2019 (3) TMI 321 - SC - Income Tax

Addition u/s 37 and 40A - distribution of profit in the guise of excessive price paid to the members against purchase of sugarcane - excessive and unreasonable cane purchase price paid to the members of the sugarcane Co-operative Society - amount paid by the society to its members/non-members above the SMP price/price determined under Clauses 3 & 5A of the Control Order, 1966 - excess cane price paid to the cane growers over the SMP - purchase price paid is excessive and unreasonable - sharing of profit/appropriation of profit V/S allowable as expenditure - HELD THAT - to the extent of the component of profit which will be a part of the final determination of SAP and/or the final price/additional purchase price fixed under Clause 5A would certainly be and/or said to be an appropriation of profit. However, at the same time, the entire/whole amount of difference between the 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 purchase price would be and/or can be said to be an appropriation of profit and for that an exercise is to be done by the assessing officer 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 deciding/fixing the final price/additional purchase price/SAP under Clause 5A of the Control Order, 1966. Merely because the higher price is paid to both, members and non-members, qua the members, still the question would remain with respect to the distribution of profit/sharing of the profit. AO will have to take into account the manner in which the business works, the modalities and manner in which SAP/additional purchase price/final price are decided and to determine what amount would form part of the profit and after undertaking such an exercise whatever is the profit component is to be considered as sharing of profit/distribution of profit and the rest of the amount is to be considered as deductible as expenditure. The question of law is answered accordingly, partly in favour of the department and partly in favour of the assessee. The impugned orders passed by the High Court, ITAT, CIT(A) as well as the assessing officers are hereby quashed and set aside and the matters are remitted to the respective assessing officers to undertake the exercise as stated hereinabove and after giving an opportunity to the respective assessee s.

Summary

Issues Involved:
1. Whether the sugarcane purchase price paid by the assessee-society to its members/non-members above the Statutory Minimum Price (SMP) determined under Clause 3 of the Control Order, 1966, and as per the price determined by the State Government under Clause 5A of the Control Order, 1966, can be considered as sharing of profit and included in the return of income.
2. Whether any amount of sugarcane purchase price paid by the society to its members/non-members above/beyond the price determined as per Clauses 3 & 5A of the Control Order, 1966, and found to be unreasonable and in excess of the fair market value, can be considered as sharing of profit and included in the total income of the assessee.

Issue-Wise Detailed Analysis:

Issue 1: Excess Payment Above SMP as Sharing of Profit
The court examined whether the difference between the SMP determined under Clause 3 and the price determined by the State Government under Clause 5A of the Control Order, 1966, can be considered as sharing of profit. The Assessing Officer (AO) had concluded that the excess payment constituted a distribution of profit, as the price under Clause 5A includes an element of profit. This was based on the mechanism for determining the SMP and SAP under the Control Order, 1966, which considers factors like the cost of production, return to growers, availability of sugar at a fair price, and the recovery of sugar from sugarcane.

The AO's view was that the additional price paid under Clause 5A, determined at the end of the season, included profit sharing between growers and factories. This was supported by the Bhargava Commission's recommendation for a 50:50 profit-sharing basis. The court agreed that the profit component in the final price/additional purchase price under Clause 5A could be considered as an appropriation of profit. However, not the entire difference between SMP and SAP could be deemed profit distribution. The AO must call upon the assessee to produce accounts and balance sheets to determine the profit component.

Issue 2: Excessive Payment Beyond Fair Market Value
The AO also considered the excess cane price paid to members/non-members above the SMP and SAP as unreasonable and excessive under Section 40A(2)(a) of the Act. The AO noted that the final price fixed by the State Government included profit, making it excessive and not deductible as expenditure. The court held that for non-members, this could be dealt with under Section 40A(2) of the Act, where the AO must determine if the payment is excessive or unreasonable. However, this was not the primary subject of the appeals.

Conclusion
The court concluded that the AO must undertake an exercise to determine the profit component in the additional purchase price under Clause 5A. The profit component should be considered as sharing of profit, while the rest is deductible as expenditure. The court partly favored the department and partly the assessee, remitting the matters back to the AO for further examination.

Disposition
The impugned orders by the High Court, ITAT, CIT(A), and the AOs were quashed and set aside. The matters were remitted to the respective AOs for re-evaluation, giving an opportunity to the assessees to present their case. All appeals were disposed of accordingly.