2016 (6) TMI 602 - HC - Income Tax

Reopening of assessment - taxability of income of the sugarcane - reasons to believe - Held that - It is undoubtedly true that the original return was not taken in scrutiny by the Assessing Officer and was merely accepted under section 143(1) of the Income-tax Act, 1961. However, the central question of taxability of income of the sugarcane in the background of reasons recorded had come up before this Court on couple of occasions in the past. A Division Bench of this Court in the case of Shri Chalthan Vibhag Khand Udylog Mandli Ltd. vs. Deputy Commissioner of Income-Tax, reported in 2015 (7) TMI 297 - GUJARAT HIGH COURT , had quashed the notice for re-opening which was based on identical reasons, it was held that the difference between the price to be paid to cane growers and the purchase price declared by the Government under sugar Sugar Control Order cannot be said to be by way of distribution of profits. It was held that the Assessing Officer had not carried out any inquiry before coming to a contrary conclusion and that he should not have a reasonable belief for forming the opinion that the income chargeable to tax had escaped the assessment. - Decided in favour of assessee

Summary

Issues:
1. Validity of notice seeking to re-open assessment for the assessment year 2010-2011 based on discrepancies in sugarcane purchase prices.
2. Interpretation of Section 37(1) of the Income Tax Act regarding deductibility of business expenditures.
3. Comparison with previous judgments regarding taxability of income from sugarcane sales.

Analysis:

1. The petitioner, a sugar co-operative society, challenged a notice to re-open its assessment for the year 2010-2011 due to discrepancies in sugarcane purchase prices. The Assessing Officer believed that the petitioner had not followed the Statutory Minimum Price/Fair and Remunerative Price (SMP/FRP) while paying for sugarcane. The Officer argued that the difference between the actual purchase price and the SMP/FRP constituted distribution of profits, violating commercial principles of accounting. This led to a belief that an amount had escaped assessment under Section 147 of the Income Tax Act, 1961.

2. The crux of the matter revolved around the interpretation of Section 37(1) of the Income Tax Act, which allows deductions for expenditures wholly and exclusively for the purpose of business. The Assessing Officer contended that the excess payment made by the petitioner to sugarcane suppliers could not be considered a legitimate business expenditure as it amounted to distribution of profits, not a necessary expense for business operations. The court analyzed the methodology adopted by the petitioner for determining the final cane price and found it to be in violation of commercial principles and the real income theory, thus disallowing it as a deductible business expenditure.

3. The court referred to previous judgments, particularly the case of Shri Chalthan Vibhag Khand Udyog Mandli Ltd. vs. Deputy Commissioner of Income-Tax, where a similar issue was addressed. In that case, it was held that the difference between the price paid to cane growers and the purchase price declared by the Government could not be considered as profit distribution. Following this precedent, the court in the present case decided to set aside the notice for re-opening the assessment, as the issues and reasoning were found to be identical to previous judgments. The petition was allowed, and the impugned notice was consequently set aside.

In conclusion, the judgment focused on the validity of the notice to re-open assessment based on discrepancies in sugarcane purchase prices, the interpretation of business expenditures under Section 37(1) of the Income Tax Act, and the comparison with previous judgments regarding the taxability of income from sugarcane sales.