Co-operative society cane payments treated as business expenditure, not related-party disallowance or profit appropriation.

A co-operative society's payments to members for sugarcane purchase price and khodki charges were held outside section 40A(2) because the provision targets specified related persons and does not, on its text and binding precedent, extend to such societies. The cane price and khodki charges were also treated as contractual business outgoings, not a statutory bonus or distribution of profits under the Maharashtra Co-operative Societies Act, so no part of those payments could be disallowed as bonus. The excess sugarcane price was characterised as a business cost arising as a charge on profits, not an appropriation of profits, under the regulated pricing framework.

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Issues: (i) Whether section 40A(2) of the Income-tax Act, 1961 applies to payments made by a co-operative society to its members towards sugarcane purchase price and khodki charges. (ii) Whether any portion of the cane price or khodki charges actually paid can be disallowed as bonus under the Maharashtra Co-operative Societies Act, 1960. (iii) Whether the excess amount of expenditure on sugarcane purchase price constitutes a charge on profits or an appropriation of profits.

Issue (i): Whether section 40A(2) of the Income-tax Act, 1961 applies to payments made by a co-operative society to its members towards sugarcane purchase price and khodki charges.

Analysis: The provision is aimed at curbing excessive payments to related persons where the fair market value of goods, services or facilities is exceeded. A co-operative society, however, is treated as a distinct entity in the income-tax scheme, and the legislative text of section 40A(2)(b) does not include it within the specified persons. The binding jurisdictional precedent had already held that such societies do not fall within the ambit of section 40A(2).

Conclusion: Section 40A(2) does not apply to the assessee co-operative society's payments for cane supplied or khodki charges, and no disallowance can be made under that provision.

Issue (ii): Whether any portion of the cane price or khodki charges actually paid can be disallowed as bonus under the Maharashtra Co-operative Societies Act, 1960.

Analysis: Bonus under section 65(2) of the Maharashtra Co-operative Societies Act, 1960 is an appropriation of net profits to specified funds or as dividend or bonus in conformity with the Act, rules and bye-laws. The amounts paid towards cane price and khodki charges were contractual/business outgoings for procurement and allied agricultural operations, not a distribution of profits in the statutory sense. The CBDT circular relied upon supported allowability of rebate or bonus only in the context contemplated by it, and not a recharacterisation of purchase price as bonus.

Conclusion: No portion of the cane price or khodki charges actually paid can be disallowed as bonus.

Issue (iii): Whether the excess amount of expenditure on sugarcane purchase price constitutes a charge on profits or an appropriation of profits.

Analysis: The price mechanism under the Sugarcane (Control) Order, 1966 and Schedule II contemplates an additional price linked to the working results and the statutory pricing formula. The amount paid to cane growers is consideration for procurement of sugarcane, and although profit is one component in price fixation, that does not convert the payment into a distribution of profits. The excess payment is therefore part of the business cost and is to be regarded as arising as a charge on profits rather than an appropriation of profits.

Conclusion: The excess amount of expenditure on sugarcane purchase price constitutes a charge on profits and not an appropriation of profits.

Final Conclusion: The Special Bench answered the referred tax issues in substance in favour of the assessee, while leaving the remaining un-referred matters to be decided separately by the Division Bench.

Ratio Decidendi: A co-operative society is not brought within section 40A(2)(b) merely because it files its return in a different status, and statutory cane-price payments made under the regulated pricing framework are business expenditure and not an appropriation of profits.

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