ORDINARY v. Manjara Shetkari Sahakari Sakhar

Mr.B.M.Chatterjee withy Mrs.P.P.Bhosale i/b.Pankaj Kapoor for appellant. Mr.S.N.Inamdar with A.K. Jasani for respondent. CORAM : F.I.REBELLO CORAM : F.I.REBELLO ANDANDAND J.P.DEVADHAR, JJ. J.P.DEVADHAR, JJ. CORAM : F.I.REBELLO J.P.DEVADHAR, JJ. JUDGMENT RESERVED ON : 25TH JULY, 2007. JUDGMENT RESERVED ON : 25TH JULY, 2007. JUDGMENT RESERVED ON : 25TH JULY, 2007. JUDGMENT PRONOUNCED ON : 14TH AUGUST, 2007. JUDGMENT PRONOUNCED ON : 14TH AUGUST, 2007. JUDGMENT PRONOUNCED ON : 14TH AUGUST, 2007. JUDGMENT (PER J.P.DEVADHAR, J.) JUDGMENT (PER J.P.DEVADHAR, J.) JUDGMENT

(PER J.P.DEVADHAR, J.)

1. In these group of 47 appeals filed under 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 :- -= : 8 : =-

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 ?

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 ?

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 ?

2. All the aforesaid 47 appeals are admitted on 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.

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.

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

The assessment year involved is Assessment -= : 9 : =- Year 1992-93.

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.

On appeal filed by the assessee, the C.I.T. (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 -= : 10 : =- 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.

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 85 TT J and by its order dated 19/8/2004 (reported in 85 TT J 85 TT J 369369369) held that section 40A (2)(b) (ii) is not applicable to the co-operative societies and further -= : 11 : =- 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.

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 ? Regarding question No.1

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 -= : 12 : =- 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.

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 -= : 13 : =- (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.

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. Regarding question Nos.2 & 3.

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 -= : 14 : =- 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.

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 Shri Malaprabha Co-operative Sugar Factory Shri Malaprabha Co-operative Sugar Factory