2020 (3) TMI 688 - AT - Income Tax

Addition on account of sale of sugar at concessional rate to the members/ other farmers by the assessee - HELD THAT - As MANGANGA SAHAKARI SAKHAR KARKHANA LTD., GANESH SAHAKARI SAKHAR KARKHANA LTD 2019 (11) TMI 346 - ITAT PUNE held 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. In other words, all items of debit to the Trading and Profit and loss account would constitute cost base. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh proceedings on this issue - Appeal of assessee are allowed for statistical purposes.

Summary

Issues Involved:
1. Addition on account of sale of sugar at concessional rates to members/other farmers by the assessee.

Detailed Analysis:

1. Addition on account of sale of sugar at concessional rates to members/other farmers by the assessee:

The crux of the assessee's grievance pertains to the addition made on account of the sale of sugar at concessional rates to its members and other farmers. The assessee, engaged in the manufacture and sale of sugar, had its case selected for scrutiny, resulting in certain additions/disallowances to the total income by the Assessing Officer (AO).

The assessee's counsel argued that the issue is covered by the decision of the Co-ordinate Bench of the Tribunal, Pune, in the case of Manganga SSK Ltd. vs. ACIT & Others. The Tribunal, in this precedent, dealt with the issue of selling sugar to members of a cooperative society at concessional prices. The Tribunal had relied on various judgments, including those of the Hon’ble Bombay High Court and the Hon’ble Supreme Court.

The Hon'ble Supreme Court, in its judgment in CIT vs. Krishna Sahakari Sakhar Karkhana Ltd., had set aside the High Court judgments and remitted the matter to the CIT(A) to determine if the differential between the market price and the concessional price should be added to the assessee's total income. The Supreme Court also directed the CIT(A) to consider whether selling sugar at concessional rates had become customary in the sugarcane industry and if there was any state government resolution supporting this practice.

The Tribunal noted that the Hon'ble Supreme Court in Tasgaon SSK Ltd. dealt with a related issue of purchasing sugarcane at excessive prices. The Supreme Court held that the difference between the Statutory Minimum Price (SMP) and the State Advised Price (SAP) had an element of 'distribution of profits' and was not deductible as expenditure. The Tribunal extended this reasoning to the sale of sugar at concessional rates, suggesting that part of the concession could be considered 'appropriation of profit.'

The AO's view that selling sugar at concessional rates constituted 'appropriation of profit' was based on the premise that a cooperative society and its members are not distinct entities. The Tribunal highlighted that tax is levied on actual income earned, not on potential income. The Tribunal also referenced the Hon'ble Supreme Court's judgment in Sir Kikabhai Premchand vs. CIT, which established that no one can make a profit from themselves, reinforcing that transactions within a cooperative society should be treated accordingly.

The Tribunal concluded that selling sugar at concessional rates results in a loss of potential profit, not appropriation of profit, unless the sugar is sold below its cost price. If the concessional price is below the cost price, the differential amount constitutes 'appropriation of profit' and should be taxed. The Tribunal directed the AO to ascertain the cost price of sugar and make additions only if the concessional price is below this cost, considering both direct and indirect costs.

Following the reasoning in the Manganga SSK Ltd. case, the Tribunal set aside the CIT(A)'s order and restored the issue to the AO with similar directions. The appeal by the assessee was allowed for statistical purposes.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the issue based on the cost price of sugar and to make additions only if the concessional price is below the cost price, thus treating it as 'appropriation of profit.' The decision underscores the principle that potential profit loss does not equate to profit appropriation unless the sale price is below the cost price.