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2019 (11) TMI 364

..... The extant issue of deduction for payment of excessive price for purchase of sugarcane, raised in most of the appeals under consideration, is squarely covered by the aforesaid judgment of the Hon’ble Supreme Court. Respectfully following the precedent, we set-aside the impugned orders on this score and remit the matter to the file of the respective A.Os. for deciding it afresh as per law in consonance with the articulation of law by the Hon’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 .....

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..... e confirmation of addition on account of Excessive cane Price paid to the Members/Non-Members. 3. We have heard the rival submissions 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 : 4. A common issue involved in almost all the appeals is against the addition made by the Assessing Officer (AO) towards of excessive sugarcane price paid to members as well as non-members of the respective assessees. The facts common to almost all the appeals are that the assesses are engaged in the business of manufacturing of white sugar. During the course of assessment proceedings, the AO observed that the assessee paid excessive cane price, over and 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 .....

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..... t, it noted that clause 5A was inserted in the year 1974 on the basis of the recommendations made by the Bhargava Commission, which recommended payment of additional price at the end of the season on 50:50 profit sharing basis between the growers and factories, to be worked out in accordance with the Second Schedule to the Control Order, 1966. Their Lordships noted that at the time when additional purchase price is determined/fixed under clause 5A, the accounts are settled and the particulars are provided by the concerned Co-operative Society as to what will be the expenditure and what will be the profit etc. Considering the fact that Statutory Minimum Price (SMP), determined under clause 3 of the Control Order, 1966, which is paid at the beginning of the season, is deductible in the entirety and the difference between SMP determined under clause 3 and SAP/additional purchase price determined under 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 c .....

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..... of sugarcane, raised in most of the appeals under consideration, is squarely covered by the aforesaid judgment of the Hon ble Supreme Court. Respectfully following the precedent, we set-aside the impugned orders on this score and remit the matter to the file of the respective A.Os. for deciding it afresh as per law in consonance with the articulation of law by the Hon ble Supreme Court in the aforenoted judgment. The 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 c .....

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..... the assessee to its member cane-growers, the AO worked out an addition of ₹ 8,32,433/-. The assessee carried the matter before the ld. CIT(A), who noticed that similar issue has been considered by the Hon ble Supreme Court in the case of CIT Vs. Krishna Sahakari Sakhar Karkhana Ltd. and others (2012) 254 CTR 638 (SC) in which the matter has been restored for ascertaining whether the difference between the Fair Market price and the Concessional price of the sugar supplied to farmers should or should not be added to the total income of the assessee along with consideration of certain other factors. The ld. CIT(A) took note of an order dated 01-03-2006 passed by the Commissioner of Sugar, Maharashtra State, considering the directions issued u/s.79(A) of the Maharashtra Cooperative Societies Rules, 1960 providing, inter alia, that the sugar factories shall sell a maximum of 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 .....

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..... ssees co-operative societies as appropriation of profit . For supporting the charging of lower price for sugar sold to members as constituting income, the ld. DR drew an analogy from the case of Tasgaon SSK Ltd. (supra) by submitting that, in that case, the price paid over and above the statutory market price for purchase of sugarcane from the members/non-members of the societies has been held by the Hon ble Supreme Court as appropriation of profit and hence chargeable to tax. He submitted that there is no qualitative difference between the two situations viz., the first in which sugarcane is purchased from the members at excessive price and the differential amount is charged to tax as appropriation of profit and the second in which sugar is supplied at concessional price and the difference between the Fair Market Price and the Concessional Price is charged to tax again as appropriation 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 .....

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..... what basis the quantity of sugar was being fixed for sale to farmers and growers/members for each year on month to month basis apart from Diwali. 15. On an analysis of the position discussed above, it clearly emerges that after the advent of the Hon ble Supreme Court judgment in Krishna SSK Ltd. (supra), the earlier judgments rendered by the Hon ble High Courts and the orders passed by the Tribunal in favour of the assessee do not continue to hold the field anymore. Our attention has not been drawn towards judgment of any Hon ble High Court or order of the Tribunal in which the issue under consideration has been decided after considering the judgment of the Hon ble Supreme Court in Krishna SSK (supra), which thereby renders the issue in question as virgin. 16. At this stage, it is relevant to note that the Hon ble Supreme Court in Tasgaon SSK Ltd. (supra) had an occasion to deal 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 Governm .....

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..... he sugar industry at excessive price in juxtaposition to the sale of sugar as finished product to members at concessional price, we find that both of them directly affect the gross profit of the sugar mills. If a part of the excessive purchase price of sugarcane paid has been held to be in the nature of appropriation of profit , then obviously a part of the concession given to members on sale of sugar, by the same standard and on the same parity of reasoning, would also have to be considered as appropriation of profit . 18. At this juncture, it is pertinent to note that the AO has held that the amount in question is disallowable not u/s 37(1) of the Act, but: supply of sugar at concessional rate, as against the prevalent market price, is nothing but an appropriation of profit and in the nature of application of income . Thus, the view point of the AO of appropriation of profit 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 eac .....

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..... C), in which the assessee employed the method of valuing the closing stock at the cost price. The deeds of trust were valued for the purpose of stamp at the market value of the shares and silver bars prevailing at the dates of their execution. The assessee, however, showed the transfer of these shares and silver bars to the trustees in the books of account at the cost price thereof by contending that the market value of the said shares and silver bars, on which the stamp duty was based, could not be the basis for computing his income from the stock-in-trade thus transferred. The Income Tax Officer did not accept this contention and assessed the profit at the difference between the cost price of the said shares and silver bars and the market value thereof at the date of their withdrawal from the business. The AAC, the Tribunal as also the Hon ble High Court rejected the contention 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 .....

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..... hai (supra), the assessee society cannot earn profit from the sale of sugar to its members. 23. It is further relevant to note that difference between the market price of sugar and concessional sale price may entail two situations. The first one is of simplicitor loss of potential profit and second one is of actual loss of profit when sugar is sold to members at below its cost price. Whereas, the simplicitor loss of potential profit cannot be termed as appropriation of profit, sale of sugar to members at below its cost price results in appropriation or distribution of profits earned from normal business operations to members in the garb of sale at a price below the cost price. The position can be understood with the help of an example. Suppose market price of sugar is ₹ 100/- and the cost price is ₹ 80/-. If the assessee sells sugar at concessional rate to its members 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 appropri .....

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..... he form of sale of sugar at a rate lower than its cost price. 25. The ld. 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 concessional sale price which is below the cost price. However, it is clarified that in determining cost price of sugar to the factory, not only all the .....

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