Income-tax---

----Cooperative society---Business expenditure---Payment of rebate by society to its members at end of year---Rebate given as special incentive for increasing society's business and encouraging cooperative movement-- Rebate not to be given if there was loss---Net profit ascertained only after allowing rebate, resulting in reduction of price at which members purchased goods from society---Payment of rebate was expenditure wholly and exclusively incurred for purposes of business---Allowable deduction.

The assessee, a cooperative society, engaged in the business of purchasing provisions and other goods, which were sold mostly to the members of the society, earned interest and other miscellaneous income. At the end of the year after ascertaining the profits, the society declared a rebate to the members. For the assessment year 1980-81, the Income-tax, Officer allowed the rebate distributed to the members as a deduction in computing the assessee's total income. Subsequently, he found that the assessment for the assessment year 1981-82 had been revised by the Commissioner of Income-tax. He accordingly treated that as an information and reopened the assessment to disallow the rebate. On appeal, the Tribunal following its own orders for the assessment year 1981-82 held that there was not rule or provision not to allow rebate as a deduction. For the assessment year 1981-82, the Commissioner of Income-tax disallowed the actual rebate given by the society by an order under section 263 and set aside the assessment holding that the rebate was nothing but an appropriation of its profits and accordingly could not be allowed as a deduction The Tribunal held that the rebate was to be related to a provisional price and hence it should be allowed as a deduction in appropriating trading profits and not as an expenditure incurred. For the assessment year 1982-83, the Income-tax Officer allowed the deduction of rebate only to the extent of profits of business. This was confirmed by the Tribunal. On a reference, the Revenue contended that since section 45 of the Andhra Pradesh Cooperative Societies Act as well as rule 36 of the Andhra Pradesh Cooperative Societies Rules talked of payment out of the net profits, it was only an appropriation of profits and could not be allowed as a business expenditure:

Held, that it is true that where an amount is. paid out of the net profit, it cannot be allowed as a business expenditure, because business expenditure is to be allowed for ascertaining the net profit and not to be paid out of the net profits. But the tact was that the net profit was ascertained only after allowing the rebate which went to reduce the price at which members purchased the goods from. the society. The rebate allowed was not a part .of profit at all. The Tribunal had pointed out that the scheme of rebate was that the price at which the goods were sold to the members was taken as a provisional price. When the rebate is given at the end of the year, the provisional price is reduced and the amount received by the society is itself taken at a reduced figure. The deduction goes to the trading account where the figure of sales will be reduced by the amount of rebate given. It was not a case where the deduction on business expenditure was made after ascertaining the gross profit. The only objection was that he rebate was given at the end of the year after ascertaining the profit made during the year. That could be an occasion to find out whether the society had a surplus out of which a rebate could be given to the loyal customers. But even if the ascertainment was at the time of making up of the accounts, the actual rebate was related back to the date of sales and the sales figure was reduced in the trading account. There was a clear decision to give a rebate to those members of the assessee-society who had done large business as an incentive for the purpose of encouraging the cooperative movement, and the rebate was not to be given, if there was a - loss. Therefore, the Tribunal was right in holding that the payment of rebate by the assessee-society to its members was an expenditure incurred wholly and exclusively for the purposes of the business.

Armoor Cooperative Meeting Society v. CIT (1987) 167 ITR 565 (AP); Associated Power Co. I`.;tc7, v. CIT (1996) 218 ITR 195 (SC) and Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521 (SC) ref.

S.R. Ashok for the Commissioner.

Y. Ratnakar and P. S. R. Chandra Murthy for the Assessee.

JUDGMENT

T.N.C. RANGARAJAN, J.----Heard learned counsel for the petitioner and Sri Y. Ratnakar and Sri P.S.R, Chandra Murthy, learned counsel for the respondents.

These three references raise identical questions and can be disposed of by a common order.

The assessee is a cooperative society engaged in the business of purchasing provisions and other goods which are sold mostly to the members of the society. It also earns interest and other miscellaneous income. At the end of the year after ascertaining the profits, the society declared rebate to the members.

For the assessment Year 19801-81, the Income-tax Officer allowed the rebate distributed to the members as a deduction in computing the assessee's total income. Subsequently, he found that the assessment for the assessment year 1981-8) bag been revised by the Commissioner of Income tax. He accordingly treated that as an information and reopened the assessment to disallow the rebate. This was carried on appeal and the Appellate Tribunal following its own orders for the assessment year 1981-82 held that there is no rule or provision not to allow rebate as a deduction.

For the assessment year 1981-82, the Commissioner of Income-tax disallowed the actual rebate given by the society by an order under section 263 and set aside the assessment holding that the rebate is nothing but an appropriation of is profits and accordingly cannot be allowed as a deduction and the Appellate Tribunal held that the rebate was to be related ta g provisional price and hence it should lie allowed as a deduction in appropriating trading profits and not as an expenditure incurred.

For the assessment year 1982-83, the Income-tax Officer allowed the deduction of rebate only to the extent of profits of business. This was confirmed by the Appellate Tribunal. On these facts two identical questions stated below have been referred for the opinion of this Court at the instance of the Revenue.

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the payment of rebate to its members was an expenditure wholly and exclusively incurred for the purpose of its business?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the appropriation of profits to members under section 45 of the Cooperative Societies Act in the name of rebate was not distribution of profits to the members?"

Learned standing counsel for the Revenue took us through the provisions of the Cooperative Societies Act and the bye-laws and pointed out that these provisions specifically referred to the payment of rebate out of the net profits and submitted that this was only an appropriation of income and could not be allowed as a deduction. He also submitted that where the amount is paid after receiving the income-tax it must be taken as an appropriation of income, unless there is some material to indicate that there was a diversion of that profit to some other person by overriding title before the profit accrues. He tried to distinguish the decision reported in Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521 (SC), relied on by the Appellate Tribunal, by pointing out that in that case there was a statutory reserve created with reference to a reasonable price fixed in the statute while in the present case the amount of rebate was at the discretion of the cooperative societies. He also pointed out that this decision has been referred to in the subsequent decision of the Supreme Court in Associated Power Company Ltd. v. CIT (1996) 218 ITR 195 and submitted that there was a clear cut difference between deductions made for ascertaining the profits and distribution made out of profits. Learned standing counsel, therefore, urged that in the present case the amount was paid only as part of the profit and, therefore, it cannot be allowed as a deduction.

On the other hand, learned counsel for the assessee submitted that a similar situation arose in Armoor Cooperative Marketing Society v. CIT (1987> 167 ITR 565 (AP.) here the question was answered in favour of the assessee under the relevant provisions of the Cooperative Societies Act. He submitted that though the rebate was given .at the end of the year after ascertaining the profit, it was. only an occasion for giving rebate and not a distribution of the profit itself. He submitted that this was an incentive encouraged by the Government and should not be disallowed for the purpose of income-tax.

On a consideration of the rival submissions we are of the opinion that the decision of the Tribunal is eminently reasonable. The Andhra Pradesh Cooperative Societies Act by section 45 provides for the disposal of net profits. Part of the net profits is to be transferred to the reserve fund. The balance of the net profits may be utilised for payment of rebate to member on the amount of volume of business done by them with the society, to the extent and in the manner specified in the bye-laws.

Paragraph 40(4) of the bye-laws of the assessee-society reads as follows:

"A rebate on purchases at a rate to be fixed by the general body on the recommendation of the board of directors shall be divided among the members according to the amount of purchases made by them during the year; subject to the restrictions imposed in rule 36(c) (sic) of the Andhra Pradesh Cooperative Societies Rules."

The Government issued a Government order in the following terms:

"Now, therefore, in exercise of the powers conferred by rule 67 of the Andhra Pradesh Cooperative Societies Rules, 1964, the Governor of Andhra Pradesh hereby exempts the Tirumala Tirupati Devasthanams Cooperative Stores Limited. Tirupati, from the provisions of rule 36(3)(c) of the said rules so as to enable the society to declare rebate on purchases made by the members of the stores subject to a maximum of 60 percent. of the net profit, earned. by the stores for the cooperative year 1967-68 and for the subsequent years on a permanent basis subject to the condition that profits earned by the stores should not fall short of the minimum so as to enable the stores to meet the statutory reserves first and then allow the rebate to its members to an extent of not exceeding 60 percent of the net profits. "

The record also shows that there was a Government order issued by the Government on January 6, 1972, which specified the maximum rebate payable as 25 percent. of the net profits. The relevant portion of the Government order dated January 6, 1972, is to the following effect:

"This special incentive offered to .the members has been resulting in increase in business of the stores year after year;

The Registrar of Cooperative Societies has considered that this concession might be extended for the year 1967-68 and also for the subsequent years on a permanent basis;

The Government are satisfied that the said society deserves the concessions on a permanent basis."

As can be seen from this Government order the rebate was being paid to the members as a' special incentive for increasing the society's business. The point taken by the Revenue is that since section 45 of the Cooperative Societies Act as well as rule 36 of the Rules talk of payment out of the net profits, it is only an appropriation of the profit and cannot be allowed as a business expenditure. It is true that where an amount is paid out of the net profit, it cannot be allowed as a business expenditure, because business expenditure is to be allowed for ascertaining the net profit and not to be paid out of the net profits. But the fact is that net profit is ascertained only after allowing rebate, which goes to reduce the price at which members purchased the goods from the society. The Tribunal has pointed out that the scheme of rebate is that the price at which the, goods were sold to the members was taken as a provisional price. When the rebate is given at the end of the year, the provisional price is reduced and the amount received by the society is itself taken at a reduced figure. In other words, the deduction goes to the trading account where the figure for sales will be reduced by the amount of rebate given. It is not a case where this deduction on business expenditure is made after ascertaining the gross profit. The only objection is that this rebate is given at the end of the year after ascertaining the profit made during the year. That can be an occasion to find out whether the society has a surplus out of which a rebate could be given to the loyal customers. But even if the ascertainment is at the time of making up of the accounts, the actual rebate is related back to the date of sales and the sales figure is reduced in the trading account. This is the view taken by this Court in Armoor Cooperative Marketing Society v. CIT (1987) 167 ITR 565, where under similar circumstances bonus was given to the members who sold goods to the society at the end of the year, after ascertaining the profits.

The Appellate Tribunal also referred to the decision of the Supreme Court in Poona Electric Supply Co. Ltd.'s case (1965) 57 ITR 521 in support of their view. In that case, the Electricity Act provided for creating a reserve for the customers, in case the profit is more than the reasonable rate admissible for paying charges to the customers. The Supreme Court pointed out that if the rebate is given, it goes to reduce the price and, therefore, it is a case of the assessee receiving less amount as a profit.

Learned standing counsel sought to distinguish that case by stating that in the present case there is no such statutory direction to grant rebate, but we are of the opinion that there is a clear decision to give rebate to those members of the society who have done large business as an incentive for the purpose of encouraging the cooperative movement and that the rebate is not to be given if there is a loss. Even in the recent decision in Associated Power Company Ltd. v. CIT(1996) 218 ITR 195, the Supreme Court has reiterated the view after quoting the following passage from Poona Electric Supply Co. Ltd.'s case (1965) 57 ITR 521, 525 (SC) (page 200):

"Under section 10(1) of .the Income-tax Act, tax shall be payable by an assessee under the head "Profits and gains of business" in respect of profits and gains of any business carried on by him. The said profits and gains are not profits regulated by any statute, but profits in a business computed on business principles. They are business profits. and not statutory profits. They are real profits and not notional profits. The real profit of a businessman under section 10(1) of the Income-tax Act cannot obviously include the amounts returned by him by way of rebate to the consumers under statutory compulsion. It is as if he received only from the consumers the, original amount minus the amount he returned to them. In substance, there cannot be any difference ,between a businessman collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs.Y .to them and another businessman collecting Rs.X alone. The amount returned is not a part of the profits at all.'(emphasis supplied).

After considering various judgments, this Court was led to observe that the income-tax was a tax on the real income. i.e., the profit arrived at on commercial principles subject to the provisions of the Income-tax Acts "The real profit could be ascertained only by making the permissible deductions. There was a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case, whether the outgoings fell in one or the other of the heads was a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that had to be borne in mind was that between the real profits and the statutory profits, that is, between the commercial profits and the statutory profits, the latter were statutorily fixed for a specified purpose. "

The Supreme Court emphasized the fact that the amount returned is not a part of profit at all. We, therefore, answer the questions in the, affirmative and against the Revenue.

M . B. A . / 3210/FCReference answered.