE TILL THE END OF THE RELEVANT ACCOUNTING PERIOD AS ALSO AT THE TIME OF CLOSING AND FINALIZATION OF THE ACCOUNTS BY THE ASSESSEE ON 30.6.1987. AS ADMITTED BY THE ASS ESSEE THERE HAD BEEN NO LEGAL OBLIGATION ON ITS PART TO MAKE S UCH PAYMENT. IT WAS FURTHER ADMITTED BY THE AUTHORIZED REPRESE NTATIVE AND MD SHRI H.S.OBEROI THAT IN VIEW OF SURPLUS PROFITS THE SAME WAS DISTRIBUTED IN THE FORM OF INCENTIVES. IN SUCH A FACT- SITUATION IT IS A PATENT CASE OF PROFIT ADJUSTMENT AFTER ITS DETERMINATION AS ON 30.6.1987 VIDE RESOLUTION PAS SED AFTER APPROXIMATELY 13 MONTHS. ACCORDINGLY DISTRIBUTION OF PROFIT OR APPLICATION OF INCOME AT THE VOLITION OF THE ASSES SEE IS NOT COVERED UNDER THE SCHEME OF INCOME-TAX ACT OR U/S 3 7 OF THE ACT AS DEDUCTIBLE EXPENDITURE. THE ASSESSEE HAS EV ERY RIGHT 32 TO USE ITS SURPLUS FUNDS IN ANY MANNER IT LIKES A ND SUCH USE OF SURPLUS PROFIT CANNOT BE TERMED AS AN EXPENDITUR E ELIGIBLE FOR DEDUCTION U/S 37 OF THE ACT. THE HON'BLE SUPRE ME COURT IN THE CASE OF CIT V IMPERIAL CHEMICAL INDS. LTD. 74 I TR 17 (S.C) HELD IN CLEAR TERMS THAT AN OBLIGATION TO APPLY THE INCOME IN A PARTICULAR WAY BEFORE IT IS RECEIVED BY THE ASSESSE E OR BEFORE IT HAS ACCRUED OR ARISEN TO THE ASSESSEE RESULTS IN T HE DIVERSION OF INCOME. THE OBLIGATION TO APPLY INCOME ACCRUED ARISEN OR RECEIPT AMOUNTS MERELY TO THE APPORTIONMENT OF INC OME AND THE INCOME SO APPLIED IS NOT DEDUCTIBLE. THE TRUE TES T FOR THE APPLICATION OF RULE OF DIVERSION OF INCOME BY AN OV ER-RIDING TITLE IS WHETHER THE AMOUNT SOUGHT TO BE DEDUCTED IN TRU TH NEVER REACHING THE ASSESSEE AS HIS INCOME. A BARE PERUSAL OF THE FACTS OF THE PRESENT CASE REVEALS THAT THE PROFITS ACCRU ED TO THE ASSESSEE AS ON 30.6.1987 AT THE END OF THE ACCOUNT ING PERIOD AND CLAIM OF PRICE DIFFERENTIAL IS AN APPLICATION O F INCOME IN THE ABSENCE OF ANY LEGAL OR CONTRACTUAL OBLIGATION. SU CH TAXABLE PROFIT IS LIABLE FOR TAX ON 30.6.1987. SUBSEQUENT APPLICATION OF SUCH PROFIT IS NOT LEGALLY PERMISSIBLE. IT IS PERTI NENT TO HIGHLIGHT HERE THAT THE HON'BLE SUPREME COURT IN THE CASE OF LUXMI DEVI SUGAR MILLS 200 ITR 603 (S.C) HELD THAT THE LIABILITY TO PAY BONUS CREATED BY THE GOVERNMENT NOTIFICATION ISSUED AFTER CLOSE OF THE ACCOUNTING YEAR IN QUESTION IS NOT AD MISSIBLE DEDUCTION AS NO LIABILITY EXISTED AT THAT RELEVANT TIME UPON THE ASSESSEE TO PAY BONUS.. 25(III) HAVING REGARD TO THE ABOVE LEGAL AND FAC TUAL DISCUSSIONS WE DO NOT FIND ANY INFIRMITY IN THE F INDINGS OF THE LD. CIT(A) ON THE ISSUE IN QUESTION AND HENCE TH E SAME ARE 33 UPHELD. THUS THESE GROUNDS OF APPEAL OF THE ASSES SEE ARE DISMISSED. 26. IN THE RESULT APPEAL OF THE ASSESSEE IN ITA NO.874/CHD/1995 IS DISMISSED. ITA NO. 875/CHD/1995 27. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOL LOWING GROUNDS OF APPEAL : 1. THAT THE IMPUGNED ORDER HAS BEEN PASSED BY THE LD. CIT(A) WITHOUT PROPER APPLICATION OF MIND AS SUCH IT IS NOT SUSTAINABLE IN LAW AND FACTS OF THE CASE. 2. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN CONFI RMING ADDITION OF RS.76 43 690/- MADE BY THE DY CIT ON ACCOUNT OF PAYMENT OF COMMISSION TO COOP. SOCIETIES. THE FACTS OF THE CASE AND LAW APPLICABLE HAVE NOT BEEN CONSIDERED PROPERLY WHICH HAS RESULTED IN ERRONEOUS ORDER AND UNTENABLE CONCLUSION. 3. THAT THE FINDING OF THE LD CIT(A) THAT THE APPELLANT HAS NOT BEEN ABLE TO MAKE OUT A CASE THAT THE EXPENDITURE WAS A BONAFIDE BUSINESS EXPENDITURE RELATING TO THE YEAR IS MISPLACED UNTENABLE AND CONTRARY TO LAW. THE EVIDENCE AND MATERIAL ON RECORDS HAVE BEEN IGNORED TO BE CONSIDERED PROPERLY BY THE AUTHORITIES BELOW WHICH HAS MADE THE ORDER ERRONEOUS AND BAD IN LAW. 4. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN CONFIRMI NG THE ACTION OF THE AO REGARDING ADDITION OF RS.15 05 008/- ON ACCOUNT OF EX-GRATIA PAYMENT TO WORKERS. PROVISIONS OF SECTION 36(1)(II) OF THE IT 34 ACT 1961 HAVE BEEN MISCONSTRUED AND MISAPPLIED IN THE APPELLANTS CASE. 5. THAT THE ORDER IS DEVOID OF JUDICIOUS AND RATION AL APPROACH AND THE ADDITIONS AND DISALLOWANCES CONFIRMED ARE BASED ON SURMISES AND CONJECTURES. 6. THAT THE ORDER IS CONTRARY TO LAW AND FACTS OF T HE CASE. 28. GROUND NO. 1 IS GENERAL IN NATURE AND NEEDS NO ADJUDICATION. 29. GROUND NOS. 2 & 3 CONTAIN IDENTICAL FACTS AND ISSUES AS ADJUDICATED BY US IN APPEAL NO. 874/CHD/1995 FOR TH E ASSESSMENT YEAR 1988-89. THEREFORE THE SAME FINDI NGS ARE APPLICABLE TO THESE GROUNDS OF APPEAL RAISED BY T HE ASSESSEE IN ITA NO.875/CHD/1995 FOR THE ASSESSMENT YEAR 1991-9 2. ACCORDINGLY IN VIEW OF SUCH DETAILED FINDINGS GIVE N ABOVE BY US IN APPEAL NO. 874/CHD/1995 FOR THE ASSESSMENT YEAR 1988-89 THESE GROUNDS OF APPEAL IN THE PRESENT APPEAL ARE DISMISSED. 30. IN GROUND NO. 4 THE ASSESSEE CONTENDED THAT CI T(A) IS NOT JUSTIFIED IN CONFIRMING THE ACTION OF THE AO REGA RDING ADDITION OF RS.15 05 008/- ON ACCOUNT OF EX-GRATIA PAYMENT TO WORKERS. 31. IN THE COURSE OF PRESENT APPELLATE PROCEEDINGS LD. 'AR' PLACED RELIANCE ON THE FOLLOWING DECISIONS : 1. CIT V RAJASTHAN MINERALS DEVELOPMENT CORPORATION 261 ITR 479 (RAJ) 2. CIT V SHAW WALLACE AND CO.LTD. 190 ITR 455 3. CIT V MAINA ORE TRANSPORT PVT.LTD. 324 ITR 100 (BOM) 32. LD. 'DR' PLACED RELIANCE ON THE ORDER OF THE LO WER AUTHORITIES. 35 33. WE HAVE CAREFULLY PERUSED THE FACT SITUATION OF THE PRESENT CASE RIVAL SUBMISSIONS AND THE DECISIONS RELIED UP ON BY THE ASSESSEE. IT IS PERTINENT TO REPRODUCE FINDINGS OF THE CIT(A) ON THE ISSUE : 5. THE NEXT GROUND FOR CONSIDERATION IS GROUND NO. 6 WHICH RELATES TO THE ADDITION OF RS.15 05 008/- OUT OF EXPENDITURE INCURRED FOR BUSINESS IN RESPECT OF PAY MENT FOR EX-GRATIA EQUIVALENT TO 40 DAYS SALARY TO ITS WORKE RS. THE AO DISCUSSED IN HIS ORDER THAT THIS PAYMENT WAS OVE R AND ABOVE THE BONUS OF 8.33% AS WELL AS INCENTIVE BONUS WHICH WAS CONTRACTUAL OBLIGATION OF THE APPELLANT. THIS AMOUNT WAS DECIDED TO BE PAID BY THE BOARD OF DIRECTORS OV ER AND ABOVE THE CONTRACTUAL OBLIGATION OF THE APPELLANT O NLY IN THE MONTH OF OCTOBER 1991 THAT IS AFTER THE ACCOUNT OF THE APPELLANT WERE CLOSED. THE APPELLANT HAS ON THE OT HER HAND ARGUED THAT THIS ADDITION WAS MADE WITHOUT GI VING ANY PROPER OPPORTUNITY TO THE ASSESSEE TO EXPLAIN H IS CASE AND THE PAYMENT HAD BEEN MADE TO THE WORKERS FOR ENSURING INDUSTRIAL PEACE CORDIAL RELATIONS WITH T HE WORKERS AND TO PREVENT STRIKES ETC. IT RELIED ON T HE DECISION OF CALCUTTA HIGH COURT IN A CASE REPORTED AT 190 IT R 455. A BARE READING OF THE DECISION OF THE CALCUTTA HIGH C OURT STATES THAT THEREIN THE HIGH COURT HAD HELD THAT AL L THE CONDITIONS CONTAINED IN CLAUSES (A) TO (C) OF THE S ECOND PROVISO TO SECTION 36(1)(II) SHOULD BE SATISFIED FO R A PERSON TO CLAIM PAYMENT OVER AND ABOVE THE AMOUNT PAYABLE UNDER THE PAYMENT OF BONUS ACT. HOWEVER THE IST AND SEC OND PROVISO HAS OF COURSE BEEN OMITTED W.E.F. 1.4.89. P RESENTLY THEREFORE ONLY THE SUM PAID TO AN EMPLOYEE S BONUS OR COMMISSION FOR SERVICES RENDERED IS ALLOWABLE AS DE DUCTION WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABLE TO HIM A S PROFIT OR DIVIDEND IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION. THE CALCUTTA HIGH COURT HAD ALSO DISCUS SED CUSTOMARY NATURE OF SUCH PAYMENTS AND IN THAT CASE MEMORANDUM OF SETTLEMENT HAD BEEN ARRIVED AT BETWEE N THE COMPANY AND ITS WORKMEN AND THESE CONDITIONS ARE MI SSING 36 IN THE CASE OF THE APPELLANT. THERE APPEARS TO HAV E BEEN NO DISPUTE BETWEEN THE MANAGEMENT AND ITS WORKERS WHIC H WAS SETTLED BY THIS PAYMENT AND THE APPELLANTS REPRESENTATIVE HAS NOT BEEN ABLE TO SHOW THAT IT WA S CUSTOMARY IN THIS LINE TO MAKE SUCH PAYMENTS. HENCE THIS ACTION OF THE AO IS UPHELD AND APPELLANTS GROUND O F APPEAL DISMISSED. 34. THE FACTS OF THE PRESENT CASE ARE COVERED BY TH E DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V MAINA OR E TRANSPORT PVT.LTD. 324 ITR 100 (BOM). THE RELEVAN T PART OF THE SAID DECISION IS REPRODUCED HEREUNDER : THE OBJECT OF THE PROVISO TO SECTION 36(1)(II) OF T HE INCOME-TAX ACT 1961 IS TO ENCOURAGE THE MANAGEMENT TO PAY BONUS IN EXCESS OF WHAT IS STATUTORILY BOUND TO BE PAID TO THE EMPLOYEES PROVIDED THE PAYMENT IS JUSTI FIABLY AS A REASONABLE PAYMENT. THE ASSESSEE CLAIMED DEDUCTION IN RESPECT OF THE E X GRATIA PAYMENT MADE TO ITS EMPLOYEES WHICH EXCEEDED THE PRESCRIBED LIMIT OF 8.33 PER CENT. THE DY. CIT)ASSESSMENT) DISALLOWED THE AMOUNT BUT THE COMMISSIONER (APPEALS) AND THE TRIBUNAL ALLOWED DEDUCTION IN RESPECT OF THE EX GRATIA PAYMENT MADE TO THE EMPLOYEES. ON A REFERENCE : HELD THAT THE TRIBUNAL WAS JUSTIFIED IN HOLDING T HAT THE EX GRATIA PAYMENT MADE IN EXCESS OF THE LIMIT P RESCRIBED UNDER THE PAYMENT OF BONUS ACT 1965 EITHER UNDER S ECTION 36(1)(II) OR SECTION 37(1) OF THE ACT WAS ALLOWABLE AS BUSINESS EXPENDITURE. THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT EX GRATIA PAYMENT MADE OVER AND ABOVE THE AMOU NT PAID IN ACCORDANCE WITH THE BONUS ACT WAS AN ALLOWA BLE EXPENDITURE THOUGH THE PAYMENT DID NOT COVER CONTRA CTUAL PAYMENT OR CUSTOMARY PAYMENT. 37 35. IT IS SUBMITTED BY THE ASSESSEE THAT SUCH PAYME NTS HAVE BEEN ACCEPTED IN THE PRECEDING AND SUCCEEDING ASSES SMENT YEAR TO THE ASSESSMENT YEAR UNDER CONSIDERATION. HAVING REGARDS TO THE ABOVE DISCUSSIONS AND RESPECTFULLY FOLLOWING TH E RATIO OF THE DECISION REPRODUCED ABOVE THIS GROUND OF APPEAL O F THE ASSESSEE IS ALLOWED. 36. THE ASSESSEE VIDE APPLICATION DATED 14.06.2003 RAISED ADDITIONAL GROUND WHICH IS REPRODUCED HEREUNDER : THAT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE NO INTEREST U/S 234B OF THE INCOME-TAX ACT 1961 IS CHARGEABLE IN VIEW OF THE FACT THAT NO ORDER FOR CHARGING THE INTEREST HAS BEEN PASSED IN THE ASSESSMENT ORDER. 37. THIS ADDITIONAL GROUND OF APPEAL PERTAINS TO TH E CHARGING OF INTEREST U/S 234B OF THE ACT. THE ASSESSEE PLAC ED RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COURT FOR ADMIS SION OF THE ADDITIONAL GROUND IN THE CASE OF NTPC V CIT 229 ITR 383 (S.C). AS THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS LEGAL ONE AND ACCORDINGLY IN THE LIGHT OF THE DECISION OF THE HO N'BLE SUPREME COURT CITED BY THE ASSESSEE THE SAME IS ADMITTED. 38. WE HAVE CAREFULLY PERUSED THE RELEVANT PROVIS IONS OF SECTION 234B OF THE ACT AND FOUND THAT THE SAME ARE MANDATORY IN CHARACTER. THIS VIEW IS SUPPORTED BY THE DECISI ON OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V ANJUM M .H. GHASWALA (2001) 252 ITR 1 (S.C). THE RELEVANT PART OF THE DECISION IS REPRODUCED HEREUNDER : THE EXPRESSION SHALL USED IN SECTION 234A 234B A ND 234C CANNOT BE CONSTRUED AS MAY. PRIOR TO THE FIN ANCE ACT 1987 THE CORRESPONDING SECTIONS PERTAINING TO IMPOSITION OF INTEREST USED THE EXPRESSION MAY BU T THE CHANGE BROUGHT ABOUT BY THE FINANCE ACT 1987 IS A CLEAR INDICATION THAT THE INTENTION OF THE LEGISLATURE WA S TO MAKE THE COLLECTION OF STATUTORY INTEREST MANDATORY. TH AT EXPRESSION IS USED DELIBERATELY. 38 39. THIS DECISION HAS BEEN RENDERED BY A BENCH COMP RISING OF FIVE SUPREME COURT JUDGES. FURTHER THIS DECISION IS RENDERED AFTER THE DECISION OF THE DIVISION BENCH OF THE HON 'BLE SUPREME COURT IN THE CASE OF CIT V RANJI CLUB LTD. 247 ITR 209. THEREFORE THE DECISION RENDERED BY THE HON'BLE SUP REME COURT COMPRISING OF FIVE JUDGES WOULD HAVE PRECEDENCE OVE R EARLIER DECISION RENDERED BY THE DIVISION BENCH. IT IS FU RTHER MENTIONED THAT CHARGING OF INTEREST U/S 234B OF THE ACT IS MA NDATORY IN NATURE AND IS NOT DEPENDENT ON MENTIONING OF SUCH C HARGING OF INTEREST UNDER THE SAID SECTION BY THE AO IN THE ASSESSMENT ORDER. THEREFORE THE CHARGING OF INTEREST U/S 234 B OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE. IN VIEW OF THIS THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS DISMISS ED. 40. IN THE RESULT APPEAL OF THE ASSESSEE IN ITA NO.875/CHD/1995 ( A.Y. 1991-92) IS PARTLY ALLOWED. 41. GROUND NOS. 5 & 6 ARE GENERAL IN NATURE AND NE ED NO SEPARATE ADJUDICATION. 42. IN THE RESULT APPEAL OF THE ASSESSEE IN ITA NO . 874/CHD/1995 FOR THE ASSESSMENT YEAR 1988-89 IS DIS MISSED WHEREAS APPEAL IN ITA NO. 875/CHD/1995 FOR THE ASSE SSMENT YEAR 1991-92 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH FEB. 2012. SD/- SD/- (H.L.KARWA) (MEHA R SINGH) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 14 TH FEB. 2012. POONAM COPY TO: THE APPELLANT THE RESPONDENT THE CIT(A) CIT DR ASSISTANT REGISTRAR ITAT CHANDIGARH