TMI Blog2024 (1) TMI 596X X X X Extracts X X X X X X X X Extracts X X X X ..... it difference on the ground difference was not in law. As in the present case the purchases are made by the assessee, which is the cooperative society of its sugar cane grower. Thus, the case of assessee is falls under sub-clause (b) of clause 5 of Sugar Cane Control order, which empowered them to pay to the producer of sugar cane, in addition to the fair and remunerative of sugar cane fixed under clause-3(1), as an additional price in accordance with first schedule. Thus, the additional price of payment of sugar cane to the grower, for purchase of raw material (sugarcane) which was approved by the managing committee of the assessee, who is also having representation of State Government as per the statutory provision of State Cooperative Society Act, cannot be termed as a distribution of profit. Such additional payment is made to the members of the Co-operative society who are the supplier of sugarcane and to none other persons. Such payment was made for the purpose of business against the payment of raw material and not for any other purpose. As in a recent decision in Kolhapur Zilla Sahkari Dudh Utpadak Sangh Ltd. [ 2023 (6) TMI 1143 - SC ORDER] while affirming the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. The Apex Court also refereed the decision of Dalmia Cement (Bharat) Ltd. [ 2001 (9) TMI 48 - DELHI HIGH COURT] wherein it was held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Thus we find that the payment of additional sugarcane price, with the approval of the managing committ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sugarcane season is consistently followed by the assessee society since last 25 years and is accepted by the revenue authorities till date. 6. Ld. CIT (A) (NFAC) erred in law and on facts confirming that AO was justified in holding that only the Statutory Minimum Price (SMP) / Fair and Remunerative Price (FRP) represents the amount of expenditure actually allowable as a deduction under IT Act. 7. Ld. CIT (A) (NFAC) erred in law and on facts in concurring with finding of AO that the payment to the farmers is not a genuine business expense but profit sharing in nature not allowable under IT Act. 8. Ld. CIT (A) (NFAC) further erred in law and on facts in not appreciating the ratio of Jurisdictional High Court in Mehsana District Co-operative Milk Producers Union Ltd. (282 ITR 24) on identical facts holding in favour of the assessee by inferring that functioning of sugar mill is different from milk cooperative. 9. Levy of interest u/s 234A, 234B, 234C 234D of the Act is unjustified. 10. Initiation of penalty proceedings u/s 271(1)(c) of the Act is unjustified. 2. Brief facts of the case are that the assessee is a cooperative society, engaged in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee filed its reply dated 20/03/2015. The contents of reply furnished by assessee is extracted in para 5 of assessment order. In the reply, the assessee stated that as per show cause notice the government has fixed a Statutory Limit Price (SMP) for sugarcane at Rs. 1832.00 per metric ton (MT) and assessee has paid excess amount of Rs. 882.78 per MT and accordingly excess amount of Rs. 58.96 crores have been paid by assessee to its Members. And that the claim of expenditure which in fact, is distribution of profit to the tune of Rs. 58.96 crores which has been paid over and above SMP which was not cane price but diversion of profit and is not allowable as business expenditure under Section 37 of the Income Tax Act, 1961 (in short, the Act). The assessee also referred various other contents of show cause notice and submitted that to understand the concept of Statutory Minimum Price (SMP), State Advisory Price (SAP), Fair Market Price (FMP) and Final Cane Price. It is necessary to understand the provision of Sugarcane Control Order, 1966. In order to seek answer to the questions like; first Sugarcane Control Order-1966 came into being and what is exact arrangement between the coop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn of the growers from alternative crops and the general trend of prices of agricultural commodities, availability of sugar to consumers at a fair price, price at which sugar produced from sugarcane is sold by sugar producers, recovery of sugar from sugarcane and other by-products. The exercise of determination of SMP of sugarcane is undertaken in a scientific manner, using an accepted tools of economic and statistical analysis and is carried out by specialized government bodies consisting of specialists/experts in the field. It takes into account costs of production and other factors. The Sugarcane Control Order, 1966 was amended in October, 2009 by inserting sub-clause (g) in clause-3, which provides for giving reasonable margins to the growers of sugarcane on account of risk and profits. Powers are vested with Central Government to determine fair and remunerative price (FRP) from 2009-10 effective from 01/10/2009. Thus, the FRP is nothing but another name of SMP after 2009-10. The Assessing Officer further held that payment of cane price is given in two instalments around February and April. The financial year for income tax purposes closed in March. At that point, the accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal cane price and this fluctuates widely from factory to factory. By referring such decision, the Assessing Officer held that it is a profit sharing nature. On the assertion of assessee that they are cooperative society set up by farmers coming together to ensure a ready and assured market for their cane at a remunerative price. The object of the co-operative sugar factory is not to earn profits for itself, but to give the best remunerative prices to farmers for the sugarcane supplied by them. While considering such contention, the Assessing Officer was of the view; whether the provisions of Income Tax Act warrant any differential or special treatment to a cooperative society. The Assessing Officer while referring some decisions of CIT(A)-3, Pune while dealing the appeal of M/s Samarth SSK limited in the year 1996, held that the income of cooperative society is to be determined on the same basis as of other business organizations. The Assessing Officer by referring the aforesaid various decisions, held ultimately that neither the commercial principle nor under provisions of Income Tax Act, an amount paid towards sharing of profit constitute and allowable deduction in computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cooperative to the cane suppliers and neither under commercial principles nor under the provisions of Income Tax Act, an amount paid towards sharing of profits. On such observation, the ld. CIT(A) dismissed the appeal of assessee. Further aggrieved, the assessee has filed present appeal before this Tribunal. 7. We have heard the submissions of the Shri Saurabh N Soparkar, learned Senior Advocate (in short, the ld. Sr. Counsel) assisted by Ms. Urvashi Shodhan learned Advocate for the assessee and Shri Airiju Jaikaran, learned Commissioner of Income Tax-Departmental Representative (in short, ld. CIT-DR) for the revenue. The ld. Sr. Counsel for the assessee submits that the assessee is a cooperative society, engaged in the business of manufacture and sale of white sugar and various by-products. As per provisions of State Cooperative Societies Act, the assessee the board of directors of assessee/ managing committee consist of four Senior State Government officers as nominees. The details of office bearers and managing committee members are given on page No. 91 of paper book, showing four government nominees as office bearers. The main raw material for manufacturing process is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e but there can be a higher than the minimum price which may be in the nature of agreed price between the producer of sugar and sugarcane grower or the sugarcane growers cooperative society. So, the field for a price higher than minimum price is clearly left open in the 1996 Order made by the Central Government. The ld. Senior Counsel for the assessee by referring the decision submits that in the said case law in case of State of M.P. Vs Jaora Sugar Mills Ltd and others (xxx) wherein it is held that there is no statutory prohibition to pay higher price. Clause-3(2) which speaks of the contract between the parties for payment of higher price of sugarcane fixed under clause 3(1) pursuant to the agreement or pursuant to minimum price fixed by the Central Government. 9. The ld. Senior Counsel for the assessee further submits that clause-3 of Sugarcane Control Order deals with the minimum price and not the maximum price which is also evident from clause- 5 of the said order. The ld. Senior Counsel for the assessee by referring clause -5, which deals with additional price of sugarcane purchased where a producer of sugar or his agent purchases any sugarcane from a grower of sugarcan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, issue cannot be re-agitated by the department when society was working under superintendence of various Government organizations and there were nominee directors of the State Government. Payment made on the last day of accounting year is allowable under section 28 of the Act to ascertain real profits on the principle of commercial accounting and the law requires to consider the purpose for which, and not the motive with which, the expenditure incurred under section 37 of the Act. The ld. Senior Counsel for the assessee submits that the facts of this case is similar more specifically there are three nominees of State Government in the Board of Directors/Managing Committee of assessee. Final price of crushing season is fixed by Board s resolution and the amount has been gone out of coffers of assessee received by growers. The accounting method regarding preparation of annual accounts is followed consistently since many years which has been accepted by the department. The Hon ble Apex Court in Excel Industries 358 ITR 295 held that once accounting method which is followed and accepted by the department cannot be now open to challenge the same. In case of assessee also, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (supra). The ld. Senior Counsel for the assessee finally submits that the issue involved in all three appeals are identical except variation in figure of disallowance of additional payment to sugarcane growers. 12. On the other hand, the ld. CIT-DR for the revenue supported the orders of lower authorities. The ld. CIT-DR for the revenue submits that the extra payment paid by the assessee is an appropriation of profit and not allowable as deduction. The assessee has not claimed such expenditure under Section 37 of the Act at all. The submission of assessee than final cane price is nothing but a price and is allowable expenses under Section 28 to arrive at a taxable profit. The recourse is to be made to ascertain nature of business and character of transaction and realities and peculiarities of the situation. The ld. CIT- DR for the revenue submits that the Tribunal is required to see the case at 360 degrees. There is no ambiguity in the fact that the price was paid after financial year. The CBDT in its Circular No. 18/2021 has clarified the said issue and clarified that the cooperative society engaged in manufacturing of sugar shall be entitled to deduction of expenditure equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od, the said amount would constitute a present obligation as a result of past even and that requires the outflow of resources to settle the obligation and no provision was made by assessee in its books of account. The assessee has consistently following such practice of actually debiting the amount payable on the basis of final cane price order under purchases , although the accounting period is over long back, and that such payment is not an allowable business expenditure rather than have some other motive other than the business expediency. The assessing officer was of the view that the nature of expenditure must be adjudged on the accepted commercial practice, trading principles and also that it must be necessitated or justified by commercial expediency. On the contention of assessee that they are cooperative society set up by farmers coming together to ensure a ready and assured market for their cane at a remunerative price and that object of the co-operative sugar factory is not to earn profits for itself, but to give the best remunerative prices to farmers for the sugarcane supplied by them. While rejecting such contention, the Assessing Officer was of the view the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e crops and the general trend of prices of agricultural commodities; (c) the availability of sugar to the consumer at a fair price; (d) the price at which sugar produced from sugarcane is sold by producers of sugar; and (e) the recovery of sugar from sugarcane: (f) the realization made from sale of by products viz. molasses, bagasse and press mud of their imputed value (g) reasonable margins for the growers of sugarcane on account of risk and profits [Provided that the Central Government or with the approval of the Central Government, the State Government, may, in such circumstances and subject to such conditions as specified in Clause 3-A, allow a suitable rebate in the price so fixed.] [Explanation. (1) Different prices may be fixed for different areas or different qualities or varieties of sugarcane. Explanation (2) When a sugar factory produces ethanol from B-Heavy molasses, the recovery rate in case of such sugar factory shall be determined by considering every 600 litres of ethanol so produced as equivalent to 1 tonne of production of sugar; Explanation (3) Production of ethanol directly from sugarcane juice shall not be allowed. (2) No person s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppliers of cane not coming forward with their claims therefor, it shall be deposited by the producer of sugar with the Collector of the district in which the factory is situated, within three months of the close of the sugar year. The Collector shall pay, out of the amount so deposited, all claims considered payable by him and preferred before him within three years of the close of the sugar year in which the cane was supplied to the factory. The amount still remaining undisbursed with the Collector, after meeting the claims from the suppliers, shall be credited by him to the Consolidated Fund of the State, immediately after the expiry of the time limit of three years within which claims therefor could be preferred by the suppliers. The State Government shall, as far as possible utilize such amounts for development of sugarcane in the State. (8) Where any producer of sugar or his agent has defaulted in furnishing information under Clause 9 of this Order or has defaulted in paying the whole or any part of the price of sugarcane to a grower of sugarcane or a sugarcane growers co-operative society within fourteen days from the date of delivery of sugarcane, or where there is an ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and distributed to satisfy the remaining claims. (13) If the amount is given to the concerned sugarcane growers co-operative societies, it shall distribute the amount through cheque/draft/or any other recognised banking instrument on any Scheduled Bank to the concerned sugarcane growers within ten days of the receipt of the amount from the Collector. (14) If the concerned sugarcane grower or the concerned sugarcane growers co- operative society do not come forward to claim or collect the amount so recovered by the Collector within three years from the date of the public notice referred to in sub-clause (10), the unclaimed amount shall be deposited by the Collector in the Consolidated Fund of the State. ** Explanation(4) ** Explanation(5) [3-A. Rebate that can be deducted from the price paid for sugarcane. A producer of sugar or his agent shall pay for the sugarcane purchased by him to the sugarcane grower or the sugarcane growers co-operative society, either the fair and remunerative price ++ of sugarcane fixed under Clause 3, or the price agreed to between the producer or his agent and the sugarcane grower or the sugarcane growers co-operative society a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entral Government or a State Government, with the concurrence of the Central Government, may, by notification in the Official Gazette, from time to time, fix the fair and remunerative price or the price of sugarcane to be paid by producers of khandsari sugar or their agents for the sugarcane purchased by them: Provided that the fair and remunerative] price or the price of sugarcane so fixed shall not exceed the fair price of sugarcane fixed for payment by producers of sugar in the region: [Provided further that no person shall sell or agree to sell sugarcane to a producer of khandsari sugar or his agent, and no such producer or his agent shall purchase or agree to purchase sugarcane at a price lower than that fixed under Clause 4. [Provided also that the Central Government or with the approval of the Central Government, the State Government, may in such circumstances and subject to such conditions as specified in Clause 4- A, allow a suitable rebate in the price so fixed.] 4-A. Rebate that can be deducted from the price paid for sugarcane by producers of khandsari sugar . A producer of khandsari sugar or his agent shall pay for the sugarcane purchased by him to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is supplied ex-field to khandsari units within their respective jurisdictions subject to the condition that the rebate so allowed shall not exceed the estimated expenditure on harvesting and transportation within their respective jurisdiction subject to the condition that the rebate so allowed shall not.. 5. Additional price for sugarcane purchased. (1) Where a producer of sugar or his agent purchases any sugarcane from a grower of sugarcane or a growers co-operative society during each of the four successive years beginning on the 1st day of November, 1958, the producer shall, in addition to the minimum price of sugarcane fixed under sub-clause (1) of Clause 3 pay to the grower or the cooperative society, as the case may be, an additional price, if found, due, in accordance with the provisions of the [First Schedule] hereto annexed. (2) Nothing in sub-clause (1) shall apply to the purchase of sugarcane, (a) where such sugarcane is used for the production of sugar in a newly established factory until the expiry of three years commencing from the year in which the factory is so established; (b) where the purchase is made by a producer of sugar, which is a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of this clause, such payment shall be deemed to have been made in lieu of the payment provided for in this clause as if that sub-clause were in force when the direction was issued or payment was made. **5-A. Additional price for sugarcane purchased on or after 1st October, 1974. (** omitted vide So No2665(E) /Ess.Com/Sugarcane dated 22 October 2009.) 17. We find that Constitution Bench of Five Judges of Hon ble Supreme Court in a majority decisions in U.P Cooperative Cane Federations Vs West UP Sugar Mills Association and others (supra) while considering the question of law on competence of State Government to fix the State advice price for purchase of sugarcane by an occupier of sugar factory over and above the minimum price fixed by the Central Government and the procedure adopted for ensuring the payment of aforesaid to the sugar cane grower; held that a reading of the 1996 Order would, therefore, show that the Central Government shall fix the minimum price of sugarcane but there can be a higher than the minimum price which may be in the nature of agreed price between the producer of sugar and sugarcane grower or the sugarcane growers cooperative society. So, the field ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the minimum price fixed under the 1966 Order. After noticing the provisions of the M.P. Act, which are somewhat similar to U.P. Act, it was held as under in para 13 of the Reports: 13. It would thus be clear that the Cane Commissioner having power to compel the cane-growers to supply cane to the factory or khandsari unit, he has incidental power and is duty bound to ensure payment of the price of the sugarcane supplied by the sugarcane grower. The price fixed or agreed is a statutory price and bears the stamp of statutory first charge on the sugar and assets of the factory over any other contracted liabilities to recover the price of the sugarcane supplied to the factory or khandsari unit. SKG Sugar Ltd. v. State of Bihar is a decision by the Bench of three judges and deals with the effect of 1966 Control Order and the Bihar Sugarcane (Regulation of Supply and Purchase) Act, 1981. It was clearly ruled that the provisions of 1966 Order do not show that there is any prohibition on the factory or the association of factories entering into an agreement to pay higher price than the minimum price prescribed under the Order and the object of the Order is to ensure that the cane grow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Cane Commissioner can direct the cane growers and the sugar factories to enter into agreements for purchase of sugarcane at a price fixed by the State Government and such agreements cannot be branded as having been obtained by force or compulsion. 18. Thus, keeping in view of the aforesaid decision of Hon ble Apex Court, we find convincing force in the submissions of ld Senior Counsel for the assessee that as per clause 3(2) of Sugar Cane control order prohibits everyone from selling or purchasing sugar cane at the lower than fixed under clause 3(1). Further it is clear FRP which was earlier known as SMP fixed by the Central Government every cursing year is to safeguard the interest of the farmers and is the lower limit only. We are also convinced that it is always open to the party to negotiate to pay a price higher than the minimum price on commercial consideration and it is not open to the revenue to disallow it difference on the ground difference was not in law. 19. We also find that in the present case the purchases are made by the assessee, which is the cooperative society of its sugar cane grower. Thus, the case of assessee is falls under sub-clause (b) of clause 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CIT Vs Ashokbhai Chimanbhi [1965] 56 ITR 42 (SC) and noted that the words accrue and arise are used to contradistinguish the word 'receive'. Income is said to be received when it reaches the assessee. When the right to receive the income becomes vested in the assessee, it is said to accrue or arise. Dealing with profits, this is what the learned Court said: Profits do not accrue from day-to-day or even from month-to-month and have to be ascertained by a comparison of assets at two stated points. Unless the right to profits comes into existence there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise. Applying the test, the learned Court held that because the board resolved to fix the final purchase price and pay on the last day of the accounting period it would not amount to application of profits. The Court also noted that the profits to be assessed have to be the real profits and are required to be determined on the ordinary principles of commercial trading and commercial accounting. The Court further noted that the expenditure in question cannot be termed to be application of in ..... 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