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TMI Blog2019 (3) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... rice 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 wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details along with return of income and details furnished during the course of assessment proceedings, an issue arose with respect to disallowance under Section 37(1) of the Act for excessive and unreasonable cane purchase price paid to the members of the sugarcane. 3.4 It was noticed that during the year under consideration, the assessee had crushed 189736.220 metric tones sugarcane. The assessee had paid ₹ 615/- and ₹ 720-/ for crushing seasons 1996-97 and 1997-98 respectively per metric tone at the time of purchase of cane and the balance amount was paid later on, as per contracted price increase of sugarcane on contract basis and as per Mantri Committee Advice in case of purchase of sugarcane from members and others. It has found as under: Particulars Quantity in MT Rate payable Rate paid (Rs.) Sugar Season 96-97 from members 8,307.520 537.700 875.000 From non-members 1,652.653 537.700 875.000 Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to the purchase made from non-members and members, it was the case of the assessee that payment has been made as per price agreed to at the time of purchase. It was submitted that a contract for the purchase of sugarcane has been entered into at the time of start of sugarcane and since the price is agreed at the time of purchase itself, the same is required to be allowed as deduction. It was, therefore, claimed that no disallowance be made either under Section 40A (2) of the Act or otherwise. 4. The Assessing Officer did not agree with the submissions on behalf of the assessee. The ultimate conclusion of the A.O. was that the difference between the price paid as per Clause 3 of the Control Order, 1966, determined by the Central Government, and the price determined by the State Government under Clause 5A of the Control Order, 1966 (and consequently paid by the assessee to the cane growers) can be said to be a distribution of profit, as in the price determination under Clause 5A of the Control Order, 1966, there is an element of profit and therefore the price paid to the cane growers determined by the State Government is excessive and therefore it is not deductible as e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iety that regarding state advised price, it is mandatory for them to follow the same as correct to a limited extent which means that for the society it is must to pay initial advance price which is fixed by the Commissioner of Sugar irrespective of actual profits. However, after the end of the season, it is the society who sends the statement of surplus to the Commissioner of Sugar in which cost of the cane is taken on the basis of initial advance price and remaining surplus is proposed to be distributed on the basis of total cane quantity purchases in the season. On being proposed by society, the Commissioner of Sugar gives consent to it and, therefore, the submission is not correct because it is the society who propose for such additional cane purchase price by way of appropriation of profits 4.2 The Assessing Officer also did not agree with the submission on behalf of the assessee that the minimum cane price notified by the Central Government is minimum and not actual cost and therefore any payment in excess of the minimum price should not be treated as an application of income by observing that the Statutory Minimum Price (hereinafter referred to as the SMP ) is furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als), relying upon and considering the decision of a Special Bench, Mumbai ITAT in the case of Manjara Shetkari Sakhar Karkhana Limited dated 19.08.2004 allowed the appeal preferred by the assessee and held that the price actually paid for the procurement of the sugarcane is to be allowed as business expenditure. The learned CIT(A) also observed and held that the excess payment of cane price as fixed by the State Government (SAP) over and above SMP for sugarcane to members and non-members cannot be disallowed either under Section 40A(2)(b) of the Act, despite the fact that profit is one of the component in asserting the price. The CIT(A) observed that just because profit is one of the component in asserting the price, it cannot be said that profit is separately distributed in the guise of additional price. The learned CIT(A) observed that the amount paid by the assessee cooperative society to the sugarcane growers is considered for the procurement of the sugarcane and it cannot be construed to be appropriation of profits. Consequently, the learned CIT(A) deleted the addition made by the Assessing Officer. 6. The learned ITAT confirmed the order passed by the learned CIT(A), wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66. 7.2 It is vehemently submitted by the learned counsel appearing on behalf of the department that there are different considerations/criterias to be applied while determining the sugarcane purchase price at the stage of Clause 3 and at the stage of Clause 5A. It is submitted that even the stages are also different while determining the sugarcane purchase price at the stage of Clause 3 and determined at the stage of Clause 5A. 7.3 It is vehemently submitted by the learned counsel appearing on behalf of the department that while determining the sugarcane purchase price under Clause 5A of the Control Order, 1966, firstly, it is at the conclusion of the financial year and when the accounts are settled, and secondly, there is an element of profit. It is submitted that one of the components while dealing with the sugarcane purchase price under Clause 5A is the profit, and whatever is paid to the cane growers under Clause 5A is therefore sharing of profit. 7.4 It is further submitted by the learned counsel appearing on behalf of the department that how and in what manner the sugarcane purchase price is determined under Clause 5A has been considered by this Court in detail in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit and appropriation of profit. 7.7 Making the above submissions, it is prayed to allow the present appeals and set aside the impugned judgments and orders passed by the High Court and consequently the orders passed by the ITAT as well as CIT(As) and to restore the respective orders passed by the assessing officers. 8. Shri P. Chidambaram, learned senior advocate, Shri Shekhar Naphade, learned senior advocate have appeared on behalf of respective assesses. 8.1 Learned counsel appearing on behalf of the respective assesses have vehemently submitted that as rightly observed and held by the High Court, merely because there is an element and/or one of the components while determining the SAP under Clause 5A of the Control Order, 1966 is profit, it cannot be said that there is a sharing of profit. 8.2 It is vehemently submitted by the learned counsel appearing on behalf of the respective assesses that under the Control Order, 1966, a sugarcane society has no other alternative but to pay to the cane growers the sugarcane purchase price as determined by the Central Government and the State Government, as the case may be. It is submitted that even if the society would be inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to consider the following aspects: (a) the cost of production of sugarcane; (b) the return to the grower from alternative crops and the general trend of prices of agricultural commodities; c the availability of sugar to the consumer at a fair price; d the price at which sugar produced from sugarcane is sold by producers of sugar; and e the recovery of sugar from sugarcane. 9.3 As per Explanation, different prices may be fixed for different areas or different qualities or varieties of sugarcane. As per sub-clause 2 of Clause 3, no person shall sell or agree to sell sugarcane to a producer of sugar or his agent, and no such producer or agent shall purchase or agree to purchase sugarcane, at a price lower than that fixed under sub-clause 1 of Clause 3. Clause 5A, which has been inserted in the year 1974 provides for an additional price to be paid for sugarcane purchased on or after 01.10.1974. It provides that where a producer of sugar or his agent purchases sugarcane, from a sugarcane grower during each sugar year, he shall, in addition to the minimum sugarcane price fixed under Clause 3, pay to the sugarcane grower an additional price, if fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inserted in the year 1974 on the basis of the recommendations made by the Bhargava Commission. As observed by this Court in the case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited (supra), the Bhargava Commission had recommended payment of additional price at the end of the season on 50:50 profit sharing basis between growers and factories, to be worked out in accordance with Second Schedule to the Control Order, 1966. It is also required to be noted that the additional price is fixed/determined under Clause 5A at the end of the season and as per Second Schedule to the Control Order, 1966. Therefore, at the time when the additional purchase price is determined/fixed under Clause 5A, the accounts are settled and the particulars are provided by the concerned cooperative society what will be the expenditure; what can be the profit etc. It is required to be noted that so far as the SMP determined under Clause 3 of the Control Order, 1966 by the Central Government is concerned, it is at the beginning of the season and while determining/fixing the SMP by the Central Government, the afore-stated things are required to be considered. Therefore, the difference of amount between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members are concerned, the same can be dealt with and/or considered applying Section 40A (2) of the Act, i.e., the assessing officer on the material on record has to determine whether the amount paid is excessive or unreasonable or not. However, this is not the subject matter in the present appeals. We are restricting the present appeals qua the sugarcane purchase price paid by the society to the cane growers above the SMP determined under Clause 3 and the difference of sugarcane purchase price between the price determined under Clause 3 and Clause 5A of the Control Order, 1966. 9.5 Therefore, the assessing officer 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. 10. In view of the above and for the reasons stated above, the question of law is answered accordingly, partly in favour of the department ..... X X X X Extracts X X X X X X X X Extracts X X X X
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