Supreme Court of India
C.I.T. BOMBAYversusTASGAON TALUKA S.S.K. LTD.
- Citation
- 2019 INSC 309
- Decided
- 5 March 2019
- Disposal
- Disposed off
- Bench
- A K SIKRI
Holding
Only the profit component embedded in the difference between the Statutory Minimum Price and the additional purchase price is to be treated as profit sharing and disallowed; the balance is deductible as a legitimate business expense.
Summary
The appellant, the Commissioner of Income Tax, Bombay, challenged the deduction claimed by Tasgaon Taluka Sahakari Sakhar Karkhana Ltd., a cooperative sugarcane processor, for the price paid to cane growers that exceeded the Statutory Minimum Price (SMP) fixed under Clause 3 of the Sugar Cane (Control) Order, 1966. The dispute centered on whether the additional purchase price (SAP) determined under Clause 5A, which incorporates a profit component, should be treated as an allowable business expense or disallowed as profit sharing under Section 37(1) and Section 40A(2) of the Income Tax Act, 1961. The Supreme Court held that the difference between SMP and SAP contains a profit element that must be disallowed, but the entire difference cannot be treated as profit sharing; only the profit portion is to be excluded from deduction. The Court directed the assessing officer to ascertain the profit component by examining the cooperative's accounts and to allow the remaining amount as a deductible expense. Consequently, the orders of the High Court, ITAT and CIT(A) were set aside and the matters remitted to the assessing officers for fresh determination.
Issues considered
- Whether the amount paid by the cooperative to cane growers above the Statutory Minimum Price, as determined under Clause 5A of the Sugar Cane (Control) Order, 1966, constitutes profit sharing and is therefore disallowable under Section 37(1) of the Income Tax Act, 1961.
- Whether the entire difference between SMP and SAP is per se an appropriation of profit, or only the profit component is to be treated as such, with the remainder being allowable as a business expense.
Legislation cited
Subjects
Income TaxSection 37Section 40ASugarcane Control OrderStatutory Minimum PriceAdditional Purchase PriceProfit sharingCooperative societyDeduction
Judgment
[2019] 4 S.C.R. 145 145
C.I.T. BOMBAY A
v.
TASGAON TALUKA S.S.K. LTD.
(Civil Appeal No. 8890 of 2012)
MARCH 05, 2019 B
[A. K. SIKRI, S. ABDUL NAZEER AND M. R. SHAH, JJ.]
Sugar Cane (Control) Order, 1966: Clause 3 and 5A –
Determination of price – The additional price is determined under
Clause 5A at the end of the season and as per Second Schedule to
C
the Control Order, 1966 – Therefore, at the time when the additional
purchase price is determined/fixed under Clause 5A, the accounts
are settled and the particulars are provided by the concerned
cooperative society what will be the expenditure; what can be the
profit etc. – So far as the Statutory Minimum Price (SMP) determined
under Clause 3 of the Control Order, 1966 by the Central D
Government is concerned, it is at the beginning of the season –
Therefore, the difference of amount between the SMP determined
under Clause 3 and the SAP/additional purchase price determined
under Clause 5A has an element of profit and/or one of the
components would be the profit.
E
Income Tax Act, 1961: s.37(1) – Disallowance for excessive
and unreasonable cane purchase price paid to the members/non-
members of the sugarcane – Whether the sugarcane purchase price
paid to the cane growers by the assessee-society more than the
Statutory Minimum Price (SMP) and as determined under Clause
F
5A of the Control Order, 1966, can be said to be the sharing of
profit/appropriation of profit – Held: The difference of amount
between the SMP determined under Clause 3 and SAP/additional
purchase price determined under Clause 5A has an element of profit
and/or one of the components would be profit – However, at the
same time, the entire/whole amount of difference between the SMP G
and the SAP per se cannot be said to be an appropriation of profit
– Only that part/component of profit, while determining the final
price worked out/SAP/additional purchase price would be and/or
can be said to be an appropriation of profit and for that an exercise
is to be done by the assessing officer by calling upon the assessee
H
145
146 SUPREME COURT REPORTS [2019] 4 S.C.R.
A to produce the statement of accounts, balance sheet and the material
supplied to the State Government for the purpose of deciding/fixing
the final price/additional purchase price/SAP under Clause 5A of
the Control Order, 1966 – As regards the non-members, the same
can be dealt with and/or considered applying s.40A(2) of the Act
i.e. assessing officer on the material on record has to determine
B
whether the amount paid is excessive or unreasonable or not – Sugar
Cane (Control) Order, 1966 – Clause 3 and 5A, Schedule – Essential
Commodities Act, 1955.
Sugar Cane (Control) Order, 1966: Clause 3 – Fixation of
SMP – Determining factors – While fixing/determining the SMP
C under Clause 3 of the Control Order, 1966, the Central Government
is required to consider the various aspects such as the cost of
production of sugarcane; the return to the grower from alternative
crops and the general trend of prices of agricultural commodities;
the availability of sugar to the consumer at a fair price; the price at
D which sugar produced from sugarcane is sold by producers of sugar;
and the recovery of sugar from sugarcane.
Disposing of the appeals, the Court
HELD: 1.1 As per Clause 3 of the Control Order, 1966,
the Central Government may, after consultation with such
E authorities, bodies or associations as it may deem fit, by
notification in the official Gazette, from time to time, fix the
minimum price of sugarcane to be paid by producers of sugar or
their agents for the sugarcane purchased by them. While fixing/
determining the SMP under Clause 3 of the Control Order, 1966,
F the Central Government is required to consider the various
aspects such as the cost of production of sugarcane; the return
to the grower from alternative crops and the general trend of
prices of agricultural commodities; the availability of sugar to
the consumer at a fair price; the price at which sugar produced
from sugarcane is sold by producers of sugar; and the recovery
G of sugar from sugarcane. [Para 9.2][158-D-G]
1.2 As per Explanation, different prices may be fixed for
different areas or different qualities or varieties of sugarcane.
As per sub-clause 2 of Clause 3, no person shall sell or agree to
sell sugarcane to a producer of sugar or his agent, and no such
H producer or agent shall purchase or agree to purchase sugarcane,
C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD. 147
at a price lower than that fixed under sub-clause 1 of Clause 3. A
Clause 5A, which has been inserted in the year 1974 provides
for an additional price to be paid for sugarcane purchased on or
after 01.10.1974. It provides that where a producer of sugar or
his agent purchases sugarcane, from a sugarcane grower during
each sugar year, he shall, in addition to the minimum sugarcane
B
price fixed under Clause 3, pay to the sugarcane grower an
additional price, if found due in accordance with the provisions of
the Second Schedule annexed to the Control Order, 1966.
[Para 9.3][158-H; 159-A-C]
1.3 Clause 5A was inserted in the year 1974 on the basis
of the recommendations made by the Bhargava Commission. The C
additional price is fixed/determined under Clause 5A at the end
of the season and as per Second Schedule to the Control Order,
1966. Therefore, at the time when the additional purchase price
is determined/fixed under Clause 5A, the accounts are settled
and the particulars are provided by the concerned cooperative D
society what will be the expenditure; what can be the profit etc.
So far as the SMP determined under Clause 3 of the Control
Order, 1966 by the Central Government is concerned, it is at the
beginning of the season. Therefore, the difference of amount
between the SMP determined under Clause 3 and the SAP/
additional purchase price determined under Clause 5A has an E
element of profit and/or one of the components would be the
profit. Therefore, to the extent of the component of profit which
will be a part of the final determination of SAP and/or the final
price/additional purchase price fixed under Clause 5A would
certainly be and/or said to be an appropriation of profit. However, F
at the same time, the entire/whole amount of difference between
the SMP and the SAP per se cannot be said to be an appropriation
of profit. Only that part/component of profit, while determining
the final price worked out/SAP/additional purchase price would
be and/or can be said to be an appropriation of profit and for that
an exercise is to be done by the assessing officer by calling upon G
the assessee to produce the statement of accounts, balance sheet
and the material supplied to the State Government for the purpose
of deciding/fixing the final price/additional purchase price/SAP
under Clause 5A of the Control Order, 1966. Merely because
H
148 SUPREME COURT REPORTS [2019] 4 S.C.R.
A the higher price is paid to both, members and non-members, qua
the members, still the question would remain with respect to the
distribution of profit/sharing of the profit. [Para 9.4][160-E-H;
161-A]
3. The assessing officer will have to take into account the
B manner in which the business works, the modalities and manner
in which SAP/additional purchase price/final price are decided
and to determine what amount would form part of the profit and
after undertaking such an exercise whatever is the profit
component is to be considered as sharing of profit/distribution of
profit and the rest of the amount is to be considered as deductible
C as expenditure. The question of law is answered accordingly,
partly in favour of the department and partly in favour of the
assessee. The impugned orders passed by the High Court, ITAT,
CIT(A) as well as the assessing officers are hereby quashed and
set aside and the matters are remitted to the respective assessing
D officers. [Paras 9.5 and 10][162-B-D]
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8890
of 2012.
From the Judgment and Order dated 29.04.2009 of the High Court
of Judicature at Bombay in Income Tax Appeal (LOD) No. 1556 of
E 2007.
WITH
Civil Appeal Nos.2485, 2484, 2482, 2483, 2486, 2487 of 2019,
4801 of 2014, 8891 of 2012, 4549 of 2013, 302 of 2013.
Arijit Prasad, Rupesh Kumar, S. A. Haseeb, T. M. Singh, Pravesh
F Thakur, Mrs. Anil Katiyar Advs. for the Appellant.
P. Chidambran, Shekhar Naphade, Sr. Advs., Chinmay Khaladkar,
Ms. Neha Sharma, Ms. S. Lakshmi, Abhikalp Singh, B. K. Pal, Advs.
for the Respondent.
The Judgment of the Court was delivered by
G M. R. SHAH, J. 1. Leave granted in all the special leave
petitions.
2. As common question of law arises in this group of appeals, all
these appeals are being disposed of together, by this common judgment
and order.
H
C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD. 149
[M. R. SHAH, J.]
3. For the sake of convenience, Civil Appeal No. 8890 of 2012 A
(Commissioner of Income Tax, Bombay vs. Tasgaon Taluka Sahakari
Sikhar Karkhana Limited) is treated and considered as a lead case, and
therefore, the facts from the said appeal are narrated and considered.
3.1 The assessee (respondent herein) is a Co-operative Society
engaged in the business of production of sugarcane and sale thereof. B
The assessee filed its return of income for the Assessment Year 1998-
99 declaring ‘NIL; income. In the return, the assessee computed carry
forward loss of Rs.40,00,339/- and unabsorbed depreciation of
Rs.1,67,26,665/-. The return was processed under Section 143(1) (a) of
the Income Tax Act, (hereinafter referred to as the ‘Act’), making
adjustment of Rs.2,02,242-/ relatable to Section 40A (3) of the Act. C
Thereafter the assessee filed a revised return wherein business loss
was shown to the tune of Rs.3,32,42,426/-.
3.2 A notice under Section 143(2()/142(1) of the Act was issued
to the assessee. The assessee was having manufacturing activities of
white sugar. It had shown the income from business of manufacturing D
sugar, petrol pump station and also interest under the head “income from
other sources”.
3.3 After scrutiny of final accounts details along with return of
income and details furnished during the course of assessment proceedings,
an issue arose with respect to disallowance under Section 37(1) of the E
Act for excessive and unreasonable cane purchase price paid to the
members of the sugarcane.
3.4 It was noticed that during the year under consideration, the
assessee had crushed 189736.220 metric tones sugarcane. The assessee
had paid Rs.615/- and Rs.720-/ for crushing seasons 1996-97 and 1997- F
98 respectively per metric tone at the time of purchase of cane and the
balance amount was paid later on, as per contracted price increase of
sugarcane on contract basis and as per Mantri Committee Advice in
case of purchase of sugarcane from members and others. It has found
as under: G
Particulars Quantity in MT Rate payable Rate paid (Rs.)
Sugar Season 96- 8,307.520 537.700 875.000
97 from members
H
150 SUPREME COURT REPORTS [2019] 4 S.C.R.
A
From non- 1,652.653 537.700 875.000
members
Total 9,960.173
B
Sugar Season 97- 129,108.966 537.700 875.000
98 from members
From non- 50,667.081 537.700 875.000
members
C
Total 179,776.047
3.5 It was noticed that the production of sugar was covered by
the Essential Commodities Act, 1955 and the Government had issued
D the Sugar Cane (Control) Order, 1966 (hereinafter referred to as the
‘Control Order, 1966’), which deals with all aspects of production of
sugarcane and sale thereof including the price to be paid to the cane
growers. It was noticed that Clause 3 of the Control Order, 1966
authorises Government to fix minimum cane price. It was also noticed
that in addition to this, additional cane price is also payable as per Clause
E 5A of the Control Order, 1966.
3.6 It was noticed that in the case of the assessee, the price paid
by the assessee to the sugarcane growers, most of those are its members,
was in excess than what was payable as per the above Order and
accordingly the assessee was asked to furnish details of payments made
F for the purchase of sugarcane and also payment made later on. The
assessee was also asked to explain whether the payment made later on
is made at the request of the assessee or not.
3.7 It appears that the assessee furnished details of payment made,
wherein it was found that the price paid for purchase of sugarcane at
G the rate of Rs.875/- PMT for sugarcane seasons 1996-97 and 1997-98.
It was further stated that the cane price payable as per Clause 3 and
Clause 5A of the Control Order, 1966, comes to Rs.537.70 for sugarcane
season 1996-97 and Rs.646.50 for sugarcane season 1997-98. Therefore,
the assessee was given an opportunity to explain why price paid by it to
members/non-members for purchase of sugarcane, in excess of what
H
C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD. 151
[M. R. SHAH, J.]
was payable as per Clause 3 and Clause 5A of the Control Order, 1966, A
be not held as excessive.
3.8 In response thereto, the assessee filed written submissions. It
claimed that the payment has been made as per the rate fixed by
Commissionerate of Sugar, Maharashtra State, Pune, and the same is as
per guidelines given by the Mantri Committee. With regard to the purchase B
made from non-members and members, it was the case of the assessee
that payment has been made as per price agreed to at the time of
purchase. It was submitted that a contract for the purchase of sugarcane
has been entered into at the time of start of sugarcane and since the
price is agreed at the time of purchase itself, the same is required to be
allowed as deduction. It was, therefore, claimed that no disallowance C
be made either under Section 40A (2) of the Act or otherwise.
4. The Assessing Officer did not agree with the submissions on
behalf of the assessee. The ultimate conclusion of the A.O. was that
the difference between the price paid as per Clause 3 of the Control
Order, 1966, determined by the Central Government, and the price D
determined by the State Government under Clause 5A of the Control
Order, 1966 (and consequently paid by the assessee to the cane growers)
can be said to be a distribution of profit, as in the price determination
under Clause 5A of the Control Order, 1966, there is an element of profit
and therefore the price paid to the cane growers determined by the
E
State Government is excessive and therefore it is not deductible as
expenditure, and is required to be included in the income of the assessee.
4.1 While holding so, the Assessing Officer considered and
observed as under:
“…The Sugar cane control order, 1966, provides for the price to
F
be paid to the cane growers. The initial price which is fixed as per
clause 3 of this order takes into account the following facts.
a) The cost of production of sugarcane.
b) The return to the growers, alternative crops and general tread
of process of Agricultural commodities.
G
c) The availability of sugar to the consumer at a fair price.
d) The price at which sugar produced from sugarcane is sold by
producer of sugar.
e) The recovery of sugar from sugarcane.
H
152 SUPREME COURT REPORTS [2019] 4 S.C.R.
A In addition to this, additional cane price is also payable to the
growers of sugar cane as per clause 5A. This clause take into
account the profitability of actually on the basis of price paid to
grower of sugarcane as per clause 3 of the Control order. As per
this Clause, the profit earned by the factory is shared by grower
of sugarcane and producer of sugar. The prices under clause 3
B
are fixed by Central Govt. the total price payable to grower of
sugarcane will be different on the basis of profitability of each
units. In the State of Maharashtra, since 90% of sugar producing
factories are in co.op sector, being aided by Govt., the Govt. has
also appointed a committee known as Mantri Committee for the
C purpose of fixing state advisory Price of sugarcane. As per this,
the initial price to be paid to the grower of sugarcane is fixed on
the basis of price fixed by central Govt. as per clause 3 of the
Control order. However, final price is fixed on the basis of
profitability of each units and in the State of Maharashtra, entire
profit is distributed among growers of sugarcane. The
D
Commissionerate of Sugar Fixes the final prices accordingly, this,
however, is done at the specific request of the assessee.
It is worthwhile to mention here that the society sends proposals
to the Commissioner of Sugar for fixation of final cane payment.
If there is higher profit available society proposes for higher
E payments. If available profit is less. Then proposed payment is
accordingly less. This makes it clear that final payment of cane
price includes profit of the society which gets distributed among
the members in the form of additional cane price. The arguments
of the society that regarding state advised price, it is mandatory
F for them to follow the same as correct to a limited extent which
means that for the society it is must to pay initial advance’ price
which is fixed by the Commissioner of Sugar irrespective of actual
profits. However, after the end of the season, it is the society
“who sends the statement of surplus to the Commissioner of Sugar
in which cost of the cane is taken on the basis of initial advance
G price and remaining surplus is proposed to be distributed on the
basis of total cane quantity purchases in the season. On being
proposed by society, the Commissioner of Sugar gives consent to
it and, therefore, the submission is not correct because it is the
society who propose for such additional cane purchase price by
H way of appropriation of profits…”
C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD. 153
[M. R. SHAH, J.]
4.2 The Assessing Officer also did not agree with the submission A
on behalf of the assessee that the minimum cane price notified by the
Central Government is minimum and not actual cost and therefore any
payment in excess of the minimum price should not be treated as an
application of income by observing that the Statutory Minimum Price
(hereinafter referred to as the ‘SMP’) is further increased by additional
B
price on the basis of actual yield and if such adjusted price is more than
initial advance price only such adjusted price is considered as allowable
deduction instead of initial advance price. The Assessing Officer also
noted that the additional cane price is calculated after the end of the
accounting year and it represents the entire surplus or income earned by
the sugar cooperative society in the whole year and it is the surplus C
profit of income which is distributed and, therefore, it cannot be treated
as a legitimate deductible expenditure. Consequently, the Assessing
Officer held that the price paid by the assessee as per Clause 3 & 5A of
the Control Order, 1966 is the fair price and therefore anything paid to
the members as well as non-members above the price determined and
D
paid by the assessee as per Clause 3 & 5A of the Control Order, 1966
will be unreasonable and excess price to its members in the form of
additional cane purchase price and therefore such excess payments are
not allowed under Section 37 of the Act. The chart of the calculation is
as under:
Particulars Quantity Price SMP + 5A Difference Addition
E
paid per (excluding
MT harvesting
and
transport)
Season 96- 8307.520 875.000 537.700 337.300 2,802,126.00 F
97
Members
Season 97- 129,108.966 875.000 646.500 228.500 29,501,399.00
98
Members
G
1,37,416.486 32,303,,525.00
4.3 Alternatively, the Assessing Officer also held that the excess
cane price paid to the cane growers over the SMP is disallowable as per
H
154 SUPREME COURT REPORTS [2019] 4 S.C.R.
A Section 40A(2)(a) of the Act by observing that purchase price paid is
excessive and unreasonable.
4.4 Accordingly, the Assessing Officer finalised the return and
making additions of the amount paid by the society to its members/non-
members above the SMP price/price determined under Clauses 3 & 5A
B of the Control Order, 1966, as income.
5. On an appeal, the learned Commissioner of Income Tax
(Appeals), relying upon and considering the decision of a Special Bench,
Mumbai ITAT in the case of Manjara Shetkari Sakhar Karkhana
Limited dated 19.08.2004 allowed the appeal preferred by the assessee
C and held that the price actually paid for the procurement of the sugarcane
is to be allowed as business expenditure. The learned CIT(A) also
observed and held that the excess payment of cane price as fixed by the
State Government (SAP) over and above SMP for sugarcane to members
and non-members cannot be disallowed either under Section 40A(2)(b)
of the Act, despite the fact that profit is one of the component in asserting
D the price. The CIT(A) observed that just because profit is one of the
component in asserting the price, it cannot be said that profit is separately
distributed in the guise of additional price. The learned CIT(A) observed
that the amount paid by the assessee – cooperative society to the
sugarcane growers is considered for the procurement of the sugarcane
E and it cannot be construed to be appropriation of profits. Consequently,
the learned CIT(A) deleted the addition made by the Assessing Officer.
6. The learned ITAT confirmed the order passed by the learned
CIT(A), which has been further confirmed by the High Court, by the
impugned judgment and order. By the impugned judgment and order,
F the High Court has dismissed the appeal preferred by the department by
observing that the question is covered by the judgment of the High Court
in the case of Commissioner of Income Tax vs. Manjara Shetkari
Sahakari Sakhar Karkhana Limited, reported in (2008) 301 I.T.R.
191 (Bom.). Hence, the present appeals by the department.
G 6.1 In some of the cases, some of the assesses – societies seem
to have paid the cane purchase price to the members/non-members even
in excess/above the price determined under Clauses 3 & 5A of the
Control Order, 1966. Therefore, the question which is posed for
consideration before this Court is,
H
C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD. 155
[M. R. SHAH, J.]
(i) Whether any amount of sugarcane purchase price paid by the A
assessee-society to its members/non-members above the SMP determined
under Clause 3 of the Control Order, 1966, may be paid as per the price
determined by the State Government under Clause 5A of the Control
Order, 1966, can be said to be the sharing of profit and therefore is to be
included in the return of income?; and
B
(ii) Whether any amount of sugarcane purchase price paid by the
society to its members/non-members above/beyond the price even
determined as per Clauses 3 & 5A of the Control Order, 1966, and
which is found to be unreasonable and in excess of the fair market
value, can be said to be the sharing of the profit and is required to be
included in the total income of the assessee? C
7. Shri Arijit Prasad, learned counsel appearing on behalf of the
department has vehemently submitted that in the facts and circumstances
of the case, as such, the Assessing Officer was justified in treating and
considering the difference between the SMP, determined under Clause
3 of the Control Order, 1966, and the SAP determined by the State D
Government under Clause 5A of the Control Order, 1966 as sharing of
profit, and therefore, the same was rightly ordered to be included in the
income of the assessee.
7.1 It is vehemently submitted by the learned counsel appearing
on behalf of the department that cogent reasons have been given by the E
assessing officer to treat the aforesaid difference as sharing of profit,
after detailed analysis of the manner and method in which the sugarcane
purchase price is determined under Clauses 3 & 5A of the Control Order,
1966.
7.2 It is vehemently submitted by the learned counsel appearing F
on behalf of the department that there are different considerations/
criterias to be applied while determining the sugarcane purchase price
at the stage of Clause 3 and at the stage of Clause 5A. It is submitted
that even the stages are also different while determining the sugarcane
purchase price at the stage of Clause 3 and determined at the stage of G
Clause 5A.
7.3 It is vehemently submitted by the learned counsel appearing
on behalf of the department that while determining the sugarcane
purchase price under Clause 5A of the Control Order, 1966, firstly, it is
at the conclusion of the financial year and when the accounts are settled,
H
156 SUPREME COURT REPORTS [2019] 4 S.C.R.
A and secondly, there is an element of profit. It is submitted that one of the
components while dealing with the sugarcane purchase price under Clause
5A is the profit, and whatever is paid to the cane growers under Clause
5A is therefore sharing of profit.
7.4 It is further submitted by the learned counsel appearing on
B behalf of the department that how and in what manner the sugarcane
purchase price is determined under Clause 5A has been considered by
this Court in detail in the case of Maharashtra Rajya Sahkari Sakkar
Karkhana Sangh Limited vs. State of Maharashtra, reported in 1995
Supp. (3) SCC 475. It is vehemently submitted by the learned counsel
that as observed by this Court in the aforesaid decision, the additional
C price determined under Clause 5A is at the end of the season. It is
submitted that as observed, the Bhargava Commission had recommended
payment of additional price at the end of the season on 50:50 profit
sharing basis between the growers and factories to be worked out in
accordance with Schedule II to the Control Order, 1966. It is submitted
D that the additional purchase price determined under Clause 5A comprises
of not only cost of cultivation but profit as well. It is submitted that as
observed by this Court in the case of Maharashtra Rajya Sahkari
Sakkar Karkhana Sangh Limited (supra), the price (additional price
determined under Clause 5A) thus being paid on recovery of cane and
profits made from sale of sugar is not minimum but optimum price which
E is paid to a cane grower. It is submitted that the entire price structure of
cane is founded on two basic factors, one, the recovery percentage and
other the incentive for sharing profit arrived at by working out receipt
minus expenditure. It is submitted that therefore the difference between
the SMP and the SAP is nothing but sharing of profit, and therefore, is
F liable to be included in the return of income under Section 37 of the Act.
7.5 It is further submitted by the learned counsel appearing on
behalf of the department that in many cases it is found that the assessee-
society has paid the sugarcane purchase price to its members/non-
members is excessive and much more than the market price and/or
G even beyond the SAP. It is submitted therefore that even considering
Section 40A (2) of the Act, such excessive and unreasonable amount
paid is not allowable to be deductible. It is submitted therefore that the
High Court has materially erred in holding that the price actually paid by
the society for the procurement of the sugarcane is to be allowed as
business expenditure.
H
C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD. 157
[M. R. SHAH, J.]
7.6 It is further submitted by the learned counsel appearing on A
behalf of the department that in view of the above facts and
circumstances, the High Court was not justified in holding that the excess
amount of expenditure on sugarcane purchase price was a charge of
profit, i.e., diversion of profit and appropriation of profit.
7.7 Making the above submissions, it is prayed to allow the present B
appeals and set aside the impugned judgments and orders passed by the
High Court and consequently the orders passed by the ITAT as well as
CIT(As) and to restore the respective orders passed by the assessing
officers.
8. Shri P. Chidambaram, learned senior advocate, Shri Shekhar C
Naphade, learned senior advocate have appeared on behalf of respective
assesses.
8.1 Learned counsel appearing on behalf of the respective
assesses have vehemently submitted that as rightly observed and held
by the High Court, merely because there is an element and/or one of the D
components while determining the SAP under Clause 5A of the Control
Order, 1966 is profit, it cannot be said that there is a sharing of profit.
8.2 It is vehemently submitted by the learned counsel appearing
on behalf of the respective assesses that under the Control Order, 1966,
a sugarcane society has no other alternative but to pay to the cane growers E
the sugarcane purchase price as determined by the Central Government
and the State Government, as the case may be. It is submitted that even
if the society would be incurring the loss, the society has to pay the
additional purchase price (final price) determined by the State
Government. It is submitted therefore that whatever is paid by the
assessee-society to the cane growers towards sugarcane purchase price F
is an allowable expenditure which is required to be deducted.
8.3 Learned counsel appearing on behalf of the respective
assesses have also relied upon Section 9 of the Sale of Goods Act. It is
further submitted by the learned counsel that as such the higher/additional
price is paid by the society to both members and non-members and G
therefore anything paid above or more than the SMP per se cannot be
said to be a sharing of profit.
8.4 It is further submitted by the learned counsel that even the
State Government is also 10% share holding and nothing is paid to the
H
158 SUPREME COURT REPORTS [2019] 4 S.C.R.
A State being a shareholder. It is further submitted by the learned counsel
that even as per the Bye-laws, the society has to pay the difference
between the SMP and the SAP. It is submitted therefore the difference
between the SMP and the SAP, by no stretch of imagination, can be said
to be a sharing of profit and as such whatever is paid while purchasing
the sugarcane is deductible as expenditure incurred.
B
8.5 Making the above submissions., it is prayed to dismiss the
present appeals preferred by the department.
9. We have heard learned counsel appearing on behalf of the
respective parties at great length.
C 9.1 A short question which is posed before this Court for
consideration is, whether the sugarcane purchase price paid to the cane
growers by the assessee-society more than the SMP and is determined
under Clause 5A of the Control Order, 1966, can be said to be the sharing
of profit/appropriation of profit or is allowable as expenditure?
D 9.2 While considering the aforesaid issue/question, the mechanism
for determining the SMP and SAP under the Control Order, 1966 is
required to be referred to and considered. As per Clause 3 of the Control
Order, 1966, the Central Government may, after consultation with such
authorities, bodies or associations as it may deem fit, by notification in
E the official Gazette, from time to time, fix the minimum price of sugarcane
to be paid by producers of sugar or their agents for the sugarcane
purchased by them. While fixing/determining the SMP under Clause 3
of the Control Order, 1966, the Central Government is required to consider
the following aspects:
F “(a) the cost of production of sugarcane;
(b) the return to the grower from alternative crops and the general
trend of prices of agricultural commodities;
(c) the availability of sugar to the consumer at a fair price;
(d) the price at which sugar produced from sugarcane is sold by
G producers of sugar; and
(e) the recovery of sugar from sugarcane.”
9.3 As per Explanation, different prices may be fixed for different
areas or different qualities or varieties of sugarcane. As per sub-clause
H
C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD. 159
[M. R. SHAH, J.]
2 of Clause 3, no person shall sell or agree to sell sugarcane to a producer A
of sugar or his agent, and no such producer or agent shall purchase or
agree to purchase sugarcane, at a price lower than that fixed under sub-
clause 1 of Clause 3. Clause 5A, which has been inserted in the year
1974 provides for an additional price to be paid for sugarcane purchased
on or after 01.10.1974. It provides that where a producer of sugar or his
B
agent purchases sugarcane, from a sugarcane grower during each sugar
year, he shall, in addition to the minimum sugarcane price fixed under
Clause 3, pay to the sugarcane grower an additional price, if found due
in accordance with the provisions of the Second Schedule annexed to
the Control Order, 1966. How the additional price under Clause 5A of
the Control Order, 1966 is to be determined is provided in the Second C
Schedule, which reads as under:
“SECOND SCHEDULE
[See Clause 5-A]
The amount to be paid on account of additional price (per quintal
of sugarcane) under Clause 5-A by a producer of sugar shall be D
computed in accordance with the following formula, namely :
R-L+A-B
X = ———————
2C
Explanation— In this formula. E
(1) ‘X’ is the additional price in rupees per quintal of sugarcane
payable by the producer of sugar to the sugarcane grower.
(2) ‘R’ is the amount in rupees of sugar produced during the sugar
year excluding the excise duty paid or payable to the factory by
the purchaser. F
(3) ‘L’ is the value in rupees of sugar produced during the sugar
year, as calculated on the basis of the unit cost per quintal ex-
factory, exclusive of excise duty, determined with reference to
the minimum sugarcane price fixed under Clause 3, the final
working results of the year and the Cost Schedule and return G
recommended by the such authority as the Central Government
may, specify from time to time.
(4) ‘A’ is the amount found payable for the previous year but not
actually paid [vide sub-clause (9)].
H
160 SUPREME COURT REPORTS [2019] 4 S.C.R.
A (5) ‘B’ is the excess or shortfall in realisations from actual sales
of the unsold stocks of sugar produced during the sugar year, as
on 30th day of September [vide item 7(ii) below] which is carried
forward and adjusted in the sale realisations of the following year.
(6) ‘C’ is the quantity in quintals of sugarcane purchased by the
B producer of sugar during the sugar year.
(7) The amount ‘R’ referred to in Explanation 2 shall be computed
as under, namely:—
(i) the actual amount realised during the sugar year; and
C (ii) the estimated value of the unsold stocks of sugar held at
the end of 30th September, calculated in regard to free sugar
stocks at the average rate of sales, namely, during the
fortnight 16th to 30th September and in regard to levy sugar
stocks at the notified levy prices as on the 30th September.
D Explanation.—In this Schedules “Sugar” means any form of
sugar containing more than ninety per cent sucrose.”
9.4 At this stage, it is required to be noted that Clause 5A was
inserted in the year 1974 on the basis of the recommendations made by
the Bhargava Commission. As observed by this Court in the case of
Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited
E
(supra), the Bhargava Commission had recommended payment of
additional price at the end of the season on 50:50 profit sharing basis
between growers and factories, to be worked out in accordance with
Second Schedule to the Control Order, 1966. It is also required to be
noted that the additional price is fixed/determined under Clause 5A at
F the end of the season and as per Second Schedule to the Control Order,
1966. Therefore, at the time when the additional purchase price is
determined/fixed under Clause 5A, the accounts are settled and the
particulars are provided by the concerned cooperative society what will
be the expenditure; what can be the profit etc. It is required to be noted
that so far as the SMP determined under Clause 3 of the Control Order,
G
1966 by the Central Government is concerned, it is at the beginning of
the season and while determining/fixing the SMP by the Central
Government, the afore-stated things are required to be considered.
Therefore, the difference of amount between the SMP determined under
Clause 3 and the SAP/additional purchase price determined under Clause
H
C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD. 161
[M. R. SHAH, J.]
5A has an element of profit and/or one of the components would be the A
profit. The entire scheme/mechanism while determining the additional
purchase price under Clause 5A has been dealt with and considered by
this Court in detail in the case of Maharashtra Rajya Sahkari Sakkar
Karkhana Sangh Limited (supra). In the said decision, it is observed
that the additional purchase price/SAP is paid at the end of the season;
B
the Bhargava Commission had recommended payment of additional price
at the end of season on 50:50 profit sharing basis between the growers
and factories to be worked out in accordance with Second Schedule to
the Control Order, 1966; that the additional purchase price comprises of
not only the cost of cultivation, but profit as well; the price thus being
paid on recovery of canes and profits made from sale of sugar is not C
minimum but optimum price which is paid to a cane grower. The
additional cane price or additional State fixed price are paid as a matter
of incentive. The entire price structure of cane is founded on two basic
factors, one, the recovery percentage and other the incentive for sharing
profit arrived at by working out receipt minus expenditure. Therefore,
D
to the extent of the component of profit which will be a part of the final
determination of SAP and/or the final price/additional purchase price
fixed under Clause 5A would certainly be and/or said to be an
appropriation of profit. However, at the same time, the entire/whole
amount of difference between the SMP and the SAP per se cannot be
said to be an appropriation of profit. As observed hereinabove, only that E
part/component of profit, while determining the final price worked out/
SAP/additional purchase price would be and/or can be said to be an
appropriation of profit and for that an exercise is to be done by the
assessing officer by calling upon the assessee to produce the statement
of accounts, balance sheet and the material supplied to the State
F
Government for the purpose of deciding/fixing the final price/additional
purchase price/SAP under Clause 5A of the Control Order, 1966. Merely
because the higher price is paid to both, members and non-members,
qua the members, still the question would remain with respect to the
distribution of profit/sharing of the profit. So far as the non-members
are concerned, the same can be dealt with and/or considered applying G
Section 40A (2) of the Act, i.e., the assessing officer on the material on
record has to determine whether the amount paid is excessive or
unreasonable or not. However, this is not the subject matter in the present
appeals. We are restricting the present appeals qua the sugarcane
purchase price paid by the society to the cane growers above the SMP
H
162 SUPREME COURT REPORTS [2019] 4 S.C.R.
A determined under Clause 3 and the difference of sugarcane purchase
price between the price determined under Clause 3 and Clause 5A of
the Control Order, 1966.
9.5 Therefore, the assessing officer will have to take into account
the manner in which the business works, the modalities and manner in
B which SAP/additional purchase price/final price are decided and to
determine what amount would form part of the profit and after
undertaking such an exercise whatever is the profit component is to be
considered as sharing of profit/distribution of profit and the rest of the
amount is to be considered as deductible as expenditure.
C 10. In view of the above and for the reasons stated above, the
question of law is answered accordingly, partly in favour of the department
and partly in favour of the assessee. The impugned orders passed by
the High Court, ITAT, CIT(A) as well as the assessing officers are
hereby quashed and set aside and the matters are remitted to the
respective assessing officers to undertake the exercise as stated
D hereinabove and after giving an opportunity to the respective assesses.
11. All these appeals stand disposed of in terms of the above.
Devika Gujral Appeals disposed of.
E
F
G
H
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "Income Tax"Sign in to search