Particulars,"Quantity in
MT",Rate payable,"R a t e paid
(Rs.)",,
S uga r Season
96-97 from
members","8,307.520",537.700,875.000,,
F r o m non-
members","1,652.653",537.700,875.000,,
Total,"9,960.173",,,,
S uga r Season
97-98 from
members","129,108.966",537.700,875.000,,
F r o m non-
members","50,667.081",537.700,875.000,,
Total,"179,776.047",,,,
Particulars,Quantity,"Price
paid
per MT","S M P +
5A
(excluding
harvesting
and
transport)",Difference,Addition
Season
96-97
Members",8307.520,875.000,537.700,337.300,"2,802,126.00
Season
97-98
Members","129,108.966",875.000,646.500,228.500,"29,501,399.00
,"1,37,416.486",,,,"32,303,,525.00
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 Karkhana Limited dated 19.08.2004 allowed the appeal preferred by the assessee and held that the price actually,,,,,
paid for the procurement of the sugarcane is to be allowed as business expenditure. The learned CIT(A) also observed and held that the excess,,,,,
payment of cane price as fixed by the State Government (SAP) over and above SMP for sugarcane to members and 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 asserting the price. The CIT(A) observed",,,,,
that just because profit is one of the component in asserting the price, it cannot be said that profit is separately distributed in the guise of additional",,,,,
price. The learned CIT(A) observed that the amount paid by the assessee â€" cooperative society to the sugarcane growers is considered for the,,,,,
procurement of the sugarcane and 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 learned CIT(A), which has been further confirmed by the High Court, by the impugned",,,,,
judgment and order. By the impugned judgment and order, the High Court has dismissed the appeal preferred by the department by observing that the",,,,,
question is covered by the judgment of the High Court in the case of Commissioner of Income Tax vs. Manjara Shetkari Sahakari 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 â€" societies seem to have paid the cane purchase price to the members/non-members even in",,,,,
excess/above the price determined under Clauses 3 & 5A of the Control Order, 1966. Therefore, the question which is posed for consideration before",,,,,
this Court is,",,,,,
(i) Whether any amount of sugarcane purchase price paid by the assessee-society to its members/non-members above the SMP determined under,,,,,
Clause 3 of the Control Order, 1966, may be paid as per the price determined by the State Government under Clause 5A of the Control Order, 1966,",,,,,
can be said to be the sharing of profit and therefore is to be included in the return of income?; and,,,,,
(ii) Whether any amount of sugarcane purchase price paid by the society to its members/non-members above/beyond the price even determined as,,,,,
per Clauses 3 & 5A of the Control Order, 1966, and which is found to be unreasonable and in excess of the fair market value, can be said to be the",,,,,
sharing of the profit and is required to be included in the total income of the assessee?,,,,,
7. Shri Arijit Prasad, learned counsel appearing on behalf of the department has vehemently submitted that in the facts and circumstances of the case,",,,,,
as such, the Assessing Officer was justified in treating and considering the difference between the SMP, determined under Clause 3 of the Control",,,,,
Order, 1966, and the SAP determined by the State Government under Clause 5A of the Control Order, 1966 as sharing of profit, and therefore, the",,,,,
same was rightly ordered to be included in the income of the assessee.,,,,,
7.1 It is vehemently submitted by the learned counsel appearing on behalf of the department that cogent reasons have been given by the assessing,,,,,
officer to treat the aforesaid difference as sharing of profit, after detailed analysis of the manner and method in which the sugarcane purchase price is",,,,,
determined under Clauses 3 & 5A of the Control Order, 1966.",,,,,
7.2 It is vehemently submitted by the learned counsel appearing on behalf of the department that there are different considerations/criterias to be,,,,,
applied while determining the sugarcane purchase price at the stage of Clause 3 and at the stage of Clause 5A. It is submitted that even the stages are,,,,,
also different while determining the sugarcane purchase price at the stage of Clause 3 and determined at the stage of Clause 5A.,,,,,
7.3 It is vehemently submitted by the learned counsel appearing on behalf of the department that while determining the sugarcane purchase price,,,,,
under Clause 5A of the Control Order, 1966, firstly, it is at the conclusion of the financial year and when the accounts are settled, and secondly, there",,,,,
is an element of profit. It is submitted that one of the components while dealing with the sugarcane purchase price under Clause 5A is the profit, and",,,,,
whatever is paid to the cane growers under Clause 5A is therefore sharing of profit.,,,,,
7.4 It is further submitted by the learned counsel appearing on behalf of the department that how and in what manner the sugarcane purchase price is,,,,,
determined under Clause 5A has been considered by this Court in detail in the case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited,,,,,
vs. State of Maharashtra, reported in 1995 Supp. (3) SCC 475. It is vehemently submitted by the learned counsel that as observed by this Court in the",,,,,
aforesaid decision, the additional price determined under Clause 5A is at the end of the season. It is submitted that as observed, the Bhargava",,,,,
Commission had recommended payment of additional price at the end of the season on 50:50 profit sharing basis between the growers and factories to,,,,,
be worked out in accordance with Schedule II to the Control Order, 1966. It is submitted that the additional purchase price determined under Clause",,,,,
5A comprises of not only cost of cultivation but profit as well. It is submitted that as observed by this Court in the case of Maharashtra Rajya Sahkari,,,,,
Sakkar Karkhana Sangh Limited (supra), the price (additional price determined under Clause 5A) thus being paid on recovery of cane and profits",,,,,
made from sale of sugar is not minimum but optimum price which is paid to a cane grower. It is submitted that 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. It is submitted that therefore the difference between the SMP and the SAP is nothing but sharing of profit, and therefore, is liable 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 on behalf 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/or even beyond the SAP. It is,,,,,
submitted therefore that even considering Section 40A (2) of the Act, such excessive and unreasonable amount paid is not allowable to be deductible.",,,,,
It is submitted therefore that the High Court has materially erred in holding that the price actually paid by the society for the procurement of the,,,,,
sugarcane is to be allowed as business expenditure.,,,,,
7.6 It is further submitted by the learned counsel appearing on behalf of the department that in view of the above facts and circumstances, the High",,,,,
Court was not justified in holding that the excess amount of expenditure on sugarcane purchase price was a charge of profit, i.e., diversion of profit",,,,,
and appropriation of profit.,,,,,
7.7 Making the above submissions, it is prayed to allow the present appeals and set aside the impugned judgments and orders passed by the High",,,,,
Court and consequently the orders passed by the ITAT as well as CIT(As) and to restore the respective orders passed by the assessing officers.,,,,,
8. Shri P. Chidambaram, learned senior advocate, Shri Shekhar Naphade, learned senior advocate have appeared on behalf of respective assesses.",,,,,
8. 1Learned counsel appearing on behalf of the respective assesses have vehemently submitted that as rightly observed and held by,,,,,
the High Court, merely because there is an element and/or one of the components while determining the SAP under Clause 5A of the Control Order,",,,,,
1966 is profit, it cannot be said that there is a sharing of profit.",,,,,
8.2 It is vehemently submitted by the learned counsel appearing on behalf of the respective assesses that under the Control Order, 1966, a sugarcane",,,,,
society has no other alternative but to pay to the cane growers the sugarcane purchase price as determined by the Central Government and the State,,,,,
Government, as the case may be. It is submitted that even if the society would be incurring the loss, the society has to pay the additional purchase",,,,,
price (final price) determined by the State Government. It is submitted therefore that whatever is paid by the assessee-society to the cane growers,,,,,
towards sugarcane purchase price is an allowable expenditure which is required to be deducted.,,,,,
8.3 Learned counsel appearing on behalf of the respective assesses have also relied upon Section 9 of the Sale of Goods Act. It is further submitted,,,,,
by the learned counsel that as such the higher/additional price is paid by the society to both members and non-members and therefore anything paid,,,,,
above or more than the SMP per se cannot be said to be a sharing of profit.,,,,,
8.4 It is further submitted by the learned counsel that even the State Government is also 10% share holding and nothing is paid to the State being a,,,,,
shareholder. It is further submitted by the learned counsel that even as per the Bye-laws, the society has to pay the difference between the SMP and",,,,,
the SAP. It is submitted therefore the difference between the SMP and the SAP, by no stretch of imagination, can be said to be a sharing of profit",,,,,
and as such whatever is paid while purchasing the sugarcane is deductible as expenditure incurred.,,,,,
8.5 Making the above submissions., it is prayed to dismiss the present appeals preferred by the department.",,,,,
9. We have heard learned counsel appearing on behalf of the respective parties at great length.,,,,,
9. 1 A short question which is posed before this Court for consideration is, whether the sugarcane purchase price paid to the cane growers by the",,,,,
assessee-society more than the SMP and is determined under Clause 5A of the Control Order, 1966, can be said to be the sharing of",,,,,
profit/appropriation of profit or is allowable as expenditure?,,,,,
9. 2 While considering the aforesaid issue/question, 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 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 following aspects:,,,,,
“(a) the cost of production of sugarcane;,,,,,
(b) the return to the grower from alternative crops and the general trend 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 by producers of sugar; and,,,,,
e the recovery of sugar from sugarcane.â€,,,,,
9.3 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.",,,,,
How the additional price under Clause 5A of the Control Order, 1966 is to be determined is provided in the Second Schedule, which reads as under:",,,,,
“SECOND SCHEDULE,,,,,
[See Clause 5-A],,,,,
The amount to be paid on account of additional price (per quintal of sugarcane) under Clause 5-A by a producer of sugar shall be computed in,,,,,
accordance with the following formula, namely :",,,,,
R - L + A - B,,,,,
X = ---------------,,,,,
2C,,,,,
Explanationâ€" In this formula.,,,,,
1 ‘X’ is the additional price in rupees per quintal of sugarcane payable by the producer of sugar to the sugarcane grower.,,,,,
2 ‘R’ is the amount in rupees of sugar produced during the sugar year excluding the excise duty paid or payable to the factory by the purchaser.,,,,,
3 ‘L’ is the value in rupees of sugar produced during the sugar year, as calculated on the basis of the unit cost per quintal ex-factory, exclusive",,,,,
of excise duty, determined with reference to the minimum sugarcane price fixed under Clause 3, the final working results of the year and the Cost",,,,,
Schedule and return recommended by the such authority as the Central Government may, specify from time to time.",,,,,
4 ‘A’ is the amount found payable for the previous year but not actually paid [vide sub-clause (9)].,,,,,
5 ‘B’ is the excess or shortfall in realisations from actual sales of the unsold stocks of sugar produced during the sugar year, as on 30th day of",,,,,
September [vide item 7(ii) below] which is carried forward and adjusted in the sale realisations of the following year.,,,,,
6 ‘C’ is the quantity in quintals of sugarcane purchased by the producer of sugar during the sugar year.,,,,,
7 The amount ‘R’ referred to in Explanation 2 shall be computed as under, namely:â€"",,,,,
i the actual amount realised during the sugar year; and,,,,,
ii the estimated value of the unsold stocks of sugar held at the end of 30th September, calculated in regard to free sugar stocks at the average rate of",,,,,
sales, namely, during the fortnight 16th to 30th September and in regard to levy sugar stocks at the notified levy prices as on the 30th September.",,,,,
Explanation.â€"In this Schedules “Sugar†means any form of sugar containing more than ninety per cent sucrose.â€,,,,,
9.4 At this stage, it is required to be noted that Clause 5A was inserted in the year 1974 on the basis of the recommendations made by the Bhargava",,,,,
Commission. As observed by this Court in the case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited (supra), the Bhargava",,,,,
Commission had recommended   payment of additional price at the end of the season on 50:50 profit sharing basis between growers and factories,",,,,,
to be worked out in accordance with Second Schedule to the Control Order, 1966. It is also required to be noted that 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. It is required to be noted that 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 and while determining/fixing the SMP by the Central",,,,,
Government, the afore-stated things are required to be considered. 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. The,,,,,
entire scheme/mechanism while determining the additional purchase price under Clause 5A has been dealt with and considered by this Court in detail,,,,,
in the case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited (supra). In the said decision, it is observed that the additional purchase",,,,,
price/SAP is paid at the end of the season; the Bhargava Commission had recommended payment of additional price at the end of season on 50:50,,,,,
profit sharing basis between the growers and factories to be worked out in accordance with Second Schedule to the Control Order, 1966; that the",,,,,
additional purchase price comprises of not only the cost of cultivation, but profit as well; 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/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. As observed hereinabove, 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. So far",,,,,
as the non-members are concerned, the same can be dealt with and/or considered applying Section 40A (2) of the Act, i.e., the assessing officer on",,,,,
the material on record has to determine whether the amount paid is excessive or unreasonable or not. However, this is not the subject matter in the",,,,,
present appeals. We are restricting the present appeals 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 of the,,,,,
Control Order, 1966.",,,,,
9.5 Therefore, 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.,,,,,
10. In view of the above and for the reasons stated above, 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 to undertake the exercise as stated hereinabove and after giving an,,,,,
opportunity to the respective assesses.,,,,,
11. All these appeals stand disposed of in terms of the above.,,,,,
