Dismissed

The Commissioner of Income Tax, Aurangabad. v. Shankar Sahakari S.R. Ltd. Bhokar

Bombay HC14 Aug 2007ITXA/328/2007

Case brief

AI extract

What is this about?

High Court Bench held that Section 40A(2) does not apply to co-operative societies. Excess sugarcane price paid as per State Advise Price fixed under statutory directions is binding, not appropriation of profits or bonus. Khodki charges are deductible business expenses.

What did the court decide?

All appeals by revenue dismissed;.additions disallowed;expenditure allowed.

The Commissioner of Income Tax, Aurangabad. Vs Shankar… — Cooperative Societies | Bombay HC (2007)

¶1

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

¶2

 ORDINARYORIGINAL CIVIL JURISDICTION

¶3

INCOME TAX APPEAL NO.318 OF 2007
WITH
INCOME TAX APPEAL NO.314 OF 2007
WITH
INCOME TAX APPEAL NO.317 OF 2007

¶4

 The Commissioner of Income-tax
 Aayakar Bhavan, Cantonment,
 Aurangabad. ..Appellant.

¶5

 V/s.

¶6

 Manjara Shetkari Sahakari Sakhar
 Karkhana Ltd., Vilasnagar,
 Dist. Latur. ..Respondent.

¶7

WITH
INCOME TAX APPEAL NO.394 OF 2005
WITH

¶8

INCOME TAX APPEAL NO.395 OF 2005
WITH
INCOME TAX APPEAL NO.396 OF 2005

¶9

 The Commissioner of Income-tax -1,
 Kendriya Rajaswa Bhavan, 2nd floor,
 Gadkari Chowk, Old Agra Road,Nasik-2. ..Appellant.

¶10

 V/s.

¶11

 Vasantdada Patil Sahakari Sakhar
 Karkhana Ltd., Vithewadi, Tal.
 Dist. Nashik. ..Respondent.

¶12

WITH
INCOME TAX APPEAL NO.418 OF 2005

¶13

 The Commissioner of Income-tax-V,
 Pratyaksha Kar Bhawan, Dr.Ambedkar,
 Bhawan, Near Akrudi Rly. Station,
 Pradhikaran, Pune - 411 044. ..Appellant.

¶14

 V/s.

¶15

 Shri Vighnahar Sahakkari Sakhar
 Karkhana Ltd., Dhalewadi, A/P.
 Shiroli (Bk.), Tal. Junnar,
 Dist. Pune. ..Respondent.

¶16

 -= : 2 : =-

¶17

WITH
INCOME TAX APPEAL NO.527 OF 2005

¶18

 The Commissioner of Income-tax -1,
 B-Wing, 1st floor, PMT Building,
 Shankarsheth Road, Swargate,
 Pune - 411 037 ..Appellant.
 V/s.
 Jagadamba Sahakari kakhar Karkhana
 Ltd., Rashin, Tal. Karjat, Dist.
 Ahmednagar. ..Respondent.

¶19

WITH
INCOME TAX APPEAL NO.247 OF 2007

¶20

 The Commissioner of Income-tax,
 Aayakar Bhavan, Cantonment,
 Aurangabad. ..Appellant.
 V/s.
 Siddheshwar Sahakari Sakhar Karkhana
 Ltd., Manik Nagar, Tq.Sillod,
 Dist. Aurangabad. ..Respondent.

¶21

WITH
INCOME TAX APPEAL NO.249 OF 2007
WITH
INCOME TAX APPEAL NO.250 OF 2007
WITH
INCOME TAX APPEAL NO.251 OF 2007

¶22

 The Commissioner of Income-tax -1,
 Kendriya Rajaswa Bhavan, 2nd floor,
 Gadkari Chowk, Old Agra Road,Nasik-2. ..Appellant.

¶23

 V/s.
 Panzarkan Sahakari Sahakari Sakhar
 Karkhana Ltd., Sakri, Dist. Dhule. ..Respondent.

¶24

WITH
INCOME TAX APPEAL NO.252 OF 2007
WITH
INCOME TAX APPEAL NO.254 OF 2007
WITH
INCOME TAX APPEAL NO.255 OF 2007

¶25

 -= : 3 : =-

¶26

 The Commissioner of Income-tax
 Aayakar Bhavan, Near Holy Cross
 High School, Cantonment, Aurangabad ..Appellant.

¶27

 V/s.

¶28

 Santh Ekanath Sahakari Sakhar
 Karkhana Ltd., Tq. Paithan
 Dist. Aurangabad. ..Respondent.

¶29

WITH
INCOME TAX APPEAL NO.257 OF 2007
WITH

¶30

INCOME TAX APPEAL NO.260 OF 2007

¶31

 The Commissioner of Income-tax
 Aayakar Bhavan, Near Holy Cross
 High School, Cantonment, Aurangabad ..Appellant.

¶32

 V/s.

¶33

 Shetkari Sahakari Sakhar Karkhana
 Ltd., Killari, Tq.Ausa, Dist. Latur. ..Respondent.

¶34

WITH
INCOME TAX APPEAL NO.262 OF 2007
WITH
INCOME TAX APPEAL NO.282 OF 2007

¶35

 The Commissioner of Income-tax
 Aayakar Bhavan, Near Holy Cross
 High School, Cantonment, Aurangabad ..Appellant.

¶36

 V/s.

¶37

 Jalna Shetkari Sahakari Sakhar
 Karkhana Ltd., Jalna Tal. Jalna
 Dist. Jalna. ..Respondent.

¶38

WITH
INCOME TAX APPEAL NO.263 OF 2007
WITH

¶39

INCOME TAX APPEAL NO.284 OF 2007

¶40

 The Commissioner of Income-tax

¶41

 Aayakar Bhavan, Near Holy Cross
 High School, Cantonment, Aurangabad ..Appellant.

¶42

 V/s.

¶43

 -= : 4 : =-

¶44

 Godavari Mannar Sahakari Sakhar
 Karkhana Ltd., Shankar Nagar, Tq.
 Biloli, Dist. Nanded. ..Respondent.

¶45

WITH
INCOME TAX APPEAL NO.264 OF 2007
WITH

¶46

INCOME TAX APPEAL NO.265 OF 2007
WITH

¶47

INCOME TAX APPEAL NO.300 OF 2007

¶48

 The Commissioner of Income-tax-1
 Kendriya Rajaswa Bhavan, Gadkari
 Chowk, Old Agra Road, Nashik. ..Appellant.

¶49

 V/s.

¶50

 Satpuda Tapi Parisar Sahakari
 Sakhar Karkhana Ltd., Tal.Shahada
 Dist. Dhule. ..Respondent.

¶51

WITH

¶52

INCOME TAX APPEAL NO.267 OF 2007
WITH

¶53

INCOME TAX APPEAL NO.286 OF 2007
WITH
INCOME TAX APPEAL NO.287 OF 2007
WITH
INCOME TAX APPEAL NO.288 OF 2007

¶54

 The Commissioner of Income-tax-1
 Kendriya Rajaswa Bhavan, Gadkari
 Chowk, Old Agra Road, Nashik-422 002. ..Appellant.

¶55

 V/s.

¶56

 Madhukar Sahakari Sakhar Karkhana
 Ltd., Faizpur, Tal. Yawal,
 Dist. Jalgaon. ..Respondent.

¶57

WITH
INCOME TAX APPEAL NO.277 OF 2007

¶58

 The Commissioner of Income-tax,
 Aayakar Bhavan, Near Holi Cross
 High School, Cantonment, Augranbad ..Appellant.

¶59

 V/s.

¶60

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

¶61

 -= : 5 : =-

¶62

WITH

¶63

INCOME TAX APPEAL NO.283 OF 2007

¶64

 The Commissioner of Income-tax,
 Aayakar Bhavan, Near Holy Cross
 School, Cantonment, Aurangabad. ..Appellant.

¶65

 V/s.
 Kalambar Vibhag Sahakari Sakhar
 Karkhana Ltd., Kalambar,
 Dist. Nanded. ..Respondent.

¶66

WITH
INCOME TAX APPEAL NO.285 OF 2007

¶67

 The Commissioner of Income-tax,
 Aayakar Bhavan, Cantonment,
 Aurangabad. ..Appellant.

¶68

 V/s.

¶69

 Jai Javan Jai Kisan Sahakari
 Sakhar Karkhana Ltd., Nalegaon
 Tq. Chakur, Dist. Latur. ..Respondent.

¶70

WITH
INCOME TAX APPEAL NO.289 OF 2007
WITH
INCOME TAX APPEAL NO.294 OF 2007
WITH
INCOME TAX APPEAL NO.325 OF 2007

¶71

 The Commissioner of Income-tax -11,
 Kendriya Rajaswa Bhavan, 2nd floor,
 Gadkari Chowk, Old Agra Road,Nasik-2. ..Appellant.

¶72

 V/s.

¶73

 Belganga Sahakari Sakhar
 Karkhana Ltd., Tal.Chalisgaon,
 Dist. Jalgaon - 425 001. ..Respondent.

¶74

WITH
INCOME TAX APPEAL NO.291 OF 2007

¶75

 The Commissioner of Income-tax -1,
 Aayakar Bhavan, Near Holi Cross High
 School, Cantonment, Aurangabad. ..Appellant.

¶76

 V/s.

¶77

 -= : 6 : =-

¶78

 Kannad Sahakari Sakhar Karkhana Ltd.,
 Mahatma Phule Nagar,Kannad, Tq.Kannad,
 Dist. Aurangabad. ..Respondent.

¶79

WITH
INCOME TAX APPEAL NO.292 OF 2007
WITH
INCOME TAX APPEAL NO.293 OF 2007
WITH
INCOME TAX APPEAL NO.296 OF 2007
WITH
INCOME TAX APPEAL NO.305 OF 2007
WITH

¶80

 INCOME TAX APPEAL NO.332 OF 2007

¶81

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

¶82

 V/s.

¶83

 Samarth Sahakari Sakhar Karkhana Ltd.,
 Wadigodri Tq. Ambad, Dist. Jalna. ..Respondent.

¶84

WITH
INCOME TAX APPEAL NO.295 OF 2007
WITH
INCOME TAX APPEAL NO.297 OF 2007
WITH
INCOME TAX APPEAL NO.299 OF 2007

¶85

 The Commissioner of Income-tax,Nasik-1,
 Kendriya Rajaswa Bhavan, 2nd floor,
 Gadkari Chowk, Old Agra Road, Nasik. ..Appellant.

¶86

 V/s.

¶87

 Shirpur Shetkari Sahakari Sakhar
 Karkhana Ltd., Shirpur, Dist.Dhule. ..Respondent.

¶88

WITH
INCOME TAX APPEAL NO.298 OF 2007

¶89

 The Commissioner of Income-tax -11,
 Kendriya Rajaswa Bhavan, 2nd floor,
 Gadkari Chowk, Old Agra Road,Nasik-2. ..Appellant.

¶90

 V/s.

¶91

 Chopda Shetkari Sahakari Sakhar
 Karkhana Ltd., Tal. Chopda
 Dist. Jalgaon. ..Respondent.

¶92

 -= : 7 : =-

¶93

WITH

¶94

INCOME TAX APPEAL NO.327 OF 2007
WITH

¶95

INCOME TAX APPEAL NO.328 OF 2007

¶96

WITH

¶97

 INCOME TAX APPEAL NO.329 OF 2007

¶98

 The Commissioner of Income-tax,
 Aayakar Bhavan Near Holy Cross
 English Schoo, Cantonment, Aurangabad ..Appellant.

¶99

 V/s.

¶100

 Shankar Sahakari Sakhar Karkhana
 Ltd., Waghalwada (Kusumnagar), Tq.
 Bhokar, Dist. Nanded. ..Respondent.

¶101

 Mr.B.M.Chatterjee withy Mrs.P.P.Bhosale i/b.Pankaj
 Kapoor for appellant.

¶102

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

¶103

CORAM : F.I.REBELLOANDJ.P.DEVADHAR, JJ.

¶104

JUDGMENT RESERVED ON : 25TH JULY, 2007.

¶105

JUDGMENT PRONOUNCED ON : 14TH AUGUST, 2007.

¶106

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

¶107

 1. In these group of 47 appeals filed under

¶108

 section 260A of the Income Tax Act, 1961 (‘the Act’ for
 short), the Commissioner of Income-tax has challenged
 various orders passed by the Income Tax Appellate
 Tribunal in the case of different assessees. Counsel
 on both sides agree that the following substantial
 questions of law arise in all these appeals, namely :-

¶109

 -= : 8 : =-

¶110

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 ?

¶111

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 ?

¶112

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 ?

¶113

2. All the aforesaid 47 appeals are admitted on

¶114

 the aforesaid questions of law and by consent of both
 the parties these group of 47 appeals are heard and
 finally disposed of by this common Judgment.

¶115

 3. Although the facts in all these appeals are
 not in dispute, for better appreciation of the disputes
 involved herein, we may note few facts in Income Tax
 Appeal No.318 of 2007. Counsel on both sides agree
 that the decision in Income Tax Appeal No.318 of 2007
 would apply to the remaining appeals as well.

¶116

 4. The respondent / assessee is a Co-operative
 Sugar Factory engaged in the manufacture of sugar by
 utilising sugarcane as raw material.

¶117

 5. The assessment year involved is Assessment

¶118

 -= : 9 : =-

¶119

 Year 1992-93.

¶120

 6. In the assessment year in question, the
 assessing officer (A.O.) noticed that the assessee had
 purchased sugarcane from members of the society as well
 as from non members at a price fixed by the State
 Government which was higher than the statutory minimum
 price (SMP) fixed by the Central Government. The A.O.
 further noticed that the price paid by the assessee to
 the sugarcane suppliers was more than the sugarcane
 price paid by Marathwada SSK Ltd. to its suppliers.
 By comparing the cane sugar price paid in the earlier
 years in the case of the assessee as well as Marathwada
 SSK Ltd., the A.O. determined the fair market value of
 the sugarcane and by invoking Section 40A(2)(a) of the
 Act, disallowed the amount which was found unreasonable
 or in excess of the fair market value. According to
 the A.O., excess cane sugar price paid by the assessee
 amounted to diversion of commercial profits earned by
 the assessee and hence not allowable. For the same
 reasons, the assessing officer disallowed the Khodki
 charges claimed by the assessee.

¶121

 7. On appeal filed by the assessee, the C.I.T.

¶122

 (A) upheld the contention of the assessee that section
 40A (2) is not applicable to a co-operative society
 and, therefore, no disallowance of excess sugarcane

¶123

 -= : 10 : =-

¶124

 price could be made under section 40A (2)(a) of the
 Act. However, the C.I.T. (A) held that the excess
 payment of sugarcane price was in the nature of
 appropriation of profits and the same would be ‘bonus’
 within the meaning of section 2(4) of the Maharashtra
 Co-operative Societies Act, 1960 (‘M.C.S. Act’ for
 short) and such incentive bonus would not be allowable
 expenditure. For the same reasons the C.I.T. (A) held
 that the Khodki charges are also liable to be
 disallowed. The C.I.T. (A) further held that the
 Khodki charges is an agricultural expenditure and since
 the assessee is not engaged in the agricultural
 activity the disallowance of Khodki charges is liable
 to be upheld.

¶125

 8. Being aggrieved by the aforesaid order, both
 the assessee as well as the revenue filed appeals
 before the I.T.A.T. The president of the I.T.A.T.
 constituted a special bench to decide the issues
 arising out of the above two appeals as also appeals in
 the case of some other assessees. The Special Bench,
 considered the fixation of sugarcane price in various
 countries like Australia, Indonesia, USA, Cuba, Mexico,
 Phillipines, Mauritius, South Africa and Puerto Rico
 and by its order dated 19/8/2004 (reported in 85 TT J

¶126

369) held that section 40A (2)(b) (ii) is not
 applicable to the co-operative societies and further

¶127

 -= : 11 : =-

¶128

 held that price fixation is a legislative function and
 the payments made to the cane growers at the rate fixed
 by the State Advise Price (SAP) cannot be disallowed by
 treating the differential amount between SMP and SAP as
 appropriation of profits or bonus. Similarly, the
 Special Bench held that the expenses incurred by the
 assessee as Khodki charges cannot be disallowed. As
 per the decision of the Special Bench, the Tribunal has
 dismissed the appeal filed by the revenue and allowed
 the appeal filed by the assessee. Challenging the
 aforesaid order, the revenue has filed these appeals.

¶129

 9. Thus, the question to be considered in all
 these appeals are, firstly, whether section 40A (2) of
 the Act applies to a cooperative society and secondly,
 whether part of the cane price paid to the sugar cane
 suppliers and the khodki charges incurred by the
 assessee could be disallowed on the ground that the
 said expenditure constitute appropriation of profits /
 bonus under the provisions of M.C.S. Act, 1960 ?

¶130

Regarding question No.1

¶131

 10. The question as to whether section 40A (2)
 of the Act applies to a co-operative society or not has
 been considered by this Court in the case of Shivamrut
 Doodh Utpadak Sahakari Sangh Maryadit, Akluj. While

¶132

 -= : 12 : =-

¶133

 dismissing the Tax Appeal No.62 of 1999 filed by the
 revenue (CIT V/s. Shivamrut Doodh Utpadak Sahakari
 Sangh Maryadit) on 7/12/1999 this Court confirmed the
 decision of the Tribunal and held that section 40A (2)
 of the Act does not apply to a co-operative society.

¶134

 11. In the case of Shivamrut Doodh Utpadak
 Sahakari Sangh (supra) the question raised was, whether
 the words "association of persons" (A.O.P.) in section
 40A (2) would include a co-operative society ? It was
 held that the word ‘A.O.P.’ in Section 40A(2) would not
 include a cooperative society, because firstly, section
 2(19) of the Act defines a co-operative society to mean
 a co-operative society registered under the
 Co-operative Societies Act, 1912 or under any other law
 for the time being in force. Section 40A(2) applies to
 the persons specifically namely therein and since
 ‘Cooperative Society’ does not appear in Section
 40A(2)(b), the said Section would not apply to a
 cooperative Society. Secondly, a co-operative society
 formed on the doctrine of mutuality is entitled to
 deduction under section 80 P of the Act, whereas, no
 such deduction is not available to an A.O.P. This
 clearly shows that under the Income Tax Act,
 cooperative Society is different from A.O.P. Thirdly,
 co-operative societies are distinctly referred to in
 various sections of the Act eg. sections 2(18) (ad), 2

¶135

 -= : 13 : =-

¶136

 (24) (vii), 27(iii), 36 (1)(ia), 40(ba), 45(3), 80 L(1)
 (ii), (vi), (via), (viii) (ix), 80P, Explanation 1
 (b)(i) to section 139 (1) [prior to Finance Act, 2001]
 193 (iib), 194A (3)(i), (v), 269T and 269 (VA). In
 these circumstances, it was held that under the Income
 Tax Act ‘Co-operative Society’ is distinct from
 ‘association of persons’ and since the word
 ‘co-operative society’ does not appear in section 40A
 (2) of the Act, disallowance under section 40(A) (2)
 cannot be made in the case of a co-operative society.

¶137

 12. Accordingly, in the light of the decision of
 this Court in the case of Shivamrut Doodh Utpadak
 Sahakari Sangh (supra), we answer the first question in
 favour of the assessee and against the revenue.

¶138

Regarding question Nos.2 & 3.

¶139

 13. According to Mr.Chatterjee, learned counsel
 for the revenue, once the statutory minimum price (SMP)
 is fixed by the Central Government the assessee is
 bound to pay that price to the cane growers and any
 price paid in excess of SMP would not be allowable
 expenditure. He submitted that the State Advice Price
 (SAP) is fixed by the State Government based on the
 particulars submitted by the assessee after
 finalisation of the accounts and determination of the

¶140

 -= : 14 : =-

¶141

 profits. Thus, the SAP fixed by the State Government
 is based on the profits earned by the assessee and,
 therefore, the differential amount between SMP and SAP
 would be in the nature of distribution of profits and
 such a payment which is in the nature of distribution
 of profits cannot be allowed as business expenditure.

¶142

 14. Mr.Chatterjee further submitted that payment
 of cane price in excess of the fair market price would
 also constitute ‘bonus’ within the meaning of section
 2(4) of the ‘MCS Act’. Bonus is nothing but sharing of
 profits and, therefore, the excess cane price which is
 in the nature of profit sharing cannot be allowed as
 business expenditure. In this connection, Mr.
 Chatterjee relied upon a decision of the Apex Court in
 the case of Shri Malaprabha Co-operative Sugar Factory
Ltd. V/s. Union of India reported in (1994) 1 SCC 648
 especially para 92 thereof.

¶143

 15. For the same reasons, Mr.Chatterjee
 submitted that the expenditure incurred by the assessee
 on Khodki charges is also liable to be disallowed.
 Accordingly, Mr.Chatterjee submitted that the questions
 raised in the Appeal be answered in favour of the
 revenue.

¶144

 16. Mr.Inamdar, learned counsel appearing on

¶145

 -= : 15 : =-

¶146

 behalf of the assessee while supporting the order
 passed by the Tribunal, submitted that under the M.C.S.
 Act and the Bye laws framed thereunder, the assessee is
 bound to submit particulars at the end of the financial
 years so as to enable the State Government to fix the
 SAP. Such particulars furnished at the end of the
 financial year are not based on determination of
 profits. He submitted that payment before finalisation
 of profit is different from payment out of profit. In
 the present case, the cane price is paid as per the SAP
 fixed by the State Government. The fact that the SAP
 is based on the particulars submitted by the assessee
 cannot be a ground to hold that the price paid to the
 cane growers is in the nature of distribution of
 profits or bonus. Referring to the Government of
 Maharashtra Circular dated 2/4/1985 and the Bye laws of
 the society, Mr.Inamdar submitted that so long as the
 State Government share capital is not fully repaid, the
 State Government was entitled to fix final sugarcane
 price and the assessee was bound and liable to pay the
 said price to the cane suppliers irrespective of the
 fact that the cane suppliers are members of the
 assessee or not. He submitted that SAP fixed by the
 State Government was a mandatory direction under
 section 79A of the M.C.S. Act and the assessee was
 bound to follow the said direction. Therefore, no
 disallowance could be made from the cane price paid by

¶147

 -= : 16 : =-

¶148

 the assessee to its members / non members at a price
 fixed by the State Government. In this connection,
 Mr.Inamdar relied upon the decision of the Apex Court
 in the case of Pravara SSK Ltd. V/s. CIT reported in
94 ITR 321 (S.C.) and the decision of the Apex Court in
 the case of Maharashtra Rajya Sahakari Sakhar Karkhana
Sangh Limited V/s. State of Maharashtra reported in
1995 Supp (3) SCC 475.

¶149

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

¶150

 18. The Apex Court in the case of U.P.Co-op.

¶151

 -= : 17 : =-

¶152

Cane Unions Federation V/s. West U.P.Sugar Mills
Association reported in (2004) 5 SCC 430 after
 reviewing the entire case law on the subject observed
 in para 39 thus:-

¶153

 " These cases clearly lay down that under
 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.

¶154

 19. In the light of the aforesaid Judgment of

¶155

 the Apex Court, it is evident that it is the
 prerogative of the State Government to fix the final
 cane price in public interest and such a final price
 fixed by the State Government in the case of each of
 the assessee which is normally higher than the SMP
 fixed by the Central Government is binding on each of
 the assessees.

¶156

 20. Once it is held that the assessee is bound
 by the SAP fixed by the State Government and payment is
 made accordingly, the question is, whether it is open

¶157

 -= : 18 : =-

¶158

 to the Assessing Officer to make disallowance on the
 ground that the cane price paid is in excess of the
 fair market value and make addition of the differential
 amount between the SAP and SMP in the income of the
 assessee.

¶159

 21. The main argument of the revenue is that
 firstly the SAP fixed by the State Government exceeds
 the fair market value and hence liable to be
 disallowed. Secondly the State Advise Price (SAP) is
 determined on the basis of the price recommended by the
 assessee after the finalisation of accounts and,
 therefore, the differential amount between SAP & SMP
 being appropriation of profits and in the nature of
 ‘bonus’ under Section 2(4) of the M.C.S. is liable to
 be disallowed. There is no merit in this contention,
 because, under the M.C.S. Act, though the assessee is
 bound to pay the S.M.P. fixed by the Central
 Government, the assessee is also bound to pay the final
 cane price as per the SAP fixed by the State
 Government. Therefore, where the payment is made to
 the cane growers as per the directions of the State
 Government, the assessee cannot be accused of paying to
 the cane growers in excess of the fair market price.
 What should be the fair market value to be paid to the
 cane growers is left to the State Government. The fact
 that SAP fixed by the State Government is based on the

¶160

 -= : 19 : =-

¶161

 price recommended by the assessee after the

¶162

 finalisation of the accounts would not constitute
 appropriation of profits / bonus because, appropriation
 of profits would arise only after the profits are
 determined and profits can be determined only after all
 the expenses incurred for the business are deducted
 from the gross income. As per the bye-laws framed
 under the M.C.S. Act, every assessee is obliged to
 recommend the final cane price after the finalisation
 of accounts in the respective year. In order to secure
 better price for the cane growers the scheme evolved by
 the State Government in the State of Maharashtra is to
 determine the final cane sugar price after completion
 of accounts at the end of the year. As noted earlier,
 the final cane sugar price determined by the State
 Government is binding and there is no challenge to the
 SAP fixed by the State Government. Therefore, payment
 of the final cane sugar price as per SAP fixed by the
 State Government based on the price recommended by the
 assessee after the finalisation of accounts cannot be
 said to be appropriation of profits.

¶163

 22. Moreover, Section 65 of the M.C.S. Act

¶164

 provides for the mode and the manner of ascertainment
 and appropriation of profits. The said Section
 provides that no part of profits shall be appropriated
 except with the approval of the annual general meeting

¶165

 -= : 20 : =-

¶166

 and in conformity with the Act, rules and bye-laws. In
 the present case, neither the profits are determined
 nor there is any resolution passed in the A.G.M. to
 distribute profits in the form of higher cane price /
 bonus. Therefore, in the facts of the present case,
 the final cane price paid at the rate fixed by the
 State Government cannot be said to be distribution of
 profits / bonus.

¶167

 23. Reliance placed by the revenue on the
 decision of the Apex Court in the case of Shri
 Malaprabha Co-operative Sugar Factory (supra), in our
 opinion is wholly misplaced. In that case, the issue
 before the Apex Court was whether the ‘statutory
 minimum price" (SMP) fixed by the Central Government on
 levy sugar was in accordance with the levy sugar order
 issued under section 3(3c) of the Essential Commodities
 Act, 1955. While holding that the S.M.P. fixed by the
 Central Government is neither arbitrary nor suffers
 from extraneous considerations, the Apex Court referred
 to the final cane pricing system adopted in the State
 of Maharashtra. It was held that in the State of
 Maharashtra the farmers get profits in the form of
 additional cane prices which fluctuates widely from
 factory to factory and the same is of a profit sharing
 nature. These observations made by the Apex Court
 cannot be construed to mean that the payments made as

¶168

 -= : 21 : =-

¶169

 per the final cane price fixed by the State Government
 constitute appropriation of profits / bonus and make
 disallowance accordingly.

¶170

 24. It is pertinent to note that the final cane
 price fixed by the State Government is paid by the
 assessee to its members as well as non members. In the
 case of Maharashtra Rajya Sahakari Sakhar Karkhana
 Sangh Limited (Supra), the Apex Court has held that the
 production of sugar being of primary concern, the SAP
 fixed by the State of Maharashtra is not only binding
 on the members but also binding on non members who
 supply sugar cane to the assessee. In these
 circumstances, the final cane price paid by the

¶171

 assessee as per the SAP fixed by the State Government
 cannot be said to be excessive or appropriation of
 profits / bonus and consequently no disallowance could
 be made in that behalf.

¶172

 25. Similarly, the Khodki charges are incurred
 as per the directions of Director of Sugar to clean out
 the farmers land and to compensate the farmer for the
 unevenly cut cane sugar at the time of harvesting.
 This Court in the case of C.I.T. V/s. Shree

¶173

Panchganga SSK Ltd. reported in 254 ITR 572 has held

¶174

 that Khodki charges are incurred for the business
 purposes and hence the said expenses are allowable.

¶175

 -= : 22 : =-

¶176

 Accordingly, following the said decision, we answer
 question Nos.2 & 3 in favour of the assessee and
 against the revenue.

¶177

 26. In the result, all the appeals filed by the
 revenue are dismissed by answering the three questions
 framed in these appeals in favour of the assessee and

¶178

 against the revenue with no order as to costs.

¶179

(F.I.REBELLO, J.)

¶180

 (J.P.DEVADHAR, J.)

The Commissioner of Income Tax, Aurangabad. v. Shankar Sahakari S.R. Ltd. Bhokar

Case brief

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The Commissioner of Income Tax, Aurangabad. v. Shankar Sahakari S.R. Ltd. Bhokar

Case brief

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What did the court decide?

What the court decided

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