Business expenditure/loss : Assessee federal society of primary milk societies : Milk rate difference determined in March and paid in subsequent year : Is allowable business expenditure/loss.

II. Reported :

46. Business expenditure/loss : Assessee federal society of
    primary milk societies : Milk rate difference determined in March and paid in
    subsequent year : Is allowable business expenditure/loss.

[CIT v. Solapur Distt. Co-op. Milk Producers & Process
Union Ltd., 180 Taxman 533 (Bom.)]

The assessees were federal societies of primary milk
societies and their business was to purchase milk from their members and other
producers at the rate to be fixed by their board of directors on the basis of
fat content of milk and to sell the milk to various parties. The assessee
fixed the rate of purchasing of milk at the beginning of the year on the basis
of the price declared by the State Government and price which other buyers
paid to the vendors. Those rates were revised from time to time and were
provisional to the final milk rate difference which was to be determined in
the month of March every year and was to be paid to primary milk societies in
the following year. The Assessing Officer refused to allow deduction of the
final rate difference on the ground that it was made on the basis of the
accrued profit of the year and, hence, would amount to distribution of profit.
The Tribunal allowed the claim and observed that the resolutions to pay final
rate difference were always passed in the month of March every year, i.e.,
before profit could be said to accrue; and that rate difference was paid only
on the basis of quantity of milk supplied during year and not in proportion of
shareholding, so as to amount to distribution of profit.

On appeal by the Revenue the Bombay High Court upheld the
decision of the Tribunal and held as under :

“(i) It was not the case of distribution of profit as the
amount to be paid was not out of the profit ascertained at the annual
general meeting. It was not paid to all shareholders. The amount was paid to
the members who supplied milk and in some cases also to non-members. The
payment was for the quantity of milk supplied and in terms of the quality
supplied.

(ii) The commercial expediency for payment of that price
were the market condition, and the need to procure more milk from the
members and non-members to the assessee. Therefore, the amount paid, by no
stretch of imagination, could be said to be dividend to the members or
shareholders or payment in the form of bonus, as bonus also had to be paid
from the accrued profits.

(iii) The Tribunal was justified in deleting the addition
made by the Assessing Officer.”