TMI Blog2016 (2) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not have borrowed the satisfaction from such order in absence of any application of mind on his part. Since the issues are almost identical and the impugned notices for reopening the assessments have been issued by the Assessing Officers under similar circumstances recording reasons which are materially similar, it would not be possible for us to take a different view. - Decided in favour of assessee - SPECIAL CIVIL APPLICATION NO. 16593, 18477, 635, 20440, 20441, 620, 621, 20501 of 2015 - - - Dated:- 2-2-2016 - MR. AKIL KURESHI AND MR. MOHINDER PAL, JJ. FOR THE PETITIONER : MR B S SOPARKAR, ADVOCATE, MR JP SHAH, SENIOR ADVOCATE, with MR MANISH J SHAH, ADVOCATE FOR THE RESPONDENT : MR KM PARIKH, ADVOCATE and MR SUDHIR MEHTA, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nus. The assessee pointed out that it would be incumbent upon the sugar co-operatives to pay the price as fixed by the State Government. In this background, while answering the question in favour of the assessee, the Bombay High Court held and observed as under: 23. It is pertinent to note that the final cane price fixed by the State Government is paid by the assessee to its members as well as non-members. In the case of Maharashtra Rajya Sahakari Sakhar Karkhan Sangh Ltd. (supra), the apex Court has held that the production of sugar being of primary concern, the SAP fixed by the State of Maharashtra is not only binding on the members but also binding on non-members who supply sugarcane to the assessee. In these circumstances, the final cane price paid by the assessee as per the SAP fixed by the State Government cannot be said to be excessive or appropriation of profits/bonus and consequently no disallowance could be made in that behalf. 3. This judgment was carried in appeal by the revenue. The Supreme Court by judgment in case of Deputy Commissioner of Income-tax, Nashik v. Shri Satpuda Tapi Parisar SSK Ltd. reported in (2010) 189 Taxman 81, remanded the proceedings be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 overriding title in the matter 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. 4. 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 expense or distribution of profits? Ordinarily, we would not have remitted these matters, particularly when they are for assessment year 1992-93, but, for the fact that this issue is going to arise repeatedly in future. It will also help the assessee(s) in a way that they will have to re-write their accounts in future depending upon the outcome of this litigation. Therefore, in the interest of justice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the same is nothing but distribution of profits and/or passing of profits on the basis of the decision of the Hon ble Supreme Court in the case of Shri Satpuda Tapi Parishar SSK Ltd. (Supra). However it is required to be noted that once at the time of original assessment under Section 143(3) of the Act the Assessing Officer after applying the mind accepted the return, thereafter reopening of the assessment can be said to be on mere change of opinion of the Assessing Officer and as per the catena of decisions of the Hon ble Supreme Court as well as this Court mere on change of opinion of the Assessing Officer, reassessment proceedings are not permissible. [9.1] If any decisions are required to be referred to on the point, they are the decision of the Hon ble Supreme Court in the case of Kelvinator of India Ltd. (Supra), decisions of this Court in the case of Cliantha Research Ltd. (Supra), Sarla Raj Verma (Supra) and Niko Resources Ltd. (Supra). In the case of Kelvinator of India Ltd. (Supra), the Hon ble Supreme Court in para 6 has held as under: 6. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to the Direct Tax Laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... believe from section 147 and their substitution by the opinion of the Assessing Officer. It was pointed out the meaning of the expression, reason to believe had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression has reason to believe in place of the words for reasons to be recorded by him in writing, is of the opinion . Other provisions of the new section 147, however remain the same. [9.2] Even otherwise it is required to be noted that the reasons to believe must necessarily show, indicate and communicate why and on what grounds / cause any income has escaped assessment. Reasons recorded must be germane, prudent and disclose prima facie belief that income has escaped assessment. Even for formation of the opinion and/or reason to believe that any income has escaped assessment, there must be some tangible new material available with the Assessing Officer on the basis of which the reassessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer is required to take into account the manner in which the business works, resolutions of the State Government, the modalities and the manner in which SAP and SMP are decided, the timing difference which will arise on account of the difference in the accounting years etc. Therefore, while considering the aforesaid question, number of questions are required to be examined by the Assessing Officer, before even forming an opinion and/or a reason to believe that the income chargeable to tax has escaped assessment. Mere payment of any amount of cane price / purchase price in excess to SAP / SMP per se cannot be said to be distribution of profits. For which a detailed inquiry is required to be conducted by the Assessing Officer. In the present case no such inquiry has been done and/or conducted by the Assessing Officer before having a reasonable belief and/or forming an opinion that the income chargeable to tax has escaped assessment on the aforesaid ground. [9.3] At this stage it is required to be noted that in some of the cases the Assessing Officer has formed an opinion on the basis of the order passed y the learned CIT (Appeals) which were pursuant to the order of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase price fixed under clause (3). However, as observed hereinabove, in a given case after holding inquiry if it is found that the purchase price paid in excess to the SMP is so exorbitant and/or unreasonable it can be said to be distributing the profits and/or passing of the profits. However, for that purpose there must be some further inquiry and/or tangible material with the Assessing Officer. [9.5] Under the circumstances, the impugned notices under Section 148 of the Act to reopen the proceedings beyond 4 years and within 4 years on the aforesaid ground i.e. on the ground that the payment of purchase price in excess to the SMP has escaped the assessment cannot be sustained and the same deserves to be quashed and set aside. 5. In this background, we may refer to the facts of the present group of petitions. Such facts can be noted from SCA No.16593 of 2015. Petitioner is a sugar co-operative. For A.Y. 2010-11, the petitioner had filed return of income which was accepted by the revenue u/s.143 (1) of the Act without scrutiny. To reopen such assessment, Assessing Officer issued impugned notice on 27.3.2015. On the request of the petitioner, he supplied the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961, as it stood at the relevant time, we are of the view that large number of questions hav remained unanswered in these cases. The applicability of Section 40A(2) of the Income Tax Act, 1961 ('Act', for short) is linked to computation under Section 28 and section 37 of the Act. It is the case of the Department in all these cases that the State Advised Price (S.A.P.) is determined on the basis of the price recommended by the assessee(s) after the finalization of accounts, and therefore, the differential amount between S.A.P. and S.M.P. would constitute appropriation of profits and not expenditure/ expenses under Section 37 of the I.T.Act. On the other hand, it is the case of the assessee(s) that they are bound to pay to the cone growers the final cane price as per the S.A.P. fixed by the State Government and the mere fact that S.A.P. fixed by the State Government is based on the price recommended by the assessee(s) after finalization 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Income tax (Appeals) takes up the matter for final hearing. We express no opinion on the merits of the case. The parties are at liberty to argue their respective points uninfluenced by any observations made in the impugned judgments on the applicability of section 28 or section 37 of the I.T.Act. 6. In view of the Hon'ble Supreme Court direction, ld. CIT(Appeals) brought new information in respect of mechanism of final remuneration paid to cane growers of the co-operative sugar factories and held that distribution is related to income post generation and was diversion of profit. 7. Only a part of the amount paid by the assessee factory to its cane supplier constitutes allowable business expenditure. The remaining amount is paid towards distribution of profits and constitutes application of income. The SMP fixed by the Central Government which takes into account cost of cultivation, opportunity cost as well as an element of profit (by factoring in the ex-factory in the ex-factory price of sugar) provides the closest approximation of price of sugarcane that would satisfy the requirement of section 37. When taken along with the amount paid under clause 5A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er ordinary commercial principles as well as under the Act, what is to be assessed in the case of a business entity is profits of the business prior to distribution or application of any portion thereof. Accordingly, so much of the cane price determined in accordance with the methodology prevalent in the State of Gujarat (and paid by the sugar factory to its cane suppliers) as constitutes distribution of profit/ application of income, are not allowable as business expenditure while computing profits and gains of business or profession of the assessee factory. The legitimate returns that the cane farmer might expect on account of risks and profits stand subsumed in such additional amount determined under clause 5A. This is apparent from the fact that when the Central Government amended the SCO, 1966 (with effect from 22nd of October 2009) in order to include a subclause (9) in Cl.3 (1) mandating that a reasonable margin for the growers of sugarcane on account of risk and profits be taken into account while fixing the SMP, it simultaneously deleted clause 5-A of the SCO requiring payment of Additional Price representing share of realization from sale of sugar between the manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions number of cases arose also out of the assessments originally framed u/s.143(1) of the Act. He pointed out that against the decision of this Court in Shree Chalthan Vibhag Khand (supra), the revenue had filed SLPs which have been dismissed by the Supreme Court. 10. Learned counsel Mr.J.P.Shah also raised similar contentions and pointed out that in some of the cases the impugned notices were issued beyond the period of four years from the end of the relevant assessment year. There was not even allegation by the department that the assessee had failed to disclose truly and fully all material facts which led to any under-assessment. 11. On the other hand, learned counsel Mr.Parikh and Mr.Sudhir Mehta for the Department opposed the petitions contending that the view taken by the Bombay High Court in case of Manjara Shetkari Sahakari Sakhar Karkhana Ltd. (supra) has not been affirmed by the Supreme Court. Instead, the entire issue has been remanded for fresh consideration before CIT(A). Under such remand orders, CIT (A) had conducted a detailed inquiry and concluded that the excess payment represents income of the cooperative society chargeable to tax. 12. Learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsion of profit of the co-operative society. 15. The second part of the reasons recorded refers to the litigation arising from the Bombay High Court judgment in case of Manjara Shetkari Sahakari Sakhar Karkhana Ltd. (supra) and the decision of the Supreme Court in the SLP against the judgment of Bombay High Court. The assessing Officer reproduced the entire order of the Supreme Court remanding the proceedings with certain observations. 16. The third part of the reasons recorded pertains to the exercise further undertaken by the CIT(A) in such remanded proceedings. The Assessing Officer noted that upon completion of the remand proceedings, the CIT(A) held that the difference represents income of the society. After thus referring to the above developments in the concluding portion in para 9 of the reasons, the Assessing Officer recorded his belief that income chargeable to tax had escaped assessment. He, in fact, went on to record that the assessee had not disclosed truly and fully all material facts. 17. In this background we may recall that under substantially similar circumstances when a group of petitioners approached the High Court complaining about notices for reopenin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged by the revenue before the Supreme Court, however, the SLP came to be dismissed. 19. Since the issues are almost identical and the impugned notices for reopening the assessments have been issued by the Assessing Officers under similar circumstances recording reasons which are materially similar, it would not be possible for us to take a different view. 20. Before closing, however, we would like to clarify one aspect. It was vehemently contended on behalf of the petitioners that the Assessing Officer ought to have conducted a detailed inquiry regarding various factors referred to by the Supreme Court in the said order in case of Shri Satpuda Tapi Parisar SSK Ltd. (supra) before the Assessing Officer could have formed the reason/belief that income chargeable to tax had escaped assessment. Learned counsel heavily relied on some of the observations made by the Division Bench of this Court in Shree Chalthan Vibhag Khand (supra). The observations cannot be picked in isolation for being treated as a ratio. What the Court held in the said judgment was that the reasons recorded by the Assessing Officer lacked validity. Undoubtedly, to form a belief that income chargeable to tax ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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