C.I.T.,NASHIK vs. SHRI SATPUDA TAPI PARISAR SSK LTD
What did the Supreme Court hold?
The Supreme Court noted that a large number of questions remained unanswered and that the applicability of Section 40A(2) was linked to Sections 28 and 37. The Court observed that the Assessing Officer would need to consider various factors, including the business operations, government resolutions, the modalities of SAP and SMP determination, and timing differences. Crucially, the Assessing Officer must inquire whether any provision made was out of profits or gross receipts, and whether the differential payment related to the cost of sugarcane or profit sharing among society members. The Court also highlighted the need to examine the theory of overriding title concerning income accrual or application. Since these questions had not been examined by the authorities below, and the issue was likely to recur, the Court remitted the cases to the concerned Commissioner of Income Tax (Appeals) for fresh adjudication. Both parties were granted liberty to amend their pleadings, and the Court expressed no opinion on the merits, allowing parties to argue uninfluenced by observations in impugned judgments.
What were the facts?
These appeals by the Dy. Commissioner of Income Tax, Nashik, and others arise from orders concerning Shri Satpuda Tapi Parisar SSK Limited and other assessees. The core issue revolves around the applicability of Section 40A(2) of the Income Tax Act, 1961. The Department contends that the differential amount between the State Advised Price (SAP) and the Market Price (SMP) paid to cane growers, determined after the finalization of accounts, constitutes an appropriation of profits rather than an allowable business expense under Section 37. The assessees argue that they are legally bound to pay the SAP fixed by the State Government, and this payment is an expense incurred for business, not an appropriation of profits, as profits can only be determined after deducting all expenses.
What were the issues?
1. Whether the differential payment made by the assessee(s) to cane growers after the close of the financial year or balance sheet date constitutes an expenditure under Section 37 of the Income Tax Act, 1961? 2. Whether such differential payment, applying the real income theory, constitutes an expenditure or a distribution of profits? Assessee's Contentions: The assessees argue that they are obligated to pay the SAP fixed by the State Government. They contend that the SAP is determined based on their recommendations after account finalization, but this does not make the payment an appropriation of profits. Profits can only be determined after deducting all business expenses, including the SAP. They rely on the principle that expenses incurred for business are deductible. Revenue's Contentions: The Department argues that the SAP, determined after account finalization and based on the assessee's recommendations, represents an appropriation of profits, not an expense under Section 37. They contend that the differential amount between SAP and SMP is not a genuine business expense but rather a distribution of profits to cane growers.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cited by 8 judgments on BharatTax
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- Shree Adinath Sahakari Sakhar Karkhana Ltd, Solapur v. Deputy Commissioner of Income-Tax, Circle - 1, SolapurPune · 2022-06-15
- Shree Adinath Sahakari Sakhar Karkhana Ltd, Solapur v. Deputy Commissioner of Income-Tax, Circle - 1, SolapurPune · 2022-06-15
- Shree Adinath Sahakari Sakhar Karkhana Ltd, Solapur v. Deputy Commissioner of Income-Tax, Circle - 1, SolapurPune · 2022-06-15
Cause title — parties, addresses and appearances
O R D E R Delay condoned.
Leave granted in special leave petitions.
Having heard learned counsel at length on the applicability of Section 40A(2) of the Income Tax Act, ...4/- 1961, as it stood at the relevant time, we are of the view that large number of questions have remained unanswered in these cases.
The applicability of Section 40A(2) of the Income Tax Act, 1961 [`Act', for short] is linked to computation under Section 28 and Section 37 of the Act. It is the case of the Department in all these cases that the State Advised Price [S.A.P.] is determined on the basis of the price recommended by the assessee(s) after the finalisation of accounts and, therefore, the differential amount between S.A.P. and S.M.P. would constitute appropriation of profits and not expenditure/expense under Section 37 of the Act. On the other hand, it is the case of the assessee(s) that they are bound to pay to the cane growers the final cane price as per the S.A.P. fixed by the State Government and the mere fact that S.A.P. fixed by the State Government is based on the price recommended by the assessee(s) after finalisation of accounts would not constitute appropriation of profits because appropriation would arise only after the profits are determined and profits can be determined only after all the expenses incurred for the business are deducted from the gross income.
On the above contentions, two questions were required to be considered by the Department, which are as follows: “Whether the above-mentioned differential payment made by the assessee(s) to the cane growers after the close of the financial year or after the balance-sheet date would constitute an expenditure under Section 37 of ...5/- the Income Tax Act, 1961; and whether such differential payment would, applying the real income theory, constitute an expenditure or distribution of profits?”
In deciding the above questions, the Assessing Officer will take into account the manner in which the business works, resolutions of the State Government, the modalities and the manner in which S.A.P. and S.M.P. are decided, the timing difference which will arise on account of the difference in the accounting years, etc. In a given case, if the assessee has made a provision in its accounts, then the Assessing Officer shall enquire whether such provision is made out of profits or from gross receipts and whether such differential payment is relatable to the cost of the sugarcane or whether it is relatable to the division of profits amongst the members of the Society? One of the points which will also arise for determination by the Assessing Officer will be on the theory of over-riding title in the matter of accrual or application of income. Therefore, in each of these cases, the Assessing Officer will decide the question as to whether the obligation is attached to income or to its source.
None of these questions have been examined by the Authorities below. These questions are required to be examined because, in these case, we are not only concerned with the applicability of Section 40A(2) of the Act but we ...6/- are primarily required to consider whether the said differential payment constitutes an expense or distribution of profits? Ordinarily, we would not have remitted these matters, particularly when they are for Assessment Year 1992-1993, but, for the fact that this issue is going to arise repeatedly in future. It will also help the assessee(s) in a way that they will have to re-write their accounts in future depending upon the outcome of this litigation. Therefore, in the interest of justice, we remit these cases to the concerned Commissioner of Income Tax (Appeals). We make it clear that both the parties are given liberty to amend their pleadings before the Commissioner of Income Tax (Appeals) takes up the matter for final hearing. We express no opinion on the merits of the case. The parties are at liberty to argue their respective points uninfluenced by any observations made in the impugned judgements on the applicability of Section 28 or Section 37 of the Act.
The civil appeals filed by the Department, accordingly, stand disposed of with no order as to costs. ......................J. [S.H. KAPADIA] ......................J. [H.L. DATTU] New Delhi, January 20, 2010.
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