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2019 (11) TMI 363

..... 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 Concessional price (over and above 5kg. per member per month). In this process, the assessees got taxed even for the potential profit to the extent of difference between the cost price and market/levy price, as the case may be. Ergo, we hold that such a straightway difference between the market/levy price and the concessional price of sugar cannot be construed as appropriation of profit leading to addition as has been extantly done. The impugned orders to this extent are set aside and the matters are restored to the file of the respective AOs for first ascertaining the cost price of sugar to each assessee and then make addition on this issue by treating it is as a case of appropriation of profit only to the extent of the concess .....

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..... on’ble Supreme Court in SHRI SATPUDA TAPI PARISAR SSK LIMITED [2010 (1) TMI 117 - SUPREME COURT] - AO would allow deduction for the price paid under clause 3 of the Sugar Cane (Control) Order, 1966 and then determine the component of distribution of profit embedded in the price paid under clause 5A, by considering the statement of accounts, balance sheet and other relevant material supplied to the State Government for the purpose of 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 th .....

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..... of sugar at concessional rate to Members/Non-members. 3. We have heard both the sides and gone through the relevant material on record. It is seen that similar issue came up for consideration before the Tribunal in a batch of 75 appeals led by Manganga Sahakari Sakhar Karkhana Ltd. Vs. ACIT in ITA No.344/PUN/2017 and others. Vide order dated 01-10-2019, the Tribunal, on this issue, has held as under : 11. On a representative basis, we are taking up the appeal filed by Manganga SSK Ltd. in ITA No.344/PUN/2017. The factual matrix of this issue is that the Assessing Officer (AO) observed during the course of assessment proceedings that the assessee had sold/supplied sugar to its members at concessional rate. On being called upon to explain as to why the difference between the Fair Market price and the Concessional price should not be disallowed as it was nothing but distribution of profit, the assessee relied on the judgment in CIT Vs. Terna Shetkari SSK Ltd. (2008) 168 Taxman 266 (Bom.) to contend that similar issue was not pressed by the ld. DR before the Hon ble Bombay High Court, which implied that the Department acquiesced the decision of the lower courts in allowing relief. Not .....

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..... ety 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 the legal position, the ld. CIT(A) reduced the addition to some extent. Aggrieved thereby, the assessee has approached the Tribunal. 12. The assessees under consideration were represented by various ld. Counsel, who made elaborate arguments. They, inter alia, relied on certain decisions to bolster the argument that there can be no addition on account of sale of sugar at concessional price to the members of the assessee co-operative societies. It was submitted, by mainly relying on the judgment of Hon ble Supreme Court in the case of A. Raman and Co. (1968) 67 ITR 11 (SC), that the law does not oblige a trader to make maximum profit out of his trading transactions. Reliance was also placed on certain other decisions including CIT Vs. Calcutta Discount Co. Ltd. 91 ITR 8 (SC); H.M. Kashiparekh & Co. Ltd. Vs. CIT 39 ITR 706 (Bom.); CIT Vs. Shoorji Vallabhdas & Co. 46 ITR 144 (SC); Rogers Pyatt Shellac & Co. Vs. Secretary of State for India 1 ITC 363 (Cal.); Union of India Vs. Azadi Bachao Andolan 263 ITR 706 (SC); and Vodafon .....

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..... 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 High Courts. The Hon ble Bombay High Court in CIT Vs. Kisanveer Satara Sahkar Karkhana Ltd. in ITA No.930/2008 vide its judgment dated 30.6.2009 decided this issue in favour of the assessee. In another judgment in CIT Vs. Krishna Sahakari Sakhar Karkhana Ltd. (ITA No.225/2009), the Hon ble Bombay High Court again decided this issue in favour of the assessee vide its judgment dated 30-06-2009. The Revenue approached the Hon ble Supreme Court against all such judgments passed by the High Courts. Vide its common judgment dated 25.09.2012 in CIT Vs. Krishna Sahakari Sakhar Karkhana Ltd. (supra), as a lead matter and covering several other cases in which similar issue was decided in favour of the assessee, the Hon ble Supreme Court set-aside the judgments passed by the Hon ble High Courts and restored the matter to the CIT(A) for deciding the question afresh as to whether the difference between the actual price of sugar sold in the market and the price of sugar sold by the assessee to its members at concessional rate should or should not be a .....

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..... rofit , 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 modalities and manner in which SAP/Additional price is decided and to carry out an exercise of considering the 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 Control Order, 1966 and thereafter determine as to what part of the differential amount would form part of the distribution of profit. Relevant discussion has been made in Para 9.4 of the judgment in which it has been categorically held that: 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. The matter was sent back to the AO with certain directions to find out the element of appropriation of profits embedded in the price fixed .....

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..... e 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 which is appropriated directly or indirectly amongst the members. One needs to draw a line of distinction between two situations, viz., the first in which profit is earned from business operations and is passed on to members and the second, in which potential profit is not earned from members or to simply put, a case of loss of potential profit. Whereas, the appropriation of profit is possible in the first situation, which is akin to the purchase of sugarcane from the members at excessive price resulting in diverting the profit earned from normal business operations to the members in the form of excess price of sugarcane, the appropriation of profit is not possible in the second situation, which is akin to the sale of sugar at concessional rate. The second situation of selling sugar at concessional rate is in the nature of foregoing potential profit which would have been otherwise earned had sugar been sold at market price. As the second situation has the effect of foregoing potential profit, it cannot be equated with an appropriation .....

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..... e 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 from the business. Such withdrawal of goods needs to be valued at cost price only and not the market price. 22. Reverting to the facts of the extant case, we find that the AO has made out a case of appropriation of profit on sale of sugar to members at concessional rate. We have noted above that the appropriation of profit pre-supposes profit which can be appropriated to the members of the co-operative society. In so far as the purchase of sugarcane from members at higher price is concerned, it clearly amounts to business profit percolating to the members in the shape of excess cane price given to the members. For example, if the SMP of sugarcane is ₹ 100/- and a sugar factory is purchasing sugarcane from its members at say, ₹ 120/-, in a way it is passing on its profit earned from normal business transactions to its members to the extent of excess price paid. This is the essence of the judgment in the case of Tasgaon SSK Ltd. (supra.). But the transaction of sale of sugar to members at concessional rate cannot be considere .....

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..... 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 contending that the law does not require a trader to make maximum profit and hence there can be no taxability on the basis of notional profit which was not actually earned from the members. We do agree with this proposition provided it is not a case of appropriation of profit. We have discussed hereinabove that in case of transaction between two independent parties, the assessee is not obliged to earn maximum profit. However, this proposition is not attracted in case the transaction is not commercial or genuine. Such a proposition cannot be extended to the cases where the amount of profit is intentionally allowed to be passed on to the members or owners. In the same case of A. Raman & Co. (supra) and in the same para no. 8, the immediately next line is an exception to the general rule whereby their Lordships noted that: By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee. Precisely, this is the propos .....

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..... sessing Officer (AO) observed that during the year the assessee supplied 3443.85 Quintals of sugar to its members on the occasion of Diwali which was at 15kgs per member. The value of sugar distributed came to ₹ 54,41,283/-. The AO opined that the income chargeable to tax escaped assessment. He, therefore, issued notice u/s.148 on 14-03-2012 and eventually made the addition of ₹ 54.41 lakh on account of sale of sugar at concessional rate, which aspect we have discussed supra on merits. The assessee remained unsuccessful before the ld. CIT(A) on initiation of re-assessment proceedings. Now the assessee has approached the Tribunal against the impugned order on this score. 7. We have heard both the sides and gone through the relevant material on record. There is no doubt that the original assessment in this case was completed u/s.143(3) on 05-11-2009. However, within a period of less than 4 years from the end of the relevant assessment year, the AO initiated re-assessment proceedings on the ground that the sugar supplied to members free of cost was liable to be considered as Appropriation of income . We have gone through the original assessment order which is only one page .....

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..... 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 sugarcane by the assesses is no more res integra in view of the recent judgment of Hon ble Supreme Court in CIT Vs Tasgaon SSK Ltd. (2019) 412 ITR 420 (SC). The Hon ble Apex Court, vide its judgment dated 05-03-2019, has elaborately dealt with this issue. It recorded the factual matrix that the assessee in that case purchased and crushed sugarcane and paid price for the purchase during crushing seasons 1996-97 and 1997-98, firstly, at the time of purchase of sugarcan .....

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..... hase 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 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 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 .....

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..... 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. 11. 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. 12. No argument was advanced qua the ground challenging the initiation of reassessment for the year under consideration. This ground, is therefore, dismissed. 13. In the result, the appeal is partly allowed for statistical purposes. A.Y. 2012-13 : 14. Ground Nos. 1 to 5 are against the Excessive Sugarcane Price paid by the assessee to its Members/Non-Members. 15. The facts of these grounds are similar to the issue discussed in the appeal for the A.Y. 2009-10. Following the view taken herein above, we set-aside the impugned order and remit the matter to the file of AO for deciding it in accorda .....

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