TMI Blog2004 (11) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed by the Assessing Officer. The relevant facts relating to the issue have been discussed by the Assessing Officer in the assessment order. In the course of inspection carried out by the Assessing Officer on 21-11-1994 u/s 131, it was observed that the assessee had made an entry to the tune of Rs. 2,53,23,741 in the share deduction account reflected in the general ledger and carried forward balance of Rs. 3,58,82,389 had been increased to which included the opening balance of Rs. 1,03,10,705 of the preceding year. Corresponding to the credit of Rs. 2,53,23,741 in the share deduction account, the assessee had made a debit entry in the sugarcane account to the tune of Rs. 2,53,28,438 with the narration "to amount of sugarcane purchases at Rs. 9 and others". The debit comprised of two entries being Rs. 2,53,23,741 on account of additional price of sugarcane @Rs. 9 per quintal and Rs. 4,697.93 in respect of "burnt cane PNB 10240-4240". On inquiry by the Assessing Officer, it was pleaded on behalf of the assessee that sugarcane had been purchased during the previous year relevant to assessment year 1993-94 at an ad hoc price. However, the Board of Directors in their meeting hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders/sugarcane suppliers. (vi) That the shareholders/sugarcane suppliers had not been informed regarding the credit to their account till then passing of the assessment order. (vii) That in some of the farmers' accounts, credit entries had been made after the issue had been raked up by the Department on 21-11-1994. According to the Assessing Officer, it was evident that no corresponding entries were made in the share deduction account. (viii) That on 5th Dec, 1994, the Managing Director of the Society in his statement had indicated the reasons for not issuing the shares in the name of sugarcane suppliers as the formalities had to be completed regarding the determination of full value of shares, addresses of the shareholders and, therefore, the entries could not be made as on 31-3-1993. (ix) That till the date of inspection u/s 131 and even till the date of finalization of the assessment proceedings, the assessee had not made specific book entries and no evidence had been produced for the dispatch of share certificates to the shareholders/farmers. (x) That the main purpose of the assessee was to divert the taxable profits by making these theoretical book entries. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Society, it was pointed out that clause 24A of the said bye-laws provides that the Board would fix an initial price for sugarcane/beet in accordance with the formula determined by the State Federation of Co-operative Sugar Mills in consultation with the sugar mills and Registrar. Final payment shall be made at the end of the crushing season. It was contended that immediately after the end of the previous year, a meeting of the Board of Directors was convened and a resolution passed. The said resolution was also ratified in the general meeting held on 26-7-1995. It was further contended that in the immediately preceding year, similar procedure was followed and deduction claimed by the assessee was allowed. It was contended that the said decision of the revenue authorities has become final. The ld. Counsel for the assessee pointed out that after the decision of the Board of Directors on 17-4-1993, entries were made in the books of account as on 31-3-1993 as the balance-sheet of the Society was signed subsequently i.e. on 29-10-1993. The ld. Counsel for the assessee further contended that the assessee is following the mercantile system of accounting and, therefore, any liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the share capital at the cost of the revenue. It was contended that as on 31st March, 1993, there was no liability of the assessee to pay the additional sugarcane price to the growers. The assessee had made huge profits and in order to pay less taxes, it was decided to make a provision on account of additional sugarcane price without any payment to the sugarcane growers. Entries have been made in the books of account at the end of the previous year and no payments have been made to the sugarcane growers. The credit to the share deduction account was merely to enhance the share capital of the assessee. The growers had no knowledge of the increase in the prices. Even after the expiry of one and a half years, no entries had been made in the individual accounts of the farmers who had supplied sugarcane to the assessee. The ld. D.R. relied upon the statement of the Managing Director of the Society who had admitted that additional sugarcane price was paid as the Society had made huge profits. Our attention was also invited to the Agenda of the Board's meeting held on 17-4-1993 and the comments thereto. The ld. D.R. contended that since the claim of the assessee on account of additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be same as of COJ-64 from 1st March onwards." These prices are fixed in consultation with the Chief Minister, Punjab. We find a reference to this in the paper placed at page 117. The relevant portion is reproduced hereunder:- "From: The Cane Commissioner, Punjab, Chandigarh. To All the Managing Directors/General Managers of the Sugar Mills in the State. No. CC/F-8/6650-71 dated 22-9-1994 Sub: Minutes of the me ting regarding sugarcane pricing Held under the Chairmanship of Sardar Beant Singh, Chief Minister, Punjab, on 8-9-1994 at 7.00 P.M. The minutes of the meeting held on 8-9-1994 under the Chairmanship of Sardar Beant Singh, Chief Minister, Punjab in which the State advised price of sugarcane for the year 1994-95 was approved are sent herewith for favour of information necessary action please. Sd/- Encl: As above. Cane Commissioner, Punjab, Chandigarh. Ends. No. CC/F-8/6672 Dated: 22-9-1994 Copy along with minutes of the meeting is sent to the Private Secretary to the worthy Chief Minister, Punjab for kind information of the Chief Minister, Punjab." In this case, the initial price has been fixed as per the rates fixed by the Cane Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the fixation of the final price of sugarcane was also in accordance with the formula provided under clause 24A of the bye-laws of the Society or in pursuance to any order of the Govt. or any other authority. It is also noteworthy that when the assessee was running in losses, the sugarcane price had not been enhanced by fixing the final price after the end of the crushing season. The fixing of final price and creating of additional liability on account of additional sugarcane price has been only in the years in which the assessee earned huge profits. It is, therefore, evident that in effect, the assessee has enhanced its capital base at the cost of the exchequer by making a provision on account of additional sugarcane price without making such payments to the sugarcane growers, it may be pertinent to mention that the Bye-laws of the Society, copy of which is on record, provide that the authorized share capital of the mills shall be Rs. 5 crores and that value of each share shall be Rs. 500 payable in lump sum at the time of admission or by instalment as may be approved by the Board. It is also provided that no individual member shall hold shares exceeding the value of Rs. 10,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39.42 39.43 39.43 398.43 120.32 120.28 120.28 117.10 1989-90 1990-91 1991-92 1992-93 (2) Rate of .. .. .. 3 Additional Price (ACP) (Rs./Qtl) 1993-94 1994-95 1995-96 1996-97 9 6 10 .... 1997-98 1998-99 1999-2000 2000-01 .. .. .. .. 2001-02 2002-03 .. .. 1989-90 1990-91 1991-92 1992-93 1993-94 (3) Mode of payment Rs.2 Nil Nil Credit to Credit to of ACP (Rs./Qtl.) per Share Share Qtl. Deduction Deduction Deducted A/c @ 3 A/c @ 9 From cane per qtl. per qtl. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ratification is also indicated to enhance the capital base. This is evident from the Resolution No. 6 reproduced hereunder:- "Resolved: General Body unanimously approves the decision of the Board of Directors/Administrator of payment of additional cane price for the years 1992-93, 1993-94 1994-95 respectively in the order of Rs. 9, Rs. 6, Rs. 10 per qtl. (i.e., in 1992-93 year in the form of Rs. 9 as share deduction, for the year 1993-94 in the form of Rs. 3 in cash and Rs. 3 in the form as share deduction, for the year 1994-95 in the form of Rs. 3 as share deduction and Rs. 7 in the form of cash) because same is required to strengthen the share capital of the mills." 12. The assessee has decided to enhance the sugarcane price but has also unilaterally decided to credit the sum to the share deduction account, which was subsequently utilized for allotment of shares to the members. This unilateral act of the Society is an indicator to the fact that the deduction claimed by the assessee was not purely a simple transaction of purchase of sugarcane and fixation of the price after the end of the previous year. The additional price is in excess of the price fixed by the Cane Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o members in proportion to the purchase of sugarcane/beet made from them. (g) Payment of incentive to the employees beside statutory bonus. (h) Research and development Fund. (i) Any surplus which remains un-distributed may be carried over to reserve fund or to the profits of the next year." It is evident from clause 29 of the bye-laws of the Society, quoted above, that a provision is to be made out of the profits of the Society for price fluctuation fund and for rebate to members in proportion to the purchase of sugarcane/beet. The assessee has fixed Rs. 9 per qtl. by way of additional sugarcane price in addition to the price fixed by the Cane Commissioner of Punjab in order to enhance its capital base and no payment has been made to the sugarcane growers. 15. In the case of Shahabad Co-operative Sugar Mills Ltd. v. CIT [1997] 226 ITR 582, similar issue arose before the jurisdictional High Court of Punjab Haryana. In the said case, assessee had decided to pay extra price of Rs. 20 per quintal of sugarcane but had paid Rs. 2 per quintal to cane growers and Rs. 18 per quintal had been taken to capital account of respective cane grower members. Assessee had claimed deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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