BHOGAWATI SAH. SAKHAR KARKHANA LTD,,KOLHAPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1,, KOLHAPUR

A common issue involved in almost all the appeals is against the addition made by the Assessing Officer (AO) towards of excessive sugarcane price paid to members as well as non-members of the respective assessees. The facts common to almost all the appeals are that the assesses are 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 and made addition for the said sum. The ld. CIT(A) in some cases deleted the addition, fully or partly, whilst in others the addition got sustained. This led to filing of the cross appeals both by the assessee as well as the Revenue before the Tribunal.

We have heard both the sides and gone through the relevant material on record. There is consensus ad idem between the rival parties that the issue of payment of excessive price on purchase of sugarcane by the assesses is no more res integra in view of the recent judgment of Hon‟ble Supreme Court in CIT Vs Tasgaon SSK Ltd. (2019) 412 ITR 420 (SC). The

Both the sides are unanimously agreeable that the extant issue of deduction for payment of excessive price for purchase of sugarcane, raised in most of the appeals under consideration, is squarely covered by the aforesaid judgment of the Hon‟ble Supreme Court. Respectfully following the precedent, we set-aside the impugned orders on this score and remit the matter to the file of the respective A.Os. for deciding it afresh as per law in consonance with the articulation of law by the Hon‟ble Supreme Court in the aforenoted judgment. The AO would allow deduction for the price paid under clause 3 of the Sugar Cane (Control) Order, 1966 and then determine the component of distribution of 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.

It is noted that in some of the appeals, the assessees have raised an alternate ground for allowing deduction u/s.80P in respect of the addition.

The ld. ARs, in some of the cases, which were represented by them, were fair enough not to press such ground as it is only an alternate ground and having become infructuous in view of the restoration of the matter to the AO. No argument was advanced in support of such ground in other cases, even where the ld. ARs participated in proceedings before the Tribunal. Therefore, the said alternate ground in all such cases is dismissed.

Apart from the above issue, which is common in almost all the appeals in this batch, there are certain appeals having other issues also. We will take up such issues one by one.

This issue has also been raised in most of the appeals under consideration.

On a representative basis, we are taking up the appeal filed by Manganga SSK Ltd. in ITA No.344/PUN/2017. The factual matrix of this issue is that the Assessing Officer (AO) observed during the course of assessment proceedings that the assessee had sold/supplied sugar to its members at concessional rate. On being called upon to explain as to why the difference between the Fair Market price and the Concessional price should not be disallowed as it was nothing but distribution of profit, the assessee relied on the judgment in CIT Vs. Terna Shetkari SSK Ltd. (2008) 168 Taxman 266 (Bom.) to contend that similar issue was not pressed by the ld. DR before

The assessees under consideration were represented by various ld. Counsel, who made elaborate arguments. They, inter alia, relied on certain decisions to bolster the argument that there can be no addition on account of sale of sugar at concessional price to the members of the assessee co- operative societies. It was submitted, by mainly relying on the judgment of Hon‟ble Supreme Court in the case of A. Raman and Co. (1968) 67 ITR 11 (SC), that the law does not oblige a trader to make maximum profit out of his trading transactions. Reliance was also placed on certain other decisions including CIT Vs. Calcutta Discount Co. Ltd. 91 ITR 8 (SC); H.M. Kashiparekh & Co. Ltd. Vs. CIT 39 ITR 706 (Bom.); CIT Vs. Shoorji Vallabhdas & Co. 46 ITR 144 (SC); Rogers Pyatt Shellac & Co. Vs. Secretary of State for India 1 ITC 363 (Cal.); Union of India Vs. Azadi Bachao Andolan 263 ITR 706 (SC); and Vodafone International Holdings B.V. Vs. Union of India 341 ITR 1 (SC) to contend that the profit charged to tax by the authorities below was not in accordance with law as it amounted to taxing notional income.

Per Contra, the ld. DR relied on the judgment of Hon‟ble Supreme Court in Tasgaon SSK Ltd. (supra) to contend that the authorities below rightly treated the difference between the Fair Market price and Concessional price charged from members of the assessees co-operative societies as „appropriation of profit‟. For supporting the charging of lower price for sugar sold to members as constituting income, the ld. DR drew an analogy from the case of Tasgaon SSK Ltd. (supra) by submitting that, in that case, the price paid over and above the statutory market price for purchase of sugarcane from the members/non-members of the societies has been held by the Hon‟ble Supreme Court as „appropriation of profit‟ and hence chargeable to tax. He submitted that there is no qualitative difference between the two situations viz., the first in which sugarcane is purchased from the members at excessive price and the differential amount is charged to tax as „appropriation of profit‟ and the second in which sugar is supplied at concessional price and the difference between the Fair Market Price and the Concessional Price is charged to tax again as „appropriation of profit‟.

We have heard both the sides and gone through the relevant material on record. Before proceeding further, we consider it expedient to mention that the issue of sale of sugar to members of a cooperative society at concessional price came up for consideration before various Benches of the Tribunal across the country. The Pune Benches of the Tribunal vide its order dated 08-08- 1996 in Chhatrapati Sahu SSK Ltd. Vs. DCIT (ITA No.1924/PN/1990), a copy placed on record, decided this issue in favour of the assessee by relying on the judgment in the case of A. Raman & Company (supra). Thereafter, several orders came to be passed by various benches of the Tribunal. All such orders were challenged by the Revenue before the respective Hon‟ble High Courts. In the case of Terna SSK Ltd. (supra), one of the issues raised by the Department

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

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

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

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

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

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

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

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.

Another issue raised in some of the appeals is against the confirmation of disallowance of contribution to Vasantdada Sugar Institute (VSI). The AO observed that the assessee made provision for Vasantdada Sugar Institute (VSI) contribution and claimed weighted deduction at 125% u/s.35(1)(ii) of the Act. The said amount was not paid to the institute. The same being only in the nature of provision, the AO did not allow deduction u/s.35(1)(ii). The ld. CIT(A) decided this issue in favour of the assessee by following an order passed by the Pune Benches of the Tribunal in the case of Bhima S.S.K. Ltd. (ITA No.1414/PUN/2000).

We have heard both the sides and gone through the relevant material on record. It is found that the ld. CIT(A) has determined this issue in favour of the assessee by following the order passed by the Pune Benches of the Tribunal in the case of Bhima S.S.K. Ltd. (supra). No material has been placed on record to show that this order of the Tribunal has been reversed or modified in any manner by the Hon‟ble High Court. Respectfully following the precedent, we decide this issue in favour of the assessee.

The Ld. AR of the assessee submitted that this issue is covered by the decision of the Co-ordinate Bench of the Tribunal, Pune dated 13.06.2019, the lead case being ACIT Vs. Shri Shankar SSK Ltd. in ITA No.382/PUN/2014

In some of the appeals, there are some new issues i.e. (i) „disallowance u/s.43B of the Act‟ and (ii) „addition on account of interest received‟ which we would adjudicate separately by following paragraphs:

The Assessing Officer observed from the chart of computation of deduction allowable u/s.43B (schedule to the audit report in form 3CD) that the assessee has computed the amount of allowable deduction in respect of the Cane purchase tax and the amount of Rs.1,28,32,666/- was deducted

During First Appellate Proceedings, the Ld. CIT(A) on the basis of Tax Audit Report (TAR) observed that the assessee claims to have paid the dues of Rs.62,49,936/- of the preceding year before filing the return for this year and therefore, deduction of Rs.62,49,936/- claimed by the assessee in his computation is actually to be added back and a further disallowance of Rs.33,07,638/- is to be made. Accordingly, the Ld. CIT(Appeals) deleted the disallowance of Rs.1,15,64,048/- made by the Assessing Officer as it was supposedly only towards cane purchase tax and the Assessing Officer is directed to disallow Rs.95,57,574/- ( Rs.62,49,936/- + Rs.33,07,638/-) u/s.43B of the Act.

At the time of hearing, the Ld. AR of the assessee submitted that the issue may be restored to the file of Assessing Officer for verification and for determination of quantum.

The Ld. DR has not raised any objection regarding restoring the issue to the file of Assessing Officer for verification and determination of quantum.

We have perused the case records and heard the rival contentions. We have also given considerable thought to the orders of the Ld. CIT(Appeals) as well as the Assessing Officer. We are of considered view that this issue needs verification regarding computation of income and Tax Audit Report regarding working of disallowance and also classification on quantum. Thus, in view of the facts and circumstances, we set aside the order of the Ld. CIT(Appeals) and remit the matter back to the file of Assessing Officer for verification and for determination of quantum in compliance with the principle of natural justice. Thus, this part of the ground raised by the assessee is allowed for statistical purposes.

The Assessing Officer observed that as per the 26AS, the assessee has received an interest of Rs.5,72,300/-. However, from the P & L account, no such amount is credited and accordingly, the same is added to the total income of the assessee.

During First Appellate Proceedings, the assessee submitted the written submissions dated 14.02.2017. The contentions of the assessee was that the amount of interest income has been offered to tax in next assessment year but the assessee has not filed any evidence regarding the same and credit of TDS has not been taken by the assessee as the assessee has contended that in 26AS no such interest was reflected at the time of filing return. Therefore, the Ld. CIT(Appeals) rejected the contentions of the assessee and upheld the findings of the Assessing Officer.

At the time of hearing, the Ld. AR of the assessee submitted that the issue may be restored to the file of Assessing Officer for verification and for determination of quantum.

The Ld. DR has not raised any objection regarding restoring the issue to the file of Assessing Officer for verification and determination of quantum.

We have perused the case records and heard the rival contentions. We have also given considerable thought to the orders of the Ld. CIT(Appeals) as well as the Assessing Officer. We are of considered view that this issue needs verification regarding credit of TDS as well as whether the interest income has been offered to tax or not. Thus, in view of the facts and circumstances, we set aside the order of the Ld. CIT(Appeals) and remit the matter back to the file of Assessing Officer for verification and for determination of quantum in compliance with the principle of natural justice. Thus, this part of the ground raised by the assessee is allowed for statistical purposes.

In the result, all the appeals are fully/partly allowed for statistical purposes in the manner aforesaid as the case may be.