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 taxpayer, and no specific prejudice (rejection of evidence/adjournment) was demonstrated; the assessment was upheld as valid. On deductibility of additional sugarcane price over FRP, the Tribunal held that, absent contemporaneous Government approval and cost-based justification, disallowance in principle could be warranted and any computation must follow the benchmark-differential method aligned with SC principles; however, for the relevant year the taxpayer produced unrebutted State Government approval of the final cane price satisfying s.36(1)(xvii), making further "profit-embedded" segregation inapplicable, so the disallowance was deleted. Set-off of brought-forward unabsorbed depreciation was directed to be allowed.

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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.

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