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2024 (1) TMI 596 - AT - Income TaxAllowability of business expenditure incurred towards purchase of sugarcane from member farmers' u/s 37(1) - whether additional sugarcane price paid to the cane growers wholly and exclusively for the purpose of business? - HELD THAT - As keeping in view of the decision of U.P Cooperative Cane Federations Vs West UP Sugar Mills Association and others 2004 (5) TMI 533 - SUPREME COURT we find convincing force in the submissions of assessee that as per clause 3(2) of Sugar Cane control order prohibits everyone from selling or purchasing sugar cane at the lower than fixed under clause 3(1). Further it is clear FRP which was earlier known as SMP fixed by the Central Government every cursing year is to safeguard the interest of the farmers and is the lower limit only. We are also convinced that it is always open to the party to negotiate to pay a price higher than the minimum price on commercial consideration and it is not open to the revenue to disallow it difference on the ground difference was not in law. As in the present case the purchases are made by the assessee, which is the cooperative society of its sugar cane grower. Thus, the case of assessee is falls under sub-clause (b) of clause 5 of Sugar Cane Control order, which empowered them to pay to the producer of sugar cane, in addition to the fair and remunerative of sugar cane fixed under clause-3(1), as an additional price in accordance with first schedule. Thus, the additional price of payment of sugar cane to the grower, for purchase of raw material (sugarcane) which was approved by the managing committee of the assessee, who is also having representation of State Government as per the statutory provision of State Cooperative Society Act, cannot be termed as a distribution of profit. Such additional payment is made to the members of the Co-operative society who are the supplier of sugarcane and to none other persons. Such payment was made for the purpose of business against the payment of raw material and not for any other purpose. As in a recent decision in Kolhapur Zilla Sahkari Dudh Utpadak Sangh Ltd. 2023 (6) TMI 1143 - SC ORDER while affirming the decision of Solapur District Co-op Milk Producers Process Union Ltd. 2009 (4) TMI 19 - BOMBAY HIGH COURT held that the addition could not be made by treating the amount paid as final rate difference as distribution of profits. It was also held that additions could not be made by treating amount paid as a final rate difference as a distribution of profit among members of the society. We find that Bombay High Court while giving such judgment followed the decision of Mehsana District Co-operative Milk Producers Union Ltd 2005 (2) TMI 25 - GUJARAT HIGH COURT thus the decision of Hon ble Gujarat High Court substantially stand approved by the Hon ble Apex Court. We find that in Mehsana District Co-operative Milk Producers Union Ltd. (supra) while considering the question of law as to whether a claim for deduction was allowable either under section 28 or section 37(1) HC held that the assessee claimed that additional payment was made towards the price of the milk. The High Court noted the legal position as to when accrual of profits can be said to have accrued. It considered the case of CIT Vs Ashokbhai Chimanbhi 1964 (10) TMI 11 - SUPREME COURT and noted that the words accrue and arise are used to contradistinguish the word 'receive'. Income is said to be received when it reaches the assessee. When the right to receive the income becomes vested in the assessee, it is said to accrue or arise. The Court also noted that the profits to be assessed have to be the real profits and are required to be determined on the ordinary principles of commercial trading and commercial accounting - expenditure in question cannot be termed to be application of income in absence of any evidence as to accrual of profits in light of settled legal position; the payment of additional/final price made on the last day of the accounting year is allowable u/s 28 of the Act being a necessary deduction for ascertaining the real profits on principles of commercial accounting and the payment in question is alternatively allowable under section 37 of the Act having been incurred wholly and exclusively for the purpose of business carried on by the assessee in light of the evidence which has come on record. Hon ble Apex Court in S.A. Builder ( 2006 (12) TMI 82 - SUPREME COURT ) held that the expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. The Apex Court also refereed the decision of Dalmia Cement (Bharat) Ltd. 2001 (9) TMI 48 - DELHI HIGH COURT wherein it was held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Thus we find that the payment of additional sugarcane price, with the approval of the managing committee of the assessee for payment of sugarcane is not distribution of profit. In the result, the grounds of appeal raised by the assessee are allowed.
Issues Involved:
1. Disallowance of genuine business expenditure under Section 37(1) of the Income Tax Act. 2. Addition of additional sugarcane price paid to cane growers. 3. Treatment of additional purchase price as appropriation of profits. 4. Applicability of Section 28 versus Section 37(1) for disallowance of expenditure. 5. Consistency in the payment of final sugarcane price over 25 years. 6. Allowable deduction under Statutory Minimum Price (SMP) / Fair and Remunerative Price (FRP). 7. Nature of payment to farmers as genuine business expense or profit sharing. 8. Relevance of the Jurisdictional High Court's decision in Mehsana District Co-operative Milk Producers Union Ltd. 9. Levy of interest under Sections 234A, 234B, 234C & 234D. 10. Initiation of penalty proceedings under Section 271(1)(c). Summary: 1. Disallowance of Genuine Business Expenditure: The Tribunal addressed the issue of disallowance of genuine business expenditure incurred by the assessee society towards the purchase of sugarcane from member farmers under Section 37(1) of the Income Tax Act. The assessee argued that the additional price paid was a business expenditure, not an appropriation of profit. 2. Addition of Additional Sugarcane Price: The Tribunal examined the addition made by the Assessing Officer (AO) of Rs. 58,96,71,804/- as additional sugarcane price paid to the cane growers. The AO's view was that the allowable expenses should be based on the Fair and Remunerative Price (FRP) or Statutory Minimum Price (SMP), and any excess payment was deemed as profit distribution. 3. Treatment of Additional Purchase Price: The Tribunal considered the AO's treatment of the additional purchase price paid by the assessee cooperative society to the member farmers as an appropriation of profits. The AO disallowed the expenditure, citing it as profit sharing rather than a business expense. 4. Applicability of Section 28 versus Section 37(1): The Tribunal discussed whether the additional price paid would fall under Section 28 or Section 37(1) of the Act. The AO applied principles under Section 37(1) to disallow the expenditure, while the assessee contended that it should be considered under Section 28. 5. Consistency in Payment of Final Sugarcane Price: The assessee argued that the payment of the final sugarcane price to the members after the completion of the sugarcane season had been consistently followed for 25 years and accepted by the revenue authorities. The Tribunal considered this aspect in its judgment. 6. Allowable Deduction under SMP/FRP: The Tribunal examined the AO's justification that only the SMP/FRP represents the allowable deduction under the Income Tax Act. The AO disallowed any excess payment over the SMP/FRP as it was considered profit sharing. 7. Nature of Payment to Farmers: The Tribunal evaluated the AO's finding that the payment to the farmers was not a genuine business expense but profit sharing in nature. The assessee argued that the additional price was a necessary business expenditure to ensure a fair price to the farmers. 8. Jurisdictional High Court's Decision: The Tribunal considered the relevance of the Jurisdictional High Court's decision in Mehsana District Co-operative Milk Producers Union Ltd., which held in favor of the assessee on similar facts. The AO distinguished the functioning of a sugar mill from a milk cooperative. 9. Levy of Interest: The Tribunal addressed the issue of the levy of interest under Sections 234A, 234B, 234C & 234D of the Act. The assessee contended that the levy was unjustified. 10. Penalty Proceedings: The Tribunal considered the initiation of penalty proceedings under Section 271(1)(c) of the Act. The assessee argued that the initiation of penalty proceedings was unjustified. Conclusion: The Tribunal allowed the appeals of the assessee, concluding that the additional sugarcane price paid was a genuine business expenditure and not an appropriation of profits. The Tribunal relied on the decision of the Hon'ble Supreme Court and the Jurisdictional High Court, which supported the assessee's claim. The appeals for the subsequent years were also allowed following the principles of consistency.
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