I-T - Entire sum of additional sugar price paid over and above the minimum price paid to sugarcane growers is not to be treated as profit: SC Larger Bench
By TIOL News Service
NEW DELHI, MAR 05, 2019: THE issue is - Whether the entire sum of additional sugar price paid over and above the minimum price paid to sugarcane growers is to be treated as profit. NO is the answer.
Facts of the case
THE appeals are consolidated because there was a common question of law. The case of assessee, Tasgaon is considered as leading case to dispose of the all the appeals together. Such an assessee is a co-operative society engaged in the business of production of sugarcane and sale. The assessee had paid to the cane growers the final cane price as per the State Advised Price (SAP) fixed by the State Government. The assessee filed return and declared its income as nil. The assessee also computed its carry forward loss and unabsorbed depreciation. The return was processed u/s 143(1) (a) making adjustment u/s 40A (3). Thereafter the assessee filed a revised return declaring its business loss and income from business of manufacturing sugar, petrol pump station and also interest under the head 'income from other sources'. Again, notice u/s 143(2) was issued.
The AO, during the assessment, noted that since the SAP fixed by the State Government is based on the price recommended by the assessees after finalisation of accounts, the differential amount between SAP and S.M.P. under the Control Order, 1966, would constitute appropriation of profits and not expenditure u/s 37. However, the assessee argued that appropriation would arise only after the profits are determined and profits can be determined only after all the expenses incurred for the business are deducted from the gross income. The AO rejected such pleas and finalised the return by making additions of the amount paid by the assessee to its members/non-members above the SMP price/price. On this issue an appeal was filed before the jurisdictional High Court, wherein the High Court has passed the order against the Revenue.
On hearing the appeals, the Apex Court held that,
++ the issue for consideration is, whether the sugarcane purchase price paid to the cane growers by the assessee more than the SMP can be said to be the appropriation of profit or is allowable as expenditure? While considering the issue, the mechanism for determining the SMP and SAP under the Control Order, 1966 is required to be referred to and considered. As per Clause 3, 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. 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;
++ clause 5A was inserted on the basis of the recommendations made by the Bhargava Commission. It is also required to be noted that the additional price is determined under Clause 5A at the end of the season and as per Second Schedule of the clause 5A. Therefore, the difference of amount between the SMP determined under Clause 3 and the SAP determined under Clause 5A has an element of profit or one of the components would be the profit. The entire scheme while determining the additional purchase price under clause 5A was considered by the Apex Court in Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited. In that decision, it was observed that the SAP is paid at the end of the season. The additional purchase price comprises of not only the cost of cultivation, but profit as well and the price thus being paid on recovery of canes and profits made from sale of sugar is not minimum but optimum price which is paid to a cane grower. The additional cane price or additional State fixed price are paid as a matter of incentive;
++the entire price structure of cane is founded on two basic factors, one, the recovery percentage and other the incentive for sharing profit arrived at by working out receipt minus expenditure. Therefore, to the extent of the component of profit which will be a part of the final determination of SAP and the final additional purchase price fixed under Clause 5A would certainly be an appropriation of profit. However, at the same time, the entire amount of difference between the SMP and the SAP per se cannot be said to be an appropriation of profit. Only that component of profit, while determining the final price worked out can be said to be an appropriation of profit and for that an exercise is to be done by the AO by calling upon the assessee to produce necessary materials for the purpose of deciding/fixing the final price/additional purchase price/SAP under Clause 5A. 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. So far as the non-members are concerned, the same can be dealt with by applying section 40A (2). However, this is not the subject matter in the present appeals. The present appeals, is restricted, 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. Therefore, the 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. Thus, the question of law is answered partly in favour of the department and partly in favour of the assessee.
(See 2019-TIOL-102-SC-IT-LB)
