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TMI Blog2007 (8) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 ('the Act' for short), the Commissioner of Income-tax has challenged various orders passed by the Income Tax Appellate Tribunal in the case of different assessees. Counsel on both sides agree that the following substantial questions of law arise in all these appeals, namely :- 1. Whether the Appellate Tribunal was right in law in holding that provisions of Section 40A(2) (a) are not applicable to a co-operative Society ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the additional payment over and above the statutory minimum price (SMP) was cane price and not diversion of profit and as such allowable as business expenditure under section 37(1) of the Income Tax Act, 1961 ? 3. Whether on the facts and in the circumstances of the case cane price / Khodki charges paid by the assessee was not "Bonus" within the meaning of 2(4) of the Maharashtra Co-op. Societies Act, 1960 and it was allowable as business expenditure ? 2. All the aforesaid 47 appeals are admitted on the aforesaid questions of law and by consent of both the parties these group of 47 appeals are heard and finally disposed of by this common Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral activity the disallowance of Khodki charges is liable to be upheld. 8. Being aggrieved by the aforesaid order, both the assessee as well as the revenue filed appeals before the I.T.A.T. The president of the I.T.A.T. constituted a special bench to decide the issues arising out of the above two appeals as also appeals in the case of some other assessees. The Special Bench, considered the fixation of sugarcane price in various countries like Australia, Indonesia, USA, Cuba, Mexico, Phillipines, Mauritius, South Africa and Puerto Rico and by its order dated 19/8/2004 (reported in Deputy CIT v. Manjara Shetakari Sakhar Karkhana Ltd. [2004] 85 TT J 369 (Mumbai) held that section 40A (2)(b) (ii) is not applicable to the co-operative societies and further held that price fixation is a legislative function and the payments made to the cane growers at the rate fixed by the State Advise Price (SAP) cannot be disallowed by treating the differential amount between SMP and SAP as appropriation of profits or bonus. Similarly, the Special Bench held that the expenses incurred by the assessee as Khodki charges cannot be disallowed. As per the decision of the Special Bench, the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 (VA). In these circumstances, it was held that under the Income Tax Act 'Co-operative Society' is distinct from 'association of persons' and since the word 'co-operative society' does not appear in section 40A (2) of the Act, disallowance under section 40(A) (2) cannot be made in the case of a co-operative society. 12. Accordingly, in the light of the decision of this Court in the case of Shivamrut Doodh Utpadak Sahakari Sangh (supra), we answer the first question in favour of the assessee and against the revenue. Regarding question Nos.2 3. 13. According to Mr.Chatterjee, learned counsel for the revenue, once the statutory minimum price (SMP) is fixed by the Central Government the assessee is bound to pay that price to the cane growers and any price paid in excess of SMP would not be allowable expenditure. He submitted that the State Advice Price (SAP) is fixed by the State Government based on the particulars submitted by the assessee after finalisation of the accounts and determination of the profits. Thus, the SAP fixed by the State Government is based on the profits earned by the assessee and, therefore, the differential amount between SMP and SAP would be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, no disallowance could be made from the cane price paid by the assessee to its members / non members at a price fixed by the State Government. In this connection, Mr.Inamdar relied upon the decision of the Apex Court in the case of Pravara SSK Ltd. V/s. CIT reported in [1974] 94 ITR 321 (S.C.) and the decision of the Apex Court in the case of Maharashtra Rajya Sahakari Sakhar Karkhana Sangh Limited V/s. State of Maharashtra reported in [1995] Supp (3) SCC 475. 17. We have carefully considered the rival submissions. In all these appeals, it is not in dispute that the share capital contributed by the State Government in the case of each assessee has not been fully repaid. It is also not in dispute that under the provisions of M.C.S. Act and the bye laws made thereunder, the State Government is entitled to fix the SAP till the share capital contributed by the State Government is repaid fully. The State Government fixes the final cane price in public interest and it is in the nature of a direction issued by the State Government under section 79A of the M.C.S. Act which is binding on the assessee. Failure to comply with such a direction given by the State Government, inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the assessee is bound to pay the S.M.P. fixed by the Central Government, the assessee is also bound to pay the final cane price as per the SAP fixed by the State Government. Therefore, where the payment is made to the cane growers as per the directions of the State Government, the assessee cannot be accused of paying to the cane growers in excess of the fair market price. What should be the fair market value to be paid to the cane growers is left to the State Government. The fact that SAP fixed by the State Government is based on the price recommended by the assessee after the finalisation of the accounts would not constitute appropriation of profits / bonus because, appropriation of profits would arise only after the profits are determined and profits can be determined only after all the expenses incurred for the business are deducted from the gross income. As per the bye-laws framed under the M.C.S. Act, every assessee is obliged to recommend the final cane price after the finalisation of accounts in the respective year. In order to secure better price for the cane growers the scheme evolved by the State Government in the State of Maharashtra is to determine the final can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akari Sakhar Karkhana Sangh Limited [1995] Supp 3 SCC 475 (Supra), the Apex Court has held that the production of sugar being of primary concern, the SAP fixed by the State of Maharashtra is not only binding on the members but also binding on non members who supply sugar cane to the assessee. In these circumstances, the final cane price paid by the assessee as per the SAP fixed by the State Government cannot be said to be excessive or appropriation of profits / bonus and consequently no disallowance could be made in that behalf. 25. Similarly, the Khodki charges are incurred as per the directions of Director of Sugar to clean out the farmers land and to compensate the farmer for the unevenly cut cane sugar at the time of harvesting. This Court in the case of C.I.T. V/s. Shree Panchganga SSK Ltd . reported in[2002] 254 ITR 572 has held that Khodki charges are incurred for the business purposes and hence the said expenses are allowable. Accordingly, following the said decision, we answer question Nos.2 3 in favour of the assessee and against the revenue. 26. In the result, all the appeals filed by the revenue are dismissed by answering the three questions framed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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