C.I.T. Bombay vs Tasgaon Taluka S.S.K. Ltd.

Income Tax Act, 1961: s.37(1) – Disallowance for excessive and unreasonable cane purchase price paid to the members/nonmembers of the sugarcane – Whether the sugarcane purchase price paid to the cane growers by the assessee-society more than the Statutory Minimum Price (SMP) and as determined under Clause 5A of the Control Order, 1966, can be said to be the sharing of profit/appropriation of profit – Held: The difference of amount between the SMP determined under Clause 3 and SAP/additional purchase price determined under Clause 5A has an element of profit and/or one of the components would be profit – However, at the same time, the entire/whole amount of difference between the SMP and the SAP per se cannot 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 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 – As regards the non-members, the same can be dealt with and/or considered applying s.40A(2) of the Act i.e. assessing officer on the material on record has to determine whether the amount paid is excessive or unreasonable or not – Sugar Cane (Control) Order, 1966 – Clause 3 and 5A, Schedule – Essential Commodities Act, 1955.

Sugar Cane (Control) Order, 1966: Clause 3 – Fixation of SMP – Determining factors – While fixing/determining the SMP under Clause 3 of the Control Order, 1966, the Central Government is required to consider the various aspects such as the cost of production of sugarcane; the return to the grower from alternative crops and the general trend of prices of agricultural commodities; the availability of sugar to the consumer at a fair price; the price at which 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 such authorities, bodies or associations as it may deem fit, by notification in the official Gazette, from time to time, fix the minimum price of sugarcane to be paid by producers of sugar or their agents for the sugarcane purchased by them. While fixing/determining the SMP under Clause 3 of the Control Order, 1966, the Central Government is required to consider the various aspects such as the cost of production of sugarcane; the return to the grower from alternative crops and the general trend of prices of agricultural commodities; the availability of sugar to the consumer at a fair price; the price at which sugar produced from sugarcane is sold by producers of sugar; and the recovery of sugar from sugarcane. [Para 9.2][158-D-G]

1.2 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 found due in accordance with the provisions of the 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 basis of the recommendations made by the Bhargava Commission. 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. 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. Therefore, the difference of amount between the SMP determined under Clause 3 and the SAP/additional purchase price determined under Clause 5A has an element of profit and/or one of the components would be the profit. Therefore, to the extent of the component of profit which will 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 cannot 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 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. [Para 9.4][160-E-H; 161-A]

3. 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. 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 well as the assessing officers are hereby quashed and set aside and the matters are remitted to the respective assessing officers. [Paras 9.5 and 10][162-B-D]