2019 (11) TMI 364 - AT - Income Tax

Addition on account of Excessive sugarcane price paid - Difference in price paid to members as well as non-members of Sahakari Sakhar Karkhana - sale of sugar at Concessional price - HELD THAT -The extant issue of deduction for payment of excessive price for purchase of sugarcane, raised in most of the appeals under consideration, is squarely covered by the aforesaid judgment of the Hon ble Supreme Court. Respectfully following the precedent, we set-aside the impugned orders on this score and remit the matter to the file of the respective A.Os. for deciding it afresh as per law in consonance with the articulation of law by the Hon ble Supreme Court in SHRI SATPUDA TAPI PARISAR SSK LIMITED 2010 (1) TMI 117 - SUPREME COURT - AO would allow deduction for the price paid under clause 3 of the Sugar Cane (Control) Order, 1966 and then determine the component of distribution of profit embedded in the price paid under clause 5A, by considering the statement of accounts, balance sheet and other relevant material supplied to the State Government for the purpose of deciding/fixing the final price/additional purchase price/SAP under this clause. The amount relatable to the profit component or sharing of profit/distribution of profit paid by the assessee, which would be appropriation of income, will not be allowed as deduction, while the remaining amount, being a charge against the income, will be considered as deductible expenditure. At this stage, it is made clear that the distribution of profits can only be qua the payments made to the members. In so far as the non-members are concerned, the case will be considered afresh by the AO by applying the provisions of section 40A(2) Similar is the position in so far as sale of sugar at concessional rate to members below the cost price is concerned in as much as the income to that extent which was earned by the assessee from its normal business operations shall be passed on to the members in the form of sale of sugar at a rate lower than its cost price. CIT(A) in the instant batch of appeals has confirmed the addition towards the difference between the Levy price and the concessional price (upto 5 kg. per member per month) and to the extent of difference between the Market price of sugar and Concessional price (over and above 5kg. per member per month). In this process, the assessees got taxed even for the potential profit to the extent of difference between the cost price and market/levy price, as the case may be. Ergo, we hold that such a straightway difference between the market/levy price and the concessional price of sugar cannot be construed as appropriation of profit leading to addition as has been extantly done. The impugned orders to this extent are set aside and the matters are restored to the file of the respective AOs for first ascertaining the cost price of sugar to each assessee and then make addition on this issue by treating it is as a case of appropriation of profit only to the extent of the concessional sale price which is below the cost price. However, it is clarified that in determining cost price of sugar to the factory, not only all the direct costs but all the indirect costs should also be taken into consideration. All items of debit to the Trading and Profit and loss account would constitute cost base. - Appeal is allowed for statistical purposes.

Summary

Issues Involved:

1. Addition on account of Excessive Cane Price paid to Members/Non-Members.
2. Sale of sugar at Concessional Price.

Issue 1: Addition on account of Excessive Cane Price paid to Members/Non-Members

The appeal concerns the confirmation of addition due to excessive cane price paid to members and non-members. The Tribunal referenced a previous batch of appeals, where the issue was addressed in the case of Manganga Sahakari Sakhar Karkhana Ltd. Vs. ACIT. The Tribunal noted that the assessee paid cane prices above the Fair and Remunerative Price (FRP) fixed by the government, justifying it as a business expense deductible under Section 37(1) of the Income-tax Act, 1961. However, the Assessing Officer (AO) viewed the excessive price as a 'distribution of profits' and disallowed the deduction, a stance supported by the Hon'ble Supreme Court in DCIT Vs. Shri Satpuda Tapi Parisar S.S.K. Ltd.

The Tribunal highlighted the Supreme Court's judgment in CIT Vs Tasgaon SSK Ltd., which clarified that while the Statutory Minimum Price (SMP) under clause 3 of the Sugar Cane (Control) Order, 1966 is fully deductible, the additional price under clause 5A contains a profit component that cannot be deducted. The Supreme Court remitted the matter to the AO to determine the profit component embedded in the additional price, considering the accounts, balance sheet, and materials provided to the State Government.

Following this precedent, the Tribunal set aside the impugned orders and remitted the matter to the AO to allow deduction for the price paid under clause 3 and determine the profit component in the price paid under clause 5A. The AO was instructed to consider the statement of accounts, balance sheet, and other relevant materials, allowing the assessee a reasonable opportunity of hearing.

Issue 2: Sale of Sugar at Concessional Price

The appeal also addressed the issue of selling sugar at concessional prices to members. The AO had disallowed the difference between the Fair Market price and the Concessional price, viewing it as an appropriation of profit. The CIT(A) partly upheld this view, referencing a Supreme Court judgment in CIT Vs. Krishna Sahakari Sakhar Karkhana Ltd., which required examining whether the concessional sale was a customary practice supported by the State Government.

The Tribunal noted that the issue had been previously considered by various benches and high courts, but the Supreme Court's judgment in Krishna SSK Ltd. necessitated a fresh examination. The Tribunal drew an analogy with the Supreme Court's decision in Tasgaon SSK Ltd., which treated excessive cane prices as 'appropriation of profit'. The Tribunal reasoned that selling sugar at concessional rates also affects the gross profit of sugar mills, similar to purchasing sugarcane at excessive prices.

The Tribunal distinguished between loss of potential profit and actual appropriation of profit, noting that selling sugar below cost price constitutes appropriation of profit. It referenced the Supreme Court's judgment in Sir Kikabhai Premchand vs. CIT, which established that no one can make a profit from self, and thus, selling sugar at concessional rates to members does not generate taxable income unless sold below cost price.

The Tribunal set aside the CIT(A)'s orders and remitted the matter to the AO to ascertain the cost price of sugar and determine the extent of appropriation of profit. The AO was instructed to consider all direct and indirect costs in determining the cost price and allow the assessee a reasonable opportunity of hearing.

Conclusion:

The appeal was partly allowed for statistical purposes, with the matters remitted to the AO for fresh determination following the guidelines and precedents set by the Supreme Court. The Tribunal emphasized the need for a thorough examination of the accounts and materials provided to determine the deductible expenses and the extent of profit appropriation.