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2019 (11) TMI 362

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..... deciding/fixing the final price/additional purchase price/SAP under this clause. The amount relatable to the profit component or sharing of profit/distribution of profit paid by the assessee, which would be appropriation of income, will not be allowed as deduction, while the remaining amount, being a charge against the income, will be considered as deductible expenditure. At this stage, it is made clear that the distribution of profits can only be qua the payments made to the members. In so far as the non-members are concerned, the case will be considered afresh by the AO by applying the provisions of section 40A(2) Similar is the position in so far as sale of sugar at concessional rate to members below the cost price is concerned in as much as the income to that extent which was earned by the assessee from its normal business operations shall be passed on to the members in the form of sale of sugar at a rate lower than its cost price. CIT(A) in the instant batch of appeals has confirmed the addition towards the difference between the Levy price and the concessional price (upto 5 kg. per member per month) and to the extent of difference between the Market price of sugar and Conces .....

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..... nd above the Fair and remunerative price (FRP) fixed by the Government, to its members as well as non-members. On being called upon to justify such deduction, the assessee gave certain explanation by submitting that such payment was solely and exclusively in connection with the business and the entire amount was deductible u/s.37(1) of the Income-tax Act, 1961 (hereinafter also called the Act ). Relying on the judgment of Hon ble Supreme Court in the case of DCIT Vs. Shri Satpuda Tapi Parisar S.S.K. Ltd. and others (2010) 326 ITR 402, the AO opined that the excessive price paid was in the nature of distribution of profits and hence not deductible. This is how, he computed the excessive cane price paid both to the members and non-members and made addition for the said sum. The ld. CIT(A) in some cases deleted the addition, fully or partly, whilst in others the addition got sustained. This led to filing of the cross appeals both by the assessee as well as the Revenue before the Tribunal. 5. We have heard both the sides and gone through the relevant material on record. There is consensus ad idem between the rival parties that the issue of payment of excessive price on purchase of suga .....

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..... nder clause 5A, has an element of distribution of profit which cannot be allowed as deduction, the Hon ble Supreme Court remitted the matter to the file of the AO for considering the modalities and manner in which SAP/additional purchase price/final price is decided. He has been directed to carry out an exercise of considering 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 and thereafter determine as to what amount would form part of the distribution of profit and the other as deductible expenditure. The relevant findings of the Hon ble Apex Court are reproduced as under:- 9.4. ..... 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, 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 part/component of profit, while .....

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..... istribution of profit paid by the assessee, which would be appropriation of income, will not be allowed as deduction, while the remaining amount, being a charge against the income, will be considered as deductible expenditure. At this stage, it is made clear that the distribution of profits can only be qua the payments made to the members. In so far as the non-members are concerned, the case will be considered afresh by the AO by applying the provisions of section 40A(2) of the Act, as has been held by the Hon ble Supreme Court supra. Needless to say, the assessee will be allowed a reasonable opportunity of hearing by the AO in such fresh determination of the issue. 4. Since the facts and circumstances of the instant appeal are mutatis mutandis similar to those already considered and decided by the Tribunal in the above batch of appeals, in the given circumstances and following the precedent, we set-aside the impugned order and remit the matter to the file of the AO for deciding it in conformity with the view taken by the Tribunal as extracted above. 5. The only other issue raised in this appeal is against restricting the addition in respect of sale of sugar at Concessional price. .....

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..... 5kg of sugar per month to its members at the rate of levy sugar plus excise duty on free sugar; the factories shall not sell sugar at concessional rate if it has crushed less than 50% during the last season. In the light of the above order of Commissioner of Sugar, Maharashtra State, the ld. CIT(A) held that maximum 5 kg per month per member can be issued at the levy price and the difference between the levy price and the concessional price actually charged from the members up to the limit of 5 kg per month per member should be taxed in the hands of the assessee; and the difference between the market price and the concessional price on the quantity of sugar sold beyond 5 kg per member per month, should also be added to the total income. To buttress his view, he took support from Nagarbail Salt Owners Co-operative Society Ltd. (2016) 238 Taxman 689 (Karnataka) in which the sale proceeds were transferred to an account called Distributable Pool Fund Account for distribution among the members of the Society. After such transfer, the Society offered remaining income to tax, which point of view of the assessee was jettisoned by the Hon ble High Court. Based on this panorama of facts and .....

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..... ropriation of profit . 14. We have heard both the sides and gone through the relevant material on record. Before proceeding further, we consider it expedient to mention that the issue of sale of sugar to members of a cooperative society at concessional price came up for consideration before various Benches of the Tribunal across the country. The Pune Benches of the Tribunal vide its order dated 08-08-1996 in Chhatrapati Sahu SSK Ltd. Vs. DCIT (ITA No.1924/PN/1990), a copy placed on record, decided this issue in favour of the assessee by relying on the judgment in the case of A. Raman & Company (supra). Thereafter, several orders came to be passed by various benches of the Tribunal. All such orders were challenged by the Revenue before the respective Hon ble High Courts. In the case of Terna SSK Ltd. (supra), one of the issues raised by the Department was against the deletion of addition made on account of sugar supply to members at concessional rate. The ld. Counsel for the Revenue did not press this issue before the Hon ble High Court, as a result of which such ground was dismissed. Various orders passed by the Tribunal came up for adjudication before the concerned Hon ble Hig .....

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..... al with a connected issue of purchase of sugarcane by the sugar factories from its members at excessive price, which we have discussed hereinabove. The AOs in that group of matters had opined that the difference between the price paid as per clause 3 of the Control Order, 1966 determined by the Central Government, being, the Statutory Minimum Price (SMP) and the price determined by the State Government under clause 5A of the Control Order, 1966, being SAP/Additional Price, was in the nature of distribution of profits and hence, not deductible as expenditure. Such an issue came to be decided by the Hon ble High Courts in favour of the assessee. When the Revenue brought the matter for consideration before the Hon ble Supreme Court, their Lordships held that the SMP determined under clause 3 of the Control Order, 1966 which is paid at the beginning of the season is deductible in the entirety but the difference between the SMP determined under clause 3 and SAP/Additional Price determined under clause 5A has an element of distribution of profit , which cannot be allowed as deduction. That is how, the Hon ble Supreme Court remitted the matter to the file of AO for considering the modalit .....

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..... by the assessee to its members by means of selling sugar at concessional price is based on the premise that a cooperative society and its members are not different from each other in the co-operative structure. 19. In case we proceed with the presumption that the assessee and its members are separate from each other and the transaction is between two independent parties, then patently, there can be no question of earning any income by selling sugar at a price lower than the market price. Tax is levied on income earned and not on loss of potential income. Neither the AO has invoked any specific provision nor the ld. DR has invited our attention towards any provision in the Act warranting the addition in the given circumstances. Further, it is not anyone s case that the provisions of section 92C are attracted. 20. Coming back to the AO s case of appropriation of profits , which point of view has been noted with approval by the Hon ble Supreme Court in para 9.4 of the judgment in Tasgaon (supra) holding excess purchase price of sugarcane to be certainly be and/or said to be an appropriation of profit , we find that such a condition of appropriation of profit pre-supposes some profit .....

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..... ion of the assessee. When the matter was brought to the Hon ble Apex Court, it held, by a majority view that : The appellant was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the appellant derived no income from it. .…. In the present case disregarding technicalities it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances, it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and IT law. The sequitur is that no person can earn profit from himself and there can be no contemplation of profit when the owner withdraws goods fr .....

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..... ers at, say, ₹ 85/- per kg., it is obviously recovering its cost of ₹ 80/- in addition to earning profit of ₹ 5/-. In such a situation, the differential amount of ₹ 15/- (₹ 100 - ₹ 85) cannot be charged to tax because it is a case of loss of potential profit and not appropriation of profit. If, on the other hand, in the given scenario of market price of sugar at ₹ 100, the assessee sells sugar at concessional rate of ₹ 75/- to its members, which is below its own cost of ₹ 80/-, then the differential amount of ₹ 5/- (₹ 80 minus ₹ 75) would obviously be appropriation of profit to members that was earned from normal business operations and passed on to members in the shape of sale price below the cost price. Whereas such differential amount of ₹ 5/- is appropriation of profit to members which should be charged to tax, the difference of ₹ 15 (₹ 100 minus ₹ 85) is loss of potential profit which cannot be characterized as appropriation of profit so as to magnetize taxability. 24. The ld. AR has relied on the judgment of Hon ble Supreme Court in the case of A. Raman & Co. (supra) by contend .....

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