HIGH COURT OF BOMBAY

Commissioner of Income-tax

v.

Manjara Shetkari Sahakari Sakhar Karkhana Ltd.

F.I.REBELLO AND J.P.DEVADHAR, JJ.

IT APPEAL NOS. 394 TO 396, 418 AND 527 OF 2005, 247, 249 TO 252, 254, 255, 257, 260, 262 TO 265, 267, 277, 282 TO 289, 291 TO 299, 300, 305, 314, 317, 318, 325, 327 TO 329 AND 332 OF 2007

AUGUST 14, 2007

Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments - Assessment year 1992-93 - Whether provisions of section 40A(2) are applicable to a co-operative society - Held, No

Section 37(1) of the Income-tax Act, 1961 read with section 2(4) of the Maharashtra Co-operative societies Act, 1960 - Business expenditure - Allowability of - Assessment year 1992-93 - Assessee, a co-operative society, purchased sugarcane from members of society as well as from non members at State Advice Price (SAP) which was higher than statutory minimum price (SMP) fixed by Central Government - Revenue held that SAP fixed by State Government exceeded fair market value and, hence, liable to be disallowed - It also held that SAP was determined on basis of price recommended by assessee after finalisation of accounts and, therefore, differential amount between SAP and SMP being appropriation of profits and in nature of ‘bonus’ under section 2(4) of 1960 Act was liable to be disallowed - For same reason it also disallowed Khodki charges paid by assessee - Whether though under 1960 Act, assessee was bound to pay SMP fixed by Central Government, it was also bound to pay final cane price as per SAP fixed by State Government and, therefore, it could not be accused of paying to cane growers in excess of fair market price - Held, yes - Whether appropriation of profits would arise only after profits are determined - Held, yes - Whether since in instant case neither profits were determined nor there was any resolution passed in AGM to distribute profits in form of higher cane price/bonus, final cane price paid at rate fixed by State Government could not be said to be distribution of profits/bonus and consequently, no disallowance could be made in that behalf - Held, yes - Whether since Khodki charges were paid as per direction of Director of Sugar to cleanout farmer’s land and to compensate farmer for unevenly cut cane sugar at time of harvesting, said expenses were allowable - Held, yes

FACTS

The assessee, a co-operative society, was engaged in the manufacture of sugar by utilizing sugarcane as raw materials. The Assessing Officer noticed that the assessee had purchased sugarcane from members of the society as well as from non members at a price fixed by the State Government which was higher than the statutory minimum price (SMP) fixed by the Central Government. The Assessing Officer accordingly, determined the fair market value of the sugarcane and disallowed the amount which was found unreasonable or in excess of fair market value. According to the Assessing Officer excess cane sugar price paid by the assessee amounted to diversion of commercial profits earned by the assessee and hence not allowable. For the same reasons, the Assessing Officer disallowed the Khodki charges claimed by the assessee.

On appeal, the Commissioner (Appeals) held that section 40A(2) is not applicable to a co-operative society and, therefore, no disallowance of excess sugarcane rice could be made under section 40A(2)(a). However, he held that the excess payment of sugarcane price was in the nature of appropriation of profits and same would be bonus within meaning of section 2(4) of the 1960 Act, and such incentive bonus would not be allowable expenditure. For the same reasons, the Commissioner (Appeals) held that the khodki charges were also liable to be disallowed. On further appeal, the Special Bench of Tribunal held that section 40A(2) is not applicable to a co-operative society. It further held that the payments made to the cane growers at the rate fixed by the State Advise Price (SAP) could not be disallowed by treating the differential amount between SMP and SAP as appropriation of profits or bonus. Similarly, the Special Bench held that the expenses incurred by the assessee as Khodki charges could not be disallowed.

On appeal:

HELD

In view of the decision of the Bombay High Court in CIT v. Shivamrut Dood Uppadak Sahkari Sangh Maryadit (Appeal No. 62 of 1999) it was to be held in the instant case that the Tribunal was right in holding that provisions of section 40A(2) are not applicable to a co-operative society. (PARA 12)

In all these appeals, it was not in dispute that the share capital contributed by the State Government in the case of each assessee had not been fully repaid. It was also not in dispute that under the provisions of the 1960 Act and the bye laws made thereunder, the State Government is entitled to fix the SAP till the share capital contributed by the State Government is repaid fully., The State Government fixes the final cane price in public interest and it is in the nature of a direction issued by the State Government under section 79A of the 1960 Act which is binding on the assessee. Failure to comply with such a direction given by the State Government, inter alia may result in removal of the Managing Committee of the Society under section 78 of the 1960 Act. (PARA 17)

In the light of judgment of the Apex Court in the case of U.P. Co-operative Cane Unions Federation v. West U.P. Sugar Mills Association (2004) 5 SCC 430, it was evident that it was prerogative of the State Government to fix the final cane price in public interest and such a final price fixed by the State Government in the case of each of the assessee which was normally higher than the SMP fixed by the Central Government was binding on each of the assessees. (PARA 19)

The main argument of the revenue was that firstly the SAP fixed by the State Government exceeded the fair market value and, hence, liable to be disallowed. Secondly, the State Advise Price (SAP) was determined on the basis of the price recommended by the assessee after the finalisation of accounts and, therefore, the differential amount between SAP and SMP being appropriation of profits and in the nature of ‘bonus’ under section 2(4) of the 1960 Act was liable to be disallowed. There was no merit in this contention, because, under the 1960 Act, though the assessee was bound to pay the SMP fixed by the Central Government, the assessee was also bound to pay the final cane price as per the SAP fixed by the State Government. Therefore where the payment was made to the cane growers as per the directions of the State Government, the assessee could not be accused of paying to the cane growers in excess of the fair market price. What should be the fair market value to be paid to the cane growers was left to the State Government. The fact that SAP fixed by the State Government was based on the price recommended by the assessee after the finalisation of the accounts would not constitute appropriation of profits/bonus because, appropriation of profits 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. As per the bye-laws framed under the 1960 Act, every assessee is obliged to recommend the final cane price after the finalisation of accounts in the respective year. In order to secure better price for the cane growers the scheme evolved by the State Government in the State of Maharashtra was to determine the final cane sugar price after completion of accounts at the end of the year. The final cane sugar price determined by the State Government was binding and there was no challenge to the SAP fixed by the State Government. Therefore, payment of the final cane sugar price as per SAP fixed by the State Government based on the price recommended by the assessee after the finalisation of accounts could not be said to be appropriation of profits. (PARA 21)

Moreover, section 65 of the 1960 Act provides for the mode and the manner of ascertainment and appropriation of profits. The said section provides that no part of profits shall be appropriated except with the approval of the annual general meeting and in conformity with the Act, rules and bye-laws. In the instant case, neither the profits were determined nor there was any resolution passed in the AGM. To distribute profits in the form of higher cane price/bonus. Therefore, in the facts of the instant case, the final cane price paid at the rate fixed by the State Government could not be said to be distribution of profits/bonus. (PARA 22)

It was pertinent to note that the final cane price fixed by the State Government was paid by the assessee to its members as well as non members. In the case of Maharashtra Rajya Sahakari Sakhar Karkhana Sangh Ltd. (supra), the Apex Court has held that the production of sugar being of primary concern, the SAP fixed by the State of Maharashtra is not only binding on the members but also binding on non members who supply sugar cane to the assessee. In these circumstances, the final cane price paid by the assessee as per the SAP fixed by the State Government could not be said to be excessive or appropriation of profits/bonus and consequently no disallowance could be made in that behalf. (PARA 24)

similarly, the Khodki charges were incurred as per the directions of Director of Sugar to clean out the farmers land and to compensate the farmer for the unevenly cut cane sugar at the time of harvesting. The Bombay High Court in the case of CIT v. Shree Panchganga SSK Ltd. (2002) 254 ITR 572/127 Taxman 581 has held that Khodki charges are incurred for the business purposes and, hence, the said expenses are allowable. Accordingly, it was held that the Khodki charges paid by the assessee was allowable as business expenditure. (PARA 25)

In the result, all the appeal filed by the revenue were dismissed.