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TMI Blog2016 (2) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... ;Fair Remunerating Price' (hereinafter referred to as "FRP"). At times, co-operative societies distribute price for the sugarcane procured from its members at a rate higher than SMP or FRP. The question in the present group of petitions in the context of reopening of assessments concerns taxability of the payments made by the co-operatives to its members over and above the FRP and SMP. Revenue contends that the excess payments would represent the profit of the co-operative societies and thus it amounts to distribution of its profit. The assessees contend that to pay the minimum price and the fair price is mandatory. However, co-operative societies are not precluded from paying higher price of sugarcane to member-farmers. Any payment made to the members for purchase of sugarcane would, therefore, be the cost of the society and full deduction thereof must be permitted. 2. The Bombay High Court in case of Commissioner of Income Tax v. Manjara Shetkari Sahakari Sakhar Karkhana Ltd. reported in (2008) 301 ITR 191 considered similar issue in tax appeals filed by the revenue. One of the questions considered in the said judgment was, whether the Appellate Tribunal was right in holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee(s) after the finalisation of accounts and, therefore, the differential amount between SAP and SMP would constitute appropriation of profits and not expenditure/expense under section 37 of the Act. On the other hand, it is the case of the assessee(s) that they are bound to pay to the cane growers the final cane price as per the SAP fixed by the State Government and the mere fact that SAP fixed by the State Government is based on the price recommended by the assessee(s) after finalisation of accounts would not constitute appropriation of profits because appropriation would arise only after the profits are determined and profits can be determined only after all the expenses incurred for the business are deducted from the gross income. 2. On the above contentions, two questions were required to be considered by the Department, which are as follows : "Whether the above-mentioned differential payment made by the assessee(s) to the cane growers after the close of the financial year or after the balance-sheet date would constitute an expenditure under section 37 of the Income-tax Act, 1961; and whether such differential payment would, applying the real income theory, constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Appellate Commissioner in some cases has made assessments making additions of additional amounts of sugarcane price. On the basis of such developments in large number of sugar co-operatives in the State, Assessing Officers had issued notices for reopening the assessments. Many of these notices were challenged by concerned assessees by filing writ petitions before this Court. A Division Bench of this Court in judgment dated 12.6.2015 in case of Shree Chalthan Vibhag Khand v. Deputy Commissioner of Income-tax in SCA No.17870 of 2014 and connected petitions reported in (2015) 376 ITR 419 (Guj.) quashed the notices making following observations: "[9.0] Now, so far as the initiation of impugned reassessment proceedings and the impugned notices under Section 148 of the Act within 4 years is concerned, it appears that the reopening has taken place only on one ground that the assessee has paid price of sugarcane more than the SMP. It is required to be noted that in all these cases the assessments were completed under Section 143(3) of the Act after holding necessary inquiry by the Assessing Officer. It also appears that the inquiry was made and the issue was gone into detail. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. But reassessment has to be based on fulfillment of certain preconditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an inbuilt test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SMP either is exorbitant or too excessive and is not justifiable at all and on the basis of the material available with the Assessing Officer with respect to the cane price paid by other societies it is found that amount of cane price paid by a particular assessee/cooperative society is not justifiable at all, as either it is exorbitant and/or unreasonable, then and then only it can be said that such excess payment of cane price is nothing but distributing the profits and/or passing of the profits. However, for that and for reopening of the assessment on the aforesaid ground, there must be some tangible material available with the Assessing Officer to have a reasonable belief and/or form such an opinion and in that case only the reassessment is permissible. At this stage it is required to be noted that as such the SMP declared by the Government, declared under the Control Order is as such in the larger interest of the cane growers and so as to see that the cane growers are not exploited and therefore, it is mandated that the sugar cooperative societies to pay the purchase price of the cane not less than the SMP declared by the Government. Under the Control Order as such there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound also the impugned reassessment proceedings within 4 years and beyond 4 years deserves to be quashed and set aside. [9.4] At this stage even the provisions of Sugarcane Control Order, 1966 are also required to be referred to. Clause 3 provides for minimum price of sugarcane payable by the producer of the sugar and it provides that the Central Government may, after consultation with such 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, having regard to (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 producers of sugar; and (e) the recovery of sugar from sugarcane. It is also required to be noted that even the Control Order provides for additional price for sugarcane purchased and it also further provides that no additional price determined under subclause (2) or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssesee has paid excess price Rs. 1,246.75 per M.T. Accordingly total excess price of Rs. 82,22,60,364/- has been paid by the assessee to its members. 4. The additional payment of Rs. 82,22,60,364/- made by the sugar factory over and above the Statutory Minimum Price was not cane price, but diversion of profit and is, therefore, not allowable as business expenditure under section 37(1) of the I.T. Act. 5. Similar issue had come up before the Honourable Supreme Court in a case of M/s. Shri Dnyaneshwar Ssk Ltd. A/P Bhande, Tal. Newasa, Dist. Ahmednagar of A.Y.1994-95 along with cases of 102 other Sugar Co-operatives of Maharashtra State. Before the Hon'ble Supreme Court the following question of law were raised. (1) Whether on the facts and in the circumstances of the case and in law, the Hon'ble High Court was justified in holding that the provisions of section 40A(2) of the I.T. Act are not applicable to the payments made by a Cooperative Society to its members towards purchase price of sugarcane supplied. (2) Whether on the facts and in the circumstances of the case and in law, the Hon'ble High Court was justified in holding that the additional payments over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. are decided, the timing difference which will arise on account of the difference in the accounting years, etc. in a given case, if the assessee has made a provision in its accounts, then the Assessing Officer shall enquire such provision is made out of profits or from gross receipts and whether such differential payment is relatable to the cost of the sugarcane or whether it is relatable to the division of profits amongst the members of the Society? One of the points which will also arise for determination by the Assessing Officer will be on the theory of over-riding title in the matte of accrual or application of income. Therefore, in each of these cases, the Assessing Officer will decide the question as to whether the obligation is attached to income or to its source. None of these questions have been examined by the Authorities below. These questions are required to be examined because, in these cases, we are not only concerned with the applicability of Section 40A(2)of the Act but we are primarily required to consider whether the said differential payment constitutes an expenses or distribution of profits? Ordinarily, we would not have remitted these matters particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent made by the assessee sugar factory over and above the FAIR AND REMUNERATIVE PRICE (FRP) was not cane price but diversion of profit, and therefore is not allowable as business expenditure under section 37 (1) of the I.T.Act, but that to the extent of the amount worked out in accordance with Cl.5A(if any) of the Sugarcane Control Order, 1966, such additional payment constitutes a diversion of profit by overriding the title, which cannot be assessed in the assessee's hands. 8. The methodology for determining what is commonly referred to as "Cane Price" by the assessee and also by the State Government, clearly envisages distribution of operational profits ("Surplus") from the manufacture of sugar. This fact is brought out incontrovertibly in the decisions of the Honourable Supreme Court, in the reports of various Expert Committees set up from time to time by the Central and State Governments as well as in the methodology for determining the same as explained by the Commissioner of Sugar, Government of Maharashtra. To determine the business income of a Cooperative Society engaged in the manufacture of sugar, the same commercial principles and legal provisions have to be employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of four years from the end of the assessment year and in some cases beyond such period, both concerning assessments originally framed after scrutiny. In some cases we are also concerned with validity of the notices for reopening of assessment which was originally framed u/s.143 (1) of the Act. However, these differences are not material so far as our scrutiny is concerned. What is important is that with cosmetic and language changes in all material aspects, reasons recorded by the Assessing Officers for issuing the impugned notices are similar. With this background, we may consider the rival submissions. 8. Learned counsel Mr.Soparkar for the petitioners submitted that the reasons recorded by the Assessing Officer for issuing the notices are invalid. On the basis of such reasons, he could not have formed a belief that income chargeable to tax had escaped assessment. The second contention was that the payments made by the sugar co-operatives to its members for purchase of sugarcane is a cost to the co-operative and the entire expenditure should, therefore, be deducted u/s.37 (1) of the Act. According to him, it does not matter whether the price so paid is higher than either the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer can reopen assessment is formation of his belief that income chargeable to tax had escaped assessment. It is, of course, true that there is a considerable difference when such notice is issued within four years and beyond four years and yet greater difference when such notice is issued concerning the assessment which was framed without scrutiny. However, one common thread which would link all cases of reopening of assessment would be that the Assessing Officer must have a reason to believe that income chargeable to tax had escaped assessment. To form such belief, there must have some tangible material at his hand which would enable him to come to such conclusion. It is in this context we need to examine the reasons recorded. We may proceed to do so on the settled principle that the notices for reopening can be substantiated only on the basis of the reasons recorded by the Assessing Officer and not with the aid of any outside material. 14. In this context, the reasons recorded by the Assessing Officer in SCA No.16593 of 2015 can be bifurcated in three parts. The first portion refers to the facts concerning the petitioner's cooperative society in which it is pointed out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings. 18. With this background, we may revisit the conclusions of the High Court in the said judgment. We have reproduced the relevant portion of the judgment. To summarize, the Court held and observed that mere payment of cane price in excess of the SMP would not ipso facto and/or per se be said to be distribution of profit. There had to be some tangible material with the Assessing Officer that the excess paid was exorbitant or too excessive or that the same was otherwise not justified. It was observed that while considering the question of taxability of such amount, number of questions would be required to be examined by the Assessing Officer "before forming an opinion and/or a reason to believe that income chargeable to tax had escaped assessment". It was further observed that a detailed inquiry is required to be conducted by the Assessing Officer. In the said cases since no such inquiry was conducted before forming a belief that income chargeable to tax had escaped assessment, the Court was persuaded to quash the notices. It also observed that the Assessing Officer had relied on the order passed by the CIT(A) in cases of some other assessees. The Assessing Officer could n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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