DEPUTY COMMISSIONER OF INCOME-TAX,, NANDED vs. BHAURAO CHAVAN SSK LTD.,, NANDED

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 clause-3 and additional price payable as per clause 5A of the

Sugarcane Control Order, 1966, 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.5,29,14,209.50

and made addition for the said sum. The ld. CIT(A) deleted the

addition on this point.

assessment proceedings are concerned, are mutatis mutandis

similar. It is seen that in some cases, the addition got deleted by

the ld. CIT(A), whilst in others the addition got sustained. This

led to filing of the appeals both by the assessee as well as the

Revenue before the Tribunal.

material on record. There is consensus ad idem between the rival

5 SSK Group

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

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’

6 SSK Group

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 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

7 SSK Group

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 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 SSK Group

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.

only be qua the payments made to the members. In so far as the

9 SSK Group

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.

II. ADDITION FOR SUGAR GIVEN TO MEMBERS AT

CONCESSIONAL RATES – [Appeals in which Krishna Sahakari

Sakhar Karkhana Limited (SC) not considered by lower

authorities ]

members at concessional rates. Such ground is against the

disallowance on account of price difference on certain quantity of

sugar given to the members at concessional rate.

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

10 SSK Group

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

11 SSK Group

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.

III. DISALLOWANCE OF EXPENSES

SSK Ltd. Vs. DCIT, Circle-3 – ITA No.492/PUN/2014 is against

the reduction in the addition of Rs.50,67,830/- on account of

expenses viz. purchases, power & fuel, repairs to machinery,

hospitality Advertisement, Travelling Expenses, Telephone

expenses etc. to Rs.5.00 lakh by the ld. CIT(A). The AO, on

estimation basis, made certain additions from various expenses at

some percentage for non-availability of evidences/non-verifiability

of details. The ld. CIT(A) restricted such addition to Rs.5 lakh and

gave partial relief. The Revenue is aggrieved by reduction in the

addition.

12 SSK Group

assessee is governed by the provisions of Cooperative Societies

Act and under the control and supervision of various Govt. authorities. The assessee has maintained books of accounts and the

same are subjected to audit. He further noted that the AO failed to

verify the books of account and made addition. Under these circumstances and considering the totality of facts and

circumstances of the case we are of the considered opinion that the

ld. CIT(A) has taken a reasonable view. Thus, we countenance the view taken by the ld. CIT(A) on this score.

Order pronounced in the Open Court on 12th April, 2019.

Sd/- Sd/-

(R.S.SYAL) (P.P.BHATT) VICE PRESIDENT PRESIDENT पुणे Pune; �दनांक Dated : 12th April, 2019 सतीश

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आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A) concerned 4. The CIT concerned िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “बी” / DR ‘B’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार // True Copy // // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 12-04-2019 Sr.PS 2. Draft placed before author 12-04-2019 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. *