Madras High Court
The Commissioner Of Income-Tax - I vs M/S.Sakthi Sugars Limited on 12 June, 2025
T.C.A. No.1002 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 12.06.2025
CORAM
THE HON'BLE MR.K.R.SHRIRAM, CHIEF JUSTICE
AND
THE HON'BLE MR.JUSTICE SUNDER MOHAN
Tax Case Appeal No.1002 of 2010
The Commissioner of Income-tax - I,
Coimbatore. .. Appellant
-vs-
M/s.Sakthi Sugars Limited,
No.180, Race Course Road,
Coimbatore 641 018.
(PAN AADCS0651B) .. Respondent
Prayer: Appeal filed under Section 260A of the Income Tax Act, 1961,
against the order dated 31.03.2010 passed in ITA No.1280/Mds/2009 on
the file of Income Tax Appellate Tribunal, 'B' Bench, Chennai for the
Assessment Year 2006-07.
For Appellant : Mr.R.Karthik
For Respondent : Mr.R.Vijayaraghavan
for M/s.Subbaraya Aiyar Padmanabhan
& Ramamani
Page 1 of 17
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T.C.A. No.1002 of 2010
JUDGMENT
(Judgment of the Court was delivered by the Hon'ble Chief Justice)
Assessee carried on business of manufacture of sugar, industrial
alcohol and soya products. For Assessment Year 2005-06 and Assessment
Year 2006-07, assessee filed its return of income declaring loss for both
Assessment Years. The return was initially processed under Section 143(1)
of the Income Tax Act, 1961 ('the Act' in short) and later, taken up for
scrutiny.
2. The Assessing Officer, while computing the assessment for AY
2005-06 and AY 2006-07, disallowed assessee's claim for depreciation on
the assets of beverages division on the ground that commercial production
had not commenced subsequent to the trial run.
3. For AY 2006-07, assessee had claimed a sum of Rs.48.35 crores as
expenditure incurred, as a result of Clause 5A notified under the Sugarcane
(Control) Order, 1966 ('the Order' in short). Initially, assessee paid its
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statutory minimum price of sugarcane to the growers. Later, the
Government fixed a final price for cane on 27.07.2004. As a result of this
notification under Clause 5A of the Order, assessee had to pay additional
cane price over and above the statutory minimum price amounting to
Rs.48.35 crores. Out of this Rs.48.35 crores, assessee debited Rs.23.35
crores representing the amount paid to the cane growers at the minimum
statutory price (MSP) to the profit and loss account under the head 'cost of
raw material' and balance Rs.25 crores was not credited to Profit and Loss
Account and not claimed in original return. Assessee filed a revised return
and claimed deduction of Rs.25 crores as cane arrears in the income-tax
computation statement and the amount was debited to profit and loss
appropriation account. Since clause 5A of the Order was passed on
27.07.2004, according to the Assessing Officer, the payment of Rs.48.35
crores crystallised for payment in the Financial Year 2004-05, relevant to
AY 2005-06. As the assessee claimed deduction of the said amount for AY
2006-07, the Assessing Officer rejected the claim as prior period expenses.
4. For AY 2006-07, assessee claimed deduction of Rs.76.38 crores on
an intangible asset (goodwill). This amount represented the amount paid
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by assessee to cane growers as agreed price, over and above the statutory
minimum price and the price fixed under Clause 5A of the Order and was
not claimed as an expenditure in the respective years of payment in the
books of accounts. It was recorded as advances to farmers in those years.
The assessee treated this amount of Rs.76.38 crores as intangible asset
under the name of 'goodwill' and claimed the entire amount as deduction
as revenue expenditure. The Assessing Officer did not dispute the payment,
but disallowed the amount on the ground that the expenditure pertained to
earlier years and not to the period relevant to AY 2006-07.
5. The Assessee had also claimed deduction of Rs.25 crores of cane
equilisation fund from the net profit while working out profit under Section
1 15JB of the Act contending it to be in accordance with Clause (i) of
Explanation-1 to Section 1 15JB of the Act. The Assessing Officer
disallowed the claim as the sum was not credited to Profit and Loss as
reserve, but was debited in the Profit and Loss Appropriation account.
6. Against the order of the Assessing Officer, assessee filed an appeal
before the Commissioner of Income-tax [CIT (A)] and the CIT(A)
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confirmed the findings of the Assessing Officer on all the issues. Against
that order, assessee preferred an appeal to the Income Tax Appellate
Tribunal (ITAT) and the ITAT answered all the four issues against the
Revenue and in favour of assessee. It is this ITAT's order pronounced on
31.03.2010 that is impugned before us in this appeal.
7. The following four substantial questions of law were framed on
29.11.2010:-
"1. Whether on the facts and in the circumstances of the
case, the Income Tax Appellate Tribunal was right in law in
holding that the assessee is entitled for depreciation on the
assets of the beverages divisions at Rs.1,82,53,201/- even
though the assessee has failed to establish that they were put
to use for business activities of the company from the period
relevant to assessment year 2006-07?
2. Whether on the facts and in the circumstances of the
case, the Income-tax Appellate Tribunal was right in law in
holding that the assessee has the option of choosing any other
accounting period when the expenditure stands crystallized
during the financial year 2004-05 (Assessment Year 2005-06),
even though the liability has clearly crystallized in the earlier
years in view of the orders passed under Clause 5A of the
Sugar Cane (Control) Order, 1996 on 27.07.2004 and
29.10.2004 and following the mercantile system of
accounting?
3. Whether on the facts and in the circumstances of the case,
the Income-tax Appellate Tribunal was right in law in holding
that the liability of earlier years can be deducted by treating
the payment as Goodwill when the fact it represents the
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agreed purchase consideration between the assessee and the
farmers and the amount already disbursed in the respective
years, and now debited to Profit and Loss Account for the
assessment years 2006-07 is valid? and
4. Whether on the facts and in the circumstances of the
case, the Income-tax Appellate Tribunal was right in law in
holding that the assessee is entitled to deduction of Rs.25
crores of Cane Equalization Fund from nete profit while
working out book profit under Section 1 15JB of the Act, is
valid ?"
8. As regards the first issue, namely, disallowance of depreciation
claimed on the assets of the beverage division, assessee had set up a
beverages division pursuant to an agreement dated 25.06.2002 that it had
entered with Hindustan Coca Cola Beverages Private Limited. The object of
venturing into the manufacturing and bottling of soft drinks was for
effective marketing of sugar and use of available infrastructure facilities to
get the maximum benefit to the assessee company. Admittedly, all
permissions from the various departments including the Tamil Nadu
Pollution Control Board, Electricity Board, Ministry of Food Processing
Industry, etc., were in place and it was established that the beverages
division had no hurdle or impediment in the commencement of commercial
production. The commercial production, however, could not be
commenced due to some public agitation.
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9. Assessee had even done a trial run which was not disputed by the
lower authorities and it was established that during the trial run of the
beverages division that the assessee undertook, raw material was consumed
and production during the trial run was sent for analysis and found suitable
for marketing purposes. We agree with the ITAT that it was clearly beyond
doubt that the beverages division was ready for commencement for
commercial production, but due to unavoidable circumstances which were
beyond the control of assessee, commercial production did not commence.
The reason, as noted earlier, was due to certain public agitation. When
assessee had completed all the required formalities for start of commercial
production, then, merely because the commercial production could not
commence due to the circumstances for which assessee is not responsible,
the claim of depreciation, as rightly held by the ITAT, cannot be denied
solely on that basis. The ITAT has rightly held that in order to get
depreciation under Section 32 of the Act, it is not necessary that the
machinery in question should have been actually used in the relevant
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previous year for the purpose of business and it is sufficient if the same is
kept ready for use during the relevant previous year, though not actually
used due to circumstances beyond assessee's control. Moreover, assessee
had not started or commenced new business, but had only established a
new division in its on-going business. Indisputably, the beverages division
had become part of block assets and was so treated by assessee in its books
of accounts. Therefore, once depreciation is allowable on entire block of
assets, even if some of the assets of the block have not been used, existence
of an individual asset in the block of assets itself amounts to use for the
purpose of business. Therefore, the assessee would be entitled for
depreciation on beverages division.
10. The first issue is answered against the Revenue and in favour of
assessee.
1 1. As regards the second issue, that is, disallowing of expenditure
due to cane price fixed vide order passed under Clause 5A of the Order,
assessee company, for AY 06-07, had to pay the sugarcane price, the
statutory minimum price, at initial stage to the farmers, as notified by the
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Central Government. The sugarcane price was finally fixed by the
Government under Clause 5A of the Order. The notification under Clause
5A of the Order for the years 1997-98 to 2000-01 was issued by the
Government on 27.07.2004 and 29.10.2004. As a result of the notification
under Clause 5A, assessee had to pay additional cane price amounting to
Rs.48.35 crores over and above the statutory minimum price. Assessee
claimed before the lower authorities that since the orders were received by
assessee on 06.05.2005 and 15.06.2005 respectively, the expenditure on
this account is allowable in AY 2006-07. The lower authorities denied the
claim of assessee on the ground that the said expenditure crystallized on
27.07.2004 and 29.10.2004 and accordingly, pertained to AY 2005-06 and
not to AY 2006-07.
12. The fact that the orders under Clause 5A of the Order were
received by assessee during May and June 2005 has been factually found to
be correct. We also find no reason as to why assessee should charge the
expenditure in the subsequent year if the orders were received in the earlier
year when the expenditure is allowable without any dispute. We find that
the lower authorities denied the claim of assessee on the ground that the
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orders cannot be received in the month of May and June, 2005 when they
were issued in July and October, 2004. The denial is only on the basis of
conjecture and surmises and without any material or evidence to
substantiate the disallowance of claim of the assessee.
13. Sri.Karthik Ranganathan submitted that the claim of assessee is
not liable in the assessment year under consideration, that is, AY 2006-07,
because the orders were notified in July and October, 2004 and that
pertained to AY 2005-06.
14. The liability arising out of the said orders is in the nature of a
statutory liability. When there is no dispute that this additional
expenditure due to the Government orders of fixing the cane price is
allowable whenever such orders are passed, then, in the absence of any
finding by the lower authorities or any material to show that assessee has
not claimed such expenditure in the AY 2005-06 due to ulterior motive or
malafide, the explanation and facts asserted by assessee cannot be
disbelieved in those circumstances. It is not the case of the revenue that
assessee received the orders immediately after it was notified, as the
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Assessing Officer has not given any finding that the orders dated
27.07.2004 and 29.10.2004 were dispatched by the Government
immediately after the date of notification. We see no reason to disbelieve
the assessee that these orders were received by assessee on 06.05.2005 and
15.06.2005. Therefore, as the expenditure is allowable in either AYs 2005-
06 or 2006-07, there is no reason as to why assessee will claim the
expenditure in a different year than the year in which it actually
crystallized. Therefore, we agree with the finding, in the facts and
circumstances of the case, that the expenditure as a result of order passed
under Clause 5A of the Order has been crystallized only when the assessee
received the Government orders.
15. Accordingly, the second question of law is answered in favour of
the assessee and against the Revenue.
16. As regards the third issue of disallowance of deduction claimed
on an intangible asset (goodwill), the relevant facts are that for every sugar
factory, the State Government demarcates an area for procurement of
sugarcane. Before commencement of sugarcane season, the sugarcane
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growers are registered with the factory for supply of cane. For every
season, the Central Government fixes the prices under the statutory
minimum price to be paid to the sugarcane growers for every State. The
statutory minimum price is not a final price to be paid by the sugarcane
factories to farmers, but it is to be paid subject to the additional payment to
be made as per the Order by the State Government. the statutory advisory
price is over and above the price fixed under Clause 5A of the Order.
17. As per the practice in the industry, to ensure continuous and
uninterrupted supply of sugarcane, sugarcane factories make payment to
the cane growers over and above the statutory minimum price as well as
the price fixed under Clause 5A of the Order. In the period relevant to AY
2006-07, assessee made a deduction of Rs.76.3 crores on an intangible
asset (goodwill). This amount represents, admittedly, payment made to the
cane farmers as an agreed price over and above the statutory minimum
price and also the price fixed under Clause 5A of the Order. Assessee
classified this amount as 'goodwill' and claimed the entire 'goodwill' amount
as deduction stating that this amount has already been paid in the earlier
year for cane as agreed price.
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18. Sri.Ranganathan submitted that when this expenditure pertained
to earlier year being the price paid to the farmers, then treatment of the
same as 'goodwill' is not permissible and the expenditure claimed by
assessee for the AY 2006-07 is not allowable.
We are surprised as to why assessee did not claim the entire amount
as expenditure for cane procurement than splitting it as cane procurement
and goodwill.
19. The payment of the advance to farmers is not disputed and the
fact that expenditure is a revenue expenditure is also not disputed by the
revenue and particularly, by the Assessing Officer. The claim has been
denied only on the ground that the expenditure pertained to earlier years.
There is no dispute that this payment was made towards purchase of
sugarcane though in advance and subject to the price fixed under Clause 5A
of the Order. It is also not disputed that for AYs 1997-98 to 2000-01, the
price fixed by the State Government under Clause 5A of the Order was only
on 27.07.2004 and 29.10.2004, which were received by assessee in the
months of May and June,2005. Therefore, the expenditure was crystallized
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during the period relevant to assessment year under consideration and the
difference between the advance paid by assessee and the price fixed under
Clause 5A of the Order was ascertainable only after the orders were
received by the assessee. We find that the assessee has been consistently
maintaining this method of accounting and treating the extra price paid as
advance to farmers during the period of orders under Clause 5A were
awaited. It is clear, therefore, that the payment on this account was made
by assessee for procurement and uninterrupted supply of sugarcane and
therefore, the expenditure was closely related to the business of assessee.
When the payment is not disputed and the purpose of payment is also not
in dispute, we see no justification in denying the claim of the said
expenditure as business expenditure only on the ground that the assessee
treated the said payment as advance to the farmers under the nomenclature
of 'goodwill'. Since the excess amount was crystallized only after the
sugarcane price was fixed under Clause 5A of the Order, then, when the
additional expenditure is allowable as per the order under Clause 5A, the
excess payment made by assessee, which cannot be recovered in the facts
and circumstances, nature of transaction and practice in the business of
assessee, is also allowable as business expenditure.
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20. The third question of law is also answered in favour of the
assessee and against the revenue.
21. As regards the fourth issue, relating to computation of book profit
under Section 1 15JB of the Act for the AY 2006-07, in view of our answers
given to the first three issues, we decide this issue also in favour of assessee
and against the revenue, when the amount of Rs.25 crores once added into
the net profit has to be excluded again from net profit while computing the
book profit under Section 1 15JB.
Accordingly, appeal is dismissed. There shall be no order as to costs.
(K.R.SHRIRAM, CJ.) (SUNDER MOHAN, J.)
12.06.2025
Index : Yes/No
Neutral Citation : Yes/No
sra
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To
1. The Income Tax Appellate
Tribunal, 'B' Bench, Chennai.
2. The Commissioner of Income-tax - I,
Coimbatore.
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The Hon'ble Chief Justice
and
Sunder Mohan, J.
(sra)
12.06.2025
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