2007 (8) TMI 260 - HC - Income Tax

Court rules in favor of co-operative societies for deductions under Section 80P, allowing cane price and Khodki charges as business expenditure.

The court held that Section 40A(2) does not apply to co-operative societies, allowing deductions under Section 80P. Additionally, the additional payment ... Assessee, Co-operative Sugar Factory - assessee purchased sugarcane at a price fixed by the State Govt which was higher than statutory minimum price (SMP) – plea of revenue that differential amount between State govt. price & SMP is nature of distribution of profit, is not acceptable – assessee have to pay state advices price – Sec. 40A(2) not applicable to cooperative society - Khodki charges was not Bonus & these are incurred for the business purposes so allowable as business expenditure Issues Involved:1. Applicability of Section 40A(2)(a) to a co-operative society.2. Allowability of additional payment over the statutory minimum price (SMP) as business expenditure under Section 37(1) of the Income Tax Act, 1961.3. Classification of cane price/Khodki charges as 'Bonus' under Section 2(4) of the Maharashtra Co-operative Societies Act, 1960, and its allowability as business expenditure.Issue-wise Detailed Analysis:1. Applicability of Section 40A(2)(a) to a Co-operative Society:The court examined whether Section 40A(2)(a) of the Income Tax Act, 1961, applies to a co-operative society. The court referenced its previous decision in the case of Shivamrut Doodh Utpadak Sahakari Sangh Maryadit, where it was held that Section 40A(2) does not apply to a co-operative society. The rationale was that the term 'association of persons' (A.O.P.) in Section 40A(2) does not include a co-operative society. This is because Section 2(19) of the Act specifically defines a co-operative society, and the term 'co-operative society' does not appear in Section 40A(2)(b). Moreover, co-operative societies are entitled to deductions under Section 80P, which are not available to an A.O.P., indicating a clear distinction under the Income Tax Act. Consequently, the court concluded that Section 40A(2) does not apply to co-operative societies, answering the first question in favor of the assessee and against the revenue.2. Allowability of Additional Payment over SMP as Business Expenditure:The court addressed whether the additional payment over the SMP, fixed by the Central Government, and paid as per the State Advice Price (SAP) fixed by the State Government, is allowable as business expenditure. The revenue argued that any payment in excess of the SMP constituted a distribution of profits and should not be allowed as a business expenditure. However, the court noted that the SAP was a mandatory direction under Section 79A of the Maharashtra Co-operative Societies Act, 1960, binding on the assessee. The SAP is fixed by the State Government based on the particulars submitted by the assessee, not on the determination of profits. The court emphasized that the SAP fixed by the State Government is in public interest and binding on the assessee. Therefore, the payment made as per SAP cannot be considered as appropriation of profits or bonus. The court further referenced the Supreme Court's decision in U.P. Co-op. Cane Unions Federation v. West U.P. Sugar Mills Association, which supported the prerogative of the State Government to fix cane prices higher than the SMP. Thus, the court concluded that the additional payment over SMP was allowable as business expenditure under Section 37(1) of the Income Tax Act, 1961.3. Classification of Cane Price/Khodki Charges as 'Bonus':The court examined whether the cane price and Khodki charges paid by the assessee constituted 'Bonus' under Section 2(4) of the Maharashtra Co-operative Societies Act, 1960, and whether they were allowable as business expenditure. The revenue contended that the excess cane price and Khodki charges were in the nature of profit sharing and should be disallowed. However, the court found that the final cane price fixed by the State Government was binding on the assessee and was not a distribution of profits or bonus. The court referenced the Supreme Court's decision in Maharashtra Rajya Sahakari Sakhar Karkhana Sangh Limited, which held that the SAP fixed by the State Government is binding on both members and non-members supplying sugarcane. Additionally, the court noted that Khodki charges were incurred as per the directions of the Director of Sugar to clean the farmers' land and compensate for unevenly cut cane sugar. Following its previous decision in CIT v. Shree Panchganga SSK Ltd., the court held that Khodki charges were incurred for business purposes and were allowable as business expenditure. Thus, the court concluded that the cane price and Khodki charges were not 'Bonus' and were allowable as business expenditure.Conclusion:The court dismissed all the appeals filed by the revenue, answering all three questions in favor of the assessee and against the revenue, with no order as to costs.