2013 (9) TMI 900 - SC - Income Tax

Excessive expenses - disallowance u/s 40A(2) - Revenue contended that the State Advised Price S.A.P. is determined on the basis of the price recommended by the assessee(s) after the finalisation of accounts and, therefore, the differential amount between S.A.P. and S.M.P. would constitute appropriation of profits and not expenditure/expense under Section 37 of the Act. Held that - None of these questions have been examined by the Authorities below. These questions are required to be examined because, in these case, we are not only concerned with the applicability of Section 40A(2) of the Act but we are primarily required to consider whether the said differential payment constitutes an expense or distribution of profits? Ordinarily, we would not have remitted these matters, particularly when they are for Assessment Year 1992-1993, but, for the fact that this issue is going to arise repeatedly in future. It will also help the assessee(s) in a way that they will have to re-write their accounts in future depending upon the outcome of this litigation. Therefore, in the interest of justice, matter remanded back.

Summary

Issues:
1. Interpretation of Section 40A(2) of the Income Tax Act, 1961.
2. Determining if the differential payment made to cane growers constitutes an expense or distribution of profits under Section 37 of the Act.

Analysis:
The Supreme Court granted leave in an appeal against the High Court's judgment in an Income Tax Appeal. The Court referred to a previous decision where it remanded a matter to the Commissioner of Income Tax (Appeals) for decision based on observations made. The Court highlighted the issue regarding the applicability of Section 40A(2) of the Income Tax Act, which is linked to computation under Sections 28 and 37 of the Act. It noted the differing contentions of the Department and the assessee regarding the differential payment made to cane growers and emphasized the need for a detailed examination by the Assessing Officer. The Court stressed the importance of determining whether the payment constitutes an expense or distribution of profits, considering various factors such as the business operations, State Government resolutions, and accounting practices.

The Court directed the Assessing Officer to consider specific aspects, including the timing of payments, accounting provisions, and the nature of the differential payment in relation to sugarcane costs or profit sharing among society members. It highlighted the significance of the theory of over-riding title in income accrual and stressed the need for a thorough examination of the obligations attached to income sources. The Court expressed concern that these critical questions had not been adequately addressed by the lower authorities and emphasized the need for a detailed assessment due to the recurring nature of the issue. Despite the assessment year being 1992-1993, the Court opted to remit the matter to the Commissioner of Income Tax (Appeals) in the interest of justice and to assist the parties in adjusting their accounts based on the outcome of the litigation.

In conclusion, the Supreme Court set aside the High Court's judgment and remanded the matter to the Commissioner of Income Tax (Appeals) to adhere to the Court's previous observations and directions. The Court clarified that both parties had the liberty to amend their pleadings before the Commissioner of Income Tax (Appeals) for the final hearing. The judgment emphasized that the parties could argue their points independently without being influenced by previous observations on the applicability of Sections 28 or 37 of the Act. All contentions of both parties were left open, and the Civil Appeal was disposed of accordingly.