THIRU AROORAN SUGARS LTD.,CHENNAI vs. ACIT, CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

The assessee filed these appeals against the orders of the Commissioner

of Income Tax – 11, Chennai and Commissioner of Income Tax-III, Chennai in

New ITA No. 60/13-14/CIT(A)-11 dated 30.11.2015 and ITA No. 866/13-

14/CIT(A)-3 dated 31.10.2014 for assessment years 2005-06 and 2006-07,

respectively.

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purchases cane from the farmers. In the assessment made for assessment year

2005-06, the AO found that the assessee has debited differential cane cost for

Tirumandankudi unit at Rs. 37,00,369/- and A. Chittur unit at Rs. 77,43,876/-

and claimed them as a deduction in the assessment year 2005-06. The AO took

a view that since the liability has not crystalized in the previous year relating to

the assessment year 2005-06, the deduction cannot be allowed for assessment

year 2005-06. While, the AO was framing the assessment for assessment year

2006-07, the assessee claimed the said sum as a liability on the basis of actual

payment made to the farmers on November, 2005, pleading that the expenditure

has become actual and final in November, 2005 and requested the AO to allow it

in assessment year 2006-07. The AO held that the additional cane price relates

to sugar season 2002-03 ie relevant to the assessment year 2003-04 and the

liability have been approved in the previous year relevant to a y 2003-04. The

AO held that since the assessee is following mercantile system , its claim that

such payments were made on cash basis during the assessment year 2006-07

cannot be acceded to and observed that for allowing this expenditure the

assessee may move the appropriate forum for making the claim in the

assessment year 2003-04.

2.1. Further, in the assessment year 2005-06, the assessee made the

provision under clause 5A of the Sugarcane (Control) order , 1966 which is the

additional purchase consideration for sugarcane payable to farmers. The AO

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held in the assessment order for ay 2005-06 that since it is only a provision,

meant for 2004-05 sugar season, not actually paid even in the subsequent years

and hence such claim was not allowable. While, the AO was making

assessment for assessment year 2006-07, the assessee has stated that this was

a tentative cane additional price envisaged for the payment during March, 2005

accounts finalisation. But, subsequently in September, 2005, it was withdrawn

as not necessary. The assessee submitted that the provision entry was a debit

in the assessment year 2005-06 , however, this claim was not allowed by the AO

while making the assessment for ay 2005-06. Hence, in ay 2006-07, the debit

entry made in ay 2005-06 was reversed by a credit entry and hence it should

not be taken as an income in ay 2006-07 . The AO held that a perusal of the

profit and loss account shows that there is no credit entry relatable to the

withdrawal of the provision of Rs. 1,48,35,532/- and hence rejected the

assessee’s claim in ay 2006-07.

2.2 Apart from the above two issues, in assessment year 2006-07, the

assessee claimed raw sugar expenses at Rs. 8,11,47,809/- on which the AO

found that TDS has not been paid within the due date but it was paid in the

financial year 2007-08 only. Hence, he disallowed it u/s. 40(a)(ia). The assessee

claimed share issue expenses at Rs. 4,65,649/- u/s. 35D. The Assessing Officer

disallowed it as a capital expenditure relying on the decision of Brooke Bond

India Ltd [225 ITR 795]. Further, the assessee has received dividend of Rs.

31,840/- and claimed same as exempt income u/s. 10(34). Relying on the

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decision of the ITAT, Mumbai in the case of ITO vs. Daga Capital Management,

Max Investment Ltd etc., and the AO disallowed Rs. 32,673/- under rule 8D.

Aggrieved, the assessee filed appeals before the CIT(A) against the assessment

orders for ays 2005-06 & 2006-07.

2.3. For ay 2005-06 , the CIT(A) upheld the disallowance of differential cost

made by the AO and on the issue of provision for 5A price also the CIT(A)

upheld AO’s disallowance holding that the provision has no basis, it is an

unascertained liability which was never met by the assessee and hence he agrees

with the AO’s decision . For the ay 2006-07, on the issue of disallowance of

provision for Additional 5A cane price the CIT(A) held that there was no

addition made on this account . Since, the AO himself has mentioned that the

appellant can makea claim in assessment year 2003-04, the CIT(A) held that

any adjudication on the assessee’s grounds are only academic in nature and

hence, treated them as dismissed, upheld the disallowances; made u/s. 40(a)(ia)

and u/s 35D, relying on the Bombay High court decision in Godrej & Boyce Mfg

Co reported in 328 ITR 81 deleted the addition made under Rule 8D and relying

on jurisdictional ITAT decision in the case Celebrity Fashions Ltd., in ITA No.

1318 & 1319/Mds/2011 dated 30.03.2012 held that 5% of dividend income

would be reasonable expenditure to earn the dividend income. Aggrieved on

these appeal orders of the CIT(A), the assessee filed these appeals.

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and the AR submitted that the assessee had provided additional cane price at

Rs. 2,14,44,515/- for ay 2005-06 and had claimed it as deduction . This has

been disallowed and the issue is before the Income Tax Appellate Tribunal.

Further, this additional cane price had actually been paid in November,2005

relevant to the Assessment Year 2006-07. It is submitted that in case, the

amount of provision is disallowed in the assessment year 2005-06 on the

ground that it was only a provision, the same may be allowed for the

assessment year 2006-07 in which the payment was made. Further, the AR

submitted that the assessee estimated the additional cane price payable to be

at Rs.1,48,35,532/ - and claimed it as a deduction in assessment year 2005-

amount was excess provision and therefore the entire amount of

Rs.1,48,35,532/ - was reversed to the credit of the Profit and Loss Account

and Balance Sheet as on 31.03.2006. This was assessed as income for the

assessment year 2006-07. It is the contention of the assessee that if this

provision is not allowed as a deduction in the assessment year 2005-06, the

same should not be assessed as income on its reversal in the assessment

year 2006-07. These additional grounds arise on account of and consequent

to the decision to be taken for the assessment year 2005-06. As it is merely a

consequential to the decision for asst year 2005-06 and all the facts are

available on record, it is prayed that these additional grounds may be

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admitted and decided on merits for the assessment year 2006-07 and relied

on the following cases.

CIT VsM.K.Yashwant Singh (231 ITR 145 (Del) National Thermal Power Co Ltd (229 ITR 383 (SC)

3.1 The additional grounds of appeal are extracted as under: “1. The differential and additional cane price notified by the Government on 09.01.2003 amounting to Rs.21444515 should be allowed as a deduction in the current year of payment if the same is not allowed for the assessment year 2005-06 on the basis of the provision made. 2 Estimated statutory minimum price of Rs.1,48,35,532/- reversed during the year should not be taxed as income if the same amount is not allowed as a deduction for the assessment year 2005-06 when the provision has been made and claimed as a deduction. 3. The Appellant craves leave to file additional grounds at the time of hearing.”

3.2 We heard the rival contentions on the additional grounds and admit

them on the merits canvassed above.

purchases cane from the farmers. The price payable to the farmers is fixed by

the Central Government as statutory minimum price (SMP) linked to the

recovery of sugar. On 12.12.2002, the Government of India notified SMP for 2002-03 sugar season i.e. 1st October to 30th September @ Rs.64.50 per

quintal. On 9.1.2003, the Government of India enhanced the statutory

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minimum price to Rs.69.50 per quintal. All the sugar manufacturers through

out India approached the High Court through their association challenging the

notification and to hold that the increase is invalid. As the Government agreed

not to take coercive steps no stay was granted. Subsequently, all the writ

petitions were transferred to the Supreme Court in June 2004. However, the

Government called upon all the sugar manufacturer associations (ISMA) and

directed them to pay even the additional cane price without pursuing the writ

petition. The sugar manufacturers had to agree to the specific directions of

Government of India during the period relevant to ay 2005-06 and accordingly

the assessee claimed this additional price at Rs.2,14,44,515/- in ay 2005-06

. Over and above the statutory minimum price (SMP), the assessee has to

share the additional profit that may arise because of the higher realization of

the sugar cane with the farmers on the basis of the formula under section 5A

of the Sugar Cane Control 1966. For the year ended 31.3.2005, the company

estimated the additional price payable under section Clause 5A of the Sugar

Cane Control 1966 at Rs.1 ,48,35,532/- and claimed it as deduction.

4.1 With regard to the accounting treatments , the A R submitted that the assessee followed the sugar season i.e. 1st October to 30th September in

its books of accounts. However, for the purpose of income- tax , they

prepared the profit & loss account and balance sheet as on 31.3.2005 and

provided for the additional price at Rs.2,14,44,515/- which accrued only

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when the company agreed to pay the amount and not to go on with the

(writ) litigation, which happened during the assessment year 2005-06.

However, the actual payment was made when its cash position improved i.e.

in November 2005 only which is in the assessment year 2006-07. Therefore ,

the AR submitted that this expenditure (ie the additional price at

Rs.2,14,44,515/-) payable to the cane growers should be allowed either on

accrual basis in the assessment year 2005-06 or on the basis of actual

payments in the assessment year 2006-07. With regard to the additional price

payable under section Clause 5A of the Sugarcane Control 1966, at

Rs.1,48,35, 532/-, the A R submitted that the company estimated the

additional price payable at Rs.1,48,35,532/- and claimed it as a deduction.

Subsequently, when the sugar year was completed ,the assessee found that

the profit did not exist and , therefore , the provision for additional price need

not be paid to the farmers. This is primarily because of the fluctuation in the sale price of sugar prevailing as on 31st March and the actual price realized at

the time of sale. Therefore, the provision made of Rs. 1,48,35,532/- was

reversed in the profit & loss account and balance sheet prepared for 31.3.2006

and was offered as income for the assessment year 2006-07. Therefore, the

provision made in the assessment year 2005-06 should be allowed as a

deduction as it was based on the estimated liability. Alternatively, if that

provision is not allowed, the income offered by reversal of this provision in

the assessment year 2006-07 should not be assessed as income.

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submitted that the order for the revised additional Statutory Minimum Price

(SMP) declared by the Central Government for the season pertaining to 2002-03

was passed on 09.01.2003 and it was challenged in the Madras High Court. The

CIT(A) after perusing certain correspondences related to the litigation, recorded

in para 6.9 of his order as under:

“ During the proceedings before the Hon'ble High Court, the Govt. of India had informed the Senior Central Govt. Standing Counsel in February, 2003 stating that the Central Govt. made an assurance before the Hon'bleCourt that no coercive steps would be taken against the sugar mills pending disposal of writ petition. The same has been conveyed by the Standing Counsel for the Association of Sugarcane Companies to the Sugar Mills Association of Tamilnadu. This goes to prove that there was never an obligation for the appellant company to pay the enhanced SMP ”.

5.1 Further, the D R submitted that the Hon'ble Madras High Court by its

order dated 03.02.2004 gave an interim stay against the Central Govt.'s order

This interim stay was extended until further orders as per the Hon'ble High

Court's order dated 16.02.2004. There was no further Court order in this matter.

Therefore, there is no case for the assessee to make any provision in a y

2005-06 as there was no stay order after 16.02.2004 (ie after the period

relevant to ay 2004-05).

With regard to the assessee’s additional ground seeking the additional 5.2

price paid at Rs.2,14,44,515/- in Nov 2005, to be allowed in the assessment

year 2006-07 on the basis of actual payments, the DR submitted the AO has

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correctly held that since the assessee is following mercantile system , its

claim that such payments were made on cash basis during the assessment year

2006-07 cannot be acceded to . The D R also sought our attention to the AO’s

observation that for allowing this expenditure the assessee may move the

appropriate forum for making the claim in the assessment year 2003-04.

material. The Central Govt. fixes the sugarcane price as per Sugarcane control

order, 1966 , in two stages, which are statutorily payable by sugar mills. First at

the commencement of sugar season, it issues the statutory minimum price

(SMP) as per Clause 3A of the sugarcane control order and subsequently after the

closure of the season, after collecting the sugar sale realization data for the

season, the additional price payable is announced as per Clause 5A. The sugar

season is between October & September. The revised additional Statutory

Minimum Price (SMP) declared by the Central Government for the season

pertainingto 2002-03 was passed on 09.01.2003 and it was challenged in the

Madras High Court. We understand from the CIT (A) order that during the

proceedings before the Hon'ble High Court, the Govt. of India had informed

through the Senior Central Govt. Standing Counsel in February, 2003 that no

coercive steps would be taken against the sugar mills pending disposal of writ

petition. The same has been conveyed by the Standing Counsel for the

Association of Sugarcane Companies to the Sugar Mills Association of Tamilnadu.

In the appellant's case, the Hon'ble Madras High Court gave an interim stay

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against the Central Govt.'s order to enhance the SMP by an order dated

03.02.2004. This interim stay was further extended until further orders as per the

Hon'ble High Court's order dated 16.02.2004. There was no further court order

on this matter. The copies of the relevant orders and correspondences are not

filed before us. Thus, apparently, for the period between 09.01.2003 and

03.02.2004, (ie the date on which the revised additional Statutory Minimum

Price (SMP) declared by the Central Government for the season pertaining to

2002-03 ) and (the date on which the Hon'ble Madras High Court gave an

interim stay against the Central Govt.'s order pertaining to the season 2002-03),

the statutory accrual for the season 2002-03 arose and accordingly it should

have been provided by the assessee in its books related to the period

relevant to ay 2003-04 itself, which ended as on 31.3.2003 itself as per

assessee’s method of accounting. But, such an observation is based on the

above incomplete data. In the above facts and circumstances, this issue is

remitted back to the A O , who shall verify the relevant orders and

correspondences and after providing adequate opportunity to the assessee,

shall decide as to when the statutory accrual for the additional price arose

and if it arose in the previous year which happens to be the year relevant

to ay 2005-06, the AO shall allow the assessee’s claim in ay 2005-06.

The assessee’s additional ground that the additional price at

Rs.2,14,44,515/- is paid in Nov 2005 and it should be allowed in the

assessment year 2006-07 on the basis of actual payments, cannot be acceded

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to as it is following mercantile system. Thus, this issue is treated as

partly allowed for statistical purposes.

Clause 5A of the Sugarcane control order, 1966, the AR submitted that is known

only after closure in Sept, 2005 which falls after Mar., 2005 which is the cut off

period for accounts of a y 2005-06. So, it is pleaded that it made a provision for

such additional cane price as a liability in its Mar., 2005 accounts to present a fair

view of accounts covering all expected liabilities as on Mar., 2005. However, the

provision entry was later reversed in Sept., 2005 on account of non-payment of

the same and accordingly got offered as income in subsequent f y 2005-06.

The AO disallowed it holding that the provision has no basis, it is an

unascertained liability which was never met by the assessee and the CIT(A)

held that “the appellant company has debited only the provision for 5A price for

which there was no basis. The said provision for 5A price was never paid

subsequently. Therefore, the said provision remained only as an unascertained

liability which was never met by the appellant company. Therefore, I agree that

AO's disallowance of provision for 5A price which is upheld and the groundsare

dismissed”.

\We heard the rival contentions and find the order of the CIT (A) does not 7.

require any interference and hence we dismiss the assessee’s plea for ay

2005-06.

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With regard to the assessee’s additional ground that if the provision 7.1.

made in the assessment year 2005-06 is not allowed, the income offered by

reversal of this provision in the assessment year 2006-07 should not be

assessed as income, the DR submitted that the AO held that a perusal of the

profit and loss account shows that there is no credit entry relatable to the

withdrawal of the provision of Rs. 1,48,35,532/- and hence the AO rightly

rejected the assessee’s claim in ay 2006-07.

We have considered the assessee’s additional ground, the rival

contentions on it and relevant material. Assessee pleads that if the provision

made in the assessment year 2005-06 is not allowed, the income offered by

reversal of this provision in the assessment year 2006-07 should not be

assessed as income. The DR submitted that the AO held that a perusal of the

profit and loss account shows that there is no credit entry relatable to the

withdrawal of the provision of Rs. 1,48,35,532/- and hence the AO’s rejection

does not require any interference. In the facts and circumstances, this issue is

remitted back to the A O , who shall re-examine this issue , afresh , and if the

provision madein the assessment year 2005-06, in this regard, is reversed in

the accounts related to the assessment year 2006-07 and offered as an

income, then such income should not be assessed as income in ay 2006-07.

The AO after providing adequate opportunity to the assessee, shall

decide this issue accordingly. To this extent , the assessee’s additional ground

is treated as allowed.

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“1. The order of the commissioner of Income Tax (Appeals) is contrary to law facts and circumstances of the case. 2. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of raw sugar expenses amounting to Rs.8,11,47,809/- u/s.40(a)(ia) since no TDS was made. 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the appellant has paid the TDS in the Assessment year 2008-09 and claimed the deduction. However the assessing officer for the assessment year 2008-09 has rectified the order u/s 154 dated - 19.03.2012 disallowing the claim of the appellant on the pretext that the appeal memo of the assessee for the assessment year 2006-07 has taken this ground on the caption issue. 2.2 The Commissioner of Income tax (Appeals) ought to have directed the AO to allow the claim of the appellant as per proviso to section 40(a)(ia), in the assessment year(2008-09) when the connected TDS obligation has been fully discharged. 3. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of the share issue expenditure amounting to Rs.4,65,649/- 3.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the appellant has incurred share issue expenses of Rs.46, 56,491/- in the Assessment year 1997-98 in connection with Right issue of 21,50,.405/- equity shares @ price of Rs. 90/- per share. As the share issue expenses are not allowable as revenue expenses the appellant has not claimed the same as deduction in its computation of income. In books the appellant has treated this as Deferred Revenue Expenses. 3.2 The Commissioner of Income tax (Appeals) ought to have appreciated that as per section 35D the appellant has been claiming deduction of an amount equal to one-tenth of the aforesaid expenditure of Rs.46, 56,491/- for each of the assessment year beginning with the assessment year 1997- 98. The CIT(A) for the earlier years has allowed the claim of the appellant. Hence to be allowed u/s 35D.

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2003-04. Subsequently the Central Government assured that it will not take any coercive measure for enforcing compliance with the revised G.O. A provision was made in the year 2004-05 and claimed as deduction in the assessment year 2005-06 but was disallowed as not crystallized in that year. The appellant claimed the liability on actual basis in November 2005. 5.3 The Commissioner of Income tax (Appeals) ought to have appreciated that since the provision was disallowed in the assessment for the assessment year 2005- 06, the same cannot be taxed in this assessment year. 6. The Appellant craves leave to file additional grounds at the time of hearing.”

erred in confirming the disallowance without appreciating the facts. The

assessee has paid Rs.8,11,47,809/- to M/s Shree Ambika Sugars Ltd towards

raw sugar processing charges on which TDS has not been paid within the due

and it was paid in the ay 2008-09. Since TDS has not been paid in ay 2006-07,

the AO disallowed it u/s 40(a)(ia) in the assessment made for ay 2006-07. In

the ay 2008-09 , the assessee has paid the TDS on Rs.8,11,47,809/- paid to

M/s Shree Ambika Sugars Ltd and claimed it as a deduction and accordingly

declared the total loss of Rs.28,95,07,118/- in its return filed for the ay

2008-09. Thereafter , in the assessment made for ay 2006-07 , the AO

disallowed Rs.8,11,47,809/- u/s 40(a)(ia) as the TDS has not been paid in ay

2006-07. In view of that , the assessee filed a revised return for ay 2008-09,

revising the total loss at Rs 37,06,54,927/- adding the impugned

Rs.8,11,47,809/- to the already declared the total loss of Rs.28,95,07,118/.

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In the assessment made for ay 2008-09 u/s 143 (3), the AO allowed such

deduction also. Thereafter, the AO taking the cognizance of the appeal

grounds filed before the CIT (A) for ay 2006-07 , rectified the assessment

order of ay 2008-08 assessing the loss at Rs.22,07,83,905/-. In view of the

above facts and circumstances, the AR pleaded that the AO may be directed to

allow Rs.8,11,47,809/- in ay 2008-09.

We heard the rival contentions and find merit in the AR’s contention.

The AO is directed examine the facts, after affording the opportunity to the

assessee if the above submissions are found correct, he shall allow the

deduction in ay 2008-09.

Rs.4,65,649/-. In this regard, the AR submitted that the Commissioner of

Income tax (Appeal) erred in confirming the disallowance without appreciating

the facts. The assessee has incurred share issue expenses of Rs.46, 56,491/-

in the Assessment year 1997-98 in connection with Right issue of 21,50,.405/-

equity shares @ price of Rs. 90/- per share. As the share issue expenses are

not allowable as revenue expenses, it has not claimed the same as deduction

in its computation of income. In books, it has treated this as Deferred

Revenue Expenses. As per section 35D, it has been claiming deduction of an

amount equal to one-tenth of the aforesaid expenditure of Rs.46,56,491/- for

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each of the assessment year beginning with the assessment year 1997-98.

The CIT(A) has allowed it in the earlier years also and hence pleaded that this

claim may be allowed.

We heard the rival contentions and find merit in the AR’s contention.

The AO is directed examine the facts, after affording the opportunity to the

assessee, if the above submissions are found correct, he shall allow the

deduction.

dividend income to earn the exempt income u/s 14A. In this regard, the AR

submitted that theCommissioner of Income tax (Appeal) erred in confirming

the disallowance of expenditure @ 5% of the dividend income to earn the

exempt income u/s 14A and argued on the lines of appeal grounds 4 to 4.3

extracted, supra, and submitted that in any event the disallowance of 5% is

high and arbitrary and the CIT (Appeals) ought to have followed the decision

of the Madras High Court in the case of Simpson &Co LTD V. DC IT, in TC(A)

No. 2621 of 2006 and restricted the disallowance to 2% of the dividend

income.

We heard the rival contentions and find merit in the AR’s contention.

The AO is directed to restrict the disallowance to 2% of the dividend income

as per the jurisdictional High Court’s decision.

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14,44,515/- paid by the appellant relates to Assessment year 2003-04 vide the

appeal grounds5 to 5.3 extracted, supra . This is dealt in para 4 to 6, supra.

are treated as partly allowed.

Order pronounced on Friday, the 08th day of December, 2017 at Chennai.

Sd/- Sd/- (एन.आर.एस .गणेशन) (एसजयरामन) (N.R.S. GANESAN) (S. JAYARAMAN) !या�यकसद"य/Judicial Member लेखासद"य/Accountant Member

चे�नई/Chennai, 0दनांक/Dated: 08th December, 2017 JPV आदेश क& )�त1ल2प अ3े2षत/Copy to: 1. अपीलाथ%/Appellant 2. )*यथ%/Respondent 3. आयकरआयु4त ) अपील(/CIT(A) 4. आयकरआयु4त/CIT 5. 2वभागीय)�त�न�ध/DR 6. गाड7फाईल/GF