1 REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 8890 OF 2012 C.I.T. BOMBAY ..APPELLANT VERSUS TASGAON TALUKA S.S.K.LTD. ..RESPONDENT WITH CIVIL APPEAL NO.2485 OF 2019 (Arising out of SLP (C) No.1279/2009) CIVIL APPEAL NO.2484 OF 2019 (Arising out of SLP (C) No.1281/2009) CIVIL APPEAL NO.2482 OF 2019 (Arising out of SLP (C) No.1278/2009) CIVIL APPEAL NO.2483OF 2019 (Arising out of SLP (C) No.1282/2009) CIVIL APPEAL NO.2486 OF 2019 (Arising out of SLP (C) No.5700/2009) CIVIL APPEAL NO. 4801 OF 2014 CIVIL APPEAL NO. 8891 OF 2012 CIVIL APPEAL NO. 4549 OF 2013 CIVIL APPEAL NO.2487 OF 2019 (Arising out of SLP (C) No.6412/2011) CIVIL APPEAL NO. 302 OF 2013 JUDGMENT Signature Not Verified Digitally signed by ASHWANI KUMAR Date: 2019.03.05 17:51:54 IST Reason: M.R. SHAH, J. 2 Leave granted in all special leave petitions. 2. As common question of law arises in this group of appeals, all these appeals are being disposed of together, by this common judgment and order. 3. For sake of convenience, Civil Appeal No. 8890 of 2012 (Commissioner of Income Tax, Bombay vs. Tasgaon Taluka Sahakari Sikhar Karkhana Limited) is treated and considered as lead case, and therefore, facts from said appeal are narrated and considered. 3.1 assessee (respondent herein) is Co-operative Society engaged in business of production of sugarcane and sale thereof. assessee filed its return of income for Assessment Year 1998-99 declaring NIL; income. In return, assessee computed carry forward loss of Rs.40,00,339/- and unabsorbed depreciation of Rs.1,67,26,665/-. return was processed under Section 143(1) (a) of Income Tax Act, (hereinafter referred to as Act ), making adjustment of Rs.2,02,242-/ relatable to Section 40A (3) of Act. Thereafter assessee filed revised return wherein business loss was shown to tune of Rs.3,32,42,426/-. 3.2 notice under Section 143(2()/142(1) of Act was issued to assessee. assessee was having manufacturing activities of 3 white sugar. It had shown income from business of manufacturing sugar, petrol pump station and also interest under head income from other sources . 3.3 After scrutiny of final accounts details along with return of income and details furnished during course of assessment proceedings, issue arose with respect to disallowance under Section 37(1) of Act for excessive and unreasonable cane purchase price paid to members of sugarcane. 3.4 It was noticed that during year under consideration, assessee had crushed 189736.220 metric tones sugarcane. assessee had paid Rs.615/- and Rs.720-/ for crushing seasons 1996-97 and 1997-98 respectively per metric tone at time of purchase of cane and balance amount was paid later on, as per contracted price increase of sugarcane on contract basis and as per Mantri Committee Advice in case of purchase of sugarcane from members and others. It has found as under: Particulars Quantity in MT Rate payable Rate paid (Rs.) Sugar Season 8,307.520 537.700 875.000 96-97 from members From 1,652.653 537.700 875.000 non-members Total 9,960.173 Sugar Season 129,108.966 537.700 875.000 97-98 from members From 50,667.081 537.700 875.000 4 non-members Total 179,776.047 3.5 It was noticed that production of sugar was covered by Essential Commodities Act, 1955 and Government had issued Sugar Cane (Control) Order, 1966 (hereinafter referred to as Control Order, 1966 ), which deals with all aspects of production of sugarcane and sale thereof including price to be paid to cane growers. It was noticed that Clause 3 of Control Order, 1966 authorises Government to fix minimum cane price. It was also noticed that in addition to this, additional cane price is also payable as per Clause 5A of Control Order, 1966. 3.6 It was noticed that in case of assessee, price paid by assessee to sugarcane growers, most of those are its members, was in excess than what was payable as per above Order and accordingly assessee was asked to furnish details of payments made for purchase of sugarcane and also payment made later on. assessee was also asked to explain whether payment made later on is made at request of assessee or not. 3.7 It appears that assessee furnished details of payment made, wherein it was found that price paid for purchase of sugarcane at rate of Rs.875/- PMT for sugarcane seasons 1996-97 5 and 1997-98. It was further stated that cane price payable as per Clause 3 and Clause 5A of Control Order, 1966, comes to Rs.537.70 for sugarcane season 1996-97 and Rs.646.50 for sugarcane season 1997-98. Therefore, assessee was given opportunity to explain why price paid by it to members/non-members for purchase of sugarcane, in excess of what was payable as per Clause 3 and Clause 5A of Control Order, 1966, be not held as excessive. 3.8 In response thereto, assessee filed written submissions. It claimed that payment has been made as per rate fixed by Commissionerate of Sugar, Maharashtra State, Pune, and same is as per guidelines given by Mantri Committee. With regard to purchase made from non-members and members, it was case of assessee that payment has been made as per price agreed to at time of purchase. It was submitted that contract for purchase of sugarcane has been entered into at time of start of sugarcane and since price is agreed at time of purchase itself, same is required to be allowed as deduction. It was, therefore, claimed that no disallowance be made either under Section 40A (2) of Act or otherwise. 4. Assessing Officer did not agree with submissions on behalf of assessee. ultimate conclusion of A.O. was that difference between price paid as per Clause 3 of Control 6 Order, 1966, determined by Central Government, and price determined by State Government under Clause 5A of Control Order, 1966 (and consequently paid by assessee to cane growers) can be said to be distribution of profit, as in price determination under Clause 5A of Control Order, 1966, there is element of profit and therefore price paid to cane growers determined by State Government is excessive and therefore it is not deductible as expenditure, and is required to be included in income of assessee. 4.1 While holding so, Assessing Officer considered and observed as under: Sugar cane control order, 1966, provides for price to be paid to cane growers. initial price which is fixed as per clause 3 of this order takes into account following facts. The cost of production of sugarcane. b return to growers, alternative crops and general tread of process of Agricultural commodities. c availability of sugar to consumer at fair price. d price at which sugar produced from sugarcane is sold by producer of sugar. e recovery of sugar from sugarcane. In addition to this, additional cane price is also payable to growers of sugar cane as per clause 5A. This clause take into account profitability of actually on basis of price paid to grower of sugarcane as per clause 3 of Control order. As per this Clause, profit earned by factory is shared by grower of sugarcane and producer of sugar. prices under clause 3 are fixed by Central Govt. total price payable to grower of sugarcane will be different on basis of profitability of each units. In State of Maharashtra, since 90% of sugar producing factories are in co.op sector, being 7 aided by Govt., Govt. has also appointed committee known as Mantri Committee for purpose of fixing state advisory Price of sugarcane. As per this, initial price to be paid to grower of sugarcane is fixed on basis of price fixed by central Govt. as per clause 3 of Control order. However, final price is fixed on basis of profitability of each units and in State of Maharashtra, entire profit is distributed among growers of sugarcane. Commissionerate of Sugar Fixes final prices accordingly, this, however, is done at specific request of assessee. It is worthwhile to mention here that society sends proposals to Commissioner of Sugar for fixation of final cane payment. If there is higher profit available society proposes for higher payments. If available profit is less. Then proposed payment is accordingly less. This makes it clear that final payment of cane price includes profit of society which gets distributed among members in form of additional cane price. arguments of society that regarding state advised price, it is mandatory for them to follow same as correct to limited extent which means that for society it is must to pay initial advance price which is fixed by Commissioner of Sugar irrespective of actual profits. However, after end of season, it is society who sends statement of surplus to Commissioner of Sugar in which cost of cane is taken on basis of initial advance price and remaining surplus is proposed to be distributed on basis of total cane quantity purchases in season. On being proposed by society, Commissioner of Sugar gives consent to it and, therefore, submission is not correct because it is society who propose for such additional cane purchase price by way of appropriation of profits 4.2 Assessing Officer also did not agree with submission on behalf of assessee that minimum cane price notified by Central Government is minimum and not actual cost and therefore any payment in excess of minimum price should not be treated as application of income by observing that Statutory Minimum Price (hereinafter referred to as SMP ) is further 8 increased by additional price on basis of actual yield and if such adjusted price is more than initial advance price only such adjusted price is considered as allowable deduction instead of initial advance price. Assessing Officer also noted that additional cane price is calculated after end of accounting year and it represents entire surplus or income earned by sugar cooperative society in whole year and it is surplus profit of income which is distributed and, therefore, it cannot be treated as legitimate deductible expenditure. Consequently, Assessing Officer held that price paid by assessee as per Clause 3 & 5A of Control Order, 1966 is fair price and therefore anything paid to members as well as non-members above price determined and paid by assessee as per Clause 3 & 5A of Control Order, 1966 will be unreasonable and excess price to its members in form of additional cane purchase price and therefore such excess payments are not allowed under Section 37 of Act. chart of calculation is as under: Particulars Quantity Price SMP + 5A Difference Addition paid per (excluding MT harvesting and transport) Season 8307.520 875.000 537.700 337.300 2,802,126.00 96-97 Members 9 Season 129,108.966 875.000 646.500 228.500 29,501,399.00 97-98 Members 1,37,416.486 32,303,,525.00 4.3 Alternatively, Assessing Officer also held that excess cane price paid to cane growers over SMP is disallowable as per Section 40A(2)(a) of Act by observing that purchase price paid is excessive and unreasonable. 4.4 Accordingly, Assessing Officer finalised return and making additions of amount paid by society to its members/non-members above SMP price/price determined under Clauses 3 & 5A of Control Order, 1966, as income. 5. On appeal, learned Commissioner of Income Tax (Appeals), relying upon and considering decision of Special Bench, Mumbai ITAT in case of Manjara Shetkari Sakhar Karkhana Limited dated 19.08.2004 allowed appeal preferred by assessee and held that price actually paid for procurement of sugarcane is to be allowed as business expenditure. learned CIT(A) also observed and held that excess payment of cane price as fixed by State Government (SAP) over and above SMP for sugarcane to members and non-members cannot be disallowed either under Section 40A(2)(b) of Act, despite fact that profit is one of component in asserting price. CIT(A) observed that just 10 because profit is one of component in asserting price, it cannot be said that profit is separately distributed in guise of additional price. learned CIT(A) observed that amount paid by assessee cooperative society to sugarcane growers is considered for procurement of sugarcane and it cannot be construed to be appropriation of profits. Consequently, learned CIT(A) deleted addition made by Assessing Officer. 6. learned ITAT confirmed order passed by learned CIT(A), which has been further confirmed by High Court, by impugned judgment and order. By impugned judgment and order, High Court has dismissed appeal preferred by department by observing that question is covered by judgment of High Court in case of Commissioner of Income Tax vs. Manjara Shetkari Sahakari Sakhar Karkhana Limited, reported in (2008) 301 I.T.R. 191 (Bom.). Hence, present appeals by department. 6.1 In some of cases, some of assesses societies seem to have paid cane purchase price to members/non-members even in excess/above price determined under Clauses 3 & 5A of Control Order, 1966. Therefore, question which is posed for consideration before this Court is, (i) Whether any amount of sugarcane purchase price paid by assessee-society to its members/non-members above SMP 11 determined under Clause 3 of Control Order, 1966, may be paid as per price determined by State Government under Clause 5A of Control Order, 1966, can be said to be sharing of profit and therefore is to be included in return of income?; and (ii) Whether any amount of sugarcane purchase price paid by society to its members/non-members above/beyond price even determined as per Clauses 3 & 5A of Control Order, 1966, and which is found to be unreasonable and in excess of fair market value, can be said to be sharing of profit and is required to be included in total income of assessee? 7. Shri Arijit Prasad, learned counsel appearing on behalf of department has vehemently submitted that in facts and circumstances of case, as such, Assessing Officer was justified in treating and considering difference between SMP, determined under Clause 3 of Control Order, 1966, and SAP determined by State Government under Clause 5A of Control Order, 1966 as sharing of profit, and therefore, same was rightly ordered to be included in income of assessee. 7.1 It is vehemently submitted by learned counsel appearing on behalf of department that cogent reasons have been given by assessing officer to treat aforesaid difference as sharing of profit, after detailed analysis of manner and method in which 12 sugarcane purchase price is determined under Clauses 3 & 5A of Control Order, 1966. 7.2 It is vehemently submitted by learned counsel appearing on behalf of department that there are different considerations/criterias to be applied while determining sugarcane purchase price at stage of Clause 3 and at stage of Clause 5A. It is submitted that even stages are also different while determining sugarcane purchase price at stage of Clause 3 and determined at stage of Clause 5A. 7.3 It is vehemently submitted by learned counsel appearing on behalf of department that while determining sugarcane purchase price under Clause 5A of Control Order, 1966, firstly, it is at conclusion of financial year and when accounts are settled, and secondly, there is element of profit. It is submitted that one of components while dealing with sugarcane purchase price under Clause 5A is profit, and whatever is paid to cane growers under Clause 5A is therefore sharing of profit. 7.4 It is further submitted by learned counsel appearing on behalf of department that how and in what manner sugarcane purchase price is determined under Clause 5A has been considered by this Court in detail in case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited vs. State of Maharashtra, reported in 1995 13 Supp. (3) SCC 475. It is vehemently submitted by learned counsel that as observed by this Court in aforesaid decision, additional price determined under Clause 5A is at end of season. It is submitted that as observed, Bhargava Commission had recommended payment of additional price at end of season on 50:50 profit sharing basis between growers and factories to be worked out in accordance with Schedule II to Control Order, 1966. It is submitted that 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 case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited (supra), 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 cane grower. It is submitted that entire price structure of cane is founded on two basic factors, one, recovery percentage and other incentive for sharing profit arrived at by working out receipt minus expenditure. It is submitted that therefore difference between SMP and SAP is nothing but sharing of profit, and therefore, is liable to be included in return of income under Section 37 of Act. 7.5 It is further submitted by learned counsel appearing on behalf of department that in many cases it is found that 14 assessee-society has paid sugarcane purchase price to its members/non-members is excessive and much more than market price and/or even beyond SAP. It is submitted therefore that even considering Section 40A (2) of Act, such excessive and unreasonable amount paid is not allowable to be deductible. It is submitted therefore that High Court has materially erred in holding that price actually paid by society for procurement of sugarcane is to be allowed as business expenditure. 7.6 It is further submitted by learned counsel appearing on behalf of department that in view of above facts and circumstances, High Court was not justified in holding that excess amount of expenditure on sugarcane purchase price was charge of profit, i.e., diversion of profit and appropriation of profit. 7.7 Making above submissions, it is prayed to allow present appeals and set aside impugned judgments and orders passed by High Court and consequently orders passed by ITAT as well as CIT(As) and to restore respective orders passed by assessing officers. 8. Shri P. Chidambaram, learned senior advocate, Shri Shekhar Naphade, learned senior advocate have appeared on behalf of respective assesses. 8.1 Learned counsel appearing on behalf of respective 15 assesses have vehemently submitted that as rightly observed and held by High Court, merely because there is element and/or one of components while determining SAP under Clause 5A of Control Order, 1966 is profit, it cannot be said that there is sharing of profit. 8.2 It is vehemently submitted by learned counsel appearing on behalf of respective assesses that under Control Order, 1966, sugarcane society has no other alternative but to pay to cane growers sugarcane purchase price as determined by Central Government and State Government, as case may be. It is submitted that even if society would be incurring loss, society has to pay additional purchase price (final price) determined by State Government. It is submitted therefore that whatever is paid by assessee-society to cane growers towards sugarcane purchase price is allowable expenditure which is required to be deducted. 8.3 Learned counsel appearing on behalf of respective assesses have also relied upon Section 9 of Sale of Goods Act. It is further submitted by learned counsel that as such higher/additional price is paid by society to both members and non-members and therefore anything paid above or more than SMP per se cannot be said to be sharing of profit. 16 8.4 It is further submitted by learned counsel that even State Government is also 10% share holding and nothing is paid to State being shareholder. It is further submitted by learned counsel that even as per Bye-laws, society has to pay difference between SMP and SAP. It is submitted therefore difference between SMP and SAP, by no stretch of imagination, can be said to be sharing of profit and as such whatever is paid while purchasing sugarcane is deductible as expenditure incurred. 8.5 Making above submissions., it is prayed to dismiss present appeals preferred by department. 9. We have heard learned counsel appearing on behalf of respective parties at great length. 9.1 short question which is posed before this Court for consideration is, whether sugarcane purchase price paid to cane growers by assessee-society more than SMP and is determined under Clause 5A of Control Order, 1966, can be said to be sharing of profit/appropriation of profit or is allowable as expenditure? 9.2 While considering aforesaid issue/question, mechanism for determining SMP and SAP under Control Order, 1966 is required to be referred to and considered. As per Clause 3 of Control Order, 1966, Central Government may, 17 after consultation with such authorities, bodies or associations as it may deem fit, by notification in official Gazette, from time to time, fix minimum price of sugarcane to be paid by producers of sugar or their agents for sugarcane purchased by them. While fixing/determining SMP under Clause 3 of Control Order, 1966, Central Government is required to consider following aspects: (a) cost of production of sugarcane; (b) return to grower from alternative crops and general trend of prices of agricultural commodities; c availability of sugar to consumer at fair price; d price at which sugar produced from sugarcane is sold by producers of sugar; and e recovery of sugar from sugarcane. 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 producer of sugar or his agent, and no such producer or agent shall purchase or agree to purchase sugarcane, at price lower than that fixed under sub-clause 1 of Clause 3. Clause 5A, which has been inserted in year 1974 provides for additional price to be paid for sugarcane purchased on or after 01.10.1974. It provides that where producer of sugar or his agent purchases 18 sugarcane, from sugarcane grower during each sugar year, he shall, in addition to minimum sugarcane price fixed under Clause 3, pay to sugarcane grower additional price, if found due in accordance with provisions of Second Schedule annexed to Control Order, 1966. How additional price under Clause 5A of Control Order, 1966 is to be determined is provided in Second Schedule, which reads as under: SECOND SCHEDULE [See Clause 5-A] amount to be paid on account of additional price (per quintal of sugarcane) under Clause 5-A by producer of sugar shall be computed in accordance with following formula, namely : R-L+A-B X = --------------- 2C Explanation In this formula. 1 X is additional price in rupees per quintal of sugarcane payable by producer of sugar to sugarcane grower. 2 R is amount in rupees of sugar produced during sugar year excluding excise duty paid or payable to factory by purchaser. 3 L is value in rupees of sugar produced during sugar year, as calculated on basis of unit cost per quintal ex-factory, exclusive of excise duty, determined with reference to minimum sugarcane price fixed under Clause 3, final working results of year and Cost Schedule and return recommended by such authority as 19 Central Government may, specify from time to time. 4 is amount found payable for previous year but not actually paid [vide sub-clause (9)]. 5 B is excess or shortfall in realisations from actual sales of unsold stocks of sugar produced during sugar year, as on 30th day of September [vide item 7(ii) below] which is carried forward and adjusted in sale realisations of following year. 6 C is quantity in quintals of sugarcane purchased by producer of sugar during sugar year. 7 amount R referred to in Explanation 2 shall be computed as under, namely: i actual amount realised during sugar year; and ii estimated value of unsold stocks of sugar held at end of 30th September, calculated in regard to free sugar stocks at average rate of sales, namely, during fortnight 16th to 30th September and in regard to levy sugar stocks at notified levy prices as on 30th September. Explanation. In this Schedules Sugar means any form of sugar containing more than ninety per cent sucrose. 9.4 At this stage, it is required to be noted that Clause 5A was inserted in year 1974 on basis of recommendations made by Bhargava Commission. As observed by this Court in case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited (supra), Bhargava Commission had recommended payment of additional price at end of season on 50:50 profit sharing basis between growers and factories, to be worked out in accordance with Second 20 Schedule to Control Order, 1966. It is also required to be noted that additional price is fixed/determined under Clause 5A at end of season and as per Second Schedule to Control Order, 1966. Therefore, at time when additional purchase price is determined/fixed under Clause 5A, accounts are settled and particulars are provided by concerned cooperative society what will be expenditure; what can be profit etc. It is required to be noted that so far as SMP determined under Clause 3 of Control Order, 1966 by Central Government is concerned, it is at beginning of season and while determining/fixing SMP by Central Government, afore-stated things are required to be considered. Therefore, difference of amount between SMP determined under Clause 3 and SAP/additional purchase price determined under Clause 5A has element of profit and/or one of components would be profit. entire scheme/mechanism while determining additional purchase price under Clause 5A has been dealt with and considered by this Court in detail in case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Limited (supra). In said decision, it is observed that additional purchase price/SAP is paid at end of season; Bhargava Commission had recommended payment of additional price at end of season on 50:50 profit sharing basis between growers and factories to be 21 worked out in accordance with Second Schedule to Control Order, 1966; that additional purchase price comprises of not only cost of cultivation, but profit as well; 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 cane grower. additional cane price or additional State fixed price are paid as matter of incentive. entire price structure of cane is founded on two basic factors, one, recovery percentage and other incentive for sharing profit arrived at by working out receipt minus expenditure. Therefore, to extent of component of profit which will be part of final determination of SAP and/or final price/additional purchase price fixed under Clause 5A would certainly be and/or said to be appropriation of profit. However, at same time, entire/whole amount of difference between SMP and SAP per se cannot be said to be appropriation of profit. As observed hereinabove, only that part/component of profit, while determining final price worked out/SAP/additional purchase price would be and/or can be said to be appropriation of profit and for that exercise is to be done by assessing officer by calling upon assessee to produce statement of accounts, balance sheet and material supplied to State Government for purpose of deciding/fixing final price/additional purchase price/SAP under 22 Clause 5A of Control Order, 1966. Merely because higher price is paid to both, members and non-members, qua members, still question would remain with respect to distribution of profit/sharing of profit. So far as non-members are concerned, same can be dealt with and/or considered applying Section 40A (2) of Act, i.e., assessing officer on material on record has to determine whether amount paid is excessive or unreasonable or not. However, this is not subject matter in present appeals. We are restricting present appeals qua sugarcane purchase price paid by society to cane growers above SMP determined under Clause 3 and difference of sugarcane purchase price between price determined under Clause 3 and Clause 5A of Control Order, 1966. 9.5 Therefore, assessing officer will have to take into account manner in which business works, modalities and manner in which SAP/additional purchase price/final price are decided and to determine what amount would form part of profit and after undertaking such exercise whatever is profit component is to be considered as sharing of profit/distribution of profit and rest of amount is to be considered as deductible as expenditure. 10. In view of above and for reasons stated above, 23 question of law is answered accordingly, partly in favour of department and partly in favour of assessee. impugned orders passed by High Court, ITAT, CIT(A) as well as assessing officers are hereby quashed and set aside and matters are remitted to respective assessing officers to undertake exercise as stated hereinabove and after giving opportunity to respective assesses. 11. All these appeals stand disposed of in terms of above. ..J. [A.K. SIKRI] J. [S. ABDUL NAZEER] NEW DELHI; ..J. MARCH 05, 2019. [M.R. SHAH] C.I.T, Bombay v. Tasgaon Taluka S.S.K. Ltd