SAHAKARI KHAND UDUOG MANDAL LTD.,NA vs. ARIVS.DCIT, NAVSARI CIRCLE, NAVSARI, NAVSARI

On the facts and in the circumstances of the case as well in law, both the lower authorities have overlooked the claim in the return of income filed for the carried forwards of business loss and unabsorbed depreciation as assessed in the regular assessment completed for the earlier years and hence, the assessment order passed by the AO arbitrarily at the assessed income of Rs. 242,12,52,595/- without giving set off of the brought forward business loss and unabsorbed depreciation for the earlier years is liable to be struck down.

Your appellant further reserves its rights to add, alter, amend or modify any of the aforesaid grounds before or at the time of hearing of an appeal.

The ld. AR then addressed the substantive issue and submitted that the Department has proceeded on a fundamentally erroneous assumption that the FRP, declared by the Central Government under the Sugarcane (Control) Order, 1966 represents the final or commercially determinative price of sugarcane. The AR submitted that FRP is merely a statutory minimum benchmark intended to protect farmers against exploitation and is not intended to restrict or regulate the commercial pricing arrangements between sugar mills and cane growers. In the cooperative sector, where the cane growers are themselves owners of the factory, the final cane price is determined after taking into account multiple operational, economic and 13 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. cooperative considerations, such as the actual sugar recovery in the relevant crushing season, actual sale realizations of sugar and molasses, bagasse and press-mud valuation, fluctuating market dynamics, cane quality improvement programmes, cost of cultivation, minimum support requirements of farmers, competitiveness with neighboring sugar mills, and ongoing socio-economic obligations integral to the cooperative structure.

The ld. AR submitted that the payment of cane price in installments — first, during the harvesting season based on provisional values and subsequently, on crystallization of accounts — is a standard and longstanding industry practice in the cooperative sugar sector throughout India and cannot be interpreted as an after-the-event distribution of surplus. The AR emphasized that the payment is always linked to quantity of cane supplied and not to the quantum of shareholding, voting rights or capital employed by the farmer-members, which clearly demonstrates that the payment is a purchase consideration for raw material and not a return on investment. The AR submitted that if the Revenue’s theory were accepted, even payments made to non-member farmers, who have no voting or dividend entitlement, would have to be treated as profit sharing, which would lead to an absurd conclusion. 14 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd.

The ld. AR also submitted that the fixation of the final cane price is not an arbitrary unilateral act but occurs under a regulatory umbrella involving the oversight or concurrence of statutory authorities such as the Director of Sugar, Gujarat State, and the Registrar and District Registrar of Co-operative Societies. The cane price is declared, approved and recorded in the statutory audit report under the Co-operative law framework, and such audit is conducted by Government-nominated auditors. The AR argued that once the State machinery has reviewed and approved the accounts in which the final cane price stands disclosed and accepted, the same must be treated as Government approved price within the meaning of later legislative enactments such as section 36(1)(xvii) and section 155(19) of the Act, which reflect the legislative intention to treat Government approved cane price as allowable business expenditure. The AR submitted that these provisions, read with CBDT Circular No. 18/2021 and the subsequent modification vide Finance Act, 2023, demonstrate that the legislature recognizes that cane price fixed under cooperative governance norms is allowable and that the income-tax department must not mechanically treat final cane price as profit distribution.

Reliance was also placed by the AR on the decision of the Hon’ble Supreme Court in CIT vs. Excel Industries Ltd. (2013) 358 ITR 295 (SC) to argue that the rule of consistency prohibits the Revenue from making contrary additions in a particular assessment year when the claim had been allowed or not challenged in earlier years under identical facts. The AR submitted that in the assessee’s own case for preceding years, as well as in several comparable cooperative sugar factories in Gujarat, Maharashtra and Karnataka, similar cane price structures have been accepted, either by the AO or by appellate forums, and hence the present year’s action represents an unjustified deviation.

The ld. AR also relied upon the recent judgment of the Hon’ble Gujarat High Court in the case of PCIT vs. Shree Narmada Khand Udyog Sahakari Mandli Ltd., R/Tax Appeal No.955 of 2024, dated 11.02.2025, wherein under similar factual circumstances, involving a cooperative sugar factory paying cane price higher than FRP, the Hon’ble Court affirmed the order of this Tribunal holding that such differential cane price does not amount to profit distribution but constitutes allowable business expenditure. The AR submitted that the said judgment, being from the & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. Hon’ble jurisdictional High Court, is binding on this Bench, and therefore, the disallowance under appeal cannot survive.

Lastly, without prejudice to the preceding submissions, the AR argued that even if the Revenue’s stance were hypothetically accepted, the entire differential amount cannot be automatically treated as profit distribution, because the Hon’ble Supreme Court in Tasgaon Taluka (supra) has clearly mandated a scientific and evidence-based computation exercise, distinguishing between members and non-members, examining whether the alleged surplus corresponds to profit, and determining whether any amount can be attributed to profit sharing. The AR submitted that the AO 17 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. has not undertaken any such exercise and hence the disallowance deserves to be deleted in toto, or in the alternative, the matter may be restored only for the limited purpose of quantification in accordance with Tasgaon principles, though the assessee maintains that no such exercise is warranted in light of subsequent judicial and legislative developments.

Proceeding to explain the ratio of Tasgaon Taluka (supra), the ld. CIT- DR submitted that the Hon’ble Supreme Court, while dealing with the earlier regime of SMP under clause 3 and additional price under clause 5A of the Sugarcane (Control) Order, 1966, had clearly held that the minimum price fixed under clause 3 represents the basic purchase price and is allowable as deduction, but that the additional price paid under clause 5A contains a component in the nature of profit-sharing with members and that such profit component, to the extent it represents distribution of 19 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. surplus, is not allowable as a business expenditure. He emphasized that the Hon’ble Supreme Court did not hold that no part of the additional cane price is allowable; instead, it laid down a structured exercise to be carried out by the AO by calling for all relevant materials furnished to the State Government for price fixation, examining the computation of additional price, identifying the element which is traceable to the profit of the year and treating such share of profit paid to members as appropriation of profits, while applying section 40A(2) of the Act separately in respect of payments to non-members. According to the CIT-DR, this framework of analysis remains fully binding even after the shift from the SMP–5A regime to the FRP regime, because the core principle is that expenditure in the nature of profit distribution cannot be allowed as deduction, and only that part of cane price which is a genuine charge on profits can be allowed.

The ld. CIT-DR submitted that post 22.10.2009, the Sugarcane (Control) Order, 1966 was amended; Clause 5A was deleted, and the pricing regime was changed to the FRP structure. He drew attention (as per his written submissions) to the fact that under the revised regime, FRP is determined keeping in view not only cost of production but also a “reasonable margin for the growers on account of risk and profit elements”, 20 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. and, therefore, the basic FRP itself is a final and definite price, unlike the provisional or ambulatory prices in cases like Kolhapur and Mehsana concerning milk co-operatives. In his submission, once the Central Government, by incorporating clauses like 2(g) and 3(1)(g), has consciously built into the FRP the component of reasonable return and risk to growers, there remains no statutory scope for further additional cane price. Any payment over and above FRP, particularly when decided post finalization of accounts and profits in the AGM, can only be regarded as ex-post distribution of surplus profits under the guise of “final cane price”. He submitted that this is precisely what has happened in the case of the present assessee, where the so-called “third installment” or “final cane price” was determined in November 2012, after completion of the accounts for the previous year ended 31.03.2012 and after the profits had already accrued to the assessee. The learned CIT-DR argued that the liability to pay the extra amount did not exist on the last day of the accounting year, that it was not a part of the original contractual price at the time of supply of cane, and that the resolution to pay extra was clearly an appropriation of profits. According to him, this is diametrically opposite to the factual position in decisions like CIT vs. Mehsana District Co-operative Milk Producers Union 21 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. Ltd., (2006) 146 Taxman 355 (Guj.) where the final rate difference was resolved on the last day of the accounting period itself and formed part of the trading results of the year, and in Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd., (2023) 152 taxmann.com 129 (SC), where the ad-hoc nature of milk pricing and the provisional character of interim rates were particularly emphasized. Apart from the above facts, the following facts were also delved upon by the CIT-DR: (a) The A.O. during the fresh assessment proceedings asked the assessee multiple times to submit the documentary evidence regarding any documents submitted to the Gujarat State Government for fixing the additional price, any relevant order by the Gujarat State Government for fixing the additional price and payment made to members/non-members, but assessee failed to give any documentary evidence to the relevant questions raised by A.O. It was pointed out that the explicit directions of this Hon’ble Tribunal while remitting the matter to the AO was to determine the element of profit based on the judgement of the Hon’ble Supreme Court in Tasgaon Taluka (supra) wherein it was held that the difference between SMP determined under clause 3 and SAP/additional purchase price 22 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. 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 and the AO was 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. According to the ld. CIT-DR, this exercise was duly carried out by the AO and the assessee was given multiple opportunities as evident from the records and the order, yet no evidence regarding any documents submitted to the Gujarat State Government for fixing the additional price, any relevant order by the Gujarat State Government for fixing the additional price and payment made to members/non-members etc was filed by the assessee and no replies as such was given by the assessee to the relevant questions raised by AO. 23 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. (b) Generally, a trade practice is that the purchase price is decided before the actual purchase of the commodity. In this case, the amount to be paid to sugarcane suppliers was decided in three instalments with first two being before/during the crushing season and the last one was determined at the time of finalization of accounts. This practice of deciding the final cane price long after the end of crushing season and at the time of finalization of their accounts through AGM in month of November was nothing but modus to substantially suppress the profits of the co-operative sugar society by showing the distribution of profit as purchases from its members. The entire profits of the sugar factories otherwise taxed in hand of society, but due to this modus operandi, remains exempted as an agriculture income in hands of sugarcane growers. Following facts further lend credence to this modus operandi of the assessee: (i) Assessee has paid additional price included in FCP which is over and above the FRP by Rs 242 Crores as determined by the AO (Rs 132 Per MT), which is not allowable as per the amended FRP regime wef 1/10/2009.

The ld. CIT-DR submitted that the assessee’s reliance on the Tribunal’s decision in Shree Narmada Khand Udyog Sahakari Mandli Ltd. (supra) and the subsequent jurisdictional High Court judgment, 172 taxmann.com 467 (Guj.), dated 11.02.2025, affirming the Tribunal is entirely misplaced and fact-specific. He pointed out that in Narmada Khand (supra), the Tribunal had recorded specific findings of fact that the additional cane price had been approved by the Managing Committee which included Government representatives under the Co-operative law, and that such price was, on facts, found to be part of the commercial pricing mechanism duly accepted by the State apparatus. He submitted that those findings are unique to that case and cannot be bodily imported into the present matters where, 26 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. according to him, the assessee has failed to produce any documentary evidence to show that the State Government of Gujarat, the Director of Sugar or any other competent authority had either fixed or approved the payment of cane price over and above the FRP. He further submitted that in Narmada Khand, this Tribunal, in para 19 of its order, had discussed clause 5(b) of the older Sugarcane Control framework and proceeded on a legal footing that does not hold good for the post-2009 FRP regime. In his written note, he argued that clause 5 itself only governed a limited period from 01.11.1958 till the 1962 Order, and that from 1974 onwards additional cane price was governed by clause 5A, which was later deleted in October 2009. Thus, in his submission, the reliance on clause 5(b) in Narmada Khand (supra) to support additional cane price in an FRP regime is not correct in law and, in any case, cannot override the binding law laid down by the Hon’ble Supreme Court in Tasgaon Taluka (supra).

The ld. CIT-DR also distinguished the line of authorities relied upon in Narmada Khand (supra) and by the ld. AR in the present case. He submitted that Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. (supra) and Mehsana Dist. Co-op Milk Producers Union Ltd. (supra) pertain to milk co-operatives where prices were provisional, ad-hoc, per kilo-fat and ambulatory in 27 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. nature, subject to frequent revision, and where the Board resolved on the last day of the accounting period to finalize the rate, thereby creating the liability within the year itself. In contrast, in the instant case, the assessee is a sugar producer, FRP is a final, non-provisional price notified by the Government, and the so-called additional price has been determined much after the year-end, in an AGM held in November 2012, after profits stood ascertained and accounts closed. Further, in Kolhapur Zilla Sahakari Dudh Utpadak (supra), the payment was made only to members, whereas in the present case and in Tasgaon (supra), the payment is made to members as well as non-members (including “nominal members”), which, according to him, is a critical factor because any element of profit can never, by definition, be said to be distributable to non-members as such. Similarly, he noted that decisions concerning West U.P. Sugar Mills, in Civil Appeal No.7508 of 2005, dated 22.04.2020, Jaora Sugar Mills, AIR 1997 SC 600 (SC) and SKG Sugar Ltd., 1959 AIR 230 (SC) related mainly to the competence or otherwise of State Governments to fix SAP under the earlier SMP regime and did not deal with the taxability of excess price as profit distribution under the FRP regime in the State of Gujarat where, admittedly, there is no SAP order issued by the Gujarat Government. Therefore, according to the 28 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. CIT-DR, none of these decisions can detract from the application of Tasgaon Taluka (supra) to the facts of the present case.

On the factual front, the learned CIT-DR submitted that the pattern of payment adopted by the assessee itself demonstrates profit distribution. Referring to the material on record, he pointed out that the assessee has paid cane price at Rs. 2,565 per MT to members, Rs. 2,450 per MT to non- members, and Rs. 2,200 per MT to third parties/other factories, thereby clearly showing that the highest rate is reserved for members, a somewhat lower rate for nominal/non-members, and the lowest for outsiders. The differential of Rs. 132 per quintal paid to members, over and above the rate at which cane is available from other sources, according to him, is nothing but distribution of profits in the guise of purchase price, and this conclusion flows even on a plain commercial comparison without any elaborate computation. He further submitted that neither before the AO in the set- aside proceedings nor before this Tribunal has the assessee produced any contemporaneous correspondence with State authorities, any order of the Government fixing a higher price, or any material to show that the so-called final cane price was ever placed before or sanctioned by the State or Central Government. The assessee’s reliance on the mere presence of “Director of 29 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. Sugar” as an ex-officio or nominee director on the Board of the co-operative was specifically rebutted by stating that the list of directors furnished by the assessee mentions only the post and not the name/designation as “Government nominee” and that there is no evidence that such Director of Sugar has either participated in or signed any resolution relating to additional cane price, much less issued any order in his official capacity. He contended that the mere fact that statutory audit reports are required to be submitted to the Registrar or Director of Sugar under the Co-operative laws does not amount to Government approval for the purposes of the Income- tax Act, and that statutory audit is primarily a matter of regulatory compliance, not a fiscal sanction.

The ld. CIT-DR then turned to the subsequent legislative developments, viz. insertion of section 36(1)(xvii) by the Finance Act, 2015 (effective from A.Y. 2016-17), and insertion of section 155(19) by the Finance Act, 2023, as elaborated in the Memorandum to the Finance Bill and the CBDT SOP Circular dated 27.07.2023. He submitted that section 36(1)(xvii) was introduced with a clear stipulation that deduction will be available to a co-operative sugar factory in respect of sugarcane price only to the extent such price is equal to or less than the price fixed or approved 30 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. by the Government, and that the same is prospective from A.Y. 2016-17. To extend this benefit to earlier years and settle pending litigation, the Parliament inserted section 155(19) enabling the AO, upon an application by the assessee, to recompute income and allow deduction for such portion of cane price as is equal to or less than Government fixed/approved price for that year. The learned CIT-DR pointed out that this remedial mechanism requires the assessee to furnish specific documentary evidence showing that the price claimed as deduction does not exceed Government fixed/approved price and that the CBDT’s SOP requires the Jurisdictional AO to dispose of such application within a stipulated timeframe. In the present case, however, he submitted that the assessee has not even filed any application under section 155(19) till date, nor has it produced the necessary documents to show that the so-called final cane price was fixed or approved by the Central or State Government. According to him, this conduct indicates that the assessee does not possess any such Government approval and only seeks to rely on general cooperative resolutions and audit reports which, in his submission, fall far short of the statutory requirement.

The ld. CIT-DR also addressed the assessee’s plea of consistency and reliance on other assessment orders wherein, according to the AR, similar 31 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. cane price payments were not disallowed. He submitted that the principle of consistency cannot be invoked to perpetuate a mistake of law, especially when a binding judgment of the Hon’ble Supreme Court, Tasgaon Taluka (supra) has subsequently clarified the position and when, in the present case, the AO has recorded specific findings that no documentary evidence of Government approval or contemporaneous pricing computation has been adduced by the assessee. The fact that some other AOs, on different records, might have accepted claims of other assessees or even the same assessee in some years does not stop the Department from making a correct assessment when full facts are examined in the light of the Hon’ble Apex Court judgment and the later statutory scheme.

In conclusion, the learned CIT-DR submitted that the assessee has miserably failed to discharge its onus either under the directions of this Tribunal in the earlier round or under the principles laid down in Tasgaon Taluka (supra), that no credible evidence has been produced to show that the excess cane price over FRP has any connection with Government- sanctioned pricing or with genuine commercial compulsion; that the pattern of post-year-end determination of additional price in the AGM after profits stand crystallized clearly indicates appropriation and distribution of 32 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. surplus to members (and to some extent to non-members) and, therefore, the disallowance made by the AO and sustained by the CIT(A) requires to be upheld in full. He further submitted that for the sugar sector, Tasgaon Taluka (supra) continues to be the governing law despite the shift to the FRP regime, that the jurisdictional High Court’s decision in Narmada Khand (supra) is distinguishable both on facts and on law as explained, and that if, for argument’s sake, Tasgaon were treated as inapplicable, the very basis of the Tribunal’s earlier remand would be nullified and the original assessment orders, wherein any payment over FRP was rightly treated as distribution of profits, would stand revived. He accordingly prayed that the appeal of the assessee be dismissed and the orders of the lower authorities be confirmed.

We have given our thoughtful consideration to the rival submissions, carefully perused the material available on record, including the paper book filed by the assessee, the assessment order passed in pursuance of the earlier remand, the impugned appellate order, as well as the detailed written submissions and supplementary notes filed by the learned AR and ld. CIT-DR. We have also deliberated on the decisions relied upon by both sides. The controversy, shorn of verbiage, lies in a somewhat narrow but legally significant compass, namely, whether the FCP/differential cane price 33 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. paid over and above FRP represents, in substance, a deductible business expenditure incurred wholly and exclusively for the purposes of the assessee’s business, or whether, to any extent, it partakes the character of distribution of surplus/profits to cane growers, particularly members, under the co-operative structure. While the assessee has sought to characterize the entire additional payment as a part of the composite contractual purchase price of raw material, the Revenue has, on the other hand, portrayed at least a portion thereof as appropriation of profits, drawing strength principally from the decision of the Hon’ble Supreme Court in Tasgaon Taluka (supra) and the subsequent statutory scheme under sections 36(1)(xvii) and 155(19) of the Act.

At this juncture, it would be apposite to note that there are two distinct layers to the grounds raised

In so far as the remand directions of this Tribunal in its order dated 19.07.2019 are concerned, it is evident that the Coordinate Bench had required the AO to undertake a fresh factual inquiry in the light of Tasgaon Taluka (supra), which envisages examination of the books of account, statements and workings submitted to the State Government for determination of cane price, and thereafter, a segregation exercise to identify the profit element, if any, embedded in the additional price insofar as paid to members. The ld. AR contends that no such exercise has been undertaken and that the impugned order is a mere reproduction of the original assessment, whereas the learned CIT-DR, while defending the 35 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. ultimate conclusion, has also urged that even if the exercise is not reflected in elaborate computational form, the pattern of payment itself (different rates to members, non-members and outsiders) is sufficient to infer profit distribution. This gives rise to a mixed question: whether, from the standpoint of procedural compliance, the directions of the Tribunal can be said to have been substantially acted upon, and secondly, whether the material actually examined and recorded by the AO is enough to support the Revenue’s inference under Tasgaon.

On the substantive dimension, it emerges from the rival submissions that there is no dispute about certain foundational facts: the assessee is a co-operative sugar factory; FRP notified under the Sugarcane (Control) Order constitutes the minimum payable price; the assessee has in fact paid cane price higher than FRP in the relevant year; part of such payment has been made during/around the crushing season and the balance, styled as “final cane price” or “third installment”, has been determined and paid much after the close of the accounting year in November, pursuant to resolutions of the co-operative society. The divergence begins at the interpretative stage—while the assessee maintains that such final fixation is a commercial mechanism of rate finalization embedded in the cooperative 36 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. model and backed, in substance, by State/regulatory oversight and thus forms an accrued contractual liability, the Department insists that once FRP, post-2009, is a final “fair and remunerative” price incorporating reasonable profit, any further ex post enhancement, especially after profits have been crystallized, has to be seen as allocation of surplus rather than a trading expense.

Considerable debate has also centered around the extent and manner of applicability of decision in case of Tasgaon Taluka (supra) in the backdrop of the FRP regime and the subsequent jurisdictional High Court decision in Shree Narmada Khand Udyog (supra). The assessee has canvassed that Tasgaon Taluka (supra) was decided in the context of the SMP + clause 5A framework; that, post deletion of clause 5A and introduction of FRP, the factual and statutory context has significantly changed; that this very Bench, in Narmada Khand Udyog (supra), has already interpreted the co-operative cane price mechanism in favour of the assessee; and that the Hon’ble Gujarat High Court has since affirmed that reasoning. The Revenue, on the other hand, contends that Tasgaon Taluka (supra) enunciates a general principle of non-deductibility of profit distribution which is not confined to the earlier regime; that Narmada 37 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. Khand Udyog (supra), properly read, turned on specific findings of Government approval and factual appreciation which are allegedly absent in the present case; and that in any event, the High Court in Narmada Khand did not directly pronounce on the precise FRP-post-2009 legal architecture or on the scope of clause 5A vis-à-vis FRP, such that Tasgaon can be said to have been diluted or rendered inapplicable. The interplay between these two lines of authority, therefore, requires careful calibration before a final view is taken.

A related facet which also surfaces in the arguments is the impact of subsequent legislative interventions, notably the insertion of section 36(1)(xvii) of the Act by the Finance Act, 2015 and section 155(19) of the Act by the Finance Act, 2023, together with CBDT Circular No. 18/2021 and the SOP dated 27.07.2023. The assessee’s stance is that these provisions are remedial and clarificatory in spirit, revealing Parliament’s intent that cane price up to Government fixed/approved levels is to be treated as allowable, and that the co-operative pattern of fixation with Government nominees and statutory audit constitutes such “approval”. The Revenue, by contrast, stresses on the prospective operation of section 36(1)(xvii), the conditional nature of relief under section 155(19) of the Act (requiring specific 38 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. application and documentary proof of Government fixation/approval), and the admitted fact that, in the present case, no such application or documentary proof of formal Government price approval has been produced. At this stage, we are therefore confronted with the question whether, and to what extent, these legislative developments can be read as throwing light on the character of cane price payments in earlier years, and what weight can be accorded to co-operative audit mechanisms and the presence of Government nominees in co-operative bodies for the limited purpose of treating the impugned FCP as “Government approved” or otherwise.

Yet another aspect which arises from the factual submissions is the differential rate structure adopted by the assessee – one rate for members, a slightly lower rate for non-members/nominal members, and a still lower rate for outside parties/other factories. The learned CIT-DR has invited us to infer, from this pattern alone, that the incremental rate for members represents nothing but appropriation of profits. The assessee, on the other hand, would have it that this differentiation is an inherent feature of the cooperative movement, justified on grounds of loyalty, supply commitment and primary membership obligations, and that as long as the base rate itself 39 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. (for non-members too) is above FRP and determined on commercial considerations, the marginal differential for members cannot, by itself, be treated as a profit slice. How far the mere presence of multiple slabs of cane price, vis-à-vis different categories of suppliers, can be determinative of the character of payment, and what role, if any, is to be played by the underlying documentation, pricing computations and Board/AGM resolutions, is another area that needs to be weighed with reference to the principles emanating from Tasgaon Taluka (supra) and related precedents.

In the backdrop of the above broad canvas, it thus becomes necessary to synthesize the factual position as emerging from the record with the legal tests propounded in Tasgaon Taluka (supra) and other cited decisions, as also to gauge the persuasive and binding force of the jurisdictional High Court judgment in Narmada Khand Udyog (supra) in the specific statutory setting governing the present assessee. It is only after such a composite evaluation that one can properly address, first, the procedural objections as to the manner of the set-aside assessment and the appellate order, and secondly, the substantive question as to whether, and to what extent, the impugned differential cane price should be regarded as & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. an allowable deduction or rejected as profit appropriation. We, therefore, proceed to examine these aspects in some detail.

We first deal with Grounds Nos. 1 to 5, wherein the assessee has assailed the assessment on jurisdictional and procedural grounds, alleging non-compliance with this Tribunal’s earlier remand directions, violation of section 144B and CBDT instructions, and denial of proper opportunity. We have perused the chronology of events, including the notices issued under sections 142(1) and 143(2) of the Act, the show-cause notice, and the assessee’s written submissions placed on record. It is evident that statutory notices were issued, the assessee was put to notice of the proposed disallowance and was afforded opportunity, albeit within the faceless framework. The assessee has not been able to point out any concrete instance where a specific piece of evidence was tendered but refused to be taken on record, or where a particular request for adjournment/pre-hearing material was arbitrarily denied so as to cause demonstrable prejudice. In the present case, the record shows a clear pattern of higher cane price being paid to members compared to non-members/third parties, without the assessee producing before the AO any detailed working or cost-based justification correlating the entire differential with commercial exigencies 41 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. such as recovery, quality or logistics etc or any iota of evidence justifying such higher payment. Equally, while it may be said that the AO has not carried out the full quantification exercise in the precise manner envisaged by this Tribunal in the earlier round, however, it is imperative to point out that the assessee has not submitted an iota of evidence to justify payments higher than the FRP, the manner of its calculation, its approval by the concerned Government Authorities etc. as laid down by Hon’ble Supreme Court and as per directions of this Tribunal , therefore, such deficiency goes to the manner of determination of disallowance and does not render the entire assessment void ab initio. On the facts before us, no such fatal prejudice is established. We, therefore, see no infirmity in the assumption of jurisdiction or in the continuation of proceedings so as to annul the assessment itself. Grounds Nos. 1 to 5 are, accordingly, dismissed.

We now turn to the substantive controversy arising from Grounds Nos. 6 to 14. The core issue is whether the FCP paid over and above the FRP is wholly deductible as business expenditure or whether a portion thereof, being in the nature of appropriation of surplus to member-growers, is liable for disallowance. The legal position on this aspect stands governed by the ratio of the Hon’ble Supreme Court in case of Tasgaon Taluka (supra) and 42 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. related decisions such as Kolhapur Zilla Sahakari Dudh (supra) and Mehsana District Co-operative Milk (supra). In essence, these authorities lay down that while the statutory or commercially determinable cane purchase price, forming part of the trading transaction, is allowable, any element embedded in the so-called “final” or “additional” price which, in substance, represents a distribution of profit to members cannot be allowed under section 37(1) of the Act. The determination of such embedded surplus is a fact-driven exercise, requiring comparison of rates paid to members vis-à- vis non-members/outsiders, timing of liability crystallisation, and contemporaneous computations or statements furnished to statutory authorities. In the present case, the record shows a clear pattern of higher cane price being paid to members compared to non-members/third parties, without the assessee producing before us any detailed working or cost- based justification correlating the entire differential with commercial exigencies such as recovery, quality or logistics. In these circumstances, we are unable to accept the plea that no disallowance at all is warranted; the onus to substantiate the entire excess payment as a trading outgo has not been discharged. Moreover, it is important to state here that no evidence of any documents submitted to the Gujarat State Government for fixing the 43 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. additional price, any relevant order by the Gujarat State Government for fixing the additional price etc was filed by the assessee at any stage of the proceedings. To this extent, the challenge to the very principle of disallowance fails and Grounds Nos. 6 to 12 stand rejected in so far as they assail the legitimacy of making any disallowance on this count.

However, while the necessity of a disallowance in principle is thus upheld, the quantification made in the impugned assessment order is not in consonance with the method indicated by the Hon’ble Supreme Court in Tasgaon Taluka (supra) nor with the structured approach adopted in comparable matters, including the order of the CIT(A) in the case of Sahakari Khand Udhyog Mandali Ltd. (supra), wherein the profit-embedded portion was isolated by taking the effective rate to non-members as the commercial benchmark and treating only the differential per MT paid to members as embedded surplus (e.g. Rs. 75 per MT × quantity procured from members). A similar approach was also recognized by the Pune Bench in the case of Mohanrao Shinde Sahakari Sakhar Karkhana Ltd., (AY 2012-13), dated 17.07.2019, where the price paid to non-members was regarded as a purely commercial deal, non-members having no claim on surplus of the co-operative. Guided by these principles, 44 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. we are of the considered view that the correct method is: (i) to identify, on the basis of the assessee’s books and records, the rates paid to members, non-members/nominal members and outside factories; (ii) to treat the rate paid to non-members/outsiders as the commercial benchmark; (iii) to compute the differential per MT between the member’s rate and such benchmark; and (iv) to multiply this differential by the quantity of cane purchased from members to arrive at the prima facie profit-embedded component liable for disallowance, subject to any further reduction to the extent the assessee, by cogent contemporaneous evidence, demonstrates that a part of such differential is directly attributable to demonstrable commercial factors (such as quality or recovery) rather than to membership. In the absence of complete computations and supporting material before us, it is neither feasible nor proper to undertake this exercise at the appellate stage. We, therefore, restore the matter to the file of the AO for the limited purpose of recomputing the disallowance strictly in the above manner and in line with the legal principles flowing from the aforesaid judicial precedents, after affording the assessee a final effective opportunity to place all relevant workings and evidence on record. To this extent, Grounds Nos. 6 to 14 are treated as partly allowed, with the ultimate 45 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. quantification left to be redetermined by the AO in accordance with law. This methodology shall apply mutatis mutandis for determination of similar issues arising in the remaining connected appeals forming part of this consolidated adjudication, subject to necessary factual adaptation. Shree Khedut Sahakari Khand Udyog (AY 2016-17) 35. Let us now take up the appeal for A.Y. 2016-17 in filed by Shree Khedut Sahakari Khand Udhyog Mandli Ltd. In this year, the assessee has raised seven grounds of appeal challenging the action of the lower authorities in sustaining the disallowance of Rs.125,56,23,819/- out of the Final Cane Price paid to cane growers.

On the facts and in the circumstances of the case as well in law, both the lower authorities have overlooked the claim in the return of income filed for the carried forwards of unabsorbed depreciation as assessed in the regular assessment completed for the earlier years and hence, the assessment order passed by the AO arbitrarily at the assessed income of Rs. 125,56,23,819/- without giving set off of the brought forward of unabsorbed depreciation for the earlier years is liable to be set aside.

Though the grounds are lengthily drafted, they essentially assert that the impugned amount represents a legitimate business expenditure allowable under section 37(1) read with section 36(1)(xvii) of the Act, that the cane price was duly approved by the competent State Government authority, that the lower authorities misapplied the statute and ignored CBDT Circular No. 18/2021 dated 25.10.2021, that the principle of consistency has been violated, and that the set-off of brought-forward unabsorbed depreciation has been wrongly denied. As all effective grounds (Ground Nos. 1 to 6) emanate from this single composite issue, they are taken up, examined and disposed of together. Ground No. 7 is general and does not require separate adjudication.

The ld. AR submitted that unlike the earlier assessment year, the present year stands on a materially different statutory footing with the introduction of section 36(1)(xvii), which specifically governs the deduction of sugarcane purchase price paid by co-operative sugar factories. He submitted that the assessee has placed on record a categorical approval & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. issued by the Director of Sugar, Government of Gujarat, fixing and approving the Final Cane Price for the relevant crushing season. This approval, according to him, satisfies the statutory requirement that cane price shall be deductible to the extent that it is equal to or less than the price fixed or approved by the Government. He further submitted that such approval is contemporaneous, statutory in character, and forms part of the regulatory framework applicable to co-operative sugar factories in the State of Gujarat. He argued that once the statutory threshold under section 36(1)(xvii) of the Act is fulfilled, no further enquiry under the general provisions of section 37(1) of the Act or under the principles of the Hon’ble Supreme Court’s decision in Tasgaon Taluka (supra) remains necessary.

The assessee also relied on CBDT Circular No.18/2021 to submit that the legislative intention behind introducing section 36(1)(xvii) was to resolve prolonged litigation in this sector and to provide certainty where the cane price corresponds to government fixation or approval. The AR submitted that the cane price was paid uniformly with reference to quantity supplied and not based on membership, voting rights, or capital contribution, and therefore cannot be characterized as profit distribution. It was further submitted that in preceding and succeeding years under the 49 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. same statutory regime, the Department has accepted similar cane price structures without disallowance, and hence the present deviation violates the rule of consistency laid down by the Hon’ble Supreme Court in case of in Excel Industries Ltd. (supra). The assessee also pointed out that although the AO computed the entire disputed amount as income, he failed to allow set-off of unabsorbed depreciation despite there being no statutory or factual bar to such set-off.

Per contra, the learned CIT-DR reiterated the reasoning of the AO and submitted that the approval relied upon by the assessee cannot be treated as a Government fixation of price in the statutory sense, and that the so- called final cane price is nothing more than post-profit distribution passed through a co-operative resolution. He argued that the differential price structure, where members receive higher rates compared to non-members and outsiders, indicates an element of patronage benefit akin to surplus distribution. According to him, the principles laid down in Tasgaon Taluka (supra) continue to apply even under the FRP regime, and unless the assessee conclusively demonstrates that the Government has formally fixed or approved the excess over FRP, the same cannot be allowed as a deduction under section 36(1)(xvii) of the Act. He therefore submitted that 50 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. the addition made by the AO and sustained by the CIT(A) deserved to be upheld.

We have considered the rival submissions and examined the material placed on record. The decisive distinguishing feature in the present assessment year is the fact that the assessee has placed on record a specific and contemporaneous approval issued by the competent State Government authority, i.e., the Director of Sugar, Gujarat, certifying and approving the Final Cane Price payable for the relevant crushing season. This approval stands unrebutted by the Revenue and is directly relatable to the cane price actually paid by the assessee. On these facts, the condition laid down in section 36(1)(xvii) of the Act that the deduction of cane price shall be allowed to the extent such price is equal to or less than the price fixed or approved by the Government stands fully satisfied. Once this statutory requirement is met, the necessity of further forensic segregation of alleged “profit-embedded elements” under Tasgaon Taluka (supa) principles does not arise for this assessment year, because the legislature has carved out an overriding and specific deduction framework for Government-approved cane pricing. The CBDT circular referred to earlier also reinforces this legislative intent. 51 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd.

We also find merit in the assessee’s contention based on the rule of consistency, as similar pricing models supported by identical forms of Government approval have been accepted in regular scrutiny assessments in adjoining years without disallowance. In the absence of any change in material facts or statutory position, a contrary view in isolation for this year is unwarranted. Further, as regards the computation aspect, we find that the AO has not disputed the availability of brought-forward unabsorbed depreciation and yet has not allowed its set-off while determining the assessed income. The AO is required to compute taxable income strictly in accordance with law and not on estimation or assumption, and therefore the assessee is entitled to such set-off.

In view of the above discussion, the disallowance of Rs.125,56,23,819/- sustained by the CIT(A) is deleted. The AO is directed to allow the full deduction of FCP paid and further grant set-off of brought- forward depreciation in accordance with law. Accordingly, all grounds raised by the assessee for AY 2016-17 in stand allowed and the appeal is allowed in full. Sahakari Khand Udhyog Mandali Ltd. (AY 2011-12 to 2014-15)

We now proceed to adjudicate the next consolidated group of eight appeals pertaining to Sahakari Khand Udhyog Mandali Ltd. (supra) covering AYs 2011-12 to 2014-15, wherein for each assessment year there exist cross-appeals—one by the Revenue challenging the partial relief granted by the CIT(A), and the corresponding appeal by the assessee contesting the portion of disallowance sustained by the CIT(A). Grounds of appeal are the same for all four assessment years; therefore, for ready reference, the grounds for AY 2011-12 for both the assessee and the Revenue are reproduced below:

On the facts and in the circumstances of the case as well in law, As per Sr.No. 1 above both the lower authorities have erred in ignoring the fact that comparable cane prices paid by the other cooperative sugar societies in other States are in commensurate with the cane price paid to registered members fixed with the approval of the State Government for the year under appeal, were allowed as business expenditure incurred to meet commercial expediency u/s 37(1) of the Act in their assessments and therefore, the action of the tax authorities to treat the portion of final/approved State Price as an element of profit, merely on comparison with final cane price paid to nominal members, being without jurisdiction, in pure contravention to the "Rule of Consistency", arbitrary, prejudicial, subjective, perverse, bad in law and hence, liable to be struck down.

On the facts and in the circumstances of the case as well in law, the C.I.T. (Appeals) failed to appreciate that on identical facts, in the past in all the assessment years, sugarcane price paid to registered members was allowed by various AOs or the Appellate Authorities, and therefore, there was no justification on the part of the Revenue to decide to the contrary, and thus, offended the law laid down by the Supreme Court in CIT Vs. Excel Industries Ltd. - (2013) 358 ITR 295 holding that Revenue must be consistent and not flip-flop on the same issue in different assessment years.

Your appellant further reserves its rights to add, alter, amend or modify any of the aforesaid grounds before or at the time of hearing of an appeal.

Since the grounds raised by both parties across all four assessment years are substantially identical and revolve around one core controversy, namely the allowability of cane price paid in excess of the statutory FRP, the appeals are adjudicated together for convenience. The variation in numerical figures year-wise does not alter the nature of the dispute. Accordingly, Ground Nos. 1 to 7 in the assessee’s appeals in to 214/SRT/2020 and Ground Nos. 1 to 5 in the Revenue’s appeals in to 221/SRT/2020 are grouped issue-wise and disposed of in a consolidated manner by the following common discussion.

During the hearing, the ld. AR reiterated that no portion of the cane price represents profit distribution and that the differential between members and nominal members was commercially justifiable based on quality parameters, logistical factors, and the co-operative procurement framework. The AR submitted that similar pricing patterns were accepted in earlier years and therefore the rule of consistency applies.

In response, the ld. CIT-DR supported the impugned orders and submitted that the assessee could not substantiate the differential pricing with contemporaneous evidence or Government approved orders / approvals. He argued that the CIT(A) adopted a balanced approach by sustaining only the demonstrable differential attributable to members, and such reasoning aligns with the mandate of the Hon’ble Supreme Court in Tasgaon Taluka (supra).

We have given our thoughtful consideration to rival submissions and carefully examined the orders of the authorities below. These assessment years fall under the legal regime prior to insertion of section 36(1)(xvii) of the Act. Accordingly, the legal matrix continues to be governed by the ratio laid down by the Hon’ble Supreme Court in Tasgaon Taluka (supra), wherein the Court categorically held that while cane purchase price paid under statutory framework is allowable, any additional amount having the character of profit allocation must be examined and disallowed to the extent it represents distribution of surplus. The Hon’ble Supreme Court further emphasized that the AO must carry out a factual enquiry to determine whether excess price paid bears nexus with cost or represents member-centric benefit not relatable to business exigency. 57 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd.

In the present cases, the CIT(A) has carried out a factual exercise based on price structure available on record and observed that while the assessee paid a uniform statutory or minimum price to all suppliers, the additional price component was selectively extended only to registered members of the cooperative society and not to nominal or outside suppliers. The CIT(A) noted that no computation sheet, approval document, pricing formula, cost sheet, or statutory correspondence was furnished demonstrating that such higher rate represented a commercially quantifiable obligation. The assessee’s explanation remained broad, general and unsupported by contemporaneous material. In such circumstances, the CIT(A) applied a rational approach by treating the difference in rate per MT between registered and nominal suppliers as representing embedded surplus akin to profit distribution and sustained such portion of the disallowance while granting relief for the balance portion which could be regarded as part of business expenditure. The assessee has not been able to rebut these findings with substantive evidence nor point out perversity or legal infirmity in the approach adopted.

At the same time, the Revenue has also not been able to demonstrate that the relief granted by the CIT(A) was excessive or contrary 58 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. to law. The Revenue has merely reiterated that the entire payment in excess of FRP ought to be disallowed without furnishing any additional material or computation. In absence of any such supporting record, and keeping in view the judicial mandate requiring proportionate disallowance rather than a blanket approach, we see no justification to interfere with the CIT(A)’s conclusions.

The plea of consistency raised by the assessee also cannot be accepted in these years because the Hon’ble Supreme Court has clarified the legal position in Tasgaon Taluka (supra) subsequent to earlier assessments. The CIT(A), having adopted a balanced factual and legal approach, cannot be faulted. Accordingly, the findings of the CIT(A) appear reasonable, well-considered and legally sustainable.

In light of the above discussion, the disallowances sustained by the CIT(A) in these four assessment years are upheld. Consequently, the appeals filed by the assessee in to 214/SRT/2020 are dismissed and the corresponding appeals filed by the Revenue in to 221/SRT/2020 challenging the partial relief are also dismissed. All grounds of appeal

On the facts and in the circumstances of the case and in Law, the Ld.CIT(A) has failed to appreciate the fact that during the course of the assessment proceedings as well as in the remand proceedings, the assessee did not furnish any details or computations to explain the basis of determination of final cane price on purchase of sugarcane from member as well as nominal member farmers.

During the course of hearing, the ld. AR reiterated that the assessee is a cooperative sugar manufacturing society operating under a regulated environment wherein the fixation of final cane price is a dynamic process based on commercial, agronomic and operational considerations. It was submitted that the marginal difference between price paid to registered members and nominal members in earlier years and the payment of cane development expenditure was not distribution of profits but an expenditure incurred wholly and exclusively in the course of business to secure supply of better-quality cane, higher recovery percentage, and stability of procurement. The AR submitted that the Ld. CIT(A) erred in sustaining even & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. the small portion of disallowance, particularly when in two years (AYs 2013- 14 and 2014-15) the CIT(A) accepted that there was no differential pricing and deleted the addition entirely. Reliance was once again placed on judicial precedents including the rulings of the Hon’ble Supreme Court in Excel Industries Ltd. (supra) and various ITAT orders in comparable cooperative sugar sector cases.

On the other hand, the ld. CIT-DR supported the findings of the AO in principle but fairly conceded that the Ld. CIT(A) had already taken a balanced and fact-based approach by analyzing the differential component and limiting disallowance strictly to amounts demonstrably linked to member-specific benefit, either by way of higher purchase price or cane development assistance. The CIT-DR submitted that in both assessment years where the assessee has filed appeals, namely AY 2011-12 and AY 2012-13, the assessee failed to furnish contemporaneous supporting documents such as computation sheets, pricing approvals, cost justification, or government-based cane pricing calibration. The CIT-DR further added that the requirement imposed by the Hon’ble Supreme Court in case of Tasgaon Taluka (supra) mandates that the Revenue must identify and segregate profit-sharing elements embedded in sugarcane payments made 64 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. to members, and therefore the limited disallowance retained by the CIT(A) was not only justified but conservative.

We have carefully considered the rival submissions and examined the record. As noted earlier while dealing with the preceding group of appeals, the relevant assessment years fall prior to the insertion of section 36(1)(xvii) of the Act, and therefore the legal position continues to be governed by the binding ratio of the Hon’ble Supreme Court in Tasgaon Taluka (supra). The principle laid down therein obligates the fact-finding authority to segregate business-based cane price from cooperative surplus allocation or membership incentives, while ensuring that only the former qualifies as allowable expenditure.

In the instant batch, the Ld. CIT(A), after appreciating the available record, has concluded that while the major portion of the cane purchase price represents commercial expenditure allowable under section 37(1), the differential element paid exclusively to registered members, as well as the cane development expenditure in certain years which was not extended to nominal suppliers, is indicative of member-linked benefit. The CIT(A) has quantified such differential element with precision based on actual price variation per metric ton and documentary invoices rather than assumptions 65 & 209/SRT/2024 & Ors. Shree Khedut Sahakari Khand Udyog Mandli Ltd. or flat percentage benchmarks. For AYs 2013-14 and 2014-15, the CIT(A) has recorded that no price distinction existed between registered and nominal suppliers and accordingly deleted the entire disallowance—a finding the Revenue has failed to rebut with contrary evidence.

The assessee, despite lengthy submissions, has not furnished any further contemporaneous evidence demonstrating that the retained disallowance in AYs 2011-12 and 2012-13 was based on incorrect appreciation of facts or law, nor produced any pricing formula, mandated government directive, or audit level cane price justification validating the differential. Mere claim of cooperative practice cannot override the Supreme Court’s directive mandating factual segregation of profit element.

Accordingly, following the consistent approach adopted in the earlier batches, we find that the conclusions reached by the Ld. CIT(A) are well- reasoned, factually supported and legally sustainable. No interference is therefore warranted.

In the result, the four Revenue appeals in to 225/SRT/2020 fail and are dismissed and the assessee’s appeals in and 17/SRT/2021 for AYs 2011-12 and 2012-13 also fail and are dismissed. All grounds raised in these six appeals thus stand dismissed. 66