C.I.T. BOMBAY versus TASGAON TALUKA S.S.K. LTD. on 5 March 2019

[2019] 4 S.C.R. 145

C.I.T. BOMBAY

v.

TASGAON TALUKA S.S.K. LTD.

(Civil Appeal No. 8890 of 2012)

MARCH 05, 2019

[A. K. SIKRI, S. ABDUL NAZEER AND M. R. SHAH, JJ.]

Sugar Cane (Control) Order, 1966: Clause 3 and 5A –Determination of price – The additional price is determined underClause 5A at the end of the season and as per Second Schedule tothe Control Order, 1966 – Therefore, at the time when the additionalpurchase price is determined/fixed under Clause 5A, the accountsare settled and the particulars are provided by the concernedcooperative society what will be the expenditure; what can be theprofit etc. – So far as the Statutory Minimum Price (SMP) determinedunder Clause 3 of the Control Order, 1966 by the CentralGovernment is concerned, it is at the beginning of the season –Therefore, the difference of amount between the SMP determinedunder Clause 3 and the SAP/additional purchase price determinedunder Clause 5A has an element of profit and/or one of thecomponents would be the profit.

Income Tax Act, 1961: s.37(1) – Disallowance for excessiveand unreasonable cane purchase price paid to the members/non-members of the sugarcane – Whether the sugarcane purchase pricepaid to the cane growers by the assessee-society more than theStatutory Minimum Price (SMP) and as determined under Clause5A of the Control Order, 1966, can be said to be the sharing ofprofit/appropriation of profit – Held: The difference of amountbetween the SMP determined under Clause 3 and SAP/additionalpurchase price determined under Clause 5A has an element of profitand/or one of the components would be profit – However, at thesame time, the entire/whole amount of difference between the SMPand the SAP per se cannot be said to be an appropriation of profit– Only that part/component of profit, while determining the finalprice worked out/SAP/additional purchase price would be and/orcan be said to be an appropriation of profit and for that an exerciseis to be done by the assessing officer by calling upon the assessee A

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Ato produce the statement of accounts, balance sheet and the materialsupplied to the State Government for the purpose of deciding/fixingthe final price/additional purchase price/SAP under Clause 5A ofthe Control Order, 1966 – As regards the non-members, the samecan be dealt with and/or considered applying s.40A(2) of the Acti.e. assessing officer on the material on record has to determineBwhether the amount paid is excessive or unreasonable or not – SugarCane (Control) Order, 1966 – Clause 3 and 5A, Schedule – EssentialCommodities Act, 1955.

Sugar Cane (Control) Order, 1966: Clause 3 – Fixation ofSMP – Determining factors – While fixing/determining the SMPCunder Clause 3 of the Control Order, 1966, the Central Governmentis required to consider the various aspects such as the cost ofproduction of sugarcane; the return to the grower from alternativecrops and the general trend of prices of agricultural commodities;the availability of sugar to the consumer at a fair price; the price atDwhich sugar produced from sugarcane is sold by producers of sugar;and the recovery of sugar from sugarcane.

Disposing of the appeals, the Court

HELD: 1.1 As per Clause 3 of the Control Order, 1966,the Central Government may, after consultation with suchEauthorities, bodies or associations as it may deem fit, bynotification in the official Gazette, from time to time, fix theminimum price of sugarcane to be paid by producers of sugar ortheir agents for the sugarcane purchased by them. While fixing/determining the SMP under Clause 3 of the Control Order, 1966,Fthe Central Government is required to consider the variousaspects such as the cost of production of sugarcane; the returnto the grower from alternative crops and the general trend ofprices of agricultural commodities; the availability of sugar tothe consumer at a fair price; the price at which sugar producedfrom sugarcane is sold by producers of sugar; and the recoveryGof sugar from sugarcane. [Para 9.2][158-D-G]

1.2 As per Explanation, different prices may be fixed fordifferent areas or different qualities or varieties of sugarcane.As per sub-clause 2 of Clause 3, no person shall sell or agree tosell sugarcane to a producer of sugar or his agent, and no suchHproducer 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 providesfor an additional price to be paid for sugarcane purchased on orafter 01.10.1974. It provides that where a producer of sugar orhis agent purchases sugarcane, from a sugarcane grower duringeach sugar year, he shall, in addition to the minimum sugarcaneprice fixed under Clause 3, pay to the sugarcane grower anadditional price, if found due in accordance with the provisions ofthe Second Schedule annexed to the Control Order, 1966.[Para 9.3][158-H; 159-A-C]

1.3 Clause 5A was inserted in the year 1974 on the basisof the recommendations made by the Bhargava Commission. Theadditional price is fixed/determined under Clause 5A at the endof the season and as per Second Schedule to the Control Order,1966. Therefore, at the time when the additional purchase priceis determined/fixed under Clause 5A, the accounts are settledand the particulars are provided by the concerned cooperativesociety what will be the expenditure; what can be the profit etc.So far as the SMP determined under Clause 3 of the ControlOrder, 1966 by the Central Government is concerned, it is at thebeginning of the season. Therefore, the difference of amountbetween the SMP determined under Clause 3 and the SAP/additional purchase price determined under Clause 5A has anelement of profit and/or one of the components would be theprofit. Therefore, to the extent of the component of profit whichwill be a part of the final determination of SAP and/or the finalprice/additional purchase price fixed under Clause 5A wouldcertainly be and/or said to be an appropriation of profit. However,at the same time, the entire/whole amount of difference betweenthe SMP and the SAP per se cannot be said to be an appropriationof profit. Only that part/component of profit, while determiningthe final price worked out/SAP/additional purchase price wouldbe and/or can be said to be an appropriation of profit and for thatan exercise is to be done by the assessing officer by calling uponthe assessee to produce the statement of accounts, balance sheetand the material supplied to the State Government for the purposeof deciding/fixing the final price/additional purchase price/SAPunder Clause 5A of the Control Order, 1966. Merely because AB

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Athe higher price is paid to both, members and non-members, quathe members, still the question would remain with respect to thedistribution of profit/sharing of the profit. [Para 9.4][160-E-H;161-A]

3. The assessing officer will have to take into account theBmanner in which the business works, the modalities and mannerin which SAP/additional purchase price/final price are decidedand to determine what amount would form part of the profit andafter undertaking such an exercise whatever is the profitcomponent is to be considered as sharing of profit/distribution ofprofit and the rest of the amount is to be considered as deductibleCas expenditure. The question of law is answered accordingly,partly in favour of the department and partly in favour of theassessee. The impugned orders passed by the High Court, ITAT,CIT(A) as well as the assessing officers are hereby quashed andset aside and the matters are remitted to the respective assessingDofficers. [Paras 9.5 and 10][162-B-D]

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8890of 2012.

From the Judgment and Order dated 29.04.2009 of the High Courtof Judicature at Bombay in Income Tax Appeal (LOD) No. 1556 ofE2007.

WITH

Civil Appeal Nos.2485, 2484, 2482, 2483, 2486, 2487 of 2019,4801 of 2014, 8891 of 2012, 4549 of 2013, 302 of 2013.

Arijit Prasad, Rupesh Kumar, S. A. Haseeb, T. M. Singh, PraveshFThakur, Mrs. Anil Katiyar Advs. for the Appellant.

P. Chidambran, Shekhar Naphade, Sr. Advs., Chinmay Khaladkar,Ms. Neha Sharma, Ms. S. Lakshmi, Abhikalp Singh, B. K. Pal, Advs.for the Respondent.

The Judgment of the Court was delivered byGM. R. SHAH, J. 1. Leave granted in all the special leavepetitions.

2. As common question of law arises in this group of appeals, allthese appeals are being disposed of together, by this common judgmentand order.

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3. For the sake of convenience, Civil Appeal No. 8890 of 2012(Commissioner of Income Tax, Bombay vs. Tasgaon Taluka SahakariSikhar Karkhana Limited) is treated and considered as a lead case, andtherefore, the facts from the said appeal are narrated and considered.

3.1 The assessee (respondent herein) is a Co-operative Societyengaged 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 carryforward loss of Rs.40,00,339/- and unabsorbed depreciation ofRs.1,67,26,665/-. The return was processed under Section 143(1) (a) ofthe Income Tax Act, (hereinafter referred to as the ‘Act’), makingadjustment of Rs.2,02,242-/ relatable to Section 40A (3) of the Act.Thereafter the assessee filed a revised return wherein business losswas shown to the tune of Rs.3,32,42,426/-.

3.2 A notice under Section 143(2()/142(1) of the Act was issuedto the assessee. The assessee was having manufacturing activities ofwhite sugar. It had shown the income from business of manufacturingsugar, petrol pump station and also interest under the head “income fromother sources”.

3.3 After scrutiny of final accounts details along with return ofincome and details furnished during the course of assessment proceedings,an issue arose with respect to disallowance under Section 37(1) of theAct for excessive and unreasonable cane purchase price paid to themembers of the sugarcane.

3.4 It was noticed that during the year under consideration, theassessee had crushed 189736.220 metric tones sugarcane. The assesseehad 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 thebalance amount was paid later on, as per contracted price increase ofsugarcane on contract basis and as per Mantri Committee Advice incase of purchase of sugarcane from members and others. It has foundas under:

Particulars Quantity in MT Rate payable Rate paid (Rs.) Sugar Season 96-8,307.520 537.700 875.000 97 from members A

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From non-1,652.653 537.700 875.000 members Total 9,960.173 BSugar Season 97-129,108.966 537.700 875.000 98 from members From non-50,667.081 537.700 875.000 members CTotal 179,776.047

3.5 It was noticed that the production of sugar was covered bythe Essential Commodities Act, 1955 and the Government had issuedDthe Sugar Cane (Control) Order, 1966 (hereinafter referred to as the‘Control Order, 1966’), which deals with all aspects of production ofsugarcane and sale thereof including the price to be paid to the canegrowers. It was noticed that Clause 3 of the Control Order, 1966authorises Government to fix minimum cane price. It was also noticedthat in addition to this, additional cane price is also payable as per ClauseE5A of the Control Order, 1966.

3.6 It was noticed that in the case of the assessee, the price paidby the assessee to the sugarcane growers, most of those are its members,was in excess than what was payable as per the above Order andaccordingly the assessee was asked to furnish details of payments madeFfor the purchase of sugarcane and also payment made later on. Theassessee was also asked to explain whether the payment made later onis made at the request of the assessee or not.

3.7 It appears that the assessee furnished details of payment made,wherein it was found that the price paid for purchase of sugarcane atGthe rate of Rs.875/- PMT for sugarcane seasons 1996-97 and 1997-98.It was further stated that the cane price payable as per Clause 3 andClause 5A of the Control Order, 1966, comes to Rs.537.70 for sugarcaneseason 1996-97 and Rs.646.50 for sugarcane season 1997-98. Therefore,the assessee was given an opportunity to explain why price paid by it tomembers/non-members for purchase of sugarcane, in excess of whatH

was payable as per Clause 3 and Clause 5A of the Control Order, 1966,be not held as excessive.

3.8 In response thereto, the assessee filed written submissions. Itclaimed that the payment has been made as per the rate fixed byCommissionerate of Sugar, Maharashtra State, Pune, and the same is asper guidelines given by the Mantri Committee. With regard to the purchasemade from non-members and members, it was the case of the assesseethat payment has been made as per price agreed to at the time ofpurchase. It was submitted that a contract for the purchase of sugarcanehas been entered into at the time of start of sugarcane and since theprice is agreed at the time of purchase itself, the same is required to beallowed as deduction. It was, therefore, claimed that no disallowancebe made either under Section 40A (2) of the Act or otherwise.

4. The Assessing Officer did not agree with the submissions onbehalf of the assessee. The ultimate conclusion of the A.O. was thatthe difference between the price paid as per Clause 3 of the ControlOrder, 1966, determined by the Central Government, and the pricedetermined by the State Government under Clause 5A of the ControlOrder, 1966 (and consequently paid by the assessee to the cane growers)can be said to be a distribution of profit, as in the price determinationunder Clause 5A of the Control Order, 1966, there is an element of profitand therefore the price paid to the cane growers determined by theState Government is excessive and therefore it is not deductible asexpenditure, and is required to be included in the income of the assessee.

4.1 While holding so, the Assessing Officer considered andobserved as under:

“…The Sugar cane control order, 1966, provides for the price tobe paid to the cane growers. The initial price which is fixed as perclause 3 of this order takes into account the following facts.

a) The cost of production of sugarcane.

b) The return to the growers, alternative crops and general treadof process 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 byproducer of sugar.

e) The recovery of sugar from sugarcane.

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In addition to this, additional cane price is also payable to thegrowers of sugar cane as per clause 5A. This clause take intoaccount the profitability of actually on the basis of price paid togrower of sugarcane as per clause 3 of the Control order. As perthis Clause, the profit earned by the factory is shared by growerof sugarcane and producer of sugar. The prices under clause 3are fixed by Central Govt. the total price payable to grower ofsugarcane will be different on the basis of profitability of eachunits. In the State of Maharashtra, since 90% of sugar producingfactories are in co.op sector, being aided by Govt., the Govt. hasalso appointed a committee known as Mantri Committee for thepurpose of fixing state advisory Price of sugarcane. As per this,the initial price to be paid to the grower of sugarcane is fixed onthe basis of price fixed by central Govt. as per clause 3 of theControl order. However, final price is fixed on the basis ofprofitability of each units and in the State of Maharashtra, entireprofit is distributed among growers of sugarcane. TheCommissionerate of Sugar Fixes the final prices accordingly, this,however, is done at the specific request of the assessee.

It is worthwhile to mention here that the society sends proposalsto the Commissioner of Sugar for fixation of final cane payment.If there is higher profit available society proposes for higherpayments. If available profit is less. Then proposed payment isaccordingly less. This makes it clear that final payment of caneprice includes profit of the society which gets distributed amongthe members in the form of additional cane price. The argumentsof the society that regarding state advised price, it is mandatoryfor them to follow the same as correct to a limited extent whichmeans that for the society it is must to pay initial advance’ pricewhich is fixed by the Commissioner of Sugar irrespective of actualprofits. However, after the end of the season, it is the society“who sends the statement of surplus to the Commissioner of Sugarin which cost of the cane is taken on the basis of initial advanceprice and remaining surplus is proposed to be distributed on thebasis of total cane quantity purchases in the season. On beingproposed by society, the Commissioner of Sugar gives consent toit and, therefore, the submission is not correct because it is thesociety who propose for such additional cane purchase price byway of appropriation of profits…”

4.2 The Assessing Officer also did not agree with the submissionon behalf of the assessee that the minimum cane price notified by theCentral Government is minimum and not actual cost and therefore anypayment in excess of the minimum price should not be treated as anapplication of income by observing that the Statutory Minimum Price(hereinafter referred to as the ‘SMP’) is further increased by additionalprice on the basis of actual yield and if such adjusted price is more thaninitial advance price only such adjusted price is considered as allowablededuction instead of initial advance price. The Assessing Officer alsonoted that the additional cane price is calculated after the end of theaccounting year and it represents the entire surplus or income earned bythe sugar cooperative society in the whole year and it is the surplusprofit of income which is distributed and, therefore, it cannot be treatedas a legitimate deductible expenditure. Consequently, the AssessingOfficer held that the price paid by the assessee as per Clause 3 & 5A ofthe Control Order, 1966 is the fair price and therefore anything paid tothe members as well as non-members above the price determined andpaid by the assessee as per Clause 3 & 5A of the Control Order, 1966will be unreasonable and excess price to its members in the form ofadditional cane purchase price and therefore such excess payments arenot allowed under Section 37 of the Act. The chart of the calculation isas under:

Particulars Quantity Price SMP + 5A Difference Addition paid per (excluding MT harvesting and transport) Season 96-8307.520 875.000 537.700 337.300 2,802,126.00 97 Members Season 97-129,108.966 875.000 646.500 228.500 29,501,399.00 98 Members 1,37,416.486 32,303,,525.00

4.3 Alternatively, the Assessing Officer also held that the excesscane price paid to the cane growers over the SMP is disallowable as per A

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ASection 40A(2)(a) of the Act by observing that purchase price paid isexcessive and unreasonable.

4.4 Accordingly, the Assessing Officer finalised the return andmaking additions of the amount paid by the society to its members/non-members above the SMP price/price determined under Clauses 3 & 5ABof the Control Order, 1966, as income.

5. On an appeal, the learned Commissioner of Income Tax(Appeals), relying upon and considering the decision of a Special Bench,Mumbai ITAT in the case of Manjara Shetkari Sakhar KarkhanaLimited dated 19.08.2004 allowed the appeal preferred by the assesseeCand held that the price actually paid for the procurement of the sugarcaneis to be allowed as business expenditure. The learned CIT(A) alsoobserved and held that the excess payment of cane price as fixed by theState Government (SAP) over and above SMP for sugarcane to membersand 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 assertingDthe price. The CIT(A) observed that just because profit is one of thecomponent in asserting the price, it cannot be said that profit is separatelydistributed in the guise of additional price. The learned CIT(A) observedthat the amount paid by the assessee – cooperative society to thesugarcane growers is considered for the procurement of the sugarcaneEand 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 learnedCIT(A), which has been further confirmed by the High Court, by theimpugned judgment and order. By the impugned judgment and order,Fthe High Court has dismissed the appeal preferred by the department byobserving that the question is covered by the judgment of the High Courtin the case of Commissioner of Income Tax vs. Manjara ShetkariSahakari Sakhar Karkhana Limited, reported in (2008) 301 I.T.R.191 (Bom.). Hence, the present appeals by the department.

6.1 In some of the cases, some of the assesses – societies seemto have paid the cane purchase price to the members/non-members evenin excess/above the price determined under Clauses 3 & 5A of theControl Order, 1966. Therefore, the question which is posed forconsideration before this Court is, G

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(i) Whether any amount of sugarcane purchase price paid by theassessee-society to its members/non-members above the SMP determinedunder Clause 3 of the Control Order, 1966, may be paid as per the pricedetermined by the State Government under Clause 5A of the ControlOrder, 1966, can be said to be the sharing of profit and therefore is to beincluded in the return of income?; and

(ii) Whether any amount of sugarcane purchase price paid by thesociety to its members/non-members above/beyond the price evendetermined as per Clauses 3 & 5A of the Control Order, 1966, andwhich is found to be unreasonable and in excess of the fair marketvalue, can be said to be the sharing of the profit and is required to beincluded in the total income of the assessee?

7. Shri Arijit Prasad, learned counsel appearing on behalf of thedepartment has vehemently submitted that in the facts and circumstancesof the case, as such, the Assessing Officer was justified in treating andconsidering the difference between the SMP, determined under Clause3 of the Control Order, 1966, and the SAP determined by the StateGovernment under Clause 5A of the Control Order, 1966 as sharing ofprofit, and therefore, the same was rightly ordered to be included in theincome of the assessee.

7.1 It is vehemently submitted by the learned counsel appearingon behalf of the department that cogent reasons have been given by theassessing officer to treat the aforesaid difference as sharing of profit,after detailed analysis of the manner and method in which the sugarcanepurchase price is determined under Clauses 3 & 5A of the Control Order,1966.

7.2 It is vehemently submitted by the learned counsel appearingon behalf of the department that there are different considerations/criterias to be applied while determining the sugarcane purchase priceat the stage of Clause 3 and at the stage of Clause 5A. It is submittedthat even the stages are also different while determining the sugarcanepurchase price at the stage of Clause 3 and determined at the stage ofClause 5A.

7.3 It is vehemently submitted by the learned counsel appearingon behalf of the department that while determining the sugarcanepurchase price under Clause 5A of the Control Order, 1966, firstly, it isat the conclusion of the financial year and when the accounts are settled, A

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Aand secondly, there is an element of profit. It is submitted that one of thecomponents while dealing with the sugarcane purchase price under Clause5A is the profit, and whatever is paid to the cane growers under Clause5A is therefore sharing of profit.

7.4 It is further submitted by the learned counsel appearing onBbehalf of the department that how and in what manner the sugarcanepurchase price is determined under Clause 5A has been considered bythis Court in detail in the case of Maharashtra Rajya Sahkari SakkarKarkhana Sangh Limited vs. State of Maharashtra, reported in 1995Supp. (3) SCC 475. It is vehemently submitted by the learned counselthat as observed by this Court in the aforesaid decision, the additionalCprice determined under Clause 5A is at the end of the season. It issubmitted that as observed, the Bhargava Commission had recommendedpayment of additional price at the end of the season on 50:50 profitsharing basis between the growers and factories to be worked out inaccordance with Schedule II to the Control Order, 1966. It is submittedDthat the additional purchase price determined under Clause 5A comprisesof not only cost of cultivation but profit as well. It is submitted that asobserved by this Court in the case of Maharashtra Rajya SahkariSakkar Karkhana Sangh Limited (supra), the price (additional pricedetermined under Clause 5A) thus being paid on recovery of cane andprofits made from sale of sugar is not minimum but optimum price whichEis paid to a cane grower. It is submitted that the entire price structure ofcane is founded on two basic factors, one, the recovery percentage andother the incentive for sharing profit arrived at by working out receiptminus expenditure. It is submitted that therefore the difference betweenthe SMP and the SAP is nothing but sharing of profit, and therefore, is Fliable to be included in the return of income under Section 37 of the Act.

7.5 It is further submitted by the learned counsel appearing onbehalf of the department that in many cases it is found that the assessee-society has paid the sugarcane purchase price to its members/non-members is excessive and much more than the market price and/orGeven beyond the SAP. It is submitted therefore that even consideringSection 40A (2) of the Act, such excessive and unreasonable amountpaid is not allowable to be deductible. It is submitted therefore that theHigh Court has materially erred in holding that the price actually paid bythe society for the procurement of the sugarcane is to be allowed asbusiness expenditure.H

7.6 It is further submitted by the learned counsel appearing onbehalf of the department that in view of the above facts andcircumstances, the High Court was not justified in holding that the excessamount of expenditure on sugarcane purchase price was a charge ofprofit, i.e., diversion of profit and appropriation of profit.

7.7 Making the above submissions, it is prayed to allow the presentappeals and set aside the impugned judgments and orders passed by theHigh Court and consequently the orders passed by the ITAT as well asCIT(As) and to restore the respective orders passed by the assessingofficers.

8. Shri P. Chidambaram, learned senior advocate, Shri ShekharNaphade, learned senior advocate have appeared on behalf of respectiveassesses.

8.1 Learned counsel appearing on behalf of the respectiveassesses have vehemently submitted that as rightly observed and heldby the High Court, merely because there is an element and/or one of thecomponents while determining the SAP under Clause 5A of the ControlOrder, 1966 is profit, it cannot be said that there is a sharing of profit.

8.2 It is vehemently submitted by the learned counsel appearingon behalf of the respective assesses that under the Control Order, 1966,a sugarcane society has no other alternative but to pay to the cane growersthe sugarcane purchase price as determined by the Central Governmentand the State Government, as the case may be. It is submitted that evenif the society would be incurring the loss, the society has to pay theadditional purchase price (final price) determined by the StateGovernment. It is submitted therefore that whatever is paid by theassessee-society to the cane growers towards sugarcane purchase priceis an allowable expenditure which is required to be deducted.

8.3 Learned counsel appearing on behalf of the respectiveassesses have also relied upon Section 9 of the Sale of Goods Act. It isfurther submitted by the learned counsel that as such the higher/additionalprice is paid by the society to both members and non-members andtherefore anything paid above or more than the SMP per se cannot besaid to be a sharing of profit.

8.4 It is further submitted by the learned counsel that even theState Government is also 10% share holding and nothing is paid to the A

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AState being a shareholder. It is further submitted by the learned counselthat even as per the Bye-laws, the society has to pay the differencebetween the SMP and the SAP. It is submitted therefore the differencebetween the SMP and the SAP, by no stretch of imagination, can be saidto be a sharing of profit and as such whatever is paid while purchasingthe sugarcane is deductible as expenditure incurred.B

8.5 Making the above submissions., it is prayed to dismiss thepresent appeals preferred by the department.

9. We have heard learned counsel appearing on behalf of therespective parties at great length.

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9.1 A short question which is posed before this Court forconsideration is, whether the sugarcane purchase price paid to the canegrowers by the assessee-society more than the SMP and is determinedunder Clause 5A of the Control Order, 1966, can be said to be the sharingof profit/appropriation of profit or is allowable as expenditure?

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9.2 While considering the aforesaid issue/question, the mechanismfor determining the SMP and SAP under the Control Order, 1966 isrequired to be referred to and considered. As per Clause 3 of the ControlOrder, 1966, the Central Government may, after consultation with suchauthorities, bodies or associations as it may deem fit, by notification inEthe official Gazette, from time to time, fix the minimum price of sugarcaneto be paid by producers of sugar or their agents for the sugarcanepurchased by them. While fixing/determining the SMP under Clause 3of the Control Order, 1966, the Central Government is required to considerthe following aspects:

“(a) the cost of production of sugarcane;F(b) the return to the grower from alternative crops and the generaltrend 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 byGproducers of sugar; and (e) the recovery of sugar from sugarcane.”

9.3 As per Explanation, different prices may be fixed for differentareas or different qualities or varieties of sugarcane. As per sub-clause H

2 of Clause 3, no person shall sell or agree to sell sugarcane to a producerof sugar or his agent, and no such producer or agent shall purchase oragree 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 year1974 provides for an additional price to be paid for sugarcane purchasedon or after 01.10.1974. It provides that where a producer of sugar or hisagent purchases sugarcane, from a sugarcane grower during each sugaryear, he shall, in addition to the minimum sugarcane price fixed underClause 3, pay to the sugarcane grower an additional price, if found duein accordance with the provisions of the Second Schedule annexed tothe Control Order, 1966. How the additional price under Clause 5A ofthe Control Order, 1966 is to be determined is provided in the SecondSchedule, which reads as under:

“SECOND SCHEDULE

[See Clause 5-A]

The amount to be paid on account of additional price (per quintalof sugarcane) under Clause 5-A by a producer of sugar shall becomputed in accordance with the following formula, namely :

R - L + A - B

X = ———————

2C

Explanation— In this formula.

(1) ‘X’ is the additional price in rupees per quintal of sugarcanepayable by the producer of sugar to the sugarcane grower.

(2) ‘R’ is the amount in rupees of sugar produced during the sugaryear excluding the excise duty paid or payable to the factory bythe purchaser.

(3) ‘L’ is the value in rupees of sugar produced during the sugaryear, as calculated on the basis of the unit cost per quintal ex-factory, exclusive of excise duty, determined with reference tothe minimum sugarcane price fixed under Clause 3, the finalworking results of the year and the Cost Schedule and returnrecommended by the such authority as the Central Governmentmay, specify from time to time.

(4) ‘A’ is the amount found payable for the previous year but notactually paid [vide sub-clause (9)].

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A(5) ‘B’ is the excess or shortfall in realisations from actual salesof the unsold stocks of sugar produced during the sugar year, ason 30th day of September [vide item 7(ii) below] which is carriedforward and adjusted in the sale realisations of the following year.

(6) ‘C’ is the quantity in quintals of sugarcane purchased by theBproducer of sugar during the sugar year.

(7) The amount ‘R’ referred to in Explanation 2 shall be computedas under, namely:—

(i) the actual amount realised during the sugar year; and

(ii) the estimated value of the unsold stocks of sugar held atthe end of 30th September, calculated in regard to free sugarstocks at the average rate of sales, namely, during thefortnight 16th to 30th September and in regard to levy sugarstocks at the notified levy prices as on the 30th September.

C

DExplanation.—In this Schedules “Sugar” means any form ofsugar containing more than ninety per cent sucrose.”

9.4 At this stage, it is required to be noted that Clause 5A wasinserted in the year 1974 on the basis of the recommendations made bythe Bhargava Commission. As observed by this Court in the case ofMaharashtra Rajya Sahkari Sakkar Karkhana Sangh LimitedE(supra), the Bhargava Commission had recommended payment ofadditional price at the end of the season on 50:50 profit sharing basisbetween growers and factories, to be worked out in accordance withSecond Schedule to the Control Order, 1966. It is also required to benoted that the additional price is fixed/determined under Clause 5A atFthe end of the season and as per Second Schedule to the Control Order,1966. Therefore, at the time when the additional purchase price isdetermined/fixed under Clause 5A, the accounts are settled and theparticulars are provided by the concerned cooperative society what willbe the expenditure; what can be the profit etc. It is required to be notedthat so far as the SMP determined under Clause 3 of the Control Order,G1966 by the Central Government is concerned, it is at the beginning ofthe season and while determining/fixing the SMP by the CentralGovernment, the afore-stated things are required to be considered.Therefore, the difference of amount between the SMP determined underClause 3 and the SAP/additional purchase price determined under Clause H

H

C.I.T. BOMBAY v. TASGAON TALUKA S.S.K. LTD.[M. R. SHAH, J.]

5A has an element of profit and/or one of the components would be theprofit. The entire scheme/mechanism while determining the additionalpurchase price under Clause 5A has been dealt with and considered bythis Court in detail in the case of Maharashtra Rajya Sahkari SakkarKarkhana Sangh Limited (supra). In the said decision, it is observedthat the additional purchase price/SAP is paid at the end of the season;the Bhargava Commission had recommended payment of additional priceat the end of season on 50:50 profit sharing basis between the growersand factories to be worked out in accordance with Second Schedule tothe Control Order, 1966; that the additional purchase price comprises ofnot only the cost of cultivation, but profit as well; the price thus beingpaid on recovery of canes and profits made from sale of sugar is notminimum but optimum price which is paid to a cane grower. Theadditional cane price or additional State fixed price are paid as a matterof incentive. The entire price structure of cane is founded on two basicfactors, one, the recovery percentage and other the incentive for sharingprofit arrived at by working out receipt minus expenditure. Therefore,to the extent of the component of profit which will be a part of the finaldetermination of SAP and/or the final price/additional purchase pricefixed under Clause 5A would certainly be and/or said to be anappropriation of profit. However, at the same time, the entire/wholeamount of difference between the SMP and the SAP per se cannot besaid to be an appropriation of profit. As observed hereinabove, only thatpart/component of profit, while determining the final price worked out/SAP/additional purchase price would be and/or can be said to be anappropriation of profit and for that an exercise is to be done by theassessing officer by calling upon the assessee to produce the statementof accounts, balance sheet and the material supplied to the StateGovernment for the purpose of deciding/fixing the final price/additionalpurchase price/SAP under Clause 5A of the Control Order, 1966. Merelybecause the higher price is paid to both, members and non-members,qua the members, still the question would remain with respect to thedistribution of profit/sharing of the profit. So far as the non-membersare concerned, the same can be dealt with and/or considered applyingSection 40A (2) of the Act, i.e., the assessing officer on the material onrecord has to determine whether the amount paid is excessive orunreasonable or not. However, this is not the subject matter in the presentappeals. We are restricting the present appeals qua the sugarcanepurchase price paid by the society to the cane growers above the SMP

A

B

C

D

E

F

G

H

Adetermined under Clause 3 and the difference of sugarcane purchaseprice between the price determined under Clause 3 and Clause 5A ofthe Control Order, 1966.

9.5 Therefore, the assessing officer will have to take into accountthe manner in which the business works, the modalities and manner inBwhich SAP/additional purchase price/final price are decided and todetermine what amount would form part of the profit and afterundertaking such an exercise whatever is the profit component is to beconsidered as sharing of profit/distribution of profit and the rest of theamount is to be considered as deductible as expenditure.

C10. In view of the above and for the reasons stated above, thequestion of law is answered accordingly, partly in favour of the departmentand partly in favour of the assessee. The impugned orders passed bythe High Court, ITAT, CIT(A) as well as the assessing officers arehereby quashed and set aside and the matters are remitted to therespective assessing officers to undertake the exercise as statedDhereinabove and after giving an opportunity to the respective assesses.

11. All these appeals stand disposed of in terms of the above.

E

Devika Gujral

Appeals disposed of.

F

G

H