2025 (12) TMI 1695 - AT - Income Tax

Sugar mill's extra sugarcane price above FRP: State approval proved, disallowance deleted; faceless assessment and depreciation set-off upheld

Faceless assessment was not vitiated under s.144B or CBDT instructions because statutory notices were issued, the proposed disallowance was put to the ... Assessment as violative of section 144B and CBDT instructions, and denial of proper opportunity - HELD THAT:- We have perused the chronology of events, including the notices issued u/s 142(1) and 143(2) of the Act, the show-cause notice, and the assessee’s written submissions placed on record. It is evident that statutory notices were issued, the assessee was put to notice of the proposed disallowance and was afforded opportunity, albeit within the faceless framework. The assessee has not been able to point out any concrete instance where a specific piece of evidence was tendered but refused to be taken on record, or where a particular request for adjournment/pre-hearing material was arbitrarily denied so as to cause demonstrable prejudice. In the present case, the record shows a clear pattern of higher cane price being paid to members compared to non-members/third parties, without the assessee producing before the AO any detailed working or cost-based justification correlating the entire differential with commercial exigencies such as recovery, quality or logistics etc or any iota of evidence justifying such higher payment. Equally, while it may be said that the AO has not carried out the full quantification exercise in the precise manner envisaged by this Tribunal in the earlier round, however, it is imperative to point out that the assessee has not submitted an iota of evidence to justify payments higher than the FRP, the manner of its calculation, its approval by the concerned Government Authorities etc. as laid down by Hon’ble Supreme Court and as per directions of this Tribunal, therefore, such deficiency goes to the manner of determination of disallowance and does not render the entire assessment void ab initio Allowability of the Final Cane Price (FCP) /additional sugarcane price paid by the assessee’s over and above the statutory Fair and Remunerative Price (FRP) [earlier known as the Statutory Minimum Price (SMP)] - whether the FCP paid over and above the FRP is wholly deductible as business expenditure or whether a portion thereof, being in the nature of appropriation of surplus to member-growers, is liable for disallowance? - HELD THAT:- In the present case, the record shows a clear pattern of higher cane price being paid to members compared to non-members/third parties, without the assessee producing before us any detailed working or costbased justification correlating the entire differential with commercial exigencies such as recovery, quality or logistics. In these circumstances, we are unable to accept the plea that no disallowance at all is warranted; the onus to substantiate the entire excess payment as a trading outgo has not been discharged. Moreover, it is important to state here that no evidence of any documents submitted to the Gujarat State Government for fixing the additional price, any relevant order by the Gujarat State Government for fixing the additional price etc was filed by the assessee at any stage of the proceedings. To this extent, the challenge to the very principle of disallowance fails and Grounds Nos. 6 to 12 stand rejected in so far as they assail the legitimacy of making any disallowance on this count. Quantification made in the impugned assessment order - Disallowance in principle is thus upheld, the quantification made in the impugned assessment order is not in consonance with the method indicated by the Hon’ble Supreme Court in Tasgaon Taluka [2019 (3) TMI 321 - SUPREME COURT] nor with the structured approach adopted in comparable matters, including the order of the CIT(A) in the case of Sahakari Khand Udhyog Mandali Ltd. (supra), wherein the profit-embedded portion was isolated by taking the effective rate to non-members as the commercial benchmark and treating only the differential per MT paid to members as embedded surplus (e.g. Rs. 75 per MT × quantity procured from members). We are of the considered view that the correct method is: (i) to identify, on the basis of the assessee’s books and records, the rates paid to members, non-members/nominal members and outside factories; (ii) to treat the rate paid to non-members/outsiders as the commercial benchmark; (iii) to compute the differential per MT between the member’s rate and such benchmark; and (iv) to multiply this differential by the quantity of cane purchased from members to arrive at the prima facie profit-embedded component liable for disallowance, subject to any further reduction to the extent the assessee, by cogent contemporaneous evidence, demonstrates that a part of such differential is directly attributable to demonstrable commercial factors (such as quality or recovery) rather than to membership. In the absence of complete computations and supporting material before us, it is neither feasible nor proper to undertake this exercise at the appellate stage. We, therefore, restore the matter to the file of the AO for the limited purpose of recomputing the disallowance strictly in the above manner and in line with the legal principles. Disallowance of portion of the Final and Approved Cane Price actually/factually paid to the canegrowers members/farmers against the supply of the sugarcane, claimed as business expenditure u/s 37(1) r.w.s. 36(1)(xvii) - The decisive distinguishing feature in the present assessment year is the fact that the assessee has placed on record a specific and contemporaneous approval issued by the competent State Government authority, i.e., the Director of Sugar, Gujarat, certifying and approving the Final Cane Price payable for the relevant crushing season. This approval stands unrebutted by the Revenue and is directly relatable to the cane price actually paid by the assessee. On these facts, the condition laid down in section 36(1)(xvii) of the Act that the deduction of cane price shall be allowed to the extent such price is equal to or less than the price fixed or approved by the Government stands fully satisfied. Once this statutory requirement is met, the necessity of further forensic segregation of alleged “profit-embedded elements” under Tasgaon Taluka [2019 (3) TMI 321 - SUPREME COURT] principles does not arise for this assessment year, because the legislature has carved out an overriding and specific deduction framework for Government-approved cane pricing. The CBDT circular referred to earlier also reinforces this legislative intent. We also find merit in the assessee’s contention based on the rule of consistency, as similar pricing models supported by identical forms of Government approval have been accepted in regular scrutiny assessments in adjoining years without disallowance. In the absence of any change in material facts or statutory position, a contrary view in isolation for this year is unwarranted. Further, as regards the computation aspect, we find that the AO has not disputed the availability of brought-forward unabsorbed depreciation and yet has not allowed its set-off while determining the assessed income. The AO is required to compute taxable income strictly in accordance with law and not on estimation or assumption, and therefore the assessee is entitled to such set-off. Disallowance sustained by the CIT(A) is deleted. The AO is directed to allow the full deduction of FCP paid and further grant set-off of brought forward depreciation in accordance with law. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether procedural/jurisdictional objections to the set-aside assessment (alleged non-compliance with remand directions, breach of natural justice/faceless procedure, and mechanical appellate affirmation) warranted annulment of the assessment. (ii) For years governed by section 37(1) (pre section 36(1)(xvii)), whether payment of Final Cane Price/differential cane price over and above FRP is wholly deductible, or whether a portion is to be treated as embedded surplus/profit distribution to members and thus disallowable; and what method should be used for quantification. (iii) For the year governed by section 36(1)(xvii), whether Government approval of the Final Cane Price mandates allowance of the full cane price deduction, displacing a Tasgaon-type profit segregation; and whether set-off of brought-forward unabsorbed depreciation must be granted in computing taxable income. (iv) In connected pre-section 36(1)(xvii) years for other cooperative sugar factories, whether the appellate approach sustaining only the member-specific differential (and, where applicable, member-only cane development expenditure) is legally sustainable, and whether 'rule of consistency' compels full allowance despite the Supreme Court framework applied by the Court. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Procedural/jurisdictional validity of the set-aside assessment Legal framework: The Court examined the assessee's objections founded on the remand directions and principles of opportunity/natural justice within the faceless framework. Interpretation and reasoning: The Court found that statutory notices were issued and the assessee was put to notice of the proposed disallowance. The assessee failed to demonstrate concrete prejudice, such as tendered evidence being refused or an arbitrarily denied request causing a fatal denial of opportunity. While the assessment did not fully reflect the elaborate quantification exercise contemplated earlier, the Court held that this deficiency affected the manner of determination and not the jurisdictional validity of the assessment, particularly because the assessee itself did not furnish material to justify the higher-than-FRP payments or Government approval as required by the applied Supreme Court principles. Conclusion: The Court rejected the plea to annul the assessment; procedural/jurisdictional grounds were dismissed. Issue (ii): Deductibility of differential cane price over FRP in pre-section 36(1)(xvii) years, and method of quantification Legal framework: The Court applied the binding principle that while the purchase price constituting a genuine trading outgo is deductible, any component which, in substance, represents distribution/appropriation of surplus to members is not allowable as business expenditure; determination is fact-driven and requires segregation based on records, rate structure, timing, and contemporaneous materials. Interpretation and reasoning: On facts, the Court found a clear pattern of higher rates being paid to members vis-à-vis non-members/outsiders, with the assessee failing to produce contemporaneous workings, cost-based justification, or evidence of documents/orders showing Government fixation/approval of the additional price. Therefore, the Court rejected the claim that no disallowance at all was warranted and upheld disallowance 'in principle.' However, it held that the blanket quantification adopted by the assessing authority (treating the entire excess over FRP as disallowable) was not aligned with the structured segregation contemplated by the governing Supreme Court approach. The Court adopted a benchmark methodology: treat the rate paid to non-members/outsiders as the commercial benchmark (non-members having no claim on cooperative surplus), and treat only the incremental differential paid to members (member rate minus benchmark) multiplied by quantity procured from members as the prima facie disallowable embedded-surplus component, subject to reduction if the assessee proves commercial factors (e.g., quality/recovery/logistics) justifying part of the differential. Conclusion: Disallowance was upheld in principle, but the matter was remitted to the assessing authority for limited recomputation strictly on the benchmark-differential method with a final effective opportunity to the assessee. The same methodology was directed to apply mutatis mutandis to connected appeals involving the same issue under the same regime. Issue (iii): Effect of section 36(1)(xvii) and Government approval in the later year; set-off of unabsorbed depreciation Legal framework: The Court considered section 36(1)(xvii), which allows deduction of cane price to the extent it is equal to or less than the price fixed/approved by the Government, and assessed whether this specific regime overrides further 'profit-embedded' segregation for that year. Interpretation and reasoning: The Court found that the assessee produced a specific contemporaneous approval by the competent State authority (Director of Sugar) certifying/approving the Final Cane Price for the relevant season, and that this approval was unrebutted and directly relatable to the actual payments. Once the statutory condition under section 36(1)(xvii) was satisfied, the Court held that the need for further forensic segregation of alleged profit elements did not arise for that year because the legislature created an overriding specific deduction framework for Government-approved pricing. The Court also held that where brought-forward unabsorbed depreciation is available and undisputed, it must be allowed as set-off while computing taxable income, and assessment cannot ignore such set-off while determining assessed income. Conclusion: The entire disallowance of cane price was deleted for that year; full deduction of Final Cane Price was allowed under section 36(1)(xvii), and the assessing authority was directed to grant set-off of brought-forward unabsorbed depreciation in accordance with law. Issue (iv): Sustainability of partial disallowance limited to member-specific differential (and member-only cane development expenditure) in other pre-section 36(1)(xvii) years; consistency Legal framework: For these years, the Court again applied the Supreme Court framework requiring segregation of business expenditure from surplus allocation/member incentives, and examined whether the appellate authority's fact-based restriction to the demonstrable member-specific differential complied with that framework. Interpretation and reasoning: The Court upheld the appellate approach which, on the record, treated the differential per MT between registered members and nominal/non-member suppliers as embedded surplus where the assessee failed to furnish contemporaneous computations, approval documents, pricing formula, cost sheets, or correspondence substantiating the higher member rate as a quantified commercial obligation. Where cane development expenditure was paid only to members and not to nominal suppliers, the Court accepted its characterization as member-linked benefit for the limited disallowance sustained in those years. Conversely, where no price distinction existed in particular years, the appellate deletion of disallowance was upheld due to lack of contrary evidence from the Revenue. The Court rejected reliance on 'rule of consistency' to compel full allowance, holding that the later clarification of legal position by the Supreme Court governs and prior acceptance cannot perpetuate an incorrect approach. Conclusion: The partial disallowances sustained on the member-specific differential (and member-only cane development expenditure where applicable) were upheld, and challenges seeking either full allowance (assessee) or full disallowance (Revenue) were dismissed for those pre-section 36(1)(xvii) years.