2016 (2) TMI 385 - HC - Income Tax

Bonus payment - reopening of assessment - State price exceeds fair market value which is fixed by the Central Government - Held that - As under substantially similar circumstances when a group of petitioners approached the High Court complaining about notices for reopening the assessments, the High Court in case of Shree Chalthan Vibhag Khand (2015 (7) TMI 297 - GUJARAT HIGH COURT ) quashed all notices. the Court held and observed that mere payment of cane price in excess of the SMP would not ipso facto and/or per se be said to be distribution of profit. There had to be some tangible material with the Assessing Officer that the excess paid was exorbitant or too excessive or that the same was otherwise not justified. It was observed that while considering the question of taxability of such amount, number of questions would be required to be examined by the Assessing Officer before forming an opinion and/or a reason to believe that income chargeable to tax had escaped assessment . It was further observed that a detailed inquiry is required to be conducted by the Assessing Officer. In the said cases since no such inquiry was conducted before forming a belief that income chargeable to tax had escaped assessment, the Court was persuaded to quash the notices. It also observed that the Assessing Officer had relied on the order passed by the CIT(A) in cases of some other assessees. The Assessing Officer could not have borrowed the satisfaction from such order in absence of any application of mind on his part. Since the issues are almost identical and the impugned notices for reopening the assessments have been issued by the Assessing Officers under similar circumstances recording reasons which are materially similar, it would not be possible for us to take a different view. - Decided in favour of assessee

Issues Involved:
1. Taxability of payments made by co-operative societies to member farmers over and above the Fair Remunerative Price (FRP) and Statutory Minimum Price (SMP).
2. Reopening of assessments based on excess payments.
3. Validity of notices for reopening assessments within and beyond four years.

Detailed Analysis:

Issue 1: Taxability of Payments Over FRP and SMP
The primary issue revolves around whether the excess payments made by co-operative societies to their member farmers above the FRP and SMP should be considered as business expenditure or distribution of profits. The Revenue contends that these excess payments represent the profit of the co-operative societies, amounting to distribution of profits and thus not deductible under Section 37(1) of the Income-tax Act, 1961. Conversely, the assessees argue that paying a higher price for sugarcane to member-farmers is not precluded and should be considered a cost of the society, thereby allowing full deduction.

Issue 2: Reopening of Assessments Based on Excess Payments
The reopening of assessments concerns whether the excess payments made by the co-operatives should be taxed. The Bombay High Court in Commissioner of Income Tax v. Manjara Shetkari Sahakari Sakhar Karkhana Ltd. held that additional payments over the statutory price were allowable as business expenditure. However, the Supreme Court in Deputy Commissioner of Income-tax, Nashik v. Shri Satpuda Tapi Parisar SSK Ltd. remanded the proceedings for further examination, emphasizing the need to consider whether such differential payments constitute expenditure or distribution of profits. The Supreme Court directed the Assessing Officer to examine the manner in which the business works, the resolutions of the State Government, and the timing differences arising from accounting years.

Issue 3: Validity of Notices for Reopening Assessments
The Gujarat High Court, in Shree Chalthan Vibhag Khand v. Deputy Commissioner of Income-tax, quashed the notices for reopening assessments on the grounds that the Assessing Officer's belief that income had escaped assessment was based on a mere change of opinion without tangible material. The Court held that the Assessing Officer must have tangible material to form a belief that income chargeable to tax had escaped assessment. Mere payment of cane price in excess of the SMP does not ipso facto amount to distribution of profits. The Court emphasized that a detailed inquiry is required to determine whether the excess payment is exorbitant or unjustified.

Analysis of the Present Case:
In the present group of petitions, the petitioners are sugar co-operatives challenging the reopening of assessments based on excess payments made to member farmers. The Assessing Officer issued notices for reopening assessments, citing that the payments over the FRP were not cane price but diversion of profit, thus not allowable as business expenditure under Section 37(1) of the Act. The petitioners argued that similar reasons were considered invalid by the Court in Shree Chalthan Vibhag Khand, where it was held that the reasons lacked validity and the Assessing Officer could not form a belief that income had escaped assessment without tangible material.

The Court observed that the reasons recorded by the Assessing Officer in the present case were materially similar to those in Shree Chalthan Vibhag Khand. The Court reiterated that mere payment of cane price above the SMP does not automatically imply distribution of profits. The Assessing Officer must have tangible material to support the belief that income chargeable to tax had escaped assessment. The Court quashed the impugned notices, holding that the Assessing Officer's reasons lacked validity and tangible material.

Conclusion:
The Gujarat High Court quashed the notices for reopening assessments, emphasizing the need for tangible material to form a belief that income chargeable to tax had escaped assessment. The Court upheld that mere payment of cane price above the SMP does not per se constitute distribution of profits and requires detailed inquiry. The petitions were allowed, and the impugned notices were set aside.

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