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SHREE NARMADA KHAND UDHYOG SAHKARI MANDALI LTD Versus INCOME TAX OFFICER - WARD - 2 (1)

2016 (2) TMI 385 - GUJARAT HIGH COURT

Bonus payment - reopening of assessment - State price exceeds fair market value which is fixed by the Central Government - Held that:- As under substantially similar circumstances when a group of petitioners approached the High Court complaining about notices for reopening the assessments, the High Court in case of Shree Chalthan Vibhag Khand (2015 (7) TMI 297 - GUJARAT HIGH COURT ) quashed all notices.

the Court held and observed that mere payment of cane price in excess of the SMP w .....

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ent”. 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 not have borrowed the satisfaction from such order in absence o .....

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, 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) 1. This group of petitions arise in a common background. Brief facts leading to the litigation are as under: All the petitioners are co-operative societies and are engaged in the manufacture of sugar and molasses from sugarcane purchased from member farm .....

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embers 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 soc .....

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er the Appellate Tribunal was right in holding that additional payments over and above the statutory price was cane price and not diversion of profit and as such allowable as business expenditure under section 37 (1) of the Income-tax Act, 1961 (hereinafter referred to as the Act ). This question arose in the background of the fact that sugar co-operatives had paid the price fixed by the State Government which was higher than the SMP declared by the Central Government. The revenue contended that .....

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e 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 ap .....

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s it stood at the relevant time, we are of the view that large number of questions have 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 [SAP] is determined on the basis of the price recommended by the assessee(s) after the finalisation of accounts and, therefore, the dif .....

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ropriation 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 un .....

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. In a given case, if the assessee has made a provision in its accounts, then the Assessing Officer shall enquire whether 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 overriding title in the matter of accru .....

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e 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, we remit these cases to the concerned Commissioner of Income-tax (Appeals). We make it clear that bo .....

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uch remand, it appears that 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 Vibha .....

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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 is also required to be noted that in some of the cases the practice of paying more prices to the cane growers than the SMP declared by the Government has been consistently followed since many years and the same has been accepted and no objection has been raised at any point of t .....

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ired 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 refer .....

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opening could be done under the above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from 1st April , 1989), they are given a goby and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much .....

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on 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 .....

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ssing Officer. We quote hereinbelow the relevant portion of Circular No.549 dated October 31, 1989 [(1990) 182 ITR (St.) 1, 29), which reads as follows: 7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression reason to believe in section 147. A number of representations were received against the omission of the words reason to 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 be .....

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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 .....

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said to be distributing the profits. There must be tangible material available with the Assessing Officer, such as the amount or cane price paid to the cane growers in excess to the 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 eit .....

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uch 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 no restriction and/or ban not to pay more amount than the SMP declared. Even in the case of Shri Satpuda Tapi Parishar S .....

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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 / .....

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cer has formed an opinion on the basis of the order passed y the learned CIT (Appeals) which were pursuant to the order of Hon ble Supreme Court in the case of Shri Satpuda Tapi Parishar SSK Ltd. (Supra). However, it is required to be noted that on the basis of the order passed by the learned CIT(Appeals) in the case of some other assessee the satisfaction of the Assessing Officer and formation of opinion in the case of present assessee cannot be sustained and the same can be said to be a borrow .....

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ed 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 .....

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A shall become payable by a producer of sugar who pays a price higher than the minimum sugarcane price fixed under Clause (3) to the sugarcane growers, provided that the price so paid shall in no case be less than the total price comprising the minimum sugarcane price fixed under clause (3) and the additional price determined under subclause (2) or subclause (3) as the case may be of Clause 5A. Therefore, even in the Control Order itself there is a reference to the additional purchase price whic .....

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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 whic .....

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ncome of Rs. Nil. 2. It was observed that during the F.Y. 2009-10 assessee had purchased 659523 M.T. of Sugarcane from its members at a total pruchase price of ₹ 1,75,99,04,285/-. As such average purchase price works out to ₹ 2,668.45 M.T. 3. However, the Government had fixed F.R.P. for sugarcane at ₹ 1,421.70/- per M.T. It is therefore seen that the assesee has paid excess price ₹ 1,246.75 per M.T. Accordingly total excess price of ₹ 82,22,60,364/- has been paid by .....

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ives 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'b .....

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applicability of Section 410A(2) of the Income Tax Act, 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 asse .....

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r 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 income. 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 case of the financia .....

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ill 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 .....

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her the said differential payment constitutes an expenses 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 hep 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, we remit these cases to the concerned Commissi .....

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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 ta .....

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ome that is taxable under I.T.Act is income computed on ordinary commercial principles but subject to the provisions of the I.T.Act.On these considerations, what is taxable in the case of a CSF is commercial profits prior to distribution thereof as Final Cane Price . As such, so much of the Final Cane Price as represents the amount of profit earned by the SCF cannot be allowed as Expenditure either under commercial principles or under the I.T.Act and represents the Real income of the assessee wh .....

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e 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 sam .....

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e Tax Act is profits arrived at according to ordinary commercial principles, but subject to the provisions of Income tax. This is also the essence of the Real Income Theory . Needless to say, under 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 .....

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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 manufacturer and the cane growers. 9. In view of above referred findings and facts of the case, I have reason to beli .....

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. In this group of petitions, we are concerned with the notices for reopening which have been issued in some cases within a period 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 conc .....

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sessment. 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 SMP or even the FRP. 9. In support of this contention, learned counsel heavily relied on a decision of Division Bench of this Court in case of Shree Chalthan Vibhag Khand &a .....

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ch 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 De .....

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ons recorded by the Assessing Officer in the present group of petitions demonstrate prima facie reasons to believe that the income chargeable to tax had escaped assessment. At the stage of reopening of assessment, it is not necessary that such belief should be final and conclusive that the additions would invariably be made. 13. We have earlier recorded that for the purpose of our decision, it would not matter whether the impugned notices have been issued within or beyond the period of four year .....

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h 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 se .....

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verage price of ₹ 2668.45 per M.T. to its members. In other words, the assessee had paid ₹ 1246.75 per M.T. over and above the FRP for the sugarcane in the year under consideration. According to the Assessing Officer, therefore, the total payment of ₹ 82.22 crores (rounded off) thus did not represent the price of cane, but it amounted to diversion of profit of the co-operative society. 15. The second part of the reasons recorded refers to the litigation arising from the Bombay .....

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eedings, 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 .....

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und may be identical, there is bound to be difference in the language and expression. However, for all material purposes, we see no distinction between the two sets of reasons. Essentially, the Assessing Officer seeks to rely on the earlier order passed by the Supreme Court and further exercise undertaken by the CIT(A) in such remand proceedings. 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 judgmen .....

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re 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 asse .....

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