2004 (8) TMI 721 - AT - Income Tax

Section 40A(2) Not Applicable: Co-op Society Payments to Members for Sugarcane Deemed Reasonable Business Expenses.

Deputy Commissioner of Income-tax Versus Manjara Shetkari Sahakari Sakhar Karkhana Ltd.

The ITAT determined that section 40A(2) of the Income-tax Act, 1961, does not apply to payments made by a Co-operative Society to its members for ... Applicability of section 40A(2) - Payments made by a Co-operative Society to its members towards purchase price of cane supplied or as khodki charges - Whether Co-operative Society comes within the ambit of 'AOP'? - expenditure on sugarcane purchase price. HELD THAT:- It is pertinent to note that the term 'AOP' could include within its ambit company or firm also. Moreover, each Finance Act prescribes a separate and concessional rate of income-tax for Co-operative Societies from that levied on a company or firm or AOP. This clearly implies that Co-operative Society is a distinct entity for the purpose of levy of income-tax. The word 'Co-operative Society' is independently used in number of sections. Tribunal, in the case of Shivamrut Dudh Utpadak Sahakari Sangh v. Dy. CIT [IT Appeal No. 742 (PN) of 1991 dated 3-12-1998] (enclosed at page 40 of the Paper Book, Volume II) has held that a plain reading of section 40A(2)(a) reveals that this provision applies to 'any person referred to in clause (b) of this sub-section' and in sub-section (b) the persons mentioned are a company, firm, association of persons or Hindu Undivided Family. Thus, it is very clear that in its wisdom the Legislature specifically left out a 'Co-operative Society' from the purview of section 40A(2)(a) of the Act. A Co-operative Society enjoys a special status with its own individuality and distinctness in the scheme of Income-tax Act. A Co-operative Society is a voluntary association of persons, it is an economic institution formed for social purpose and not motivated by entrepreneurial profits. In other words, it is a democratic organisation owned and controlled by those utilising the services. In the present case we find that the decision of the Tribunal, approved by the jurisdictional High Court in the case of Shivamrut Doodh Utpadak Sahakari Sangh Maryadit [1998 (12) TMI 120 - ITAT PUNE], is direct on the point. No contrary decision of binding nature was brought before us. We, therefore, respectfully following the precedent, hold that the provisions of section 40A(2) of the Act are not applicable to payments made by a Co-operative Society to its members towards purchase price of cane supplied or as khodki charges. The payment cannot be termed as excessive or unreasonable expenditure. As such, it cannot be disallowed u/s 40A(2) of the Act. Whether the excess amount of expenditure on sugarcane purchase price could be construed to be appropriation of profits - Indisputably the amount is paid towards the price. For the fixation of additional price, modus is prescribed in Schedule II of the Sugar (Control) Order, 1966. The proformat statement of receipt and expenses gives the mechanism of determining cane price. As per section 9 of the Sale of Goods Act, 1930, the parties may, by agreement, fix such price for the goods as they may please. They are the best judges of their interest. But in the present case, parties accepted the price fixed by the State. They have no choice. Profit is a component for the determination of the price. This theory of price fixation was devised by the State in the interest of the Public. It is based on the price fixation mechanism of sugarcane followed in other countries. Just because profit is one of the component in ascertaining the price, it cannot be said that profit is separately distributed in the guise of additional price. The amount paid by the assessee Co-operatives to the sugarcane growers is consideration for the procurement of sugarcane. It cannot be construed to be appropriation of profits. In our opinion, it constitutes a charge on profits. All the issues were not referred for the consideration of the Special Bench. Therefore, the Division Bench will decide the remaining issues. We direct the Registry to place these appeals before the Division Bench for deciding the remaining issues. Issues Involved:1. Applicability of section 40A(2) of the Income-tax Act, 1961 to payments made by a Co-operative Society to its members for cane supplied or as khodki charges.2. Disallowance of price paid for sugarcane as excessive or unreasonable under section 40A(2).3. Disallowance of sugarcane price and khodki charges as non-business expenditure.4. Disallowance of cane price/khodki charges as 'bonus' under section 2(4) of the Maharashtra Co-op. Societies Act, 1960.5. Allowability of additional amount paid for sugarcane after finalizing financial results.6. Whether additional amount paid based on profit amounts to application of profit.7. Disallowance of additional amount paid for procurement of sugarcane under section 40A(2) as excessive or unreasonable expenditure.Summary:Issue 1, 2, and 7: Applicability of section 40A(2) of the Income-tax Act, 1961The Tribunal held that the provisions of section 40A(2) are not applicable to payments made by a Co-operative Society to its members towards the purchase price of cane supplied or as khodki charges. The payment cannot be termed as excessive or unreasonable expenditure and thus cannot be disallowed under section 40A(2) of the Act. The Tribunal emphasized that the term 'AOP' does not include a Co-operative Society within its ambit, as supported by the decision in CIT v. Shivamrut Doodh Utpadak Sahakari Sangh Maryadit.Issue 3: Disallowance of sugarcane price and khodki charges as non-business expenditureThe Tribunal concluded that the price actually paid for the procurement of sugarcane is to be allowed as business expenditure. The Tribunal declined to answer whether cane price collected by way of refundable/non-refundable deposits together with interest thereon is exigible to tax, as it was not referred to the Special Bench.Issue 4: Disallowance of cane price/khodki charges as 'bonus' under section 2(4) of the Maharashtra Co-op. Societies Act, 1960The Tribunal held that any portion of the cane price/khodki charges actually paid cannot be disallowed as 'bonus' as defined under section 2(4) of the Maharashtra Co-operative Societies Act, 1960, in view of section 65(2) of the Maharashtra Co-operative Societies Act and CBDT Circular No. 117 dated 22nd August, 1973.Issue 5 and 6: Additional amount paid for sugarcane and application of profitThe Tribunal observed that the excess amount of expenditure on sugarcane purchase price constitutes a charge on profits and not an appropriation of profits. The Tribunal noted that the additional price is fixed based on the Bhargava Committee's recommendations and the Sugar (Control) Order, 1966, which involves profit-sharing between the growers and the factories. The Tribunal concluded that the amount paid by the assessee Co-operatives to the sugarcane growers is consideration for the procurement of sugarcane and cannot be construed as appropriation of profits.Conclusion:The Tribunal directed the Registry to place the appeals before the Division Bench for deciding the remaining issues not referred to the Special Bench.