The Commissioner of Income Tax v. Shetkari Sahakari Sakhar Karkhana Limited

... ASG for Appellant : Shri Alok Sharma ... CORAM : D. G. KARNIK & S. B. DESHMUKH, JJ. Dated: February 10, 2012 ... ORAL JUDGMENT : (Per D.G.KARNIK,J.):-

1. Heard learned ASG for the appellant. None present for the respondent, though served.

2. Two issues, as under, are pressed before us :- (1) Whether an amount, for which a provision is made in the books of account by the assessee (a sugar factory), who maintains accounts on the mercantile basis, towards contribution made to a recognised research institute, can be allowed as a deduction under Section 35(1) of the Income Tax Act, 1961, if the amount is not actually paid in the relevant assessment year ? 2 TA/25/2008 (2) Whether the difference between the market price of sale of sugar and price of the sale of a small quantity of sugar made by the assessee ( a sugar factory ) to it's sugarcane producer members at a concessional rate, can be added in the income of an assessee under Section 40A of the Income Tax Act, 1961 ?

3. So far as first issue is concerned, by an order dated 7.2.2012 passed in Tax Appeal No.17 of 2008 (CIT Vs. Jai Ambika Sahakari Sakhar Karkhana Ltd.), we have held in favour of an assessee and against the revenue. Hence, for the reasons recorded in the order passed therein, the issue, so far as this Court is concerned, is concluded.

4. So far the second issue is concerned, the facts may be briefly stated. The respondent - assessee is a cooperative sugar factory manufacturing sugar from sugarcane. It purchases sugarcane from it's producer members as well as non-member farmers. Small quantity of the sugar produced is offered for sale at a concessional rate to the farmers (i.e. producer members as well as non-members) supplying sugar cane to the appellant perhaps as an incentive and ensuring adequate supply of raw material required for production of sugar. According to the appellant the difference between the market price and the sell price of sugar is required sought to be added as an income of the assessee under Section 40A (2) of the Income Tax Act, 1961 (for the sake of brevity, hereinafter referred to as “the IT Act” ). Sub-section (2)(a) of Section 40A of the IT Act reads thus:- " (2) (a) Where the assessee incurs any expenditure in respect of 3 TA/25/2008 which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction."

5. The conditions necessary application of sub-section (2)(a) of Section 40A are - (i) the assessee must have incurred any expense in respect of which payment has been made or is to be made by the assessee, (ii) the payment must be made or to be made to a person referred to in clause (b) of sub-section (2) (a) (for short, a related person), (iii) the Assessing Officer must form an opinion that the expenditure is excessive or unreasonable having regard to the fair market value of the goods services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing in to him thereby, (iv) so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable shall not be allowed as a deduction while computing the income of the assessee.

6. The object of sub-section (2)(a) of Section 40A is to prevent an assessee to divert a part of his income to a related person specified in clause (b) by purchasing from him any goods or services at a price higher than the 4 TA/25/2008 market price. The very language of sub-section (2)(a) of Section 40A indicates that it applies only where the assessee is the purchaser of goods or receiver of the services for which he makes or is required to make the payment. It does not apply to a case where the assessee is the seller of goods or provider of services for which it receives or is to receive the payment. In other words, even if the assessee sales any goods or provides any service to a related person specified in clause (b) at a concessional price or rate i.e. at a rate less than the market rate of such goods or services, the difference between the market price and the price at which the goods are sold or services are provided by the assessee would not be dis-allowed as expenses or deduction while computing income of the assessee. The sale of goods or services by the assessee even to a related person is not covered by sub-section 2(a) of Section 40A.

7. Income Tax Act, being a taxing statute, must be given strict interpretation and if the plain reading of a section favours the assessee interpretation in favour of the revenue cannot be made by an interpretative process.

8. Learned counsel for the appellant relied upon a decision of the Supreme Court in the case of Deputy Commissioner of Income-Tax Vs. Shri Satpuda Tapi Prarisar SSK Ltd. and others [(2010) 231 CTS (SC) 224] and contended that where any goods are sold by a member or related person to an assessee at a rate higher than the market rate, the difference between the sale price and the market price can be added in the income of an 5 TA/25/2008 assessee. In that case, the sugarcane was sold by its member to the assessee (a sugar factory). As stated earlier, Section 40A(2)(a) only covers a case wherein the goods or services are sold by a related person to the assessee and does not cover the case where goods or services are sold by the assessee to a related person. The decision is, therefore, not applicable to the facts of the present case.

9. The appeal is accordingly dismissed. ( S. B. DESHMUKH, J. ) ( D. G. KARNIK, J. ) ...