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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI S.S.GODARA, JM & SHRI DR. DIPAK P. RIPOTE, AM
आदेश / ORDER PER S. S. GODARA, JM :
This assessee’s appeal for A.Y. 2015-16 is directed against the CIT(A)-1, Kolhapur’s order dated 07/08/2018 passed in case No. CIT(A)-1/10233 /2017-18 involving proceeding u/s. 143(3) of the Income Tax Act, 1961; in short "the Act”. Case called twice. None appears at assessee’s behest. It is accordingly proceeded ex-parte.
2 ITA No.371/PUN/2020 A.Y. : 2015-16 Shri Bhogwati Sahakari Sakhar Kharkhana Ltd.,
Coming to the assessee’s former twin substantive grounds that both the learned lower authorities have erred in law and on facts in disallowing its payment(s) of Rs.1,89,488/- to its members thereby terming the same as mere application of profits, we note from the CIT(A)’s detailed discussion affirming the assessment findings as follows.
“25. Conclusion: From the discussion in above paragraphs, following points/conclusions emerge:-
a) The mechanism for fixing FRP followed by the Govt indicates that the farmers are being adequately compensated for their efforts in growing cane. Not only does the FRP cover the cost of production, it has other considerations as well woven into the process such as opportunity cost, recovery of sugar from the cane, the final selling price of sugar so produced etc as also includes reasonable margins on account of risk and profits. It is therefore apparent that after the amendment in 2009 to the Sugarcane control order wherein clause 5A was deleted and the concept of FRP introduced, the risk of the transaction of growing cane and its sale to the SSKs are now on the heads of the farmers. He is therefore being compensated for the risk and also there is a profit margin embedded in the FRP itself. This is the crucial difference between SMP and FRP. Earlier SMP was computed without sub clause (g) of 3(1), i.e. there was no margin to the farmer on account of risk and profits and perhaps therefore there was a clause 5A whereby additional cane price was to be paid to be calculated as per Sch I. Now with the deletion of 5A, the margin for risk and profits were embedded in the FRP. This would be a strong indicator that the FRP should be considered as the uncontrolled market price. All the elements of „uncontrolled market price‟ are present in the computation
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of FRP. This discussion is necessary in the light of the directions of the Hon’ble Supreme Court in the case of Satpuda Tapi Parisar discussed above. Through this part of the discussion, I have considered the first direction of the Supreme Court to consider the modalities and methodology of the fixation of FRP.
b) The methodology of fixing the final cane price by the appellant indicates that the 1st advance is based on the last years FRP with a mark up. There appears to be no rational basis for the mark up which is claimed to be based on negotiations with farmer unions. However the methodology of deciding the additional price to be paid is based on the formula discussed in the foregoing paragraphs. The very formula followed leaves nothing to imagination and is clearly distribution of surplus from sale of sugar. As the months pass and the crushing season progresses, the appellant is able to sell the sugar in the market and from time to time the net surplus from its sale is calculated. This is then linked to the cane purchased and distributed amongst the suppliers. It is reiterated that this „net surplus‟ from sale of sugar is computed after deducting all costs direct and indirect including depreciation from the sale revenues. It is also to be noted once again that for determining the ‘net surplus’, the cane price as per FRP is deducted as cost of cane and the remaining surplus worked out. To my mind this is nothing but distribution of surplus from profits made from sugar sale. The observations of the Hon‟ble Supreme Court in the case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Ltd vs State of Maharashtra 1995 Supp (3) Supreme Court Cases 475 also indicate that the amounts paid over and above FRP are nothing but profits from the sale of sugar which have to be distributed to the
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members. The only objective way of doing this is to do it on a per ton of cane purchased. I have discussed the 2nd direction of the Supreme Court in determining the modalities and methodology of fixing cane price by the assessee.
c) The next issue to be examined is whether the provisions made by the appellant in his books is out of gross profits or receipts and whether such differential payments are related to price of cane or distribution of profits. The detailed discussion above indicates that the provisions over and above FRP are made by the appellant out of his profits. The very formula used by the appellant indicates so clearly. There is nothing to show that the provisions are out of gross receipts. It may also be noted here that the issue of sale price of sugar has already been factored into the FRP by clause 3(1) of the Sugarcane Control order. The differential payment over and above FRP is distribution of profits and not related to the price of cane. It is merely incidental that after determining the „net surplus‟, the appellant should have an objective method of actually distributing the surplus. This is done by dividing the net surplus by the tonnage of cane purchased from each member and compensating him in that ratio. Merely because the net surplus is actually distributed on a per MT basis, it cannot be said that the payments over and above the FRP are related to the cane price. Using the cane supplied is the only objective criterion available to the appellant for distribution.
d) The next issue to be examined is the issue of diversion of income by overriding title. The settled law on diversion of income by overriding title and application of income is as under: -
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Diversion of income is an obligation to apply the income in a particular way before it is received by the assessee or before it has arisen or accrued to the assessee. The source is charged with overriding title which diverts the income. The essential ingredients are that income is diverted at source, there is an overriding charge for such diversion and the charge or obligation is on the source of income and not on the receiver.
On the other hand, application of income is merely an obligation to apply the income, which has accrued or arisen or has been received and amounts to mere apportionment of income. The essentials are that income accrues to the assessee, income reaches the assessee and income is applied to discharge an obligation which is self imposed or gratuitous.
In the present case, it is clear that the payment of surplus over and above FRP is an application of income received by the appellant from the sale of sugar. There is no obligation on the appellant to apply the proceeds of sale of sugar for any particular purpose and there is also no overriding charge on the sale proceeds of sugar. The facts point to exactly the opposite that this is an application of income as all ingredients of application of income are satisfied. In the present case, it is the appellant society which is deriving income from sale of sugar, it actually receives the sale proceeds and the income is applied to benefit the producer members through the device of additional cane price over and above FRP. This is a gratuitous application of income. The appellant is a society
6 ITA No.371/PUN/2020 A.Y. : 2015-16 Shri Bhogwati Sahakari Sakhar Kharkhana Ltd.,
formed by farmers themselves for and by them. The farmer members supply cane to the society which then through their collective will, manufactures sugar on their behalf. In doing so, the society makes a profit. The society is a different legal person from the members. The farmers are therefore in a dual role, one as supplier of cane and the other as manufacturer of sugar represented through the society. Diversion of income through overriding title in this case would mean that the farmers have a right abintio over the sale of sugar. This is clearly not the case. Clauses 3(1) (c), (d), (e) & (f) of the Sugarcane Control Order indicate that the recovery and final sale price of sugar is already factored in sufficiently in the FRP itself. There is therefore nothing more to be offered to the farmer in terms of compensation for supply of cane. Once the farmer is compensated adequately by the FRP which has all the elements of market price including profits, anything more paid to him would not be overriding title but would be gratis and a gratuitous application of income. There is another important reason why the payments made over and above FRP cannot be held to be overriding title. On a specific query from me, the appellant stated that in times of losses to SSK itself on sale of sugar, the farmer is indemnified. Thid means that the loss of the SSK is not passed on to the farmers while the profits axe. The formula followed by the appellant for determining final cane price clearly indicates distribution of „net surplus‟. I am therefore of the considered opinion that the theory of overriding title does not apply in this case.
7 ITA No.371/PUN/2020 A.Y. : 2015-16 Shri Bhogwati Sahakari Sakhar Kharkhana Ltd.,
e) At this stage, it would be profitable to look at a recent decision of the Hon‟ble Karnataka High Court in a case of strikingly similar facts and issue. In the case of Nagarbail Salt Owners Cooperative Society Ltd (2016) 68 taxmann.com 149 (Karnataka), the Hon‟ble High Karnataka High Court has held that the sale proceeds transferred to a separate account for distribution amongst its members is not an eligible deduction. Quoting from the same:- FACTS
The assessee was a society of 'Maliks' who were owners of land (Agar) on which salt was manufactured. The society was formed inter alia to acquire from the 'Maliks' their rights and to manufacture salt and its by-products. In terms of the bye-laws and other arrangements, the individual pieces of lands belonging to the members vested with the society. Society purchased and installed necessary plants and machinery to manufacture salt and other by-products. Assessee-society manufactured and sold salt and other by-products in its own name. The sale proceeds were being transferred to an account called 'Distributable Pool Fund Account' for distribution among the members of the society.After such transfer the society would offer remaining income to tax. For relevant assessment year also, the assessee transferred certain amount to Distributable Pool Fund Account and thereafter
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Nil income was declared in return of income. The Assessing Officer held that transfer to Distribution Pool Fund Account could not be considered as expenditure. He assessed income by adding amount transferred to Distribution Pool Fund Account. On appeal, the Commissioner (Appeals) partly allowed assessee's appeal. The Tribunal dismissed revenue‟s appeal. On appeal to the High Court:
HELD
During the course of the argument, though transfer to the Distribution Pool Fund before offering to tax was sought to be justified as it is meant for benefit of members of co-operative society, no satisfactory explanation was forthcoming. It was not pointed out as to under what provision or bye-law, the transfer of funds is authorised to the 'Distribution Pool Fund'. The bye-laws are exhaustive in nature and there is no provision in the bye-laws to transfer the fund to the Distribution Pool Fund for onward payment to the members. The provisions made towards depreciation of machinery, building, etc., are sufficient indications to infer that the bye- laws were framed with clear intention in mind to acquire the 'Malik' rights of the persons who were holders of land ('Agar'), to manufacture and sell salt and its by-products. [Para 12] A careful analysis of the rival contentions urged by the revenue, the assessee and perusal of records leads to infer and deduce that:
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That no person other than a 'Malik' can be a (a) member of the assessee-society; A 'Malik' is a person owning jointly or severally or (b) having an interest in 'Agar' (land on which salt is manufactured); Society has taken the 'Malik' rights from its (c) owners; Society is managed by a managing committee; (d) Society manufacturers salt and other by-products (e) and sells the same in its own name; therefore, the income earned is the income of society and, therefore, liable to tax; The amount distributable among the members is (f) transferred to a Distributable Pool Fund Account before offering the income to tax. [Para 1 7]
The above facts lead an irresistible inference that the 'Agar' (the land) belonging to the Maliks' is used to manufacture salt and its by-product and the same is sold by the assessee-society itself. In the course of its business, society earns 'profits' which falls within the definition of 'income' under section 2(24). Therefore, the assessing authority was right in holding that the transfer of fund for subsequent distribution to the members before payment of tax is not a 'deductible expenditure' in computation of business income of the assessee- co-operative society and further that the income declared after disbursement of profits is not logical and has no relevance to determination of taxable profit under the Income-tax Act. [Para 18]
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Non-compliance of statutory provisions is sought to be justified by the society on a plea that society indulges in such enterprise on behalf of members of the society and tax demand on the entire income would run counter to co-operative movement. [Para 20]
There can be perhaps no disagreement with the proposition that co-operative movement is benevolent to its members. Nonetheles, an ideology however lofty does not ipso facto exempt such entity from the solemn duty and sacrosanct obligation of obeying the law of the land nor does it insulate the entity from the vigour of penal actions in case of default. Thus, assessee a co-operative entity which runs a business enterprise is duty bound to offer its profits to tax before diverting any funds to the Distributable Pool Fund Account. [Para 21]
In the result, this appeal merits consideration and it is accordingly allowed. [Para 22]
A careful analysis of the rival contentions urged 17. by the Revenue, the Assessee and perusal of records, leads us to infer and deduce that; (a) that no person other than a 'Malik' can be a member of the Assessee- Society;
(b) a 'Malik' is a person owning jointly or severally or having an interest in 'Agar' (land on which salt is manufactured);
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(c) Society has taken the 'Malik' rights from its owners;
(d) Society is managed by a Managing Committee;
(e) Society manufactures salt and other by products and sells the same in its own name; Therefore, the income earned is the income of Society and therefore liable to tax;
(f) The amount distributable among the members is transferred to a Distributable Pool Fund Account before offering to the income to tax.
'Income' is defined under Section 2(24) of the Act and it includes profits and gains. The above facts lead us an irresistible inference that the 'Agar' (the land) belonging to the 'Maliks' is used to manufacture salt and its by- product and the same is sold by the Assessee-Society itself. In the course of its business, Society earns 'profits' which falls within the definition of 'income' under Section 2(24) of the Act. Therefore, in our considered view, the Assessing Authority was right in holding that the transfer of fund for subsequent distribution to the members before payment of tax is not a 'deductible expenditure' in computation of business income of the Assessee-Co- operative Society and further that the income declared after disbursement of profits is not logical and has no relevance to determination of taxable profit under the Income Tax Act.
Revenue collection augments State exchequer. A prosperous treasury is a means for development leading
12 ITA No.371/PUN/2020 A.Y. : 2015-16 Shri Bhogwati Sahakari Sakhar Kharkhana Ltd.,
to good living of citizenry. Income Tax one of the tributaries which flows into State coffers. Therefore, we are of the view it is imperative for the Courts to opt strict interpretation while dealing with fiscal laws.
Based on evidence and admission of appellant, we have held, that the Society has transferred funds to Distribution Pool before offering to Tax. On facts, we have held that, the Society has indulged in the enterprise of manufacture and sale of salt. Non- compliance of statutory provisions is sought to be justified by the Society on a plea that Society indulges in such enterprise on behalf of members of the society and tax demand on the entire income would run counter to cooperative movement.
There can be perhaps no disagreement with the proposition that Co-operative movement is benevolent to its members. Nonetheless, an ideology however lofty does not ipso facto exempt such entity from the solemn duty and sacrosanct obligation of obeying the law of the land nor does it insulate the entity from the vigour of penal actions in case of default. Thus, assessee a co-operative entity which runs a business enterprise is duty bound to offer its profits to tax before diverting any funds to the Distributable Pool Fund Account.
In the result, this appeal merits consideration and it is accordingly allowed. The substantial question of law raised by the Revenue is answered in its favour. The impugned order in I.T.A.No.252/PNJ/2014 dated 23.1.2015 passed by the ITAT, Panaji Bench is set aside.
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The facts of this case are strikingly similar to our present case at hand. In the Karnataka case, the society utilized the assets of the members to make profits and the distributable profits were credited to a separate fund and claimed as a deduction out of taxable profits. In the present appeal, the society utilizes the cane supplied by the farmers to make profits. The surplus of profits after considering the FRP price on cane is then distributed to the farmers as additional cane price. Following the ratio of the decision of the Karnataka High Court, such a claim would amount to distribution of surplus/profits and therefore not allowable as deduction u/s 37(1).
This whole proposition can be seen from another angle also. It must be remembered that the farmer is in a dual role. One is a supplier of cane to his own SSK and the other is a manufacturer of sugar by his own SSK. In the 1st role, the farmer is being compensated for the cane price through FRP which is market price and includes margins for profits and risk also. In the 2nd role as a manufacturer of sugar, the farmer is being compensated through a distribution of „net surplus‟ from sale of sugar in terms of final cane price. This distribution of net surplus in my opinion would not qualify as a deductible expenditure. This proposition finds support from the decision of the Hon‟ble Karnataka High Court cited supra. From the detailed discussion above, I am of the opinion that the payments made by the appellant over and above the FRP are a mere distribution of surplus/profits calculated after deducting the cane price at FRP. This therefore cannot be allowed as a deduction u/s 37(1).
Let me now consider the submissions of the appellant before me. The appellant has filed a general submission wherein he has referred to all the issues arising in Sahakari Sakhar Karkhanas. The submission is same as made before assessing officer during assessment proceedings. The assessing officer has already discussed the submission of the appellant in detail in his assessment order. Here I would be discussing only those issues which are not generalized by the appellant in his
14 ITA No.371/PUN/2020 A.Y. : 2015-16 Shri Bhogwati Sahakari Sakhar Kharkhana Ltd.,
submission.
The appellant has also argued that the additional price has arisen purely due to market forces and competition. The price demanded by the farmer organizations are far in excess of FRP and if the same is not paid then none would supply cane to the SSK. The appellant has argued that the cane price paid by him is neither unreasonable nor excessive and the price fixation has been left to the discretion of the BOD &/or the State Govt. The appellant is free to pay anything more than the FRP to the farmers. The question is what would the differential represent? Would it be cane price or distribution of profits? This has been clearly laid down by the Hon‟ble Supreme Court in the case of Satpuda Tapi Parasar. I have merely examined the case of the appellant vis-a-vis the directions of the Hon‟ble Court. On the face of it, the differential payments being linked to cane supplied would lead one to believe that the same is cane price. However on scratching the surface a bit, and examining the methodology of determining the differential, it is seen that the differential price is based on the „net surplus‟ from sale of sugar. This read along with the fact that the final sugar price has already been factored in while deciding the FRP and the FRP also takes into account the profit margins to the farmer, leads one to conclude that the differential payments is only distribution of surplus from sale of sugar and it is only incidental that the same is actually paid on a per ton basis. Once again to repeat, it is open to the appellant to pay more than FRP, and it is equally open to the AO to examine the nature of the differential payment. From the discussion above, it is apparent that the producer members are receiving two distinct types of payments. One being the payment for the cane represented by the FRP (as it has a profit element already embedded) and the other being surplus on sale of sugar which is termed as/ linked to cane price. Merely by linking it to cane price, distribution of surplus would not change its nature and become cane price per se. The concept of commercial expediency would therefore not apply to the aggregation of these two payments as they are two distinct payments based on two
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distinct principles. Incidentally it may also be observed that this device used by the appellant results in taxable profits (in the hands of the appellant) being diverted to the producer members in whose hands the same are tax free as agricultural income. I am therefore unable to appreciate the contention of commercial expediency cited by the appellant.
From all the above discussions it finally emerges that:
(i) That the business income of a co-operative society engaged in manufacture of sugar has to be arrived at on the basis of the same commercial principles and legal provisions that are applied to any other business entity while assessing its income by way of profits and gains of business or profession under the Income-tax Act. Needless to say, under the ordinary commercial principles as well as under the Act, what is to be assessed in the case of a business entity is profits of the business prior to the distribution or application of any portion thereof.
(ii) That the methodology for determining what is commonly referred to as “Cane Price” in the State of Maharashtra by the Co-operative Sugar Factories, cane growers and the State Government is not based on ordinary commercial principles but the same clearly envisages distribution of profit (surplus) from manufacture of sugar.
(iii) That the FRP determined by the Central Government takes into account all costs as well as reasonable margins of profit and risks of the cane growers and can be considered to be the cane price.
Thus, it is held that FRP of sugarcane determined by the Central Government through methodology adopted by factoring in „a reasonable margin for the growers of sugarcane on account of risk and profit‟ by introducing sub-clause (g) in clause 3(1) of the Sugar
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Control Order, 1966 and by simultaneously deleting clause 5A of the SCO, whereby profits of the SSK were earlier being distributed and simultaneously declaring under Explanation II of clause 3(3C) of the ECA that 'minimum price‟ excludes additional payments under the clause 5A or any other payment made is the most appropriate cane purchase price and fits into the concept of purchase price as per ordinary commercial principles and is in accordance with the provision of section 37(1) of the Income-tax Act. Therefore, any amount paid over and above FRP on the basis of operational profits minus expenses and reserves is not business expenditure under section 37(1) of the Income-tax Act. Accordingly, it is held that the assessing officer was justified in treating the amount paid by the appellant over and above the FRP as distribution of surplus and therefore, such excess payments cannot be allowed as „business expenditure‟ while computing business profits under the provision of the Income-tax Act.”
We next find that the instant first and foremost issue regarding assessee’s payment of alleged excess sugarcane price is no more res integra as the tribunal’s latest co-ordinate bench order in ITA Nos.313 to 316/PUN/2019 Shree Chhatrapati SSK Ltd. V/s ITO dated 28/07/2022 has restored the very issue that to the assessing authority as follows:-
“Mr. Jasanani vehemently supported the learned lower authorities action on both counts i.e. assessee’s payment of excess cane price and sale of sugar at concessional rate (both to members) disallowed in both the lower proceedings. He fails to dispute that the former twin issues of excess cane price payment as well as sugar at concessional rate are no more res integra as the tribunal’s various co-ordinate benches, and more particularly ITA No.68/PUN/2018 in The Malegaon Sahakari Sakhar Karkhana Limited vs. ITO’s order dated 21.40.2021 has set aside the concerned assessee’s substantive grounds back to the
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assessing authority for its afresh appropriate adjudication as per law. Ordered accordingly.”
We also adopt the very course of actions mutatis mutandis and direct the Assessing Officer to decide the instant issue afresh in very terms.
Next comes the latter issue of disallowance of Rs.6,0077,880 representing assessee’s sale of sugar to its members at concessional rates. There is hardly any issue that the very co-ordinate bench has restored the instant issue as well back to the Assessing Officer for his afresh appropriate adjudication. Learned CIT DR could not dispute both the lower authorities have adopted the identical reasoning as it was the issue before the tribunal hereinabove. We thus direct the assessing authority to re-decide the instant latter issue as well in very terms.
We note before parting that the assessee’s instant appeal suffers from 504 days delay in filing which was ultimately instituted on 13.03.2020 i.e. during the outbreak of covid-19 pandemic only. It has also filed a condonation application dated 01.04.2020 explaining reasons thereof as various procedural approvals as well as lack of communication. Hon’ble apex court’s landmark decision in Collector Land Acquisition V/s Mst. Katiji& Others (1987) 167 ITR 471 (SC) has settled the law longback that the cause of substantial justice must prevail over all other technical aspects. We accordingly condone the impugned delay going by the very analogy.
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This assessee’s appeal is allowed for statistical purposes in above terms.
Order pronounced in the Open Court on this 29th day of August, 2022.
Sd/- Sd/- (DR.DIPAK P.RIPOTE) (S.S. GODARA) लेखध सदस्य/ ACCOUNTANT MEMBER न्यधनयक सदस्य/JUDICIAL MEMBER पपणे / Pune; ददनधांक / Dated : 29th August, 2022. Ashwini
आदेश की प्रनतनलनप अग्रेनषत / Copy of the Order forwarded to : अपऩलधथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The CIT(A)-1, Kolhapur. 4. The Pr.CIT-1, Kolhapur. 5. नवभधगऩय प्रनतनननध, आयकर अपऩलऩय अनधकरण, “ए” बेंच, पपणे / DR, ITAT, “A” Bench, Pune. गधर्ा फ़धइल / Guard File. आदेशधनपसधर / BY ORDER, 6. // True Copy // Senior Private Secretary आयकर अपऩलऩय अनधकरण, पपणे / ITAT, Pune.
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S.No. Details Date Initials 1 Draft dictated on 20.06.2022 2 Draft placed before author 17.08.2022 Draft proposed & placed before the Second 3 Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement on 7 Date of uploading of Order 8 File sent to Bench Clerk 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order