2016 (1) TMI 1391 - AT - Income Tax

Disallowance of Sugarcane Purchases payments - compulsions requiring the appellant to pay farmers a competitive sugarcane price of 1400/Mt - Held that - As relying on COMMISSIONER OF INCOME-TAX VERSUS EXXON MOBIL LUBRICANTS P. LTD. 2010 (9) TMI 36 - DELHI HIGH COURT the amount of 2, 33, 30, 414/- paid by the assessee towards the additional cost for procurement of sugarcane in season 2008-09 crystallized when the Board of Directors decided to pay the additional cost to the farmers. The management of the assessee company could not have ascertained this expenditure in assessment year 2009-10 - merit in the appeal of the assessee. The appeal of the assessee is accepted to the extent of 2, 33, 30, 414/- paid towards the additional cost for procurement of sugarcane. - decided partly in favour of assessee.

Issues Involved:
1. Disallowance of Rs. 2,41,58,633 paid for sugarcane purchases in the 2008-09 season.
2. Determination of whether the additional price paid for cane purchases was a prior period expenditure.
3. Nature of the expenditure as appropriation of profits.
4. Allowance of the payment made to cane suppliers as a business expenditure.

Detailed Analysis:

1. Disallowance of Rs. 2,41,58,633 Paid for Sugarcane Purchases:
The assessee, a public limited company engaged in sugar production, filed its return for the assessment year 2010-11, declaring a negative income. The scrutiny assessment revealed prior period expenses totaling Rs. 2,48,99,860, including a cane price difference of Rs. 2,33,30,414. The Assessing Officer allowed some expenses but disallowed the major portion related to the cane price difference, adding Rs. 2,41,58,633 to the assessee's income. The Commissioner of Income Tax (Appeals) upheld this disallowance, leading to the current appeal.

2. Determination of Whether the Additional Price Paid for Cane Purchases was a Prior Period Expenditure:
The assessee argued that the additional price paid for sugarcane purchased in the 2008-09 season was due to agitation and demands from farmers, which crystallized in the financial year 2009-10. The Board of Directors decided on 24-08-2009 to pay an additional Rs. 200 per MT for cane supplied at Rs. 1200 per MT and Rs. 100 per MT for cane supplied at Rs. 1300 per MT, aligning with prices paid by other sugar mills. The assessee contended that the liability crystallized when the decision was made, not in the year of the original supply.

3. Nature of the Expenditure as Appropriation of Profits:
The Department argued that the assessee was following a mercantile system of accounting and that claiming prior period expenses constituted a shift to a mixed system. They relied on the Madras High Court decision in Madras Fertilizers Limited and the Mumbai Tribunal decision in Deputy Commissioner of Income Tax Vs. Rediff.Com India (P.) Ltd. The assessee countered that the payments were made out of business expediency and that the additional price was not anticipated earlier, thus not provisioned in the books for the 2009-10 period.

4. Allowance of the Payment Made to Cane Suppliers as a Business Expenditure:
The Tribunal found that the additional price paid was indeed a business expenditure that crystallized due to compelling circumstances in the financial year 2009-10. The decision referenced the Delhi High Court ruling in Commissioner of Income Tax Vs. Exxon Mobil Lubricants (P) Ltd., which allowed similar prior period expenses when liabilities crystallized in a later year. The Tribunal concluded that the additional cost of Rs. 2,33,30,414 paid for sugarcane procurement in the 2008-09 season crystallized when the Board decided to compensate the farmers, thus allowing this amount as a business expenditure.

Conclusion:
The appeal was partly allowed, accepting the assessee's claim to the extent of Rs. 2,33,30,414 for the additional cost of sugarcane procurement, recognizing it as a legitimate business expenditure that crystallized in the financial year 2009-10. The order was pronounced on January 29, 2016.

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