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
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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
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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
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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 ?
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(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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
