Vishwasrao Naik Sahakari Sakhar Karkhana Ltd, Sangli V. Assistant Commissioner of Income-tax, Circle - 2, Sangli

ITA 2612/PUN/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 2086 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-06-2021
• Assessment Year: 2014-2015
• Appeal Filed On: 16-11-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VITTHAL BHOSALE
• Assessee Lawyers: M KULKARNI
• Keywords: Revenue expenditure
• Section: 191; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E (THROUGH VIRTUAL COURT) BEFORE SHRI INTURI RAMA RAO, AM AND SHRI S. S. VISWANETHRA RAVI, JM ITA NO.2612/PUN/2017 / ASSESSMENT YEAR : 2014-15 VISHWASRAO NAIK SAHAKARI, SAKHAR KARKHANA LIMITED, A/P CHIKHALI, TAL. SHIRALA, DIST. SANGLI. PAN : AAAAV0215B. . / APPELLANT V/S THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 2, SANGLI. . / RESPONDENT ASSESSEE BY : SHRI M. KULKARNI. REVENUE BY : SHRI VITTHAL BHOSALE. / DATE OF HEARING : 17.06.2021 / DATE OF PRONOUNCEMENT : 21.06.2021 / ORDER PER INTURI RAMA RAO, AM: THIS IS AN APPEAL FILED BY THE ASSESSEE CO-OPERATIVE SOCIET Y DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) 1, KOLHAPUR DATED 11.09.2017 FOR THE ASSESSMENT YEAR 2014-15. 2. THE BRIEF FACTS OF THE CASE ARE AS UNDER : THE APPELLANT IS A CO-OPERATIVE SOCIETY REGISTERED UNDER THE MAHARASHTRA CO-OPERATIVE SOCIETY ACT, 1950. IT IS ENTE RED INTO THE BUSINESS 2 OF MANUFACTURE AND SALE OF SUGAR AND ITS BY-PRODUCTS. TH E RETURN OF INCOME FOR A.Y. 2014-15 WAS FILED ON 27.09.2014. AGAINST THE SAID RE TURN OF INCOME, THE ASSESSMENT WAS COMPLETED BY THE ACIT 2, S ANGLI (HEREINAFTER CALLED AS ASSESSING OFFICER) VIDE ORDER DATED 21.11.2016 PA SSED UNDER SEC.143(3) OF THE ACT AT A TOTAL INCOME OF RS.1,89,46,340/-. WHILE DOING SO, THE ASSESSING OFFICER MADE THE FOLLOWING ADDITIONS : (I) EXCESSIVE SUGAR CANE PRICE PAID TO ITS MEMBERS AT RS.55,06,298/- AND; (II) SALE OF SUGAR AT CONCESSIONAL RATE TO ITS MEMBERS AT RS.1,34,44,039/-. 3. THE BRIEF FACTUAL MATERIAL READ INTO THE ABOVE ADDITIONS IS AS UNDER : (I) ADDITION ON ACCOUNT OF EXCESSIVE SUGAR CANE PURCHAS E PRICE : DURING THE COURSE OF ASSESSMENT PROCEEDINGS RELEVANT FO R THE YEAR UNDER CONSIDERATION, THE APPELLANT SOCIETY PURCHASED SUGA RCANE OF 424283.200 MTS. OUT OF WHICH, 19979.310 MTS OF SUGARC ANE WAS PURCHASED BY PAYING A PRICE OF 2,620 PER MT AS AGAINST T HE FAIR REMUNERATIVE PRICE (FRP) DECLARED BY THE CENTRAL GOVERNME NT OF RS.2344.40. ACCORDING TO THE ASSESSING OFFICER, THIS EXCESS OF 275.6 PER MT SUGARCANE AGGREGATING TO A SUM OF RS.55,06,298/- IS NO THING BUT DISTRIBUTION OF PROFITS MADE FROM THE SUGAR SALE WHICH CANNO T BE ALLOWED AS DEDUCTION AND ACCORDINGLY BROUGHT THE DIFFERENCE AMOUNT OF RS.55,06,298/- TO TAX. 3 (II) SALE OF SUGAR AT CONCESSIONAL RATE TO ITS MEMBERS A T RS.1,34,44,039/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS RELEVANT FOR THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER FOUND THAT THE A PPELLANT SOCIETY HAS SOLD 9643.7 QUINTALS OF SUGAR TO ITS MEMBERS AT A CO NCESSIONAL PRICE OF RS.500/- PER M.T. AS AGAINST THE LEVIED PRICE OF RS.13 93.66. ACCORDING TO THE ASSESSING OFFICER, SALE OF SUGAR AT CONCESSIONAL RATE TO ITS MEMBERS AMOUNTS TO APPROPRIATION OF PROFITS TO THE MEMBERS WHICH CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING THE TAXABLE INCOME OF T HE APPELLANT SOCIETY. ACCORDINGLY, ASSESSING OFFICER MADE ADDITION OF RS.1,34,40,03 9/-. 4. BEING AGGRIEVED BY THE ABOVE ADDITIONS, AN APPEAL WAS PREFERRED BEFORE THE COMMISSIONER OF INCOME TAX (APPEAL) 1, KOLHAPU R, WHO VIDE IMPUGNED ORDER DT. 11.09.2017 AFTER DISCUSSING AT LENGTH TH E MECHANISM OF DETERMINING OF FAIR REMUNERATIVE PRICE (FRP) UPHELD THE AD DITION ON ACCOUNT OF EXCESS PRICE PAID FOR SUGARCANE TO THE MEMBE RS ON THE GROUND THAT THE NEW MECHANISM APPLICABLE FOR THE A.Y. 2010-11 ONW ARDS I.E., FRP ALSO INCLUDES THE ELEMENT OF PROFIT AS THE REASONABLE MARG INS TO BE PASSED ON TO THE GROWERS OF SUGARCANE ON ACCOUNT OF RISK AND PROFIT HAS ALSO TAKEN INTO CONSIDERATION. THE RELEVANT SCHEME OF MECHANISM WAS SET OUT BY THE LD.CIT(A) VIDE PARA 12 OF HIS ORDER. AS REGARDS TO THE SALE OF SUGAR AT CONCESSIONAL PRICE TO THE MEMBERS, THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER REFE RRING TO THE JUDGMENTS OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. KRISHNA SAKHAR KARKHANA LTD., HELD THAT THE APPELLANT ADOPTED A DEVICE BY WHICH THE GROSS SALE PROCEEDS THEMSELVES ARE DIVERTED TO ITS OWN MEMBER S WHO SUPPLY THE 4 CANE. THIS IS NOTHING BUT A DISTRIBUTION OF PROFITS AND ACCORDING LY UPHELD THE ACTION OF THE ASSESSING OFFICER. 5. BEING AGGRIEVED BY THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS), THE APPELLANT CO-OPERATIVE SOCIETY IS IN APPEAL BE FORE US IN THE PRESENT APPEAL. IT IS SUBMITTED BEFORE US THAT THE DECISION OF COMMISS IONER OF INCOME TAX (APPEALS) IS BASED ON THE PREMISE THAT FRP CONTAINS AN ELEMENT OF PROFIT WHICH IS CONTRARY TO THE FACTS OF THE CAS E. IT IS FURTHER SUBMITTED THAT A REVIEW PETITION IS PENDING DISPOSAL BEFORE THE HONBLE SUPREME COURT AGAINST THE DECISION OF HONBLE SUPREME C OURT IN THE CASE OF CIT VS. TASGAON TALUKA SSK LTD., REPORTED IN (2019) 10 3 TAXMANN.COM 57 (SC). SIMILARLY, IT IS CONTENDED THAT THE LD.CIT(A) HAS NOT APPRECIATED TH E OBSERVATIONS MADE IN THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF CIT VS. KRISHNA SAKHAR KARKHANA LTD AND ACCORDINGLY, HE PRAYED THAT THE MATTER MAY BE REMANDED BACK TO THE FILE OF AO FOR DE NOVO CONSIDERATION . 6. ON THE OTHER HAND, THE LD.D.R. HAD NOT RAISED ANY SERIOU S OBJECTIONS IF THE MATTER IS REMANDED TO THE FILE OF ASSESSING OFFICER. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FIRST ISSUE IN THE PRESENT APPEAL RELATES TO THE ALLOWABILITY OF SUGARCANE PURCHASE PRICE PAID TO THE MEMBER S ON EXCESS PRICE DETERMINED UNDER FRP. THE ASSESSING OFFICER MADE A DISALLOWANCE OF PRICE PAID IN EXCESS FIXED UNDER FRP MECHANISM HOLDING TO BE AN APPROPRIATION OF PROFITS TO ITS MEMBERS. THE LD.CIT(A) ALSO CONFIRMED THE 5 ACTION OF THE ASSESSING OFFICER AFTER ADVERTING TO THE MEC HANISM OF FIXATION OF FRP. 8. IT IS WELL SETTLED PROPOSITION OF LAW THAT ANY APPROPRIAT ION OF PROFITS TO ITS MEMBERS OF A CO-OPERATIVE SOCIETY CANNOT BE ALLOWED A S DEDUCTION WHILE COMPUTING THE TAXABLE INCOME OF THE CO-OPERATIVE SOCIETY. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. TASGAON TALUKA S.S .K. LTD., (SUPRA) HAD REMITTED THE ISSUE TO THE FILE OF ASSESSING OFFICER TO DE TERMINE WHETHER THE AMOUNT PAID UNDER THE OLD MECHANISM UNDER CLAUSE 5A OF SUGAR CANE (CONTROL) ORDER, 1966 (HEREINAFTER REFERRED TO AS THE CON TROL ORDER, 1966) IS APPROPRIATION OF PROFITS OR NOT. THE CLAUSE 5A OF THE S AID ORDER INSERTED IN THE YEAR 1974 BASED ON THE RECOMMENDATIONS MADE BY B HARGAV COMMISSION. THE PROVISIONS OF SECOND SCHEDULE ANNEXED TO CONTROL ORDER, 1966 CLEARLY PROVIDES THE MECHANISM AS TO HOW THE ADDIT IONAL PRICE UNDER CLAUSE 5A OF THE CONTROL ORDER, 1966 IS TO BE DETERMINE D. THE BHARGAV COMMISSION HAD RECOMMENDED PAYMENT OF ADDITIONAL PRICE AT THE END OF T HE SEASON ON 50 : 50 PROFIT SHARING RATIO BETWEEN GROWERS AND FACTORIES TO BE WORKED OUT IN ACCORDANCE WITH THE SECOND SCHEDULE OF TH E CONTROL ORDER, 1966. THUS, THE ADDITIONAL PRICE FIXED UNDER CLAUSE 5A OF THE CONTROL O RDER, 1966 CONTAINS AN ELEMENT OF PROFIT WHICH IS NOTHING BUT AN APPROPRIATION OF PROFITS AND WHICH IS NOT ALLOWABLE AS DEDUCTION WHILE COMPUTIN G THE TAXABLE INCOME OF THE SOCIETY. THE DECISION OF HON'BLE SUPREME COU RT IN THE CASE OF CIT VS. TASGAON TALUKA S.S.K. LTD (SUPRA) IS BASED ON ABO VE PREMISES. HOWEVER, AS SET OUT BY THE LD.CIT(A) IN HIS ORDER, THE SCH EME OF MECHANISM OF DETERMINING THE SUGARCANE PRICE HAD UNDERGONE CHANGE FROM A.Y. 2010- 11. THE NEW MECHANISM IS KNOWN AS FRP. THE DISTINGUIS HED FEATURE OF 6 FRP IS THAT IT HAD DONE AWAY WITH THE PAYMENT OF ADDITION AL PRICE UNDER CLAUSE 5A OF THE CONTROL ORDER, 1966. THE FRP IS FIXED B ASED ON THE RECOMMENDATIONS OF THE COMMISSION FOR AGRICULTURAL COSTS A ND PRICES (CACP) UNDER AFTER CONSULTATION WITH THE STATE GOVERNMENT AND ASSOCIATIONS OF SUGAR INDUSTRY AND CANE GROWERS TAKING IN TO CONSIDERATION THE FOLLOWING FACTORS : A) COST OF PRODUCTION OF SUGARCANE; B) RETURN TO THE GROWERS FROM ALTERNATIVE CROPS AND THE GENERAL TREND OF PRICES OF AGRICULTURAL COMMODITIES; C) AVAILABILITY OF SUGAR TO CONSUMERS AT A FAIR PRICE; D) PRICE AT WHICH SUGAR PRODUCED FROM SUGAR CANE IS SOLD BY SUGAR PRODUCERS; E) RECOVERY OF SUGAR FROM SUGARCANE; AND F) THE REALIZATION MADE FROM SALE OF BY-PRODUCTS VIZ. M OLASSES, BIOGASES AND PRESS MUD ON THEIR IMPUTED VALUE (INSERTE D VIDE NOTIFICATION DATED 29 TH DECEMBER 2008) G) REASONABLE MARGINS FOR THE GROWERS OF SUGARCANE ON ACCOUNT OF RISK AND PROFITS (INSERTED VIDE NOTIFICATIO N DATED 22 ND DECEMBER 2009); 9. NO DOUBT ONE OF THE FACTORS CONSIDERED FOR THE PURP OSE OF ARRIVING AT FRP INCLUDES REASONABLE MARGIN OF SUGAR FACTORIES TO BE PA SSED ON TO THE SUGARCANE GROWERS / MEMBERS BUT THIS IS NOT THE ALONE CRITERION WHICH IS TAKEN INTO CONSIDERATION. IT INCLUDES SEVERAL OTHER FACTOR S AS WELL, AS REFERRED TO (A) TO (F) STATED ABOVE. THEREFORE, THE ENTIR E EXCESS SUGARCANE PRICE PAID TO THE FARMERS OVER AND ABOVE THE FRP FIXED CANNOT BE SAID TO BE A MARGIN OF PROFIT PASSED ON TO THE GROWERS OF SUGARCAN E. TO DETERMINE THIS ELEMENT OF PROFIT EMBEDDED IN EXCESS PRICE PAID OVER AND A BOVE THE FRP PRICE, AN EXERCISE HAS TO BE DONE BY THE ASSESSING OFFICE R BY CALLING UPON THE ASSESSEE TO PRODUCE THE STATEMENTS OF ACCOUNTS, BALANCE-SHEET ETC AND MATERIAL SUPPLIED TO THE STATE GOVERNMENT FOR THE PURPOS E OF DECIDING FRP 7 ETC. MERELY, BECAUSE HIGHER PRICE FOR SUGARCANE IS PAID T O THE MEMBERS OVER AND ABOVE THE FRP CANNOT IPSO FACTO OR PER SE IS AN APPROPRIATION OF PROFITS AS HELD BY THE HONBLE GUJARAT HIGH COURT IN THE CASE O F SHREE CHALTHAN VIBHAG KHAND VS. DCIT REPORTED IN (2015) 376 ITR 419 (G UJ) AFFIRMED BY THE HONBLE SUPREME COURT BY DISMISSAL OF SLP IN THE CA SE OF SHREE CHALTHAN VIBHAG KHAND VS. DCIT REPORTED IN 239 TAXAMNN.COM 393 (S C). 10. IT IS A MATTER OF COMMON KNOWLEDGE THAT THE QUESTIO N OF APPROPRIATION OF PROFITS PRESUPPOSES EXISTENCE OF PROFITS AND WOULD ARISE ONLY AFTER THE PROFITS ARE DETERMINED AT THE END OF THE ACCOUNTING YEAR AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MANJA RA SHETKARI SAHAKARI SAKHAR KARKHANA LTD. REPORTED IN (2008) 166 TAX MAN 287, 301 ITR 191 (BOM). IT IS A QUESTION OF FACT WHICH REQUIRES T O BE DETERMINED BY THE ASSESSING OFFICER WHETHER THE EXCESS PRICE PER SUGAR CANE PAID TO THE SUGARCANE GROWERS / MEMBERS IS IN THE NATURE OF APPROP RIATION OF PROFITS OR THE PAYMENTS ARE MADE OUT OF THE CONSIDERATIONS OF BUSI NESS EXPEDIENCY. THE ONUS LIES ON THE DEPARTMENT TO PROVE THE SAME BY BRINGING NECESSARY MATERIAL ON RECORD. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MANJARA SHETKARI SAHAKRI SAKHAR KARKHANA LTD. (S UPRA) HELD THAT IN THE CASE WHERE NEITHER THE PROFITS WERE DETERMINED N OR WAS THERE ANY RESOLUTION PASSED IN THE ANNUAL GENERAL MEETING OF THE CO- OPERATIVE SOCIETY TO DISTRIBUTE THE PROFITS IN THE FORM OF HIGHER CANE PRICE / BONUS, IT CANNOT BE SAID TO BE DISTRIBUTION OF PROFITS OR BONUS AND NO DISALLO WANCE OF EXCESS PRICE CAN BE MADE. SIMILARLY, THE HONBLE MADRAS HIGH COU RT IN THE CASE OF CIT VS. ARUNA SUNRISE HOTELS LTD REPORTED IN (2018) 93 TA XMANN.COM 361 (MADRAS) HELD THAT THE PAYMENT MADE TO SUGARCANE GROWE RS / MEMBERS IN 8 EXCESS OF THE ADMINISTERED PRICE DETERMINED BY THE SUGAR CANE CONTROL ORDER, 1966 IS ELIGIBLE TO BE TREATED AS AN ALLOWABLE AS THE REVENUE EXPENDITURE EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. 11. IN THE LIGHT OF THE ABOVE LEGAL POSITION, WE ARE OF TH E CONSIDERED OPINION THAT THIS ISSUE REQUIRES TO BE REMITTED TO THE AS SESSING OFFICER WITH THE DIRECTION TO UNDERTAKE AN EXERCISE TO DETERMINE THE ELEMENT OF PROFIT PAID IN THE EXCESS PRICE, ALSO EXAMINE THE BUSINESS EXPEDIE NCY OF PAYMENT OF SUCH EXCESS PRICE TO THE GROWERS. IN CASE, ON VERIFIC ATION, IT IS FOUND THAT THE EXCESS SUGARCANE PRICE PAID TO THE SUGARCANE GROWERS / MEM BERS IS ONLY AN APPROPRIATION OF PROFITS, THE SAME SHOULD BE DISALLOWED. AC CORDINGLY, THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 12. AS REGARDS TO THE NEXT GROUNDS OF APPEAL, IT RELATES TO THE ADDITION ON ACCOUNT OF SALE OF SUGAR AT CONCESSIONAL RATE TO ITS MEM BERS, WE HAVE GONE THROUGH THE ORDERS OF LOWER AUTHORITIES, WE FOUND THAT T HE COMMISSIONER OF INCOME TAX (APPEALS) THOUGH REFERRED TO THE DECISION OF H ON'BLE SUPREME COURT IN THE CASE OF CIT VS. KRISHNA SAKHAR KHARKHANA (SUPRA) HAD NOT DEALT WITH THE FOLLOWING QUESTION RAISED BY THE HON'BLE SUPREME COURT . 38. APART FROM THE AFORE-STATED QUESTION, CIT(A) WOULD TAKE INTO ACCOUNT, WHETHER THE ABOVE-MENTIONED PRACTICE OF SE LLING SUGAR AT CONCESSIONAL RATE HAS BECOME THE PRACTICE OR CUSTOM IN THE COOPERATIVE SUGAR INDUSTRY?; AND WHETHER ANY RESOLU TION HAS BEEN PASSED BY THE STATE GOVERNMENT SUPPORTING THE PRACT ICE? THE CIT(A) WOULD ALSO CONSIDER ON WHAT BASIS THE QUANTI TY OF THE FINAL PRODUCT, I.E, SUGAR, IS BEING FIXED FOR SALE TO FAR MERS/ CANE GROWERS/ MEMBERS EACH YEAR ON MONTH-TO-MONTH BASIS, APART FR OM DIWALI? 9 13. THEREFORE, THIS GROUND OF APPEAL ALSO NEEDS TO BE RES TORED TO THE FILE OF ASSESSING OFFICER WITH THE DIRECTION TO ADDRESS THE QUES TIONS RAISED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. KRISHNA SA KHAR KHARKHANA LTD (SUPRA) AND THEN DECIDE THE ALLOWABILITY OF THE SAME AS REVENUE EXPENDITURE IN ACCORDANCE WITH THE LAW. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 21 ST DAY OF JUNE, 2021. SD/- SD/- (S. S. VISWANETHRA RAVI) (I NTURI RAMA RAO) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; / DATED : 21 ST JUNE, 2021. YAMINI / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(A)-1, KOLHAPUR. 4. THE PR.CIT-1, KOLHAPUR. 5. , , , / DR, ITAT, A BENCH, PUNE. 6. / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE.