Dismissed

The Commissioner of Income Tax, Aurangabad. v. Terna Shetkari S S K Ltd. Dhoki

Bombay HC22 Oct 2007ITXA/278/2007

Case brief

AI extract

What is this about?

This income tax appeal challenged deletions of additions made by the Assessing Officer regarding binding material charges paid by a cooperative sugar society. The Court held that the Sugarcane Control Order's rebate provision is directory, not mandatory, and the earlierprecedent confirmed Section 40A(2)(a) does not apply to cooperative societies.

What did the court decide?

The appeal filed by the revenue was dismissed with no order as to costs, upholding the deletion of additions made by the Assessing Officer.

The Commissioner of Income Tax, Aurangabad. Vs Terna Shetkari S S… — Income Tax | Bombay HC (2007)

¶1

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

¶2

 ORDINARYORIGINAL CIVIL JURISDICTION

¶3

INCOME TAX APPEAL NO.278 OF 2007

¶4

 The Commissioner of Income Tax, )
 Aayakar Bhavan, Near Holi Cross )
 High School, Cantonment, )
 Aurangabad. )..Appellant.

¶5

 V/s.

¶6

 Terna Shetkari Sahakari Sakhar )
 Karkhana Ltd. Dhoki, Tal. & Dist. )
 Osmanabad. )..Respondent.

¶7

 Mr.B.M.Chatterji, Advocate with Mrs.P.P.Bhosale for the
 appellant.

¶8

 Mr.S.N.Inamdar, Advocate with Mr.A.K.Jasani for
 respondent.

¶9

CORAM : F.I.REBELLOANDJ.P.DEVADHAR, JJ.
JUDGMENT RESERVED ON : 8TH OCTOBER, 2007.
JUDGMENT PRONOUNCED ON : 22ND OCTOBER, 2007.

¶10

JUDGMENT (PER J.P.DEVADHAR, J.)

¶11

 1. This appeal is filed by the Commissioner of
 Income Tax, Aurangabad under section 260A of the Income
 Tax Act, 1961 against the order passed by the I.T.A.T.,
 Pune, Bench-A, Pune bearing ITA No.256/PN/05 dated
 17/2/2006 for AY 1992-93.

¶12

 2. Although several questions are raised in the
 appeal, the appeal is admitted on the following

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¶14

 reframed questions of law and the appeal is taken up

¶15

 for final hearing by consent of both the parties:-

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1. Whether the Appellate Tribunal was right in law in holding that provisions of Section 40A(2) (a) are not applicable to a co-operative Society ?

¶17

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the additional payment over and above the statutory minimum price (SMP) was cane price and not diversion of profit and as such allowable as business expenditure under section 37(1) of the Income Tax Act, 1961 ?

¶18

3. Whether on the facts and in the circumstances of the case cane price / Khodki charges paid by the assessee was not "Bonus" within the meaning of 2(4) of the Maharashtra Co-op. Societies Act, 1960 and it was allowable as business expenditure ?

¶19

4. Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in deleting the addition of Rs.59,047/- made on account of sugar supplied to members at concessional rate ?

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5. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the expenditure of Rs.14,25,008/and Rs.2,07,038/- incurred by the society towards binding material charges paid to members and non members respectively holding that the said expenditure was incurred as a matter of business expediency of the assessee society and it forms part of transportation charges ?

¶21

 3. As regards the first three questions are
 concerned, counsel on both sides agree that the
 aforesaid questions are answered by this Court in
 Income Tax Appeal No.318 of 2007 (The Commissioner of

¶22

 -= : 3 : =-

¶23

 Income-tax, Aurangabad V/s. Manjara Shetkari Sahakari
 Sakhar Karkhana Ltd., Latur) dated 14th August, 2007 in
 favour of the assessee and against the revenue.

¶24

 4. As regards question No.4 is concerned,,
 learned counsel for the revenue states that in view of
 the C.B.D.T. Circular No.117 dated 22/8/1973, he is
 not pressing the fourth question. Hence the only
 question to be decided in this appeal is question No.5.

¶25

 5. The facts relevant for deciding the 5th
 question are that the respondent (‘assessee’ for short)
 is engaged in the manufacture of sugar. Sugarcane is
 the raw material required for manufacture of sugar and
 the same is purchased by the assessee from its members
 as well as non members.

¶26

 6. Sugar being a controlled commodity, minimum
 price payable to the sugarcane growers by the producer
 of sugar like the assessee is fixed by the Central
 Government under the Sugarcane (Control) Order, 1966 as
 modified from time to time.

¶27

 7. Clause 3A of the Sugarcane (Control) Order,
 1966 as modified by Sugarcane (Control) Amendment
 Order, 1983 to the extent relevant herein reads as
 under:-

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 -= : 4 : =-

¶29

 3A. REBATE THAT CAN BE DEDUCTED FROM THE PRICE PAID
FOR SUGARCANE

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 " A producer of sugar or his agent shall pay,
 for the sugarcane purchased by him, to the sugarcane
 grower or the sugarcane growers’ co-operative
 society, either the minimum price of sugarcane fixed
 under clause 3, or the price agreed to between the
 producer or his agent and the sugarcane grower or
 the sugarcane growers’ co-operative society, as the
 same may be (hereinafter referred to as the agreed
 price) ;

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 Provided that -

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 (i) .....

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 (ii) .....

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 (iii) where the sugarcane is brought bound in
 bundles and weighed as such, the Central
 Government or with the approval of the
 Central Government, the State Government,
 or the Director of Agriculture, or the
 Cane Commissioner, or the District
 Magistrate, within their respective
 jurisdiction may allow a suitable rebate
 in regard to the weight of the binding
 material not exceeding 1000 kilograms per
 quintal of sugarcane; and

¶35

 (iv) The Central Government, or the State
 Government, or the Director of
 Agriculture, or the Cane Commissioner, or
 the District Magistrate, may allow a
 suitable rebate in the minimum price or
 the agreed price as the case may be, when
 the cane is supplied within their
 respective jurisdiction subject to the
 conditions that the rebate so allowed
 shall not exceed the estimate expenditure
 on harvesting. "

¶36

 8. Thus, under the sugarcane (Control) order,
 the sugar factories are allowed to deduct from the

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 -= : 5 : =-

¶38

 sugarcane price rebate towards the binding material not
 exceeding 1 kg. per quintal of sugarcane i.e. 0.01% if
 the sugarcane is brought bound in bundles. It is the
 case of the assessee that most of the time sugarcane is
 brought to the factory in bullock carts / tractors -
 trailors in unbound condition, that is without using any
 binding material. However, few farmers bring the
 sugarcane to the factories bound in bundles. The sugar
 factories prefer to pay the cane price to such farmers
 on the gross weight without deducting the costs of
 binding material at 0.01% permitted under the Sugarcane
 Control order.

¶39

 9. In the assessment year in question the
 assessing officer was of the opinion that the assessee
 was bound to deduct 0.01% from the total sugarcane price
 towards the cost of the binding material as per the
 Sugarcane Control Order and since the assessee failed to
 deduct any amount towards the binding material, the
 assessing officer estimated the cost of the binding
 materials at 0.01% and disallowed the same. However,
 the assessing officer disallowed a sum of Rs.14,25,008/-
 towards cost of the binding material supplied by the
 members under section 40A (2) (a) of the Income Tax Act,
 1961 and disallowed a sum of Rs.2,07,038/- towards the
 cost of binding materials supplied by the non members
 under section 37 of the Income Tax Act, 1961.

¶40

 -= : 6 : =-

¶41

 10. On appeal filed by the assessee, the

¶42

 Commissioner of Income Tax (A) deleted the additions
 made by the assessing officer, by relying upon the
 Special Bench decision in the case of Manjara Shetkari
 Sahakari Sakhar Karkhana Ltd.

¶43

 11. On appeal filed by the revenue, the
 I.T.A.T. Pune Bench, Pune dismissed the appeal filed by
 the revenue and upheld the order of C.I.T.(A). Hence
 this appeal is filed by the revenue under section 260A
 of the Income Tax Act, 1961.

¶44

 12. Mr.Chatterji, learned counsel appearing on

¶45

 behalf of the revenue submitted that the direction given
 by the Central Government to deduct 0.01% from the
 sugarcane price towards the cost of binding materials
 was mandatory and since the assessee had failed to

¶46

 deduct the said amount, the assessing officer was
 justified in making disallowance of the said amount. He
 submitted that irrespective of the fact that the binding
 material could be used as a fuel, the directions given
 by the Central Government regarding binding material was
 binding on the assessee and as the assessee failed to
 deduct the cost of the binding material, the assessing
 officer was justified in making the disallowance to that
 extent. He submitted that it is not open to the

¶47

 -= : 7 : =-

¶48

 assessee to contend on the one hand that the directions
 given by the Government regarding the payment of
 sugarcane price is binding on them and at the same time
 refuse to follow the directions regarding the deduction
 of the cost of the binding materials from the total
 sugarcane price payable to the members and non members.
 Mr.Chatterji further submitted that the excess payment
 made to members and non members in contravention of the
 Sugarcane (Control) Order, apart from being contrary to
 law amounts to distribution of profits which is not
 permissible in law. Accordingly, Mr.Chatterji submitted
 that the Commissioner of Income Tax (A) as well as the
 Tribunal were not justified in deleting the additions
 made by the assessing officer.

¶49

 13. Mr.Inamdar, learned counsel appearing on
 behalf of the respondent while supporting the order of
 the Tribunal submitted that the deduction towards
 binding charges contained in the Sugarcane (Control)
 Order was not mandatory but directory. He submitted
 that the decision of the assessee not to deduct the
 weight of the binding material was based on business
 expediency. He submitted that what was paid was not a
 separate expenditure as such but it was payment of cane
 price only. He submitted that the additions made by the
 assessing officer by making disallowance under Section
 40A(2) of the Income Tax Act, 1960 cannot be sustained

¶50

 -= : 8 : =-

¶51

 in view of the decision of this Court in the case of

¶52

 CIT, Aurangabad V/s. Manjara SSK Limited (I.T.A.
 No.318 of 2007) decided on 14th August, 2007.
 Similarly, the disallowance made under section 37 of the
 Act cannot be sustained as the total sugarcane price has
 been paid as per the State Advice Price (SAP) fixed by
 the State Government. Accordingly, Mr.Inamdar submitted
 that there is no merit in the appeal filed by the
 revenue and the same is liable to be dismissed.

¶53

 14. We have carefully considered the rival
 submissions.

¶54

 15. At the outset, it may be noted that the
 object of Sugarcane (Control) Order is to ensure that
 the sugarcane growers gets the minimum price for the
 sugarcane grown by them. The said order inter alia
 empowers the Central Government or other authorities
 named therein to allow rebate from the minimum price not
 exceeding 0.01% towards the cost of the binding
 material. According to the revenue, the directions
 given in the Sugarcane (Control) Order to deduct the
 cost of the binding materials @ 0.01% of the total
 sugarcane price is mandatory, whereas, according to the
 assessee it is directory.

¶55

 16. On a plain reading of clause 3A of the

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 -= : 9 : =-

¶57

 Sugarcane (Control) Order, it is seen that the
 directions contained therein are directory and not
 mandatory. The use of the word ‘may’ in clause 3A(iii)
 of the Sugarcane (Control) Order clearly shows that the
 direction contained therein is directory and not
 mandatory. Moreover, neither the Central Government nor
 the State Government nor any other authorities in
 exercise of the powers conferred under clause 3A of the
 Sugarcane (Control) Order had directed the assessee to
 deduct 0.01% from the total sugarcane price towards the
 cost of the binding materials. In these circumstances,
 it is difficult to accept the argument of the revenue,
 that deduction of 0.01% from the total sugarcane price
 towards the cost of the binding materials was mandatory.
 Consequently, disallowance made on the footing that
 excess cane price has been given to the members and non
 members in contravention of the mandatory provisions
 contained in the Sugarcane (Control) Order cannot be
 sustained.

¶58

 17. Moreover, in the present case, the
 addition of Rs.14,25,008/- towards the cost of binding
 materials is made by the assessing officer by making
 disallowance from the sugarcane price payable to the
 members of assessee, under Section 40A(2) of the Income
 Tax Act. This Court in the case of Manjara SSK Limited
 (Supra) has held that Section 40A(2) of the Income Tax

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 -= : 10 : =-

¶60

 Act is not applicable to a cooperative society.
 Therefore, the deletion of the addition of
 Rs.14,25,008/- could not be made by making disallowance
 under section 40A(2) in the case of the assessee
 cooperative society.

¶61

 18. As regards the deletion of the addition of
 Rs.2,07,038/- is concerned, in the present case, the
 assessee has paid to the non-members the sugarcane price
 as per the State Advise Price (SAP) fixed by the State
 Government. As held by this Court in the case of
 Manjara SSK Ltd. (supra) the SAP fixed by the State
 Government is binding on the assessee. The State Advise
 Price fixed by the State Government does not contain any
 direction to deduct the cost of the binding materials
 from the SAP. It is not in dispute that the assessee
 has made payments to the members and non members as per
 the SAP fixed by the State Government. Therefore, in
 the facts of the present case, it cannot be said that
 the payments made to the members and non members was in
 excess of the Sugarcane (Control) Order and consequently
 making disallowance / addition on that ground does not
 arise at all.

¶62

 19. The 5th question raised by the revenue is,
 therefore, answered in the affirmative, that is in
 favour of the assessee and against the revenue.

¶63

 -= : 11 : =-

¶64

 20. The appeal is dismissed accordingly, with

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 no order as to costs.

¶66

(F.I.REBELLO, J.)

¶67

 (J.P.DEVADHAR, J.)

The Commissioner of Income Tax, Aurangabad. v. Terna Shetkari S S K Ltd. Dhoki

Case brief

What is this about?

What did the court decide?

The Commissioner of Income Tax, Aurangabad. v. Terna Shetkari S S K Ltd. Dhoki

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

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