PADMASHRI DR. D. Y. PATIL SAHAKARI SAKHAR KARKHANA LTD.,KOLHAPUR vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, KOLHAPUR

PER SATBEER SINGH GODARA, J.M.

These assessee’s twin appeals for assessment years 2016-2017 & 2017-2018, arise against the National Faceless Appeal Centre [in short “NFAC”] Delhi’s separate Din and Order Nos.ITBA/NFAC/S/250/2022-23/1049653001(1) & 1049653084(1), both dated 11.02.2023, assessment year-wise, respectively, involving proceedings u/s. 143(3) of the Income Tax Act, 1961 (in short “the Act”).

Heard both the parties. Case files perused.

2 ITA.No.337/PUN./2023 2. It emerges during the course of hearing that the assessee has raised its sole substantive grounds in both the appeals challenging correctness of both the learned lower authorities action disallowing its alleged sugar cane purchase price paid to the cane growers in excess of the fair and remunerative price, “FRP” involving Rs.2,75,00,238/- and Rs.16,63,46,871/- assessment year-wise respectively and sugar sold at concessional rates to them having the amount in question of Rs.21,04,240/- in former appeal for assessment year 2016-17 in assessment orders dated 29.11.2018 and 30.12.2019 for assessment years 2016-17 and 2017-18 respectively, as upheld in the NFAC’s lower appellate order.

“I. EXCESSIVE SUGARCANE PRICE PAID

3 ITA.No.337/PUN./2023 towards of excessive sugarcane price paid to members as well as non-members of the respective assessees. On a representative basis, we are espousing the facts in the case of Majalgaon Sahakari Sakhar Karkhana Limited Vs. ACIT, Circle-3, Aurangabad – ITA No.308/PUN/2018 for the assessment year 2013-14. The assessee is engaged in the business of manufacturing of white sugar. During the course of assessment proceedings, the AO observed that the assessee paid excessive cane price, over and above the Fair and remunerative price (FRP) fixed by the Government, to its members as well as non-members. On being called upon to justify such deduction, the assessee gave certain explanation by submitting that such payment was solely and exclusively in connection with the business and the entire amount was deductible u/s.37(1) of the Income-tax Act, 1961 (hereinafter also called `the Act’). Relying on the judgment of Hon’ble Supreme Court in the case of DCIT Vs. Shri Satpuda Tapi Parisar S.S.K. Ltd. and others (2010) 326 ITR 402, the AO opined that the excessive price paid was in the nature of `distribution of profits’ and hence not deductible. This is how, he computed the excessive cane price paid both to the members and non-members at Rs.22,02,95,387/- and made addition for the said sum. The ld. CIT(A) echoed the assessment order on this point.

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5 ITA.No.337/PUN./2023 sales thereof including the price to be paid to the cane growers. Clause 3 of the Sugar Cane (Control) Order, 1966 authorizes the Government to fix minimum sugarcane price. In addition, the additional sugarcane price is also payable as per clause 5A of the Control Order, 1966. The AO in that case concluded that the difference between the price paid as per clause 3 of the Control Order, 1966 determined by the Central Government and the price determined by the State Government under clause 5A of the Control Order, 1966, was in the nature of `distribution of profits’ and hence not deductible as expenditure. He, therefore, made an addition for such sum paid to members as well as non-members. When the matter finally came up before the Hon’ble Apex Court, it noted that clause 5A was inserted in the year 1974 on the basis of the recommendations made by the Bhargava Commission, which recommended payment of additional price at the end of the season on 50:50 profit sharing basis between the growers and factories, to be worked out in accordance with the Second Schedule to the Control Order, 1966. Their Lordships noted that at the time when additional purchase price is determined/fixed under clause 5A, the accounts are settled and the particulars are provided by the concerned Co-operative Society as to what will be the expenditure and what will be the profit etc. Considering the fact that Statutory

6 ITA.No.337/PUN./2023 Minimum Price (SMP), determined under clause 3 of the Control Order, 1966, which is paid at the beginning of the season, is deductible in the entirety and the difference between SMP determined under clause 3 and SAP/additional purchase price determined under clause 5A, has an element of distribution of profit which cannot be allowed as deduction, the Hon’ble Supreme Court remitted the matter to the file of the AO for considering the modalities and manner in which SAP/additional purchase price/final price is decided. He has been directed to carry out an exercise of considering accounts/balance sheet and the material supplied to the State Government for the purpose of deciding/fixing the final price/additional purchase price/SAP under clause 5A of the Control Order, 1966 and thereafter determine as to what amount would form part of the distribution of profit and the other as deductible expenditure. The relevant findings of the Hon’ble Apex Court are reproduced as under :-

“9.4. ..... Therefore, to the extent of the component of profit which will be a part of the final determination of SAP and/or the final price/additional purchase price fixed under Clause 5A would certainly be and/or said to be an appropriation of profit. However, at the same time, the entire/whole amount of difference between the SMP and the SAP per se cannot be said to be an appropriation of profit. As observed hereinabove, only that part/component of profit, while determining the final price worked out/SAP/additional purchase price would be and/or can be said to be an appropriation of profit and for that an exercise is to be done by the assessing officer by calling upon the assessee to produce the statement of

7 ITA.No.337/PUN./2023 accounts, balance sheet and the material supplied to the State Government for the purpose of deciding/fixing the final price/additional purchase price/SAP under Clause 5A of the Control Order, 1966. Merely because the higher price is paid to both, members and non-members, qua the members, still the question would remain with respect to the distribution of profit/sharing of the profit. So far as the non-members are concerned, the same can be dealt with and/or considered applying Section 40A (2) of the Act, i.e., the assessing officer on the material on record has to determine whether the amount paid is excessive or unreasonable or not........

9.5 Therefore, the assessing officer will have to take into account the manner in which the business works, the modalities and manner in which SAP/additional purchase price/final price are decided and to determine what amount would form part of the profit and after undertaking such an exercise whatever is the profit component is to be considered as sharing of profit/distribution of profit and the rest of the amount is to be considered as deductible as expenditure.”

8 ITA.No.337/PUN./2023 profit embedded in the price paid under clause 5A, by considering the statement of accounts, balance sheet and other relevant material supplied to the State Government for the purpose of deciding/fixing the final price/additional purchase price/SAP under this clause. The amount relatable to the profit component or sharing of profit/distribution of profit paid by the assessee, which would be appropriation of income, will not be allowed as deduction, while the remaining amount, being a charge against the income, will be considered as deductible expenditure. At this stage, it is made clear that the distribution of profits can only be qua the payments made to the members. In so far as the non- members are concerned, the case will be considered afresh by the AO by applying the provisions of section 40A(2) of the Act, as has been held by the Hon’ble Supreme Court supra. Needless to say, the assessee will be allowed a reasonable opportunity of hearing by the AO in such fresh determination of the issue.”

3.1. Learned coordinate bench has adopted the very course of action regarding sale of sugar made to members in issue as under :

II. ADDITION FOR SUGAR GIVEN TO MEMBERS AT CONCESSIONAL RATES – [Appeals in which Krishna Sahakari

9 ITA.No.337/PUN./2023 Sakhar Karkhana Limited (SC) not considered by lower authorities ]

10 ITA.No.337/PUN./2023 custom in the Co-operative sugar industry?; and whether any Resolution has been passed by the State Government supporting the practice?; The CIT(A) would also consider on what basis the quantity of the final product, i.e. sugar, is being fixed for sale to farmers/cane growers/Members each year on month-to-month basis, apart from others from Diwali?” The issue under consideration can be decided by an appropriate lower authority only on the touchstone of the relevant factors noted in the above judgment. In our considered opinion, it would be just and fair if the impugned orders on this score are set aside and the matter is restored to the file of AOs, instead of to the CITs(A), for fresh consideration as to whether the difference between the average price of sugar sold in the market and that sold to members at concessional rate is appropriation of profit or not, in the light of the directions given by the Hon’ble Supreme Court in the case of Krishna Sahakari Sakhar Karkhana Limited (supra). Restoration to the AO is necessitated because, following the judgment of the Hon’ble Apex Court in the case of Tasgaon Taluka S.S.K. Ltd. (supra), we have remitted the issue of payment of excessive price to the file of AO, and as such, the instant issue cannot be sent to ld. CIT(A) as it would amount to simultaneously sending one part of

11 ITA.No.337/PUN./2023 the same assessment order to the AO and other to the CIT(A), which is not appropriate. We order accordingly.”

3.2. The Revenue’s case therefore is that we ought to adopt judicial consistency in deciding the assessee’s instant former and latter substantive ground in assessment year 2016-17 and sole substantive ground in assessment year 2017-18 as well.

12 ITA.No.337/PUN./2023 Memorandum thereto issued in very terms. Mr. Joshi’s case therefore is that now since there is much more clarity on the above twin issues, the Assessing Officer may also be directed to consider all these latest amendments and clarifications in his consequential proceedings.

Order pronounced in the open Court on 15.05.2023.

Sd/- Sd/- [DR. DIPAK P. RIPOTE] [SATBEER SINGH GODARA] ACCOUNTANT MEMBER JUDICIAL MEMBER Pune, Dated 15th May, 2023 VBP/-

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Copy to

Assistant Registrar, ITAT, Pune Benches, Pune.