JT.CIT, CIR. (OSD) CIR.-1, NASHIK, DHULE vs. KADWA SAHAKARI SAKHAR KARKHANA, NASHIK

Sakhar Karkhana Limited Vs. ACIT, Circle-3, Aurangabad – ITA

No.308/PUN/2018 for the assessment year 2013-14. The assessee

is 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

17 SSK Group cases

paid both to the members and non-members at Rs.22,02,95,387/-

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

assessment order on this point.

assessment proceedings are concerned, are mutatis mutandis

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

or partly by the ld. CIT(A), 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.

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

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

18 SSK Group cases

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’

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

19 SSK Group cases

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

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

20 SSK Group cases

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.”

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)

21 SSK Group cases

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.

raised an alternate ground for allowing deduction u/s.80P in

respect of the addition.

22 SSK Group cases

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.

the appeals in this batch, there are certain appeals having other

issues also. We will take up such issues one by one.

II. ADDITION FOR SUGAR GIVEN TO MEMBERS AT

CONCESSIONAL RATES – [Appeals in which Krishna Sahakari

Sakhar Karkhana Limited (SC) not considered by lower

authorities ]

to 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

23 SSK Group cases

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

24 SSK Group cases

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.

III. DISALLOWANCE OF CONTRIBUTION TO AREA

DEVELOPMENT FUND

deletion/confirmation of disallowance made by the AO on account

of Area Development Fund.

material on record, it is seen that similar issue came up for

25 SSK Group cases

consideration before the Hon’ble Supreme Court in the case of

Siddheshwar Sahakari Sakhar Karkhana Limited Vs. CIT and

others (2004) 270 ITR 1 (SC). In that case, the Hon’ble Supreme

Court observed in para 44 that the receipts in the form of Area

Development Fund always remained with the assessee. It also

noted the contention of the assessee in para 45 that the realisations

made towards the Area Development Fund were impressed with

the specific legal obligation to spend the money for specified

purposes which were unrelated to the business of the sugar factory

and hence, could not be treated as income of the assessee.

Eventually, the Hon’ble Supreme Court remitted the matter back

for fresh determination. It is noticed that in the appeals under

consideration, the ld. CITs(A) have not considered the impact of

the judgment of the Hon’ble Supreme Court in Siddheshwar

Sahakari Sakhar Karkhana Limited (supra) and decided the issue

without taking note of the factors directed to be considered in the

aforenoted case. In view of the above decision of Hon’ble Supreme

Court, we set-aside such impugned orders and remit the matter to

the file of the respective AOs for deciding the issue afresh in

conformity with the guidelines laid down by the Hon’ble Apex

Court in the above judgment.

26 SSK Group cases

IV. DISALLOWANCE FOR LATE DEPOSIT OF

EMPLOYEES’ SHARE IN EPF ETC.

confirmation of disallowance for delayed deposit of ESI / EPF

employees’ share. During the course of assessment proceedings, it

was noticed that the assessee belatedly deposited the amount of

employees’ contribution towards EPF and ESI. The details of due

dates and actual payments have been set out in the respective

assessment orders. The AO, therefore, made such disallowance,

which came to be affirmed in the first appeal.

material on record. It is found that the issue raised herein is no

more res integra. The Hon’ble Apex Court in the case of CIT v.

Alom Extrusions Limited (2009) 319 ITR 306 (SC) has held that the

amendment to first proviso and omission of the second proviso to

section 43B by the Finance Act, 2003, is retrospective. The

Hon’ble Delhi High Court in the case of CIT v. Aimil Limited

(2010) 321 ITR 508 (Delhi) has allowed deduction in respect of

employees’ share when the amount was paid before the due date.

When we consider these two judgments, it is manifested that both

the employer’s and employees’ contribution are allowable as

27 SSK Group cases

deduction if these are deposited albeit belatedly under the

respective Acts, but before the due date of filing of return u/s

139(1) of the Act.

cases deposited the employees’ contribution towards EPF and

ESIC before the due date u/s 139(1) of the Act. Respectfully

following the aforenoted judgment of the Hon’ble Delhi High

Court, we order for the deletion of the addition sustained in the

first appeals on account of late deposit of employees’ contribution

to the Provident fund.

V. PROVISION FOR VASANTDADA SUGAR INSTITUTE

(VSI) CONTRIBUTION :

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

28 SSK Group cases

Tribunal in the case of Bhima S.S.K. Ltd. (ITA

No.1414/PUN/2000).

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.

VI. CONTRIBUTION TO CHIEF MINISTER RELIEF FUND :

confirmation of addition on account of contribution made to Chief

Minister Relief Fund.

Relief Fund and claimed deduction for the same in its Profit and

loss account. The AO observed that this fund established by the

State Government is covered u/s.80G(iiihf) of the Act and, as such,

the contribution is deductible at 50% of the aggregate of the sums

specified. He, therefore, disallowed the amount, which action

came to be countenanced in the first appeal.

29 SSK Group cases

material on record. There is no dispute that the assessee did make

contribution to the Chief Minister Relief Fund. As against the

assessee claiming the entire amount as deduction in its Profit and

loss account, the AO opined that the said contribution was eligible

for deduction u/s. 80G(iiihf) of the Act at the rate of 50% along

with other qualifying sums. The ld. CIT(A) sustained the entire

addition overlooking the fact that deduction u/s.80G(iiihf) was not

allowed by the AO on such contribution in the computation of total

income. Under these circumstances, we cannot uphold the

disallowance of the entire amount claimed as deduction by the

assessee in its Profit and loss account. Approving the additions

made, we remit the matter to the file of the AO for granting the

deduction u/s.80G(iiihf) as per law after allowing a reasonable

opportunity of hearing to the assessee.

VII. KHODKI CHARGES

granting of deduction towards payment of Khodki charges. On

being called upon to justify such deduction, the assessee submitted

that this payment was made as per the order of the Director of

Sugar. It was further explained that at the time of harvesting, the

30 SSK Group cases

harvesting labour cut more part of the upper side of the crop and

therefore, to compensate loss in weight to the grower, the said

Khodki charges were paid to the farmers. The AO was not

satisfied with the explanation tendered on behalf of the assessee.

He noted that the Commissioner of Sugar, on behalf of

Government of Maharashtra, was issuing directions for payment of

Khodki charges only on the basis of proposal sent by the respective

assessees. The ld. CIT(A) deleted the addition by relying on the

judgment of Hon’ble Bombay High Court in CIT Vs. Manjara

Shetkari SSK Ltd. and others (2008) 301 ITR 191 (Bom.), against

which the Revenue has come up in appeal before the Tribunal.

material on record. It is seen that Khodki charges were incurred as

per the directions of the Director of Sugar to compensate for the

farmers’ loss for unevenly cutting of cane sugar at the time of

harvesting. This issue came up for consideration before the

Special Bench of the Tribunal in DCIT Vs. Manjara Shetkari SSK

Ltd. (2004) 85 TTJ (Mum.)(SB) 369, which granted deduction for

said expenses. On further appeal by the Revenue to the Hon’ble

Bombay High Court, their Lordships in the aforenoted case

approved the view taken by the Tribunal allowing deduction for

payment of such Khodki charges. The ld. CIT(A) has recorded

31 SSK Group cases

that the SLP filed by the Department in the case of Jadamba SSK

Ltd., on similar issue, has been dismissed by the Hon’ble Supreme

Court on 23-03-2009. In view of the fact that Khodki charges have

been held as deductible by the Hon’ble jurisdictional High Court

and the recent judgment of Hon’ble Supreme Court in Tasgaon

Taluka Sahakari Sakhar Karkhana Ltd. (supra) does not cover

Khodki charges, we hold that this issue needs to be decided in

favour of the assessee.

VIII. DEDUCTION u/s.80P ON INTEREST AND DIVIDEND

80P of the Act on interest and dividend income is also involved.

The assessee claimed deduction u/s.80P(2)(d) of the Act on

interest and dividend received from Co-operative Society on

Savings Bank accounts. The AO did not allow such deduction.

The ld. CIT(A) overturned the assessment order on this point and

granted deduction. The Revenue is aggrieved by such allowing of

deduction.

material on record. Relevant part of section 80P reads as under : -

“80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub- section (2), there shall be deducted, in accordance with and subject to

32 SSK Group cases

the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely :— (a) to (c) (d) in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other co- operative society, the whole of such income; ........”

amount of interest or dividend derived by a Co-operative Society

from its investments with any other Co-operative Society, is

deductible under clause (d) of section 80P(2) of the Act. The ld.

CIT(A) has given a categorical finding that assessee is a Co-

operative Society and the Co-operative Bank from which the

above-mentioned income was earned, is also a Co-operative

Society duly registered under Maharashtra Cooperative Societies

Act. This contention has not been controverted by the ld. DR with

any cogent material or evidence. Thus, it is seen that the case of

the assessee is fully covered u/s.80P(2)(d) of the Act. Reliance of

the AO on the provisions of sub-section (4) of section 80P is

misplaced. Such provision states that : ` The provisions of this

section shall not apply in relation to any co-operative bank other

than a primary agricultural credit society or a primary co-operative

agricultural and rural development bank.’ As the assessee under

33 SSK Group cases

consideration is not a Co-operative Bank, the mandate of sub-

section (4) does not extend to it. We, therefore, approve the view

taken by the ld. CIT(A) in granting deduction u/s.80P(2)(d) of the

Act in respect of interest and dividend income earned by the

assessee on such facts.

statistical purposes.

Order pronounced in the Open Court on 14th March, 2019.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 14th March, 2019 सतीश 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 // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

SSK Group cases

Date 1. Draft dictated on 12-03-2019 Sr.PS 2. Draft placed before author 14-03-2019 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. *