C.I.T. Bombay Vs Tasgaon Taluka S.S.K.Ltd. (Supreme Court of India)
Conclusion: AO was directed while determining sugarcane purchase price paid to the cane growers by the assessee-society to take into account the manner in which the business works, the modalities and manner in which SAP/additional purchase price/final price were decided and to determine what amount would form part of the profit and after undertaking such an exercise whatever was the profit component was to be considered as sharing of profit/distribution of profit and the rest of the amount was to be considered as deductible as expenditure under section 37.
Held: Assessee was having manufacturing activities of white sugar. An issue arose with respect to disallowance under Section 37(1) for excessive and unreasonable cane purchase price paid to the members of sugarcane. Assessee claimed that the payment had been made as per the rate fixed by Commissionerate of Sugar, Maharashtra State, Pune, and the same was as per guidelines given by the Mantri Committee. AO held that the difference between the price paid as per Clause 3 of the Control Order, 1966, determined by Central Government, and the price determined by State Government under Clause 5A of the Control Order, 1966 (and consequently paid by the assessee to the cane growers) could be said to be a distribution of profit, as in the price determination under Clause 5A of the Control Order, 1966, there was an element of profit and therefore the price paid to the cane growers determined by the State Government was excessive and therefore it was not deductible as expenditure, and was required to be included in the income of the assessee. Whether the sugarcane purchase price paid to the cane growers by the assessee-society more than the SMP and was determined under Clause 5A of the Control Order, 1966, could be said to be the sharing of profit/appropriation of profit or was allowable as expenditure? It was held to the extent of the component of profit which would be a part of the final determination of SAP and/or the final price/additional purchase price fixed under Clause 5A would certainly be and/or said to be an appropriation of profit. However, at the same time, the entire/whole amount of difference between the SMP and the SAP per se could not be said to be an appropriation of profit. Only that part/component of profit, while determining the final price worked out/SAP/additional purchase price would be and/or could be said to be an appropriation of profit and for that an exercise was to be done by AO by calling upon 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. Thus, AO would have to take into account the manner in which the business works, the modalities and manner in which SAP/additional purchase price/final price were decided and to determine what amount would form part of the profit and after undertaking such an exercise whatever was the profit component was to be considered as sharing of profit/distribution of profit and the rest of the amount was to be considered as deductible as expenditure.
FULL TEXT OF THE SUPREME COURT JUDGMENT
Leave granted in all the special leave petitions.
2. As common question of law arises in this group of appeals, all these appeals are being disposed of together, by this common judgment and order.
3. For the sake of convenience, Civil Appeal No. 8890 of 2012 (Commissioner of Income Tax, Bombay vs. Tasgaon Taluka Sahakari Sikhar Karkhana Limited) is treated and considered as a lead case, and therefore, the facts from the said appeal are narrated and considered.
3.1 The assessee (respondent herein) is a Co-operative Society engaged in the business of production of sugarcane and sale thereof. The assessee filed its return of income for the Assessment Year 1998-99 declaring ‘NIL; income. In the return, the assessee computed carry forward loss of Rs.40,00,339/- and unabsorbed depreciation of Rs.1,67,26,665/-. The return was processed under Section 143(1) (a) of the Income Tax Act, (hereinafter referred to as the ‘Act’), making adjustment of Rs.2,02,242-/ relatable to Section 40A (3) of the Act. Thereafter the assessee filed a revised return wherein business loss was shown to the tune of Rs.3,32,42,426/-.
3.2 A notice under Section 143(2()/142(1) of the Act was issued to the assessee. The assessee was having manufacturing activities of white sugar. It had shown the income from business of manufacturing sugar, petrol pump station and also interest under the head “income from other sources”.
3.3 After scrutiny of final accounts 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 Rs.615/- and Rs.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:
