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TMI Blog2022 (10) TMI 820X X X X Extracts X X X X X X X X Extracts X X X X ..... are being adequately compensated for their efforts in growing cane. Not only does the FRP cover the cost of production, it has other considerations as well woven into the process such as opportunity cost, recovery of sugar from the cane, the final selling price of sugar so produced etc as also includes reasonable margins on account of risk and profits. It is therefore apparent that after the amendment in 2009 to the Sugarcane control order wherein clause 5A was deleted and the concept of FRP introduced, the risk of the transaction of growing cane and its sale to the SSKs are now on the heads of the farmers. He is therefore being compensated for the risk and also there is a profit margin embedded in the FRP itself. This is the crucial difference between SMP and FRP. Earlier SMP was computed without sub clause (g) of 3(1), i.e. there was no margin to the farmer on account of risk and profits and perhaps therefore there was a clause 5A whereby additional cane price was to be paid to be calculated as per Sch I. Now with the deletion of 5A, the margin for risk and profits were embedded in the FRP. This would be a strong indicator that the FRP should be considered as the uncontrolled ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cates that the provisions over and above FRP are made by the appellant out of his profits. The very formula used by the appellant indicates so clearly. There is nothing to show that the provisions are out of gross receipts. It may also be noted here that the issue of sale price of sugar has already been factored into the FRP by clause 3(1) of the Sugarcane Control order. The differential payment over and above FRP is distribution of profits and not related to the price of cane. It is merely incidental that after determining the 'net surplus', the appellant should have an objective method of actually distributing the surplus. This is done by dividing the net surplus by the tonnage of cane purchased from each member and compensating him in that ratio. Merely because the net surplus is actually distributed on a per MT basis, it cannot be said that the payments over and above the FRP are related to the cane price. Using the cane supplied is the only objective criterion available to the appellant for distribution. d) The next issue to be examined is the issue of diversion of income by overriding title. The settled law on diversion of income by overriding title and application of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... farmer in terms of compensation for supply of cane. Once the farmer is compensated adequately by the FRP which has all the elements of market price including profits, anything more paid to him would not be overriding title but would be gratis and a gratuitous application of income. There is another important reason why the payments made over and above FRP cannot be held to be overriding title. On a specific query from me, the appellant stated that in times of losses to SSK itself on sale of sugar, the farmer is indemnified. Thid means that the loss of the SSK is not passed on to the farmers while the profits axe. The formula followed by the appellant for determining final cane price clearly indicates distribution of 'net surplus'. I am therefore of the considered opinion that the theory of overriding title does not apply in this case. e) At this stage, it would be profitable to look at a recent decision of the Hon'ble Karnataka High Court in a case of strikingly similar facts and issue. In the case of Nagarbail Salt Owners Cooperative Society Ltd (2016) 68 taxmann.com 149 (Karnataka), the Hon'ble High Karnataka High Court has held that the sale proceeds transferred to a separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusal of records leads to infer and deduce that: (a) That no person other than a 'Malik' can be a member of the assessee-society; (b) A 'Malik' is a person owning jointly or severally or having an interest in 'Agar' (land on which salt is manufactured); (c) Society has taken the 'Malik' rights from its owners; (d) Society is managed by a managing committee; (e) Society manufacturers salt and other by-products and sells the same in its own name; therefore, the income earned is the income of society and, therefore, liable to tax; (f) The amount distributable among the members is transferred to a Distributable Pool Fund Account before offering the income to tax. [Para 1 7] * The above facts lead an irresistible inference that the 'Agar' (the land) belonging to the Maliks' is used to manufacture salt and its by-product and the same is sold by the assessee-society itself. In the course of its business, society earns 'profits' which falls within the definition of 'income' under section 2(24). Therefore, the assessing authority was right in holding that the transfer of fund for subsequent distribution to the members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which falls within the definition of 'income' under Section 2(24) of the Act. Therefore, in our considered view, the Assessing Authority was right in holding that the transfer of fund for subsequent distribution to the members before payment of tax is not a 'deductible expenditure' in computation of business income of the Assessee-Co- operative Society and further that the income declared after disbursement of profits is not logical and has no relevance to determination of taxable profit under the Income Tax Act. 19. Revenue collection augments State exchequer. A prosperous treasury is a means for development leading to good living of citizenry. Income Tax one of the tributaries which flows into State coffers. Therefore, we are of the view it is imperative for the Courts to opt strict interpretation while dealing with fiscal laws. 20. Based on evidence and admission of appellant, we have held, that the Society has transferred funds to Distribution Pool before offering to Tax. On facts, we have held that, the Society has indulged in the enterprise of manufacture and sale of salt. Non- compliance of statutory provisions is sought to be justified by the Society on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion above, I am of the opinion that the payments made by the appellant over and above the FRP are a mere distribution of surplus/profits calculated after deducting the cane price at FRP. This therefore cannot be allowed as a deduction u/s 37(1). 27. Let me now consider the submissions of the appellant before me. The appellant has filed a general submission wherein he has referred to all the issues arising in Sahakari Sakhar Karkhanas. The submission is same as made before assessing officer during assessment proceedings. The assessing officer has already discussed the submission of the appellant in detail in his assessment order. Here I would be discussing only those issues which are not generalized by the appellant in his submission. 28. The appellant has also argued that the additional price has arisen purely due to market forces and competition. The price demanded by the farmer organizations are far in excess of FRP and if the same is not paid then none would supply cane to the SSK. The appellant has argued that the cane price paid by him is neither unreasonable nor excessive and the price fixation has been left to the discretion of the BOD &/or the State Govt. The appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness entity while assessing its income by way of profits and gains of business or profession under the Income-tax Act. Needless to say, under the ordinary commercial principles as well as under the Act, what is to be assessed in the case of a business entity is profits of the business prior to the distribution or application of any portion thereof. (ii) That the methodology for determining what is commonly referred to as "Cane Price" in the State of Maharashtra by the Co-operative Sugar Factories, cane growers and the State Government is not based on ordinary commercial principles but the same clearly envisages distribution of profit (surplus) from manufacture of sugar. (iii) That the FRP determined by the Central Government takes into account all costs as well as reasonable margins of profit and risks of the cane growers and can be considered to be the cane price. Thus, it is held that FRP of sugarcane determined by the Central Government through methodology adopted by factoring in 'a reasonable margin for the growers of sugarcane on account of risk and profit' by introducing sub-clause (g) in clause 3(1) of the Sugar Control Order, 1966 and by simultaneously deleting cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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