RAJARAMBAPU PATIL SSK ,SANGLI vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 2,, SANGLI

This appeal preferred by the assessee emanates from the order of the Ld. CIT(Appeal)-1, Kolhapur dated 27.04.2017 for the assessment year 2013- 14 as per the grounds of appeal on record.

Though the assessee has raised multiple grounds of appeal, the crux of the grievance of the assessee is with regard to “addition on account of sale of sugar at concessional rate to the members/ other farmers by the assessee”.

At the very outset, the Ld. Counsel for the assessee submitted that the solitary issue raised in the present appeal is covered by the decision of the Co-ordinate Bench of the Tribunal, Pune in the case of Manganga SSK Ltd. Vs. ACIT & Others, and ITA No.545/PUN/2017 for the assessment years 2010-11 and 2012-13 and Others.

The Ld. DR has fairly conceded to the submissions made by the Ld. AR of the assessee.

We have perused the case records and heard the rival contentions. We have also considered the decision of the Co-ordinate Bench of the Tribunal, Pune relied on the by the Ld. AR of the assessee. The Co-ordinate Bench of the Tribunal, Pune in the case of Manganga SSK Ltd. Vs. ACIT & Others (supra.) on the issue has held as follows:

On an analysis of the position discussed above, it clearly emerges that after the advent of the Hon‟ble Supreme Court judgment in Krishna SSK Ltd. (supra), the earlier judgments rendered by the Hon‟ble High Courts and the orders passed by the Tribunal in favour of the assessee do not continue to hold the field anymore. Our attention has not been drawn towards judgment of any Hon‟ble High Court or order of the Tribunal in which the issue under consideration has been decided after considering the judgment of the Hon‟ble Supreme Court in Krishna SSK (supra), which thereby renders the issue in question as virgin.

At this stage, it is relevant to note that the Hon‟ble Supreme Court in Tasgaon SSK Ltd. (supra) had an occasion to deal with a connected issue of purchase of sugarcane by the sugar factories from its members at excessive price, which we have discussed hereinabove. The AOs in that group of matters had opined that the difference between the price paid as per clause 3 of the Control Order, 1966 determined by the Central Government, being, the Statutory Minimum Price (SMP) and the price determined by the State Government under clause 5A of the Control Order, 1966, being SAP/Additional Price, was in the nature of „distribution of profits‟ and hence, not deductible as expenditure. Such an issue came to be decided by the Hon‟ble High Courts in favour of the assessee. When the Revenue brought the matter for consideration before the Hon‟ble Supreme Court, their Lordships held that the SMP determined under clause 3 of the Control Order, 1966 which is paid at the beginning of the season is deductible in the entirety but the difference between the SMP determined under clause 3 and SAP/Additional Price determined under clause 5A has an element of „distribution of profit‟, which cannot be allowed as deduction. That is how, the Hon‟ble Supreme Court remitted the matter to the file of AO for considering the modalities and manner in which SAP/Additional price is decided and to carry out an exercise of considering the 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 Control Order, 1966 and thereafter determine as to what part of the differential amount would form part of the „distribution of profit.‟ Relevant discussion has been made in Para 9.4 of the judgment in which it has been categorically held that: “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.‟ The matter was sent back to the AO with certain directions to find out the element of appropriation of profits embedded in the price fixed under clause 5A.

In view of the above judgment in the case of Tasgaon SSK Ltd.(supra), it is clear that the Hon‟ble Apex Court has, in principle, held that the excessive cane price paid to the members is, to some extent, in the nature of „appropriation of profit‟ which should be charged to tax in the hands of the assessee. When we consider the nature of transaction dealt with by the Hon‟ble Supreme Court, being, purchase of sugarcane as raw material in the sugar industry at excessive price in juxtaposition to the sale of sugar as finished product to members at concessional price, we find that both of them directly affect the gross profit of the sugar mills. If a part of the excessive purchase price of sugarcane paid has been held to be in the nature of „appropriation of profit‟, then obviously a part of the concession given to members on sale of sugar, by the same standard and on the same parity of reasoning, would also have to be considered as „appropriation of profit‟.

At this juncture, it is pertinent to note that the AO has held that the amount in question is disallowable not u/s 37(1) of the Act, but: `supply of sugar at concessional rate, as against the prevalent market price, is nothing but an appropriation of profit and in the nature of application of income‟. Thus, the view point of the AO of `appropriation of profit‟ by the assessee to its members by means of selling sugar at concessional price is based on the premise that a co-operative society and its members are not different from each other in the co-operative structure.

In case we proceed with the presumption that the assessee and its members are separate from each other and the transaction is between two independent parties, then patently, there can be no question of earning any income by selling sugar at a price lower than the market price. Tax is levied on income earned and not on loss of potential income. Neither the AO has invoked any specific provision nor the ld. DR has invited our attention towards any provision in the Act warranting the addition in the given circumstances. Further, it is not anyone‟s case that the provisions of section 92C are attracted.

Coming back to the AO‟s case of `appropriation of profits‟, which point of view has been noted with approval by the Hon‟ble Supreme Court in para 9.4 of the judgment in Tasgaon (supra) holding excess purchase price of sugarcane to be `certainly be and/or said to be an appropriation of profit‟, we find that such a condition of appropriation of profit pre-supposes some profit which is appropriated directly or indirectly amongst the members. One needs to draw a line of distinction between two situations, viz., the first in which profit is earned from business operations and is passed on to members and the second, in which potential profit is not earned from members or to simply put, a case of loss of potential profit. Whereas, the appropriation of profit is possible in the first situation, which is akin to the purchase of sugarcane from the members at excessive price resulting in diverting the profit earned from normal business operations to the members in the form of excess price of sugarcane, the appropriation of profit is not possible in the second situation, which is akin to the sale of sugar at concessional rate. The second situation of selling sugar at concessional rate is in the nature of foregoing potential profit which would have been otherwise earned had sugar been sold at market price. As the second situation has the effect of foregoing potential profit, it cannot be equated with an appropriation of profit except where the sale of sugar is made at below the actual cost.

Again apropos the view point of the AO in treating the co-operative society and its members as one and the same thing with the theory of appropriation of profit, we underscore the settled legal position that no one can make profit from self. In this regard, it will be befitting to note the judgment of the Hon‟ble Summit Court in Sir Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC), in which the assessee employed the method of valuing the closing stock at the cost price. The deeds of trust were valued for the purpose of stamp at the market value of the shares and silver bars prevailing at the dates of their execution. The assessee, however, showed the transfer of these shares and silver bars to the trustees in the books of account at the cost price thereof by contending that the market value of the said shares and silver bars, on which the stamp duty was based, could not be the basis for computing his income from the stock-in-trade thus transferred. The Income Tax Officer did not accept this contention and assessed the profit at the difference between the cost price of the said shares and silver bars and the market value thereof at the date of their withdrawal from the business. The AAC, the Tribunal as also the Hon‟ble High Court rejected the contention of the assessee. When the matter was brought to the Hon‟ble Apex Court, it held, by a majority view that : `The appellant was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the appellant derived no income from it. .…. In the present case disregarding technicalities it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances, it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and IT law.‟ The sequitur is that no person can earn profit from himself and there can be no contemplation of profit when the owner withdraws goods from the business. Such withdrawal of goods needs to be valued at cost price only and not the market price.

Reverting to the facts of the extant case, we find that the AO has made out a case of appropriation of profit on sale of sugar to members at concessional rate. We have noted above that the appropriation of profit pre-supposes profit which can be appropriated to the members of the co- operative society. In so far as the purchase of sugarcane from members at higher price is concerned, it clearly amounts to business profit percolating to the members in the shape of excess cane price given to the members. For example, if the SMP of sugarcane is Rs.100/- and a sugar factory is purchasing sugarcane from its members at say, Rs.120/-, in a way it is passing on its profit earned from normal business transactions to its members to the extent of excess price paid. This is the essence of the judgment in the case of Tasgaon SSK Ltd. (supra.). But the transaction of sale of sugar to members at concessional rate cannot be considered as appropriation of profit, but a case of not earning some potential profit. To illustrate, if sugar is sold at concessional price at Rs.80/- against the prevalent price of Rs.100/-, what the sugar mill is doing is that it is charging its members less by Rs.20/-, vis-a-vis sale made to non-members. This differential amount of Rs.20/- is loss of potential profit and not appropriation of profit. Going by the ratio in the case of Sir Kikabhai (supra), the assessee society cannot earn profit from the sale of sugar to its members.

It is further relevant to note that difference between the market price of sugar and concessional sale price may entail two situations. The first one is of simplicitor loss of potential profit and second one is of actual loss of profit when sugar is sold to members at below its cost price. Whereas, the simplicitor loss of potential profit cannot be termed as appropriation of profit, sale of sugar to members at below its cost price results in appropriation or distribution of profits earned from normal business operations to members in the garb of sale at a price below the cost price. The position can be understood with the help of an example. Suppose market price of sugar is Rs.100/- and the cost price is Rs.80/-. If the assessee sells sugar at concessional rate to its members at, say, Rs.85/- per kg., it is obviously recovering its cost of Rs.80/- in addition to earning profit of Rs.5/-. In such a situation, the differential amount of Rs.15/- (Rs.100 – Rs.85) cannot be charged to tax because it is a case of loss of potential profit and not appropriation of profit. If, on the other hand, in the given scenario of market price of sugar at Rs.100, the assessee sells sugar at concessional rate of Rs.75/- to its members, which is below its own cost of Rs.80/-, then the differential amount of Rs.5/- (Rs. 80 minus Rs.75) would obviously be `appropriation of profit‟ to members that was earned from normal business operations and passed on to members in the shape of sale price below the cost price. Whereas such differential amount of Rs.5/- is „appropriation of profit‟ to members which should be charged to tax, the difference of Rs.15 (Rs.100 minus Rs.85) is loss of potential profit which cannot be characterized as appropriation of profit so as to magnetize taxability.

The ld. AR has relied on the judgment of Hon‟ble Supreme Court in the case of A. Raman & Co. (supra) by contending that the law does not require a trader to make maximum profit and hence there can be no taxability on the basis of notional profit which was not actually earned from the members. We do agree with this proposition provided it is not a case of appropriation of profit. We have discussed hereinabove that in case of transaction between two independent parties, the assessee is not obliged to earn maximum profit. However, this proposition is not attracted in case the transaction is not commercial or genuine. Such a proposition cannot be extended to the cases where the amount of profit is intentionally allowed to be passed on to the members or owners. In the same case of A. Raman & Co. (supra) and in the same para no. 8, the immediately next line is an exception to the general rule whereby their Lordships noted that: `By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee.‟ Precisely, this is the proposition in the case of Tasgaon SSK Ltd. (supra) as well that an income belonging to the assessee which has been appropriated to the members should be brought to tax in the hands of the assessee only. Similar is the position in so far as sale of sugar at concessional rate to members below the cost price is concerned in as much as the income to that extent which was earned by the assessee from its normal business operations shall be passed on to the members in the form of sale of sugar at a rate lower than its cost price.

The ld. CIT(A) in the instant batch of appeals has confirmed the addition towards the difference between the Levy price and the concessional price (upto 5 kg. per member per month) and to the extent of difference between the Market price of sugar and Concessional price (over and above 5kg. per member per month). In this process, the assessees got taxed even for the potential profit to the extent of difference between the cost price and market/levy price, as the case may be. Ergo, we hold that such a straightway difference between the market/levy price and the concessional price of sugar cannot be construed as appropriation of profit leading to addition as has been extantly done. The impugned orders to this extent are set aside and the matters are restored to the file of the respective AOs for first ascertaining the cost price of sugar to each assessee and then make addition on this issue by treating it is as a case of appropriation of profit only to the extent of the concessional sale price which is below the cost price. However, it is clarified that in determining cost price of sugar to the factory, not only all the direct costs but all the indirect costs should also be taken into consideration. In other words, all items of debit to the Trading and Profit and loss account would constitute cost base. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh proceedings on this issue.”

In the result, appeal of the assessee is allowed for statistical purposes.

The CIT(Appeals)-1, Kolhapur.