The ITO, Ward-2, Gandhinagar V. Gujarat State Federation of Co.Op.Sugar Factories Ltd., Gandhinagar

ITA 1129/AHD/2007

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1813 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 17-03-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 16-03-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: J P SHAH
• Keywords: Business income; Opportunity of being heard
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI, JM AND D. C. AGRAWAL , AM) ITA NO.1129, 1727 AND 3679/AHD/2007 A. Y.: 2003-04, 2004-05 AND 2005-06 THE INCOME TAX OFFICER, WARD-2, GANDHINAGAR, BLOCK NO.14, 5 TH FLOOR, UDHYOG BHAVAN, SECTOR- 11, GANDHINAGAR VS GUJARAT STATE FEDERATION OF CO- OP. SUGAR FACTORIES LTD, PLOT NO.274, SECTOR NO.16, GANDHINAGAR PA NO. AAAAG 0288 P (APPELLANT) (RESPONDENT) DEPARTMENT BY SHRI MUDIT NAGPAL, SR. DR ASSESSEE BY SHRI J. P. SHAH, AR O R D E R PER BHAVNESH SAINI: ALL THE DEPARTMENTAL APPEALS ARE DIRECTED AGAINST DIFFERENT ORDERS OF THE LEARNED CI T(A), GANDHINAGAR, AHMEDABAD DATED 14-12-2006 FOR ASSESSMENT YEAR 2003 -04, DATED 28-2-2007 FOR ASSESSMENT YEAR 2004-05 AND DATED 11- 7-2007 FOR ASSESSMENT YEAR 2005-06, CHALLENGING THE ORDER OF T HE LEARNED CIT(A) IN HOLDING THAT INCOME OF THE ASSESSEE IS EX EMPT ON THE PRINCIPLE OF MUTUALITY AND IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF INTEREST ON CUMULATIVE DEPOSITS AMOUNTIN G TO RS.24,49,026/-, RS.14,66,615/- AND RS.7,00,653/- I NCURRED RESPECTIVELY IN ALL THE 3 ASSESSMENT YEARS. 2. THE LEARNED CIT(A) DISCUSSED THE FACTS ON BOTH T HE GROUNDS IN ASSESSMENT YEAR 2003-04 AND FOLLOWED HIS ORDER IN T HE REMAINING ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 2 ASSESSMENT YEARS FOR DELETING THE ADDITION. THEREFO RE, THE FACTS AS CONTAINED IN ASSESSMENT YEAR 2003-04 ARE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF DISPOSAL OF ALL THE APPEALS. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COOPERATIVE SOCIETY WHICH HAD FILED RETURN OF INCOME FOR ASSESS MENT YEAR 2003- 04 DECLARING NIL INCOME. THE ENTIRE INCOME EARNED D URING THE YEAR WAS CLAIMED AS EXEMPT BASED ON THE CONCEPT OF MUTUA LITY STATING THAT THE SOCIETY WAS NOT HAVING OBJECT OF PROFIT, THERE WAS NO SHARE CAPITAL AND ALSO NO DISTRIBUTION OF PROFIT. THE AO ON VERIF ICATION WAS OF THE VIEW THAT THE ASSESSEE DID NOT FULFILL THE REQUIREM ENT FOR EXEMPTION OF INCOME. A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSES SEE STATING THAT CONCEPT OF MUTUALITY WAS NOT APPLICABLE TO THE ASSE SSEE. IN THIS CONTEXT, THE DECISION OF THE HONBLE GUJARAT HIGH C OURT IN THE CASE OF CIT VS SHREE JARI MERCHANTS ASSOCIATION 106 ITR 542 WAS REFERRED TO. IT WAS ALSO POINTED OUT THAT THE ASSESSEE WAS N OT FULFILLING THE CONDITION REGARDING DISTRIBUTION OF SURPLUS ASSETS ONLY AMONG THE MEMBERS OF ASSOCIATION ON ITS DISSOLUTION. ACCORDIN G TO THE AO IN THE ABSENCE OF A CLEAR-CUT PROVISION FOR DISTRIBUTION O F SURPLUS AMONG THE MEMBERS, BASIC PRINCIPLE OF MUTUALITY WAS NOT FULFI LLED. THE ASSESSEE FURNISHED DETAILED REPLY TO THE SHOW CAUSE NOTICE W HEREIN IT WAS POINTED OUT THAT THE SOCIETY WAS A MUTUAL ASSOCIATI ON AND ITS MEMBERS WERE CO-OPERATIVE FACTORIES OF THE STATE OF GUJARAT. THE ONLY OBJECTION TO THE APPLICABILITY OF MUTUALITY WA S THAT THE SURPLUS IN THE EVENT OF DISSOLUTION WAS NOT RETURNABLE TO THE MEMBERS. THE ASSESSEE REFERRED TO THE DECISION OF THE HONBLE GU JARAT HIGH COURT IN THE IN THE CASE OF CIT VS ADARSH CO-OP. HOUSING SOC IETY LTD. 213 ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 3 ITR 677. IN THE ABOVE CASE, THE SURPLUS WAS NOT TO BE DISTRIBUTED AMONG THE MEMBERS AND WAS TO BE GOVERNED BY SECTION 115 OF THE GUJARAT CO-OPERATIVE SOCIETIES ACT. THE HONBLE COU RT HELD THAT THE CONCEPT OF MUTUALITY WAS APPLICABLE TO THAT CASE. T HE PRIMARY CONDITION OF MUTUALITY BETWEEN THE ASSESSEE AND ITS MEMBERS WAS THAT THE ASSESSEE, WHICH WAS COLLECTING MONEY FROM ITS MEMBERS, MUST APPLY THE SAME FOR THEIR BENEFIT NOT AS SHAREH OLDERS HAVING INTEREST IN ITS PROFIT BUT AS PERSONS THEMSELVES WH O HAVE PUT UP THE FUND BY CONTRIBUTING TO IT. THERE MUST BE A THREAD AGENCY FOR ACTING FOR THE CONTRIBUTORS FOR ACHIEVING THE OBJECTIVES. IT WAS ALSO POINTED OUT THAT THE HONBLE GUJARAT HIGH COURT DISTINGUISH ED ITS EARLIER DECISION IN THE CASE OF CIT VS SHREE JARI MERCHANTS ASSOCIATION IN THE LATER CASE OF CIT VS ADARSH CO-OP. HOUSING SOCI ETY LTD. 213 ITR 677. THE AO EXAMINED THE REPLY OF THE ASSESSEE. IT WAS POINTED OUT THAT THERE WAS NO MENTION OF ANY CLAUSE WHETHER THE MEMBERS COULD DECIDE HOW THE SURPLUS WAS TO BE UTILIZED IN THE EV ENT OF DISSOLUTION. IN THE EVENT OF DISSOLUTION OR WINDING UP, THE ASSE TS WAS LIABLE TO BE TRANSFERRED TO THE REGISTRAR OF CO-OPERATIVE SOCIET IES, WHO WOULD BE TRANSFERRING THE SAME TO A NEW SOCIETY FORMED WITH SIMILAR OBJECTIVES. AS SUCH, THE AO HELD THAT THERE WAS NO COMPARISON O F THE PRESENT CASE WITH THAT OF ADARSH CO-OP. HOUSING SOCIETY LTD . WHICH AS PER THE BYELAWS HAD A CLAUSE TO THE EFFECT THAT SURPLUS AS AVAILABLE AFTER PAYING ENCUMBRANCES WAS TO BE USED FOR PUBLIC PURPO SES AS RESOLVED BY THE GENERAL MEETING CALLED FOR THE PURP OSE AND AS APPROVED BY THE REGISTRAR. IN THE PRESENT CASE, THE BYELAW WAS SILENT ON THE MATTER OF DISSOLUTION. IT WAS FURTHER POINTE D THAT THE ASSESSEE DID NOT SATISFY THE CONCERNED CONCEPT OF MUTUALITY AS EXPLAINED IN THE ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 4 CASE OF STYLES VS NEW YORK LIFE INSURANCE CO. (1989 ) 2 TC 460 HL. IN THE PRESENT CASE, THE ASSETS WERE NOT LIABLE TO BE RETURNED TO THE MEMBERS AND THE DECISION ON HOW TO EXPEND THE FUNDS ALSO DID NOT REST ON THE CONTRIBUTORS TO THE ASSOCIATION BUT WIT H THE REGISTRAR AS PER GUJARAT CO-OPERATIVE SOCIETIES ACT. IN THE ABOV E CONTEXT, THE IDENTITY BETWEEN THE CONTRIBUTORS AND RECIPIENTS AR E LOST AND THE SAME NULLIFIED THE VERY BASIC PRINCIPLE OF MUTUALITY. AC CORDINGLY THE AO REJECTED THE CLAIM OF EXEMPTION AND HELD THAT THE I NCOME WAS TAXABLE UNDER THE HEAD BUSINESS. THE ASSESSEE OBJECTED TO THE ACTION OF THE AO AS PER GROUND NO.1, WHICH IS AS UNDER: 1. THE ASSESSING OFFICER ERRED IN HOLDING THAT ITS INCOME IS NOR ELIGIBLE FOR EXEMPTION ON THE BASIS O F PRINCIPLE OF MUTUALITY AND THAT ITS INCOME IS TAXAB LE UNDER THE HEAD BUSINESS INCOME. 4. THE ASSESSEE SUBMITTED BEFORE THE LEARNED CIT(A) THAT THERE WAS A FACTUAL MISTAKE IN THE STATEMENT OF THE AO WH EREIN IT WAS STATED THAT THE ASSESSEE WAS A CO-OPERATIVE SUGAR F ACTORY. THE ASSESSEE WAS NOT OWNING OR HAVING ANY FACTORY OF IT S OWN. IT WAS ONLY A FEDERATION OF CO-OPERATIVE SUGAR FACTORIES. IT WA S FUNCTIONING FOR THE BENEFIT OF THE CO-OPERATIVE SUGAR FACTORIES OF GUJA RAT WHO ARE ITS MEMBERS. IT WAS FURTHER SUBMITTED THAT THE AO HAD R ELIED ON THE DECISION OF CIT VS SHREE JARI MERCHANTS ASSOCIATION 106 ITR 542 AND HELD THAT THE SURPLUS FUNDS OF LIQUIDATION OF A SSOCIATION WAS NOT DIVISIBLE OR TO BE RETURNED TO THE MEMBERS AND HENC E THE CONCEPT OF MUTUALITY WAS NOT APPLICABLE. IT WAS CONTENDED THAT A LATER DECISION OF THE HONBLE GUJARAT HIGH COURT ION THE CASE OF CIT VS ADARSH CO-OP. HOUSING SOCIETY LTD. 213 ITR 677 WAS APPLICABLE TO THE FACTS OF THE ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 5 PRESENT CASE. IN THE ABOVE MENTIONED CASE, THE SURP LUS ON DISSOLUTION WAS NOT TO BE DISTRIBUTED AMONGST THE M EMBERS AND WAS GOVERNED BY SECTION 115 OF THE GUJARAT CO-OPERATIVE SOCIETIES ACT IS APPLICABLE AND AS SUCH THE ABOVE DECISION BY THE HO NBLE GUJARAT HIGH COURT SHOULD HAVE BEEN APPLIED. THE LEARNED CO UNSEL FOR THE ASSESSEE REFERRED TO SECTIONS 114 AND 115 OF THE GU JARAT CO- OPERATIVE SOCIETIES ACT AND POINTED OUT THAT THE CO NDITIONS LAID DOWN IN THE ABOVE SECTIONS WERE APPLICABLE TO ALL SOCIET IES, INCLUDING THE ASSESSEE. A READING OF THE ABOVE SECTIONS MAKE IT C LEAR THAT THE SOCIETIES HAVE RIGHT TO DECIDE AS TO HOW IT SHOULD DISPOSE OFF ITS SURPLUS FROM THE BEGINNING STIPULATING AS TO HOW AN D WHEN THE SURPLUS ASSETS ARE TO BE DISTRIBUTED. THIS COULD BE DONE AT ANY STAGE AS THE SOCIETY IS COMPETENT TO INCORPORATE THIS KIN D OF BYELAW WITHIN THE PROVISIONS OF SECTIONS 114 AND 115 OF THE GUJAR AT CO-OPERATIVE SOCIETIES ACT. THE ASSESSEE IS A SOCIETY WHICH IS F UNCTIONING AND THE ABSENCE OF ANY BYELAW REGARDING DISTRIBUTION OF ASS ETS AT THE TIME OF LIQUIDATION; DO NOT AFFECT ITS AUTHORITY TO DISTRIB UTE THE ASSETS ON LIQUIDATION. THE ASSESSEE IS ALSO GOVERNED BY THE P ROVISIONS OF SECTIONS 114 AND 115 AS IN THE CASE OF CIT VS ADARS H CO-OP. HOUSING SOCIETY LTD. 213 ITR 677 AND ACCORDINGLY TH E DECISION IN THE ABOVE CASE SHALL BE APPLICABLE. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO REFERRED TO THE DECISION OF ITAT, COC HIN BENCH IN THE CASE OF BUS OPERATORS ASSOCIATION VS ACIT (2006) 10 0 TTJ 904, WHEREIN A SIMILAR QUESTION WAS DECIDED. IN THE ABOV E CASE, THE PROFIT EARNED WAS NOT TO BE DISTRIBUTED AMONGST THE MEMBER S AND IN THE CASE OF THE ASSOCIATION COMING TO AN END; SUCH PROF IT WOULD GO TO THE GOVERNMENT OR A BODY WITH THE SIMILAR OBJECTS. THE TRIBUNAL HELD THAT ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 6 THE ABOVE ASSESSEE WAS ENTITLED TO EXEMPTION. THE P ROVISIONS OF SECTION 115 OF THE GUJARAT CO-OPERATIVE SOCIETIES A CT ALSO MANDATE A SIMILAR DISTRIBUTION AND ACCORDINGLY IT WAS ARGUED THAT THE ABOVE DECISION WAS APPLICABLE TO THE FACTS OF THE PRESENT CASE. 5. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE ALLOWED THE APPEAL OF THE ASSESSEE BY HOLD ING THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION ON THE BASIS OF MUTUALITY. HIS FINDINGS IN PARA 2.5 TO 2.5.3 ARE REPRODUCED AS UND ER: 2.5 THE ISSUE HAS BEEN CONSIDERED. THE APPELLANT IS A CO-OPERATIVE SOCIETY. THE ASSESSING OFFICER DE NIED THE CLAIM OF EXEMPTION ON THE BASIS OF MUTUALITY ST ATING THAT THE APPELLANT DID NOT FULFILL THE CARDINAL PRI NCIPLE REGARDING DISTRIBUTION OF SURPLUS AMONGST ITS MEMBE RS IN THE EVENT OF LIQUIDATION OR WINDING UP. THE APPELL ANT CLEARLY EXPLAINED THAT EVEN THOUGH THE BYELAW WAS S ILENT ON THE QUESTION OF DISTRIBUTION OF SURPLUS IN THE E VENT OF LIQUIDATION, THE ASSOCIATION WAS GOVERNED BY SECTIO NS 114 AND 115 OF THE GUJARAT CO-OPERATIVE SOCIETIES ACT, WHICH PROVIDED THAT THE MEMBERS HAD THE RIGHT TO DECIDE T HE MODE OF DISTRIBUTION OF ASSETS AND THE REGISTRAR OF CO- OPERATIVE SOCIETIES HAVE TO DO THE SAME WITHIN THE RESTRICTIONS PLACED BY SECTIONS 114 AND 115. THE HO NBLE GUJARAT HIGH COURT HAD UPHELD THE CLAIM OF MUTUALIT Y IN THE CASE OF CIT VS ADARSH CO-OP. HOUSING SOCIETY LT D. REPORTED IN 213 ITR 677, WHEREIN A SIMILAR SITUATIO N HAD ARISEN. THE HONBLE GUJARAT HIGH COURT IN THIS CASE OBSERVED AS UNDER: THE PRIMARY CONDITION OF MUTUALITY BETWEEN THE ASSESSEE AND ITS MEMBERS IS THAT THE ASSESSEE WHICH COLLECTS MONEY FROM ITS MEMBERS, MUST APPLY THE SAME FOR THEIR BENEFIT NOT AS SHAREHOLDERS HAVING INTEREST IN ITS PROFIT BUT AS PERSONS THEMSELVES WHO HAVE ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 7 PUT UP THE FUND BY CONTRIBUTING TO IT. THERE MUST BE A THREAD OF AGENCY FOR ACTING FOR THE CONTRIBUTORS FOR ACHIEVING THE OBJECTIVES. IN THIS CONNECTION, THE OBSERVATIONS OF THE OF THE SUPREME COURT IN THE CASE OF ROYAL WESTERN INDIA TURF CLUB LTD. (1953) 24 ITR 551 ARE VERY MUCH RELEVANT. .. WHAT IS REALLY REQUIRED IS THAT ALL THE PARTICIPANTS MUST CONTRIBUTE TO THE FUND AS AGAINST MERELY BEING ENTITLED TO CONTRIBUTE. IT IS ALSO NOT NECESSARY THAT THE PARTICIPANTS IN THE SURPLUS NEED BE THE SAME INDIVIDUALS WHO HAVE CONTRIBUTED BUT THEY MUST BEAR THE SAME CHARACTER, NAMELY CONTRIBUTOR MEMBER. 2.5.1 IT WAS FURTHER OBSERVED THAT THE IDENTITY OF THE INDIVIDUAL AS CONTRIBUTORS AND PARTICIPANTS IS NOT ESSENTIAL BUT WHAT IS ESSENTIAL IS THE IDENTITY OF CHARACTER AS CONTRIBUTORS AND PARTICIPANTS. SO FAR AS THE RESTRI CTIONS PLACED BY SECTION 115 OF THE GUJARAT CO-OPERATIVE SOCIETIES ACT, WHICH PROHIBITS DIVISION OF SURPLUS ASSETS AMONGST ITS MEMBERS, THE FOLLOWING OBSERVATIONS WER E MADE: THE CORPUS OF FUND IS NOT DIVISIBLE AS SUCH PRO RATA BETWEEN THE MEMBERS ON THE WINDING UP OF THE SOCIETY. HOWEVER, THAT STATUTE ALSO PROVIDES THAT SUCH SURPLUS SHALL BE DEVOTED TO ANY OBJECT OR OBJECTS PROVIDED IN THE BYE-LAWS OF THE SOCIETY IF THEY SPECIFY THAT SUCH A SURPLUS SHALL BE UTILIZED FOR THE PARTICULAR PURPOSE. 2.5.2 IT WAS FURTHER OBSERVED THAT THE RIGHT OF TH E MEMBERS TO DEAL WITH THE SURPLUS IS NOT DESTROYED B UT IS ONLY RESTRICTED TO THE EXTENT THAT INSTEAD OF DIVID ING THE CORPUS PRO RATA, IT HAS BEEN CONFINED TO UTILISATIO N OR EXPENDING OF THE SURPLUS FOR THE OBJECTIVES AS PER THEIR OWN DECISION. THIS DOES NOT DETRACT FROM THE CONCEP T OF RETURN OF THE SURPLUS TO MEMBERS WHICH THEY HAVE ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 8 CONTRIBUTED IN MAKING THAT FUND. THE HONBLE COURT DISTINGUISHED ITS EARLIER DECISION IN THE CASE OF S HREE JARI MERCHANTS ASSOCIATION 106 ITR 542 POINTING OUT THA T IN THAT CASE DIVISION OF THE CORPUS WAS MADE UPON AMON GST NON-CONTRIBUTORS AS WELL BY VOLUNTARY ACT OF THE ME MBERS THEMSELVES. THE FACTS OF THE PRESENT CASE ARE SIMIL AR TO THE FACTS CONSIDERED BY THE HONBLE GUJARAT HIGH CO URT IN THE CASE OF CIT VS ADARSH CO-OP. HOUSING SOCIETY LT D. AND ACCORDINGLY, THE ABOVE DECISION WOULD APPLY. 2.5.3 THE DECISION RELIED UPON BY THE APPELLANT IN THE CASE OF BUS OPERATORS ASSOCIATION VS ACIT (2006 ) REPORTED IN 100 TTJ 904 IS ALSO SIMILAR TO THE FACT S OF THE PRESENT CASE. CONSIDERING THE ABOVE DECISION, IT IS CLEAR THAT THE APPELLANTS CLAIM OF MUTUALITY IS NOT HIT BY THE ABSENCE OF BYELAW REGARDING DISTRIBUTION OF ASSETS IN THE EVENT OF LIQUIDATION OR WOUNDING UP. ACCORDINGLY, I T IS HELD THAT THE APPELLANT HAS CLAIMED EXEMPTION ON THE BAS IS OF MUTUALITY. THE GROUND RAISED IS ALLOWED. 5.1 WITH REGARD TO THE ADDITION OF RS.24,49,026/- T HE AO FOUND THAT THE ASSESSEE HAD EARNED INTEREST OF RS.24,49,026/- AS INTEREST ON DEPOSITS DURING THE ASSESSMENT YEAR UNDER APPEAL. T HE ASSESSEE HAS SHOWN INTEREST INCOME OF RS.1,66,459/- ON DEPOS IT OF RS.2.36 CRORES IN CENTRAL BANK OF INDIA. THE ASSESSEE WAS R EQUESTED TO RECTIFY THE DISCREPANCY. THE ASSESSEE POINTED OUT T HAT IT WAS FOLLOWING CASH SYSTEM OF ACCOUNTING AND ACCORDINGLY INTEREST ON ACCRUAL BASIS WAS NOT TO BE ASSESSED. THE AO HOWEVE R, ON EXAMINATION OF THE RECORDS FOUND THAT THE INCOME SH OULD BE TAXED ON ACCRUAL BASIS AND MADE THE ADDITION ACCORDINGLY TRE ATING THE INTEREST INCOME AS INCOME FROM OTHER SOURCES. THE ASSESSEE P LEADED BEFORE THE LEARNED CIT(A) THAT INTEREST ON SURPLUS FUND IS EXEMPT ON PRINCIPLE OF MUTUALITY. CERTAIN DECISIONS WERE RELIED UPON IN SUPPORT OF THE ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 9 CONTENTION AND IT WAS ALSO SUBMITTED THAT THE ASSES SEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING AND HAD BEEN OFFERING TAX ON INTEREST RECEIPTS AS AND WHEN RECEIVED. THE LEARNED CIT(A) O N CONSIDERATION OF THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE A SSESSEE NOTED THAT IT IS ALREADY HELD THAT INCOME OF THE ASSESSEE IS EXEMPT ON PRINCIPLE OF MUTUALITY AS IS HELD ON OTHER GROUND A ND FURTHER THE ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING. T HEREFORE, EVEN ACCORDING TO AMENDED PROVISIONS OF SECTION 145 OF T HE IT ACT THE ASSESSEE WAS LIABLE TO FOLLOW DIRECT CASH OR MERCAN TILE SYSTEM OF ACCOUNTING. THEREFORE, ADDITION IS CLEARLY UNJUSTIF IED. ADDITION WAS ACCORDINGLY DELETED. 6. THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUTS ET SUBMITTED THAT IN ORDER TO AVOID PROTECTIVE LITIGATIONS ON TH E ABOVE ISSUES, THE ASSESSEE CO-OPERATIVE SOCIETY PASSED RESOLUTION NO. 6 IN THE ANNUAL GENERAL BODY MEETING HELD ON 11-03-2011 AND ADDED C LAUSE NO.9A TO THE BYELAW OF THE FEDERATION, IN THE CASE OF LIQUIDATION OF THE FEDERATION AFTER CLEARANCE OF ALL OUTSTANDING DUES/LIABILITIES BY THE LIQUIDATOR, REMAINING PROPERTY/ASSET WILL BE DISTRIBUTED AMONGST THE INST ITUTIONAL MEMBERS I. E. MEMBER SUGAR FACTORIES IN PROPORTION OF FINANCIAL CONTRIBU TION MADE BY THEM . COPY OF THE SAME IS FILED IN THE PAPER BOOK ALONG WITH ENGL ISH TRANSLATION. HE HAS SUBMITTED THAT THE ABOVE RESOLUTION HAS BEEN SA NCTIONED BY THE DIRECTOR OF SUGAR, GUJARAT STATE, GANDHINAGAR VIDE LETTER DATED 15-3- 2011 AND THE SAME WAS ADDED IN THE FORM NO.4 AS PER THE SANCTION DATED 15-3-2011. COPIES OF THE SAME ALONG WITH ENGL ISH TRANSLATION COPIES ARE FILED ON RECORD. THE TRUE COPY OF THE RE SOLUTION (PB-4) READS AS UNDER: ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 10 TRUE COPY OF RESOLUTION NO.6 OF THE ANNUAL GENERAL BODY MEETING OF THE GUJARAT STATE FEDERATION OF CO-OP. SUGAR FACTORIES LTD., GANDHINAGAR HELD ON 11 TH MARCH, 2011: RESOLUTION NO. 6: MOFIFICATION IN BYE-LAWS OF THE FEDERATION : IN CASE OF LIQUIDATION OF THE FEDERATION, AFTER CLEARANCE OF OUTSTANDING DUES / LIABILITIES BY THE LIQUIDATOR, REMAINING PROPERTY / ASSETS CAN BE DISTRIBUTED AMONGST INSTITUTIONAL MEMBERS I.E. MEMBER SUGAR FACTORIES, THERE IS NO PROVISION IN BY - LAWS OF THE FEDERATION. THE EXECUTIVE BODY MEETING OF THIS FEDERATION WHICH WAS HELD ON 22-06-2010 VIDE RESOLUTION NO.12 PROPOSED TO GENERAL BODY AND HENCE IT HAS BEEN UNANIMOUSLY DECIDED TO MAKE PROVISION IN BY-LAWS OF THIS FEDERATION AS INDICATED BELOW: 9(A) IN CASE OF LIQUIDATION OF THE FEDERATION, AF TER CLEARANCE OF ALL OUTSTANDING DUES / LIABILITIES BY THE LIQUIDATOR, REMAINING PROPERTY /ASSETS WILL BE DISTRIBUTED AMONGST INSTITUTIONAL MEMBERS I. E. MEMBER SUGAR FACTORIES IN PROPORTION OF FINANCIAL CONTRIBUTION MADE BY THEM. THE LEARNED COUNSEL FOR THE ASSESSEE ACCORDINGLY SU BMITTED THAT SINCE THE RESOLUTION PASSED RECENTLY, THE MATTER MA Y BE RESTORED TO THE FILE OF THE AO FOR RECONSIDERATION AND PASSING THE ORDER AFRESH IN ORDER TO DECIDE THE ABOVE ISSUES ONCE FOR ALL. THE LEARNED DR ALSO SUBMITTED THAT THE MATTER IN ISSUE MAY BE RESTORED TO THE FILE OF THE AO FOR RECONSIDERATION. 7. ON CONSIDERATION OF THE SUBMISSIONS OF THE PARTI ES, IN THE LIGHT OF RESOLUTION NO.6 OF THE ASSESSEE (SUPRA) WE SET A SIDE THE ORDERS OF ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 11 THE AUTHORITIES BELOW AND RESTORE BOTH THE ISSUES T O THE FILE OF THE AO FOR RECONSIDERATION OF THE ISSUES AFRESH. THE MAIN REASON FOR REJECTING THE CLAIM OF THE ASSESSEE WAS THAT THE ASSESSEE HAS NOT FULFILLED THE CONDITION REGARDING DISTRIBUTION OF SURPLUS ASSETS ONLY AMONGST THE MEMBERS OF THE ASSOCIATION ON ITS DISSOLUTION. IN T HE ABSENCE OF CLEAR CUT PROVISIONS FOR DISTRIBUTION OF SURPLUS, CLAIM O F THE ASSESSEE ON BOTH THE GROUNDS OF APPEAL WAS REJECTED. THE ASSESS EE HAS HOWEVER, MODIFIED THE BYE-LAWS BY ADDING CLAUSE 9 (A) REFERR ED TO ABOVE WHICH WAS ACCORDED SANCTION BY DIRECTOR OF SUGAR, GANDHIN AGAR AND ACCORDINGLY IT WAS PUT IN FORM NO.4 ALSO. THESE PA PERS WERE NOT BEFORE THE AO FOR CONSIDERATION. THEREFORE, THE LEA RNED COUNSEL FOR THE ASSESSEE RIGHTLY CONTENDED THAT THE MATTER MAY BE RESTORED TO THE FILE OF THE AO ON BOTH THE GROUNDS FOR RECONSIDERAT ION IN ACCORDANCE WITH THE ABOVE NEW DEVELOPMENT BY MODIFYING THE BYE -LAWS OF THE FEDERATION. THE LEARNED DR HAS NO OBJECTION FOR RES TORING THE MATTER TO THE FILE OF THE AO ON BOTH THE GROUNDS OF APPEAL . ACCORDINGLY, THE ORDERS OF THE AUTHORITIES ARE SET ASIDE AND BOTH TH E GROUNDS ARE RESTORED TO THE FILE OF THE AO FOR RECONSIDERATION IN THE LIGHT OF THE DOCUMENTS NOW PLACED ON RECORD BY THE LEARNED COUNS EL FOR THE ASSESSEE ABOVE. THE AO SHALL PASS REASONED ORDER BY GIVING REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THE RESULT, APPEAL OF THE REVENUE IN ITA NO.1129/AH D/2007 FOR ASSESSMENT YEAR 2003-04 IS ALLOWED FOR STATISTICAL PURPOSES. 8. THE LEARNED CIT(A) FOLLOWED THE SAME ORDER IN TH E REMAINING ASSESSMENT YEARS 2004-05 AND 2005-06. BY FOLLOWING THE ORDER IN ASSESSMENT YEAR 2003-04, THE REMAINING ORDERS OF TH E AUTHORITIES ITA NO.1129, 1727 AND 3679/AHD/2007 ITO, W-2, GANDHINAGAR VS. GUJARAT STATE FEDERATION OF CO-OP SUGAR FACTORIES LTD. 12 BELOW ARE ALSO SET ASIDE AND THE MATTER IN ISSUES A RE RESTORED TO THE FILE OF THE AO FOR RECONSIDERATION AFRESH AS DIRECT ED ABOVE. 9. IN THE RESULT, ALL THE APPEALS OF THE REVENUE AR E ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 25-03-2011 SD/- SD/- (D. C. AGRAWAL) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 25-03-2011 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD