Budhewal Co-operative Sugar Mills Ltd. vs Commissioner of Income Tax

Ajay Kumar Mittal, J.

CM No. 1200-CII of 2006

This is an application u/s 151 of the CPC for condonation of 46 days'' delay in refiling the appeal.

Having perused the application, the delay in refiling the appeal is condoned. CM stands disposed of accordingly.

IT Appeal No. 84 of 2006

In this appeal by the assessee u/s 260A of the IT Act, 1961 (for short "the Act") order dt. 30th Nov., 2004 of the Income Tax Appellate Tribunal, Chandigarh Bench "A", Chandigarh (hereinafter referred to as "the Tribunal") passed in ITA No. 847/Chd/1995 [reported as Budhewal Co-operative Sugar Mills Ltd. v. Dy. CIT (2005) 94 TTJ 293-Ed.] relating to the asst. yr. 1993-94 has been challenged. The assessee has claimed that the following substantial questions of law arise for consideration of this Court:

Whether on the facts and in circumstances of the case, the addition sustained by the Tribunal on account of additional cane price paid to the sugarcane growers was justified in law and is legally sustainable ?

Whether on the facts and in circumstances of the case, the addition sustained by the Tribunal on account of additional cane price paid to the sugarcane growers on new and irrelevant basis not arising out of the order of CIT(A) was justified in law and is legally sustainable ?

Whether on the facts and in circumstances of the case, the addition sustained by the Tribunal on account of additional cane price paid to the sugarcane growers being sustained on new and relevant basis not arising out of the order of CIT(A) was justified in law and is legally sustainable, this being a case of exceeding jurisdiction by the Tribunal ?

Whether on the facts and in the circumstances of the case, the findings of the Tribunal in rejecting the appeal of the appellant society in confirming the addition made on account of enhanced sugarcane price are perverse and coloured by irrelevant considerations and erroneous criteria ?

Briefly stated, the facts are that the assessee co-operative society filed its return declaring an income of Rs. 76,93,310 for the asst. yr. 1993-94 on 27th Oct., 1993. The return was processed u/s 143(1)(a) of the Act and subsequently, notice u/s 143(2) of the Act was issued to the assessee and the assessment was made at an income of Rs. 2,83,46,160. The assessee filed the appeal before the CIT(A), Ludhiana against the said additions made by the AO who vide order dt. 16th March, 1995 allowed the appeal in part. The CIT(A) allowed the assessee''s claim for deduction u/s 80-1 of the Act amounting to Rs. 2,39,447 and sustained the disallowance of additional sugarcane price amounting to Rs. 2,53,23,741. Against the same, the assessee took the matter in appeal before the Tribunal, who vide order dt. 30th Nov., 2004 (supra) dismissed the appeal.

The point that arises for adjudication in the present appeal is whether the assessee appellant was entitled to claim deduction on account of additional sugarcane price as a business expenditure especially when no payment had been made before the end of the financial year and the liability on account of such alleged expense was directly taken to share capital account.

It would be apposite to notice the findings recorded by the Tribunal while disposing of the appeal filed by the assessee. The relevant findings are recorded in paras 8 and 10 to 14, which read thus:

So, however, there are several gray areas, which cloud the issue of deduction in respect of the additional sugarcane price fixed by the assessee after the end of the previous year. The thrust of the Revenue for disallowance of the claim is that no payment has been made to the sugarcane growers and the assessee has provided the liability by credit to the share deduction account in order to enhance its capital base. As per information available to us, the assessee has adopted this system of enhancing the sugarcane price and crediting the share deduction account for asst. yrs. 1992-93. 1993-94, 1994-95 and 1995-96 and not in any other years. The issue before us, as already pointed out is limited to the deduction permissible to the assessee for enhanced price on the basis of fixation of the sugarcane price in the subsequent year. In fact, the real issue involved in this appeal is as to whether deduction is permissible to the assessee on account of unilateral enhancement of sugarcane price by crediting to the share deduction account without making any payment to the sugarcane growers. Had it been a simple case of final fixation of rates for supply of sugarcane, then perhaps the assessee could not unilaterally impose the condition of not making the payments to the sugarcane growers and instead crediting the additional price to the share deduction account. The procedure for fixation of price as provided under Clause 24A of the bye-laws of the society, reproduced elsewhere in this order, has also not been followed. In this case, it is not even the case of the assessee that the fixation of the final price of sugarcane was also in accordance with the formula provided under Clause 24A of the bye-laws of the society or in pursuance to any order of the Government or any other authority. It is also noteworthy that when the assessee was running in losses, the sugarcane price had not been enhanced by fixing the final price after the end of the crushing season. The fixing of final price and creating of additional liability on account of additional sugarcane price has been only in the years in which the assessee earned huge profits. It is, therefore, evident that in effect, the assessee has enhanced its capital base at the cost of the exchequer by making a provision on account of additional sugarcane price without making such payments to the sugarcane growers. It may be pertinent to mention that the bye-laws of the society, copy of which is on record, provide that the authorized share capital of the mills shall be Rs. 5 crores and that value of each share shall be Rs. 500 payable in lump sum at the time of admission or by instalment as may be approved by the board. It is also provided that no individual member shall hold shares exceeding the value of Rs. 10,000. The share capital collected from the grower members would be linked to their acreage under sugarcane as per decision of the board from time to time. In this case it is not known as to whether after the allotment of additional shares, each individual member was holding shares exceeding the value of Rs. 10,000. It is also provided as per the bye-laws that the application for allotment of shares shall be made to the managing director in the form prescribed by the mills. In the case of additional cane price, the grower members had not even been informed about the increase in price and allotment of shares and accordingly there could not be any applications from the members for allotment of additional shares.

In the share deduction account there is a credit of Rs. 117.10 lakhs even as on 31st March, 2003. As pointed out earlier share deduction account, is accumulation of additional sugarcane prices deducted by the assessee in the four financial years. Clause 24A of the bye-laws to the extent of fixation of final price seems to have been operative only for four years. When the requirement of enhancement of share capital of the assessee was satisfied, no need was felt to fix the final price of sugarcane after the end of every crushing season in accordance with Clause 24A of the bye-laws of the society.

From the agenda of the meeting of board of directors and the resolution passed by the board of directors there is no doubt that the enhancement of sugarcane price braced with the condition of no cash payment was solely with the purpose of enhancing the capital base at the cost of exchequer without payment of taxes in respect of the related amount. The assessee also does not get support from the ratification of the resolution in the general body meeting as the purpose in the said ratification is also indicated to enhance the capital base. This is evident from the resolution No. 6 reproduced hereunder:

Resolved : General body unanimously approves the decision of the board of directors/administrator of payment of additional cane price of the years 1992-93, 1993-94 and 1994-95 respectively in the order of Rs. 9, Rs. 6 and Rs. 10 per qtl. (i.e. in 1992-93 year in the form of Rs. 9 as share deduction, for the year 1993-94 in the form of Rs. 3 in cash and Rs. 3 in the form as share deduction, for the year 1994-95 in the form of Rs. 3 as share deduction and Rs. 7 in the form of cash) because same is required to strengthen the share capital of the mills.

The assessee has decided to enhance the sugarcane price but has also unilaterally decided to credit the sum to the share deduction account, which was subsequently utilized for allotment of shares to the members. This unilateral act of the society is an indicator to the fact that the deduction claimed by the assessee was not purely a simple transaction of purchase of sugarcane and fixation of the price after the end of the previous year. The additional price is in excess of the price fixed by the Cane Commr. for the crushing season. In this case price has been fixed for the supply made in the preceding year but the payment on account of additional price has not been made to the growers. It would have been perhaps a different matter, if the payments had been made to the members and they had applied for allotment of additional shares as per their wishes and requirements. The fixation of additional sugarcane price and the decision of not making payments to the sugarcane growers was unilateral and, therefore, it cannot be viewed as a simple fixation of actual price for supply of sugarcane in the previous year.

It may be relevant to refer to the powers and duties of the board of directors as per bye-laws of the society. One of the powers indicated under Clause 20(va) is as under:

20(va)-To recommend to the general body any deductions from the cane price paid to members. Such deductions to be made on voluntary basis may be used for health, education, services and for the development of co-operatives for the benefit of the area falling within the area of operation of the mills.

Clause 26 also provides that the mill shall be competent to deduct any dues recoverable from the member on account of services rendered by it out of the sale proceeds of the sugarcane/beet supplied to it. There is no other clause in the bye-laws authorising the board of directors to make deductions from the cane price paid to the members for allotment of shares. Therefore, the act of non-payment of additional sugarcane price fixed by the society demonstrated its real intention behind enhancing sugarcane price with a view to enhance the share capital without payment of taxes in respect of the said profits.

Reference to Clause 29 of the bye-laws would also be relevant. It provides for distribution of the profits as under:

Distribution of profits--The net profits of the mills after making statutory provisions, shall be distributed by the general body in its meeting as follows:

(i) 25 per cent shall be carried to reserve fund.

(ii) Remaining amount may be allocated to any one or more purposes detailed below:

(a) Dividends on shares (c) not exceeding 10 per cent on the value of paid up shares.

(b) Price fluctuation fund.

(c) Common good fund.

(d) Contingent fund to meet any contingent liabilities arising out of taxes or otherwise.

(e) Building fund.

(f) Rebate to members in proportion to the purchase of sugarcane/beet made from them.

(g) Payment of incentive to the employees beside statutory bonus, (h) Research and development fund.

(i) Any surplus which remains undistributed may be carried over to reserve fund or to the profits of the next year.

It is evident from Clause 29 of the bye-laws of the society, quoted above, that a provision is to be made out of the profits of the society, for price fluctuation fund and for rebate to members in proportion to the purchase of sugarcane/beet. The assessee has fixed Rs. 9 per qtl. by way of additional sugarcane price in addition to the price fixed by the Cane Commr. of Punjab in order to enhance its capital base and no payment has been made to the sugarcane growers.

From the perusal of the above, it would be noticed that the Tribunal after appreciating the material on record has recorded the following findings:

(a) that the assessee had been fixing final price and creating additional liability on account of additional sugarcane price only in those assessment years when the assessee had earned huge profits;

(b) that the capital base of the assessee had been enhanced by making a provision on account of additional sugarcane price without there being any actual payment to the sugarcane growers;

(c) that there was no information to the sugarcane growers regarding increase in price of additional cane price and allotment of shares to them. Further, in such a situation there could not be any application made by the members for the allotment of additional shares;

(d) the resolution passed in the meeting of the board of directors which was ratified subsequently, the method adopted for enhancement of sugarcane price was without any cash payment and the enhancement of capital base was without payment of taxes in respect of related amount; and

(e) this action of the assessee to enhance the sugarcane price by crediting the same to share deduction account was unilateral.

The Tribunal on the basis of the above findings had concluded that the action of the assessee was not bonafide and this device was employed to avoid payment of dues to the exchequer. The findings recorded by the Tribunal are findings of fact and do not give rise to any question of law much less a substantial question of law. We draw support from the binding precedent of a Division Bench of this Court in Shahabad Co-operative Sugar Mills Ltd. Vs. Commissioner of Income Tax, in that regard.

In view of the above, finding no merit in this appeal, the same is hereby dismissed. There shall, however, be no order as to costs.