Disallowance of the assessee's business expenditure claims related to the purchase of sugarcane from member farmers, as well as the treatment of additional sugarcane price paid to growers as an appropriation of profits.

2024 (1) TMI 596 - ITAT SURAT

The case involves appeals against the orders of the National Faceless Appeal Centre Delhi and the Commissioner of Income Tax (Appeals) for the Assessment Years (AY) 2012-13, 2013-14, and 2014-15. The central issue is the Assessing Officer's disallowance of the assessee's business expenditure claims related to the purchase of sugarcane from member farmers, as well as the treatment of additional sugarcane price paid to growers as an appropriation of profits, not an allowable business expense​​.

Case Background:

1. Nature of the Business: The assessee, a cooperative society, is engaged in manufacturing and selling white sugar and its by-products. The society declared NIL income for A.Y. 2012-13, attracting scrutiny from the Income Tax Department​​.

2. Assessment and Disallowance: The Assessing Officer, noting discrepancies in the assessee's declared profits and net income, scrutinized the sugarcane purchase expenses. The Officer's primary contention was that the actual allowable expenses for sugarcane purchase should be based on the Fair and Remunerative Price (FRP)/Statutory Minimum Price (SMP) set by the government​​.

3. Assessee's Stance: In response to a show-cause notice, the assessee argued that the government-fixed SMP for sugarcane was ₹1,832.00 per metric ton (MT), but they paid an excess amount of ₹882.78 per MT to their members. This excess payment, totaling ₹58.96 crores, was claimed as a business expenditure but viewed by the Income Tax Department as a distribution of profit and not permissible under Section 37 of the Income Tax Act, 1961​​.

4. Assessing Officer's Viewpoint: The Assessing Officer maintained that the SMP, fixed based on various economic and agricultural factors, represented the allowable expenditure limit for sugarcane purchases. Payments exceeding this limit were seen as profit distribution, not business expenses. The Officer also noted that the accounts were not closed at the end of the financial year, leaving the purchase amount open until the issuance of the "final cane price," which was based on operational profit​​.

5. Appeal and CIT(A)'s Decision: The assessee's appeal to the CIT(A) upheld the Assessing Officer's decision. The CIT(A) agreed that the payment should be considered in light of the Supreme Court's decision in Malaprabha Co-operative Sugar Factory Ltd. case and that the income tax provisions do not treat every businessman or assessment year separately. The CIT(A) also noted that the cane price decided by the sugar cooperative did not involve passing on profits to the cane suppliers and that payments exceeding the government-fixed price could not be considered allowable business expenses under the Income Tax Act​​.

Legal Analysis:

1. Statutory Minimum Price (SMP) and Business Expenditure: The core of the dispute lies in the interpretation of the SMP and its application to business expenses. The Income Tax Department's stance is that any payment over the SMP is not a genuine business expense but rather a distribution of profits.

2. Accounting Practices and Provision Creation: The Assessing Officer emphasized the normal accounting practice of creating a provision at the end of the accounting period for such liabilities. The assessee's failure to create such a provision and the practice of debiting the amount payable based on the final cane price, even after the accounting period, was highlighted as problematic​​.

3. Role of Cooperative Societies: The assessee's argument that, as a cooperative society set up by farmers, their primary objective is not profit-making but providing remunerative prices to farmers. This contention was dismissed by the Assessing Officer, who asserted that the Income Tax Act does not provide differential treatment to cooperative societies in this context​​.

4. Case Laws and Precedents: The decision of the CIT(A) relied heavily on the Supreme Court's ruling in the Malaprabha Co-operative Sugar Factory Ltd. case. The assessee's reference to the Mehsana District Cooperative Milk Producers Union Ltd case, which might have analogous circumstances, was not found compelling enough to sway the judgment​​.

Conclusion:

The case underscores the complexities involved in determining what constitutes allowable business expenses, especially in the context of cooperative societies. The interpretation of the SMP and its application to business expenditures lies at the heart of this dispute. The Income Tax Department's stance, upheld by the CIT(A), reflects a strict interpretation of the law, focusing on the statutory guidelines for allowable expenses and the commercial principles guiding such expenditures. The case also highlights the nuances of accounting practices and their implications in tax assessments.

Full Text:

2024 (1) TMI 596 - ITAT SURAT