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REPORTABLE IN THE 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

J U D G M E N T

M.R. SHAH, J.

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Leave granted in all the 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 the 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 a lead case,

and  therefore,  the  facts  from  the  said  appeal  are  narrated  and

considered.

3.1 The assessee (respondent herein) is a Co-operative Society

engaged in the business of production of sugarcane and sale thereof.

The  assessee  filed  its  return  of  income  for  the  Assessment  Year

1998-99 declaring ‘NIL; income. In the return, the assessee computed

carry forward loss of Rs.40,00,339/- and unabsorbed depreciation of

Rs.1,67,26,665/-.  The return was processed under Section 143(1) (a)

of the Income Tax Act, (hereinafter referred to as the ‘Act’),  making

adjustment of Rs.2,02,242-/ relatable to Section 40A (3) of the Act.

Thereafter the assessee filed a revised return wherein business loss

was shown to the tune of Rs.3,32,42,426/-.   

3.2 A notice under Section 143(2()/142(1) of the Act was issued

to the assessee.  The assessee was having manufacturing activities of

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white  sugar.   It  had  shown  the  income  from  business  of

manufacturing sugar, petrol pump station and also interest under the

head “income from other sources”.

3.3 After scrutiny of final accounts details along with return of

income  and  details  furnished  during  the  course  of  assessment

proceedings,  an  issue  arose  with  respect  to  disallowance  under

Section 37(1) of the Act for excessive and unreasonable cane purchase

price paid to the members of the sugarcane.

3.4 It was noticed that during the year under consideration, the

assessee  had  crushed  189736.220  metric  tones  sugarcane.   The

assessee  had  paid  Rs.615/-  and  Rs.720-/  for  crushing  seasons

1996-97  and  1997-98  respectively  per  metric  tone  at  the  time  of

purchase of cane and the 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  96-97 from  members

8,307.520 537.700 875.000

From  non-members

1,652.653 537.700 875.000

Total 9,960.173 Sugar Season  97-98 from  members

129,108.966 537.700 875.000

From 50,667.081 537.700 875.000

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non-members Total 179,776.047

3.5 It was noticed that the production of sugar was covered by

the Essential Commodities Act, 1955 and the Government had issued

the Sugar Cane (Control) Order, 1966 (hereinafter referred to as the

‘Control Order, 1966’), which deals with all aspects of production of

sugarcane and sale thereof including the price to be paid to the cane

growers.   It  was noticed that  Clause 3 of  the 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 the Control Order, 1966.

3.6 It was noticed that in the case of  the assessee, the price

paid by the assessee to the sugarcane growers, most of those are its

members,  was  in  excess  than  what  was  payable  as  per  the  above

Order and accordingly the assessee was asked to furnish details of

payments made for the purchase of sugarcane and also payment made

later on.  The assessee was also asked to explain whether the payment

made later on is made at the request of the assessee or not.

3.7 It appears that the assessee furnished details of  payment

made,  wherein  it  was  found  that  the  price  paid  for  purchase  of

sugarcane at the rate of Rs.875/- PMT for sugarcane seasons 1996-97

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and 1997-98.  It was further stated that the cane price payable as per

Clause  3  and  Clause  5A  of  the  Control  Order,  1966,  comes  to

Rs.537.70 for sugarcane season 1996-97 and Rs.646.50 for sugarcane

season 1997-98.  Therefore, the assessee was given an 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 the Control Order, 1966, be not held as excessive.

3.8 In response thereto, the assessee filed written submissions.

It claimed that the payment has been made as per the rate fixed by

Commissionerate of Sugar, Maharashtra State, Pune, and the same is

as per guidelines given by the Mantri Committee.  With regard to the

purchase made from non-members and members, it was the case of

the assessee that payment has been made as per price agreed to at the

time of purchase.  It was submitted that a contract for the purchase of

sugarcane has been entered into at the time of start of sugarcane and

since the price is agreed at the time of purchase itself, the same is

required to be allowed as deduction.  It was, therefore, claimed that no

disallowance  be  made  either  under  Section  40A  (2)  of  the  Act  or

otherwise.

4. The Assessing Officer did not agree with the submissions on

behalf of the assessee.  The ultimate conclusion of the A.O. was that

the difference between the price paid as per Clause 3 of the Control

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Order, 1966, determined by the Central Government, and the price

determined by the State Government under Clause 5A of the Control

Order,  1966  (and  consequently  paid  by  the  assessee  to  the  cane

growers) can be said to be a distribution of profit,   as in the price

determination under Clause 5A of the Control Order, 1966, there is an

element  of  profit  and  therefore  the  price  paid  to  the  cane  growers

determined by the State Government is excessive and therefore it is

not deductible as expenditure, and is required to be included in the

income of the assessee.

4.1 While  holding  so,  the  Assessing  Officer  considered  and

observed as under:

“…The Sugar cane control order, 1966, provides for the price to be paid to the cane growers. The initial price which is fixed as per clause 3 of this order takes into account the following facts.

a The cost of production of sugarcane. b The return to the growers, alternative crops and           

general tread of process 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 producer of sugar. e The recovery of sugar from sugarcane.

In addition to this, additional cane price is also payable to the growers of sugar cane as per clause 5A. This clause take into account the profitability of actually on the basis of price paid to grower of sugarcane as per clause 3 of the Control order. As per this Clause, the profit earned by the factory is shared by grower of sugarcane and producer of sugar. The prices under clause 3 are fixed by Central Govt. the total price payable to grower  of  sugarcane  will  be  different  on  the  basis  of profitability of each units. In the State of Maharashtra, since 90% of  sugar producing factories are in co.op sector,  being

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aided  by  Govt.,  the  Govt.  has  also  appointed  a  committee known as Mantri  Committee for  the purpose of  fixing  state advisory Price of sugarcane. As per this, the initial price to be paid to the grower of sugarcane is fixed on the basis of price fixed by central  Govt.  as per clause 3 of  the Control  order. However, final price is fixed on the basis of profitability of each units  and  in  the  State  of  Maharashtra,  entire  profit  is distributed  among  growers  of  sugarcane.  The Commissionerate of Sugar Fixes the final prices accordingly, this, however, is done at the specific request of the assessee. It  is  worthwhile  to  mention  here  that  the  society  sends proposals to the 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 the society which gets distributed among the members in the form of additional cane price. The arguments of the society that regarding state advised price, it is mandatory for them to follow the same as correct to a limited extent which means that for the society it is  must  to  pay  initial  advance’  price  which  is  fixed  by  the Commissioner of Sugar irrespective of actual profits. However, after the end of the season, it is the society “who sends the statement of surplus to the Commissioner of Sugar in which cost of the cane is taken on the basis of initial advance price and remaining surplus is proposed to be distributed on the basis of total cane quantity purchases in the season. On being proposed by society, the Commissioner of Sugar gives consent to it and, therefore, the submission is not correct because it is the  society  who propose  for  such additional  cane  purchase price by way of appropriation of profits…”  

4.2 The  Assessing  Officer  also  did  not  agree  with  the

submission on behalf  of  the assessee that the minimum cane price

notified by the Central Government is minimum and not actual cost

and therefore any payment in excess of the minimum price should not

be treated as an application of income by observing that the Statutory

Minimum  Price  (hereinafter  referred  to  as  the  ‘SMP’)  is  further

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increased by additional price on the 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.  The Assessing Officer also noted that the additional cane price

is calculated after the end of the accounting year and it represents the

entire surplus or income earned by the sugar cooperative society in

the  whole  year  and  it  is  the  surplus  profit  of  income  which  is

distributed  and,  therefore,  it  cannot  be  treated  as  a  legitimate

deductible expenditure.  Consequently, the Assessing Officer held that

the price paid by the assessee as per Clause 3 & 5A of the Control

Order,  1966  is  the  fair  price  and  therefore  anything  paid  to  the

members  as  well  as  non-members  above  the  price  determined and

paid by the assessee as per Clause 3 & 5A of the Control Order, 1966

will be unreasonable and excess price to its members in the form of

additional cane purchase price and therefore such excess payments

are  not  allowed  under  Section  37  of  the  Act.   The  chart  of  the

calculation is as under:

Particulars Quantity Price paid  per MT

SMP + 5A (excluding harvesting and transport)

Difference Addition

Season 96-97 Members

8307.520 875.000 537.700 337.300 2,802,126.00

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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

4.3 Alternatively, the Assessing Officer also held that the excess

cane price paid to the cane growers over the SMP is disallowable as

per Section 40A(2)(a) of the Act by observing that purchase price paid

is excessive and unreasonable.

4.4 Accordingly, the Assessing Officer finalised the return and

making  additions  of  the  amount  paid  by  the  society  to  its

members/non-members above the SMP price/price determined under

Clauses 3 & 5A of the Control Order, 1966, as income.

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

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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 – 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 – 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

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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

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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

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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

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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.

8.1 Learned  counsel  appearing  on  behalf  of  the  respective

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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.

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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,

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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.”

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

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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  

Explanation— 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

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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:—

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.—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 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

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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

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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

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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

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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.

…………………………………..J. [A.K. SIKRI]

……………………………………J. [S. ABDUL NAZEER]

NEW DELHI; ……………………………………..J. MARCH 05, 2019. [M.R. SHAH]