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2020 (9) TMI 1234 - AT - Income TaxDisallowance on account of Fair Remunerative Price (FRP) in addition to Statutory Minimum Price (SMP) - CIT (A) confirming action of AO treating additional price paid over and above FRP (Fair remunerative price) to the cane growers amounted to distribution of profits by the appellant - HELD THAT - Hon'ble Supreme Court in the case of CIT v. Tasgaon Taluka S. S.K. Ltd.. 2019 (3) TMI 321 - SUPREME COURT held that as per Clause 3 of Control Order 1966, Government in the official Gazette, from time to time fixed the minimum price of sugar cane (SMP) to be paid to farmers. So far as determination of SMP is concerned it is at the beginning of the season. The additional purchase price (SAP) is determined at the end of the season when accounts are settled under Clause-5A. The difference of amount of SMP SAP has an element of profit and/or one of the components would be profit. The additional price is paid as a matter of incentive. Thus, the entire whole amount of difference between SMP and the SAP per se cannot be said to be an appropriation of profit. Only that part/component of profit, while determining the final price worked out/SAP/Additional price would be and/or the said to be an appropriation of profit and for that an exercise is to be done by the AO by calling upon the assessee to produce the statement of accounts, balance sheet and the material supplied to the State Government for the purpose of fixing the final price/additional price/SAP under Clause 5A of control order 1966. We restore the file of the AO for deciding the issue as afresh in accordance with the decision to Hon'ble Supreme Court and will pass the order in accordance with law. Needless to direct that before passing the order the AO will consider the facts already available on record and shall grant opportunity of hearing to the assessee. The assessee is also directed to provide all the necessary details, evidences and information to the AO in accordance with the direction of Hon'ble Apex Court in the case of Tasgaon Taluka (supra). Appeal of the assessee is allowed for statistical purposes.
Issues Involved:
1. Additional price paid over and above Fair & Remunerative Price (FRP) to cane growers. 2. Treatment of such payments as application of income. 3. Allowability of additional payment as a business expense under Section 37. 4. Divergence in treatment of Final Cane Price and FRP. 5. Treatment of additional payment made to productive members. 6. Applicability of overriding title theory for payments exceeding FRP. 7. Applicability of 'Real Income Theory.' 8. Allegation of a colorable device to avoid tax. 9. Levy of interest under Sections 234A, 234B, 234C, and 234D. 10. Initiation of penalty proceedings under Section 271(1)(c). Detailed Analysis: 1. Additional Price Paid Over and Above FRP to Cane Growers: The assessee, a Cooperative Society running a sugar mill, paid an additional price over the Statutory Minimum Price (SMP) declared by the Central Government. The Assessing Officer (AO) treated this additional payment as not incurred wholly and exclusively for business purposes, thus disallowing it under Section 37 of the Income Tax Act. The CIT(A) upheld this view, confirming that the additional price paid was a distribution of profits rather than a deductible business expense. 2. Treatment of Such Payments as Application of Income: The AO and the CIT(A) treated the additional payments as an application of income assessable in the hands of the assessee. This was based on the view that the payments were a distribution of profits rather than a legitimate business expense. 3. Allowability of Additional Payment as a Business Expense Under Section 37: The AO disallowed the additional payment under Section 37, arguing it was not expended wholly and exclusively for business purposes. The CIT(A) confirmed this view, stating that such payments were not allowable as business expenses. 4. Divergence in Treatment of Final Cane Price and FRP: The CIT(A) held that the payment of the Final Cane Price after the close of the year was a diversion of profit, while the purchase price paid as per FRP, declared after the close of the year, was an allowable expense under Section 37. 5. Treatment of Additional Payment Made to Productive Members: The CIT(A) treated the additional payment made to productive members from gross receipts as a diversion of profit. However, it was noted that the payment of cane price was unrelated to the shareholding of the farmers, and non-members were also paid the same price. 6. Applicability of Overriding Title Theory for Payments Exceeding FRP: The CIT(A) held that in the absence of an agreement between the appellant and farmers to make payments exceeding FRP, the only obligation was to pay the purchase price as per FRP. Hence, the theory of overriding title for the application of income was applicable only to the extent of FRP allowable as expenditure under Section 37. 7. Applicability of 'Real Income Theory': The CIT(A) held that the 'Real Income Theory' was not applicable since the surplus remaining after adjusting revenue against expenditure and provisions for anticipated expenditure constituted taxable profits that should be first offered to tax under the Income Tax Act. 8. Allegation of a Colorable Device to Avoid Tax: The CIT(A) made an observation that the appellant devised a colorable device to distribute the entire profit in the guise of cane price to avoid paying any tax on its income. 9. Levy of Interest Under Sections 234A, 234B, 234C, and 234D: The assessee contested the levy of interest under Sections 234A, 234B, 234C, and 234D, considering it unjustified. 10. Initiation of Penalty Proceedings Under Section 271(1)(c): The assessee also contested the initiation of penalty proceedings under Section 271(1)(c) as unjustified. Tribunal's Decision: The Tribunal noted that the issues raised in the present appeals were directly covered by the decision of the Hon'ble Supreme Court in CIT v. Tasgaon Taluka S.S.K. Ltd. The Supreme Court had held that while the entire difference between SMP and SAP (State Advised Price) cannot be said to be an appropriation of profit, an exercise must be done by the AO to determine the profit component. The Tribunal restored the matter to the file of the AO for fresh consideration in light of the Supreme Court's decision, directing the AO to consider the facts already on record and grant an opportunity of hearing to the assessee. The appeals were allowed for statistical purposes, and the AO was instructed to pass the order afresh in accordance with the Supreme Court's directions.
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