ASSISTANT COMMISSIONER OF INCOME-TAX vs. NIPHAD SAHAKARI SAKHAR KARKHANA LTD.,, NASHIK

We have heard both the sides and gone through the

relevant material on record. It is an agreed position 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 Taluka S.S.K. Ltd. (2019) 103 taxmann.com 57

(SC). The Hon’ble Apex Court, vide its judgment dated 05-03-

2019, has elaborately dealt with this issue. It recorded the

factual matrix that the assessee in that case purchased and

crushed sugarcane and paid price for the purchase during

crushing seasons 1996-97 and 1997-98, firstly, at the time of

purchase of sugarcane and then, later, as per the Mantri

Committee advice. It further noted that the production of sugar is

covered by the Essential Commodities Act, 1955 and the

Government issued Sugar Cane (Control) Order, 1966, which

deals with all aspects of production of sugarcane and 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

4 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

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 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

5 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

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 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

6 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

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.”

issue of deduction for payment of excessive price for purchase of

sugarcane 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 AO 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

7 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

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 further made clear that the

assessee will be at liberty to raise any other argument concerning

the issue before the AO.

the deletion of addition of Rs.3,22,58,450/- made by the AO on

account of understatement of sale.

sale of certain quantities of sugar to M/s. Jai Jagdish Sugar

8 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

Export/Import, Dhule (JJSD) under quota at the rate of

Rs.1,080/- per bag. The sugar was delivered by the assessee to

JJSD, a merchant, against the release order dated 06-11-2001

from the Director, Krishi Bhawan, New Delhi for export

purposes. The AO observed that JJSD failed to produce any

proof of having made such exports. The sugar purchased from

the assessee meant for export at lower price, was, in fact, sold by

JJSD in the local market without the Department’s permission.

The AO called upon the assessee to explain as to why the

difference between the market price and the quota price of such

sugar should not be taxed in its hands as understatement of sales.

The assessee replied that when it demanded proof of export of

sugar from JJSD, they could not produce the same and they

deposited the excise duty of Rs. 78,34,195/- from 21-03-2002 to

13-06-2002 with the assessee along with interest of

Rs.8,07,544/- on late payment of excise duty, which was duly

deposited by it. The assessee submitted that no extra income

was earned by the assessee from JJSD warranting any addition.

Not convinced, the AO made an addition of Rs.3,22,58,450/-,

being, the difference between the market price of Rs.1,430/- per

bag and the price at which it was sold to JJSD at Rs.1,080/- per

9 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

bag. The ld. CIT(A) deleted the addition, against which the

Revenue has come up in appeal before the Tribunal.

material on record. The facts of this ground are not disputed in

as much as the assessee admittedly sold sugar to JJSD at a

concessional rate of Rs.1,080/- per bag on the understanding that

the same was meant for export by the latter. JJSD did not export

the sugar. Rather, they sold the sugar obtained from the assessee

under quota in the domestic market at the prevailing market

prices. These facts indicate that the assessee did not understate

the sale price. It reflected in its accounts the correct price

received from JJSD. The default was committed by JJSD in not

actually exporting the sugar purchased from the assessee at a

reduced quota price, for which it faced the music. In so far as

the assessee is concerned, there is not any default in reflecting

the sales at lower price. In fact, the assessee recorded the same

sale price of the sugar sold to JJSD, at which it was actually sold.

It has been brought to our notice that the assessee took up civil

proceedings against JJSD and some arbitration award was also

passed. The ld. AR submitted that the Hon’ble Bombay High

Court has cancelled the award directing the payment of some

10 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

compensation to the assessee. Be that as it may, in our

considered opinion, compensation, if any, which the assessee

eventually receives from JJSD will be subjected to tax in its hand

when it acquires the right to receive the same. In sofaras the year

under consideration is concerned, the assessee has neither

recovered excess over quota price from JJSD nor acquired right

to receive any compensation. We, therefore, hold that the ld.

CIT(A) was justified in deleting the addition.

A.Y. 2012-13 :

is against entitling the assessee to deduction on account of

expenditure claimed on salaries and wages amounting to

Rs.2,72,51,072/-.

raised an additional ground before the ld. CIT(A) that it incurred

liability for salary arrears amounting to Rs.2,72,51,072/- as per

the registered agreement dated 23-11-2011 which was omitted to

be debited to the Profit and loss account or claimed as deduction.

The assessee claimed that deduction should be allowed for such

11 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

an amount. The ld. CIT(A) noted in para no.8.2 of the impugned

order that: “There is no mention about salary arrears by the AO

in the assessment order. However, the appellant is entitled for

expenditure claimed on salary and wages. The AO is directed to

verify the same and allow relief”. The Revenue is aggrieved by

it.

material on record, it is observed that the ld. CIT(A) has not

granted any relief in respect of the expenditure of Rs. 2.72 crore.

He simply directed the AO to verify the assessee’s claim and

then allow relief. In other words, if on verification, the AO finds

that the relief is not due, he will deny the same and vice versa.

The mere fact of restoring the matter to the file of AO, in our

considered opinion, does not constitute any cause of grievance to

the Revenue in asmuch as the ball has again come back to the

court of the AO, who can decide the issue as per law. We are,

therefore, not inclined to disturb the impugned order on this

score.

12 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

against the confirmation of addition on account of excess price

paid on purchase of sugarcane amounting to Rs.13,55,67,049/-.

relevant material on record. It is observed that similar issue was

raised by the Revenue in its appeal for the A.Y. 2002-03, which

we have dealt with hereinabove giving certain directions to the

AO. The impugned order is set-aside to this extent and the

matter is sent back to the AO for deciding this issue afresh as per

law in accordance with our observations recorded above.

objection is against the confirmation of addition towards sale of

sugar at concessional rate.

Tribunal in several cases. The Pune Bench has restored it to the

file of the AO for fresh adjudication giving certain directions.

Relevant finding of the Tribunal in the case of Majalgaon

Sahakari Sakhar Karkhana Ltd. Vs. ACIT and others in ITA

No.308/PUN/2018, order dated 14-03-2019 reads as under :

Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

“11. Having heard both the sides and gone through the relevant material on record, it is observed that the AO made addition of the difference between the market price and the concessional price at which sugar (final product) was given to farmers and cane growers. In this regard, it is observed that this issue has been considered by the Hon’ble Supreme Court in the case of CIT Vs. Krishna Sahakari Sakhar Karkhana Limited (2012) 27 taxmann.com 162 (SC). Vide judgment dated 25-09-2012, the Hon’ble Supreme Court noticed that the difference between the average price of sugar sold in the market and the price of sugar sold by the assessee to its members at concessional rate was taxed by the Department under the head “Appropriation of profit”. The Hon’ble Summit Court remitted the matter to the CIT(A) for considering, inter alia,: “whether the abovementioned practice of selling sugar at concessional rate has become the practice or 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 the same assessment order to the AO and other to the CIT(A), which is not appropriate. We order accordingly.”

order to this extent and remit the matter to the file of AO for its

fresh determination in accordance with law.

14 Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

cross objection of the assessee is allowed for statistical purposes.

Order pronounced in the Open Court on 26th June, 2019.

Sd/- Sd/- (VIKAS AWASTHY) (R.S.SYAL) �ाियक सद� /JUDICIAL MEMBER उपा��/ VICE PRESIDENT पुणे Pune; �दनांक Dated : 26th June, 2019 सतीश आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु&(अपील) / 3. The CIT (Appeals)-I, Nashik 4. The CIT-I, Nashik िवभागीय )ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “बी बी” / DR ‘B’, ITAT, Pune; बी बी गाड� फाईल / Guard file. // True copy // 6.

आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार

// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Niphad Sah. Sakhar Karkhana Ltd., A.Yrs. 2002-03 & 2012-13

Date 1. Draft dictated on 25-06-2019 Sr.PS 2. Draft placed before author 25-06-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *