Gujarat High Court
The Principal Commissioner Of Income ... vs Shree Narmada Khand Udyog Sahkari ... on 11 February, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/955/2024 ORDER DATED: 11/02/2025
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 955 of 2024
With
R/TAX APPEAL NO. 954 of 2024
With
R/TAX APPEAL NO. 956 of 2024
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THE PRINCIPAL COMMISSIONER OF INCOME TAX 1
Versus
SHREE NARMADA KHAND UDYOG SAHKARI MANDLI LTD.
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Appearance:
MR. RUDRAM TRIVEDI, ADVOCATE FOR MR NIKUNT K RAVAL(5558) for
the Appellant(s) No. 1
MR. S.N.SOPARKARN, SR.ADVOCATE WITH MR B S SOPARKAR(6851)
for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
Date : 11/02/2025
COMMON ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Advocate Mr.Rudram Trivedi for the Appellant-Revenue and learned Senior Standing Counsel Mr. S.N.Soparkar with learned Advocate Mr. Bandish Soparkar appearing on Caveator.
2. These three Tax Appeals are filed by the Appellant -Revenue raising the following substantial questions of law arising out of the Page 1 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined common judgement and order passed by the Income Tax Appellate Tribunal (for short "the ITAT") Surat Bench in ITA No.102, 103 and 104/SRT/2023 for the Assessment Years 2012-13, 2013-14 and 2014-15.
"(A) Whether on the facts and in the circumstances of case and in law, the Appellate Tribunal was justified in deleting the addition of Rs.58,96,71,804/-made by the AO by disallowing the excess payment paid for purchasing of sugar cane, treating it as appropriation of profit?
(B) Whether on the facts and in the circumstances of case and in law, of Income Tax Control Order without appreciating the legal position that the the Appellate Tribunal has erred in holding that the case of the assessee falls under sub-clause (b) of clause-5 of Sugarcane Clause 5 dealt with only 4 years with effect from 01.11.1958 till the Sugarcane Control Order (1962) came into operation, while post October, 1974, additional price was dealt through Clause 5A which has also been deleted in October, 2009 while shifting to the "Fair and Remunerative Price (FRP)" from "Statutory Minimum Price (SMP)" regime?
(C) Whether on the facts and in the circumstances of case and in law, the Appellate Tribunal was justified in not applying the ratio of the decision of the Hon'ble Apex Court in CIT vs. Tasgaon Taluka S.S.K. Ltd. [2019] 103 taxmann.com 57 (SC)?
3. The above questions are for the Assessment Year 2012-13 and the similar questions are framed for the other two years i.e. 2013-14 and 2014-15 which are as under:-
For the Assessment Year 2013-14 "(A) Whether on the facts and in the circumstances of case and Page 2 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined in law, the Appellate Tribunal was justified in deleting the addition of Rs.79,65,89,202/- made by the AO by disallowing the excess payment paid for purchasing of sugar cane, treating it as appropriation of profit ?
(B) Whether on the facts and in the circumstances of case and in law, the Appellate Tribunal has erred in holding that the case of the assessee falls under sub-clause (b) of clause-5 of Sugarcane Control Order without appreciating the legal position that the Clause 5 dealt with only 4 years with effect from 01.11.1958 till the Sugarcane Control Order (1962) came into operation, while post October, 1974, additional price was dealt through Clause SA which has also been deleted in October, 2009 while shifting to the "Fair and Remunerative Price (FRP)" from "Statutory Minimum Price (SMP)" regime?
(C) Whether on the facts and in the circumstances of case and in law, the Appellate Tribunal was justified in not applying the ratio of the decision of the Hon'ble Apex Court in CIT vs. Tasgaon Taluka S.S.K. Ltd. [2019] 103 taxmann.com 57 (SC)?"
For Assessment Year 2014-15:-
"(A) Whether on the facts and in the circumstances of case and in law, the Appellate Tribunal was justified in deleting the addition of Rs.43,71,78,605/- made by the AO by disallowing the excess payment paid for purchasing of sugar cane, treating it as appropriation of profit ?Page 3 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025
NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined (B) Whether on the facts and in the circumstances of case and in law, the Appellate Tribunal has erred in holding that the case of the assessee falls under sub-clause (b) of clause-5 of Sugarcane Control Order without appreciating the legal position that the Clause 5 dealt with only 4 years with effect from 01.11.1958 till the Sugarcane Control Order (1962) came into operation, while post October, 1974, additional price was dealt through Clause 5A which has also been deleted in October, 2009 while shifting to the "Fair and Remunerative Price (FRP)" from "Statutory Minimum Price (SMP)" regime? (C) Whether on the facts and in the circumstances of case and in law, the Appellate Tribunal was justified in not applying the ratio of the decision of the Hon'ble Apex Court in CIT vs. Tasgaon Taluka S.S.K. Ltd. [2019] 104 taxmann.com 57 (SC)?"
4. The respondent-assessee is engaged in the business of manufacture and sale of White Sugar. The case of assessee was selected for scrutiny. The Assessing Officer was of the view that the actual allowable expenses on account of the sugarcane purchase should be based on its Fair and Remunerative Price (FRP)/Statutory Minimum Price (SMP) and made addition for excess purchase expenses on the ground that the respondent-assessee adopted a device to reduce the taxable income by transferring the profit to the Page 4 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined sugarcane growers who are agriculturists and in their end the purchase price paid by the assessee would be exempt being agricultural income.
5. The Assessing Officer after considering the submissions and reply filed by the Assessee disallowed the sugarcane purchase price paid by the assessee being the difference between the SNP and price determining under Clause 5A of the Sugarcane Control Order 1966
6. Being aggrieved by the dis-allowance of the sugarcane price, the Assessee filed appeal before the CIT (Appeals). The CIT (Appeals) after considering the contents of the Assessment Order and the submissions of the Assessee upheld the order passed by the Assessing Officer by taking view that there is no dispute that the payment was actually made by the Assessee and relied upon the decision of the Apex Court in case of Malaprabha Co-operative Sugar Factory Ltd. reported in (1994) 1 SCC 648 to hold that under the Income Tax provision, every businessman and every assessment year is treated separately according to the facts of each case. The Page 5 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined reliance was also placed on the CBDT Circular No.18/2021 wherein, it is clarified that in case of sugarcane co-operative engaged in the production of sugar separately as all the Co-operative Societies are not identical.
7. Being aggrieved by the order passed by the CIT (Appeals), the respondent-assessee preferred an appeal before the Tribunal challenging the addition made and confirmed regarding the sugarcane price paid by the asseessee in excess of the SMP.
8. Tribunal after taking into consideration the submissions made and the case was relied upon by both the sides arrived at finding of fact to the effect that Sugarcane Control Order 1966 was amended in October 2009 by inserting sub clause(g) in clause- 3 which provides for giving reasonable margins to the growers of the sugarcane on account of risk and profits and therefore the FRP is nothing but another name of SMP after 2009-10. The Tribunal referred to the Sugarcane Control Order 1966 as amended from time to time and after considering the amended provisions and the procedure Page 6 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined prescribed for determination of the FRP held as under:-
"17. We find that Constitution Bench of Five Judges of Hon'ble Supreme Court in a majority decisions in U.P Cooperative Cane Federations Vs West UP Sugar Mills Association and others (supra) while considering the question of law on competence of State Government to fix the State advice price for purchase of sugarcane by an occupier of sugar factory over and above the minimum price fixed by the Central Government and the procedure adopted for ensuring the payment of aforesaid to the sugar cane grower, held that a reading of the 1996 Order would, therefore, show that the Central Government shall fix the minimum price of sugarcane but there can be a higher than the minimum price which may be in the nature of agreed price between the producer of sugar and sugarcane grower or the sugarcane growers' cooperative society. So, the field for a price higher than minimum price is clearly left open in the 1966 Order made by the Central Government. The Hon'ble Court also referred its earlier decisions of division bench in State of M.P. Vs Jaora Sugar Mills Ltd and others (dated 10.10.1996), wherein the dispute arose on account of fixation of price under the M.P. Sugar (Regulation of Supply and Purchase) Act, 1958. The contention on behalf of the sugar factories was that Clauses 3 and 5-A of the 1966 Order determine the liability to pay the price and additional price and the Central Government having determined the price of the sugarcane under the aforesaid Order, there is no power with the State Government de hors the Order to fix any agreed price. The concept of agreed price came into force on 19.9.1976 by virtue of Clause 3-A of the said Order and until then there was no power to fix an agreed price. It was also urged that the State Government has, therefore, no power under the Act to fix any price as the field was occupied by the 1966 Order. The contention was, however, not accepted and after noticing the provisions of Clauses 3(2) and 3(3), it was held as under in para 8 of the Reports: "8. This would clearly indicate that despite the fixation of minimum price under clause 3(1), by agreement between the sugarcane grower and the purchaser of the sugarcane, they would be at liberty to agree to sell or purchase the 108 sugarcane at a higher price than that fixed by the Central Government under clause 3(1). Only for postponement of payment beyond 14 days, there should be an agreement in writing between Page 7 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined the parties obviously with the concurrence of the Central Government or authorised authority in that behalf. Thus, there is no statutory prohibition in that behalf to pay higher price. That would be further clear by clause 3(2) which speaks of the contract between the parties for payment of higher price of sugarcane fixed under sub-clause (1) of clause 3 pursuant to the agreement or pursuant to the minimum price fixed by the Central Government under clause 3(1) of the Order. It was observed in paras 9 and 10 that there was no prohibition for the cane growers and occupiers of the sugar factories in entering into oral agreement through the service of the Cane Commissioner, a statutory authority, who could effect such an agreement. The agreement would not be tainted with compulsion but in novation of the minimum price fixed under the 1966 Order. Alter noticing the provisions of the M.P. Act. which are somewhat similar to U.P. Act, it was held as under
in para 13 of the Reports: "13. It would thus be clear that the Cane Commissioner having power to compel the cane-growers to supply cane to the factory or khandsari unit, he has incidental power and is duty bound to ensure payment of the price of the sugarcane supplied by the sugarcane grower. The price fixed or agreed is a statutory price and bears the stamp of statutory first charge on the sugar and assets of the factory over any other contracted liabilities to recover the price of the sugarcane supplied to the factory or khandsari unit." SKG Sugar Ltd. v. State of Bihar is a decision by the Bench of three judges and deals with the effect of 1966 Control Order and the Bihar Sugarcane (Regulation of Supply and Purchase) Act, 1981. It was clearly ruled that the provisions of 1966 Order do not show that there is any prohibition on the factory or the association of factories entering into an agreement to pay higher price than the minimum price prescribed under the Order and the object of the Order is to ensure that the cane growers should not be compelled to sell their sugarcane at a price lower than the minimum price fixed by the Central Government under Clause 3. In this case an agreement had been arrived at between Sugar Factories Owners Association and sugarcane growers, wherein a higher price was agreed to be paid but this was sought to be resiled by the appellant on the ground that it was a Company, which was an independent entity in the eye of law and was, therefore, not bound by any such agreement. After noticing the provisions of the Act and the earlier decision rendered in State Page 8 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined of M.P. v. Jaora Sugar Mills Ltd. (supra) it was held as under in para 6 of the reports: "It is not in dispute that under Section 31 of the Supply Act, the State Government has power to fix the reserved area, in other words, zone was carved out for the appellant for the supply of sugarcane to the factory. All the farmers who are cultivating sugarcane within that zone are bound by the State action to supply sugarcane to the factories within that reserved Consequently, the factory also is bound by the actions of the State Government Obviously, pursuant to the obligation had by the State under the Supply Act, the meeting was convened by the State Government where at the Factory Owners' Association and farmers participated and agreed to fix the price at Rs.20.50 per quintal of sugarcane. As a consequence, both the cane growers as well as the owners of the factory are bound by the decision. This having been agreed upon, the price fixed by the State Government in excess of the minimum price fixed by the Central Government under clause 3 of the Order would be the price fixed for supply of sugarcane and the Government would be entitled to enforce the liability....." It was also observed in the same paragraph that the State Government acted in their statutory capacity to fix the higher price of the sugarcane. These cases clearly lay down that under the 1966 Order the Central Government only fixes the minimum price and it is always open to the State Government to fix a higher price. Under the enactments made by the State Legislatures areas are reserved for the sugar factories and the cane growers. therein are compelled to supply sugarcane to them and therefore the State Government has incidental power to fix the price of sugarcane which will also be statutory price. They further lay down that the Cane Commissioner can direct the cane growers and the sugar factories to enter into agreements for purchase of sugarcane at a price fixed by the State Government and such agreements cannot be branded as having been obtained by force or compulsion.
18. Thus, keeping in view of the aforesaid decision of Hon'ble Apex Court, we find convincing force in the submissions of Id Senior Counsel for the assessee that as per clause 3(2) of Sugar Cane control order prohibits everyone from selling or purchasing sugar cane at the 'lower than' fixed under clause 3(1). Further it is clear FRP which was earlier known as SMP fixed by the Central Government every cursing year is to safeguard the interest of the farmers and is the lower limit only. We are also convinced that it is Page 9 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined always open to the party to negotiate to pay a price higher than the minimum price on commercial consideration and it is not open to the revenue to disallow it difference on the ground difference was not in law.
19. We also find that in the present case the purchases are made by the assessee, which is the cooperative society of its sugar cane grower. Thus, the case of assessee is falls under sub-clause (b) of clause 5 of Sugar Cane Control order, which empowered them to pay to the producer of sugar cane, in addition to the fair and remunerative of sugar cane fixed under clause-3(1), as an additional price in accordance with first schedule. Thus, the additional price of payment of sugar cane to the grower, for purchase of raw material (sugarcane) which was approved by the managing committee of the assessee, who is also having representation of State Government as per the statutory provision of State Cooperative Society Act, cannot be termed as a distribution of profit. Such additional payment is made to the members of the Co-operative society who are the supplier of sugarcane and to none other persons. Such payment was made for the purpose of business against the payment of raw material and not for any other purpose.
20. We further find that in a recent decision, the Hon'ble Supreme court in Kolhapur Zilla Sahkari Dudh Utpadak Sangh Ltd. (supra) while affirming the decision of Hon'ble Bombay High Court in the case of CIT Vs Solapur District Co-op Milk Producers & Process Union Ltd. (supra), held that the addition could not be made by treating the amount paid as final rate difference as distribution of profits. It was also held that additions could not be made by treating amount paid as a final rate difference as a distribution of profit among members of the society. We find that Bombay High Court while giving such judgment followed the decision of Gujarat High Court in Mehsana District Co-operative Milk Producers Union Ltd. (supra), thus the decision of Hon'ble Gujarat High Court substantially stand approved by the Hon'ble Apex Court.
21. We find that Hon'ble jurisdictional High Court in Mehsana District Co-operative Milk Producers Union Ltd. (supra) while considering the question of law as to whether a claim for deduction was allowable either under section 28 or section 37(1). The Hon'ble Page 10 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined Court held that the assessee claimed that additional payment was made towards the price of the milk. The Assessing Officer disallowed the same on the ground of profit adjustment. The CIT (Appeals) affirmed the order of the Assessing Officer. The Tribunal allowed the assessee's claim. Various contentions were sought to be canvassed before the learned High Court. The High Court noted the legal position as to when accrual of profits can be said to have accrued. It considered the case, of CIT Vs Ashokbhai Chimanbhi [1965] 56 ITR 42 (SC) and noted that the words "accrue" and "arise" are used to contradistinguish the word 'receive'. Income is said to be received when it reaches the assessee. When the right to receive the income becomes vested in the assessee, it is said to accrue or arise. Dealing with profits, this is what the learned Court said: "Profits do not accrue from day-to-
day or even from month-to-month and have to be ascertained by a comparison of assets at two stated points. Unless the right to profits comes into existence there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise." Applying the test, the learned Court held that because the board resolved to fix the final purchase price and pay on the last day of the accounting period it would not amount to application of profits. The Court also noted that the profits to be assessed have to be the "real profits" and are required to be determined on the ordinary principles of commercial trading and commercial accounting. The Court further noted that the expenditure in question cannot be termed to be application of income in absence of any evidence as to accrual of in profits light- of settled legal position; the payment of additional/final price made on the last day of the accounting year is allowable under section 28 of the Act being a necessary deduction for ascertaining the real profits on principles of commercial accounting and the payment in question is alternatively allowable under section 37 of the Act having been incurred wholly and exclusively for the purpose of business carried on by the assessee in light of the evidence which has come on record.
22. The Hon'ble Apex Court in S.A. Builder (supra) held that the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a Page 11 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined business expenditure, if it was incurred on grounds of commercial expediency. The Apex Court also refereed the decision of Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377, wherein it was held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the venue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
9. The Tribunal thus arrived at finding of fact that the payment of additional sugarcane price paid by the Asseessee with the approval of the Managing Committee is not distribution of profit and therefore, whatever price was paid by the Asseessee was allowable under Section 37(1) of the Act.
10. Learned advocate Mr.Rudram Trivedi for the Appellant- Revenue submitted though Clause 5A is deleted from October, 2009, any amount paid in excess of the SMP or FRP would be nothing but distribution of profit by the Respondent-Assessee. It was submitted that post 2009 amendment SMP regime changed to FRP regime Page 12 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined under which the Central Government is determining the fair and remunerative price and in the facts of the case admittedly the Respondent-Assessee has paid the sugarcane purchase price more than the SMP or FRP and therefore, the Assessing Officer was justified in disallowing the excess amount paid by the Respondent- Assessee not being the expenditure wholly and exclusively for the purpose of business.
10.1 It was submitted that the Tribunal has failed to consider the decision of the Apex Court in case of CIT Vs. Tasgaon Taluka S.S.K.Ltd. reported in [2019] 103 taxmann.com 57 (SC) wherein, the Hon'ble Apex Court has elaborately dealt with this issue of payment in excess of the SMP or FRP by the sugarcane producers. 10.2 It was submitted that the Assessing Officer has rightly disallowed the sugarcane price under section 37(1) of the Act which was paid over and above the prescribed limit under The Sugarcane Control Order 1966.
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10.3 Learned advocate Mr.Rudram Trivedi further referred to and relied upon the Circular dated 14 of 2023 dated 27.07.2023 issued by the Central Board of Direct Taxes. He submits that the issue of payment of sugarcane price in excess of over and above SMP and being in the nature of appropriation/distribution of profit and hence was not allowable as deduction by the Revenue, there was an amendment by inserting a new Clause (xvii) in Section 36 (1) of the Act to provide that the amount paid for purchase of sugarcane by the co-operative societies engaged in the manufacture of sugar at a price which is equal to or less than the price fixed by or fixed with the approval of the Government shall be allowed as deduction for computing business income of the sugar co-operative factories. The said amendment came into force from Assessment Year 2016-17 onwards. It was submitted that as per the said Circular for the year prior to both the years i.e. prior to A.Y.2016, the Assessee is required to make an application before the Assessing Officer to get the benefit of the provision of Section 36(1)(xvii) of the Act and the suitable amendments were made in Section 155 by inserting Clause 19 of the Act, so as to dispose of such application to be filed by the Page 14 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined Assessee.
10.4. It was submitted that as per the Circular time limit prescribed in Section 154 of the Act was required to be considered from April, 2022 so as to given benefit of Section 36(1)(xvii) of the Act which has came into effect from 1.4.2016.
10.5 It was therefore submitted that these appeals may be allowed by quashing and setting aside the orders passed by the Tribunal, the Assessing Officer and CIT(Appeals) and remand the matter back to the Assessing Officer so as to reply the Circular of the CBDT. 10.6. It was therefore submitted that the Tribunal has failed to consider the above aspects and the the order passed by the Tribunal is in contradictory to the decision of the Hon'ble Apex Court in the case of CIT Vs. Tasgaon Taluka S.S.K.Ltd. (Supra).
11. Per contra, learned Senior Advocate Mr.S.N.Soparkar appearing for the Caveator submitted that the decision relied upon by the Revenue in the case of CIT Vs. Tasgaon Taluka S.S.K.Ltd.
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(Supra) is not applicable in the facts of the case. It was pointed out that the facts involved in the said decision pertains to year 1996-97 and 1997-98 which are prior to October 2009 when Clause 5A which was in question being additional price payable to the growers of the sugarcane as per the said clause before the Apex Court. It was therefore submitted that in the facts of the case before this Court, Assessment Years involved are 2012-2013 to 2014-15 and therefore, the decision of the Hon'ble Apex Court pertaining to the years 1996-97, 1997-98 and Clause 5A of the Sugarcane Control Order 1966 was in existence, would not be applicable and therefore, the reliance placed by the Appellant -Revenue on the said decision is misplaced.
11.1 It was further submitted that the Tribunal has rightly relied upon the decision of this Court in case of Commissioner of Income- tax Vs. Mahesana District Co-operative Milk Producers Union Ltd. reported in [2006] 282 ITR 24 (Gujarat) wherein, this Court in the facts of the said case while considering the issue of dis- allowance of the prices paid for the milk procured by the Assessee Page 16 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined held that the Assessing Officer could not have made disallowance either under Section 28 or Section 37. It was further submitted that the Constitution Bench of the Hon'ble Apex Court in the case of U.P.Cooperative Cane Unions Federations Vs.West U.P.Sugar Mills Association and others reported in (2004) 5 SCC 430 has held that as agreed to between the producers and the Sugarcane Growers Co-operative Society is any contractual agreement, such price can be a price higher than the minimum price being in nature of agreed price. It was therefore submitted that as the Tribunal has arrived at finding of fact regarding payment of the sugarcane price by the Assessee to the Sugarcane Growers, the Assessing Officer could not have made addition on account of difference between the SMP and the additional price determined under Clause 5A of the Sugarcane Control Order,1966 though the same was not applicable for the year under consideration.
12. Having heard learned advocates appearing for the respective parties, it appears that the Tribunal after considering the decision of the Apex Court in case of U.P.Co-operative Cane Unions Page 17 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined Federations (Supra) as well as decision of this Court in case of Commissioner of Income-tax Vs. Mahesana District Co- operative Milk Producers Union Ltd. (Supra) has arrived at and findings of fact that the sugarcane price paid by the Assessee is a purely business decision and there is no element of distribution of profit as alleged by the Assessing Officer by taking recourse to the Sugarcane Control Order, 1966 which prescribed the minimum price to be paid to the Sugarcane Grower by the Sugarcane Co- operatives meaning thereby the sugarcane producers cannot purchase the sugar below the minimum price prescribed in the Sugarcane Control Order, 1966. However, there is no prohibition in payment of higher price by the sugarcane producer and therefore, the Tribunal has rightly come to the conclusion that the Assessing Officer could not have made any addition by substituting the business decision of the assessee to pay the sugarcane price to the sugarcane growers as agreed between them. This Court in case of Commissioner of Income-tax Vs. Mahesana District Co-operative Milk Producers Union Ltd. (Supra) while considering the dis-allowance made in the facts of said case under Sections 28 and 37 has held as Page 18 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined under :-
"16. It is necessary to take note of the fact that the Assessing Officer had made disallowance in the alternative i.e., either under section 28 or under section 37 of the Act. The law as to how profits must be ascertained before being brought to tax under section 28 of the Act is well established. Subject to any specific provision under the Act, the profits to be assessed have to be the "real profits" and are required to be determined on ordinary principles of commercial trading and commercial accounting. In other words, a claim for deduction for which there is no specific provision under the Act would be admissible under section 28 of the Act having regard to the accepted commercial practice and trading principles, if it can be said to have been incurred for the purpose of business or in the course of carrying on the business and it is incidental to it.
17. Under section 37 of the Act, the law requires to consider the purpose for which, and not the motive with which, the expenditure is incurred, because purpose is different from motive. The section requires that the expenditure should be "wholly or exclusively"
laid out or expended for the purpose of the business, but not that it should necessarily be laid out or expended for such purpose. In other words, even if the outlay is found to be unnecessary or unnecessarily large or benefits a third party, in absence of a specific provision prohibiting the outlay or restricting it, like section 40A(2) of the Act, such outlay cannot be disallowed. A subjective standard of reasonableness cannot be adopted by the assessing authority to disallow a part of business expenditure. Similarly, it is not open to the authority to decide what type of expenditure should an assessee incur and in what circumstances. The jurisdiction of the Assessing Officer is confined to deciding the reality of the expenditure, namely, whether the amount claimed as a deduction was actually incurred or not? In the present case, admittedly, the payment in question has been treated as a bona fide and genuine payment as recorded by the Tribunal.
13. The Hon'ble Apex Court in case of U.P.Co-operative Cane Page 19 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined Unions Federations Vs.West U.P.Sugar Mills Association and others (Supra) has also held while analyzing 1966 order as under:-
"12. The 1966 Order has been amended several times by the Central Government, Sub-clause (3) of clause 3 was substituted on 18-5-1968, clause 3-A relating to rebate that can be deducted from the price paid for the sugarcane was inserted on 24-9-1976 and clause 5-A was inserted on 25-9-1974, The definition of "price" given in clause 2(g) shows that it can either be the price or the minimum price fixed by the Central Government. Clause 3(3) deals with payment of the price of the cane sold at the rate agreed to between the producer and the sugarcane-grower or sugarcane-growers' cooperative society or that fixed under sub-clause (1), as the case may be. Clause 3-A which deals with rebate that can be deducted from the price paid for sugarcane also refers to either the minimum price of sugarcane fixed under clause 3 or the price agreed to between the producer and the sugarcane-grower or the sugarcane-growers' cooperative society. So far as the power of the Central Government is concerned, under clause 3(1) it can fix only the "minimum price" of sugarcane to be paid by producers of sugar for the sugarcane purchased by them. This is the lowest-permissible rate. The effect of clause 3(2) is that a producer of sugar can under no circumstances purchase sugarcane at a price lower than the minimum price fixed under clause 3(1) and there is a similar prohibition on the cane- grower and he cannot sell or agree to sell sugarcane to a producer of sugar below the said price. But the 1966 Order, in view of the definition of "price" given in clause 2(g) and also the language used in clauses 3 and 3-A, clearly contemplates that there can be a price other than the "minimum price" of sugarcane fixed under clause 3(1), namely, the "price agreed to between the producer and the sugarcane-grower or the sugarcane-growers' cooperative society". Clause 5-A lays down that where a producer of sugar purchases sugarcane from a grower of sugarcane during each sugar year, he shall in addition to the minimum sugarcane price fixed under clause 3 Page 20 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined pay to the sugarcane-grower an additional price, if found due in accordance with the provisions of the Second Schedule. This additional price is to be calculated in accordance with the formula given in the Second Schedule and is dependent upon the value of the sugar produced and the profits made and in effect it is a sharing of profits. Sub-clause (5) of clause 5-A lays down that no additional price determined under sub- clause (2) shall become payable by a producer of sugar who pays a price higher than the "minimum sugarcane price" fixed under clause 3 to the sugarcane-grower, if the same is not less than the total of the price fixed under clause 3(1) and additional price determined under clause 5-A(2). This provision again contemplates payment of price higher than the minimum price fixed under clause 3(1). A whole reading of the 1966 Order would, therefore, show that the Central Government shall fix the minimum price of sugarcane but there can be a price higher than the minimum price which may be in the nature of agreed price between the producer of sugar and the sugarcane-grower or the sugarcane-growers' cooperative society. So the field for a price higher than the minimum price is clearly left open in the 1966 Order made by the Central Government."
14. The reliance placed by learned advocate for the Revenue on the Circular No. 14 of 2023 is misplaced as the said Circular would not be applicable in the facts of the case because the Assessing Officer making addition of the difference between the SMP and additional price defined under Clause 5A of the Sugarcane Control Order 1966, is contrary to any provisions of the said order as clause 5A has been deleted since October, 2009. Moreover, the Tribunal has arrived at finding of fact to the effect that the Page 21 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined Respondent-Assessee has paid the amount of sugarcane purchase price on the basis of agreed price between the parties. The Tribunal has therefore rightly referred and relied upon the decision in case of State of M.P. Vs. Jaora Sugar Mills Ltd. and others wherein the dispute arose on account of fixation of price under the M.P. Sugar (Regulation of Supply and Purchase )Act, 1958 and came to conclusion that the sugarcane price paid by the Assessee which was approved by the Managing Committee of the Assessee having representations of the State Government as per the statutory provision of State Co-operative Societ Act cannot be termed as distribution of profit. In view of the above factual finding arrived at by the Tribunal, we are of the opinion that the expenditure claimed by the Assessee on payment of sugarcane price cannot be considered as distribution of profit as the addition price paid by the Assessee is an expenditure allowable under Section 37 incurred wholly and exclusively for the purpose of business carried out by the Assessee in light of the findings arrived at by the Tribunal. The Tribunal was therefore right in law in deleting the additions made by way of disallowance on the additional purchase price towards Page 22 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025 NEUTRAL CITATION C/TAXAP/955/2024 ORDER DATED: 11/02/2025 undefined the purchase of sugarcane sanctioned by the Managing Committee of the Asseessee.
15. In view of the above, no questions of law much less any substantial questions of law arises from the impugned order of the Tribunal. The appeals therefore being devoid of any merit are accordingly dismissed.
(BHARGAV D. KARIA, J) (D.N.RAY,J) BINA SHAH Page 23 of 23 Uploaded by BINA SHAH(HC00353) on Mon Mar 03 2025 Downloaded on : Fri Mar 07 22:12:58 IST 2025