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. Issues: (i) Whether the final cane price (FCP) paid over and above the FRP is allowable as business expenditure or, to any extent, constitutes distribution of surplus/profit requiring disallowance; (ii) Whether the assessment proceedings after remand complied with the Tribunal's directions and afforded the assessee adequate procedural opportunity under the faceless assessment regime.Issue (i): Whether the FCP/excess sugarcane price over FRP is wholly deductible under sections 28/37(1) or must be dissected and disallowed as distribution of surplus to members; and the correct method for quantification where disallowance is required.Analysis: The legal framework is governed by the Supreme Court's Tasgaon Taluka principles and related precedents, which require a fact-driven exercise to identify any profit-embedded element in the additional price. The appropriate approach is to treat the rate payable to non-members/outsiders as the commercial benchmark, compute the per-unit differential between members' rate and that benchmark, and multiply by quantity from members, subject to reduction if contemporaneous evidence shows commercial justification (e.g., quality, recovery). Where a statutory Government fixation/approval exists under the Sugarcane (Control) Order framework or under section 36(1)(xvii), deduction is allowable to the extent of the Government-fixed/approved price. The Tribunal examined record evidence (pricing slabs, timing of fixation, presence/absence of Government approval, contemporaneous computations) and applied these tests to the appeals before it.Conclusion: In appeals where no Government fixation/approval or contemporaneous supporting computations were produced, a disallowance in principle is justified; however quantification must follow the Tasgaon methodologyusing the non-member rate as benchmark and recomputing the differential attributable to members. Where a contemporaneous and unrebutted Government approval for the FCP exists (and is within the statutory provision under section 36(1)(xvii)), the deduction for that year is allowed in full and further segregation under Tasgaon is not required.Issue (ii): Whether the AO complied with the Tribunal's remand directions and whether the assessee was denied meaningful opportunity under section 144B / CBDT instructions.Analysis: The remand required the AO to undertake fresh factual inquiry as per Tasgaon (examine books, accounts and materials furnished to authorities for price fixation and quantify any profit element). The Tribunal reviewed the assessment record, notices and submissions. It found that statutory notices were issued and opportunities afforded; the assessee failed to point to any specific material arbitrarily excluded or to demonstrate demonstrable prejudice. Although the AO's order did not set out extensive computations in a formulaic manner, the record showed factual findings (pricing pattern, lack of contemporaneous Government approval or cost workings) that supported the conclusion reached.Conclusion: The procedural and jurisdictional grounds are dismissed; the set-aside assessment is not vitiated for want of compliance or denial of meaningful opportunity on the facts before the Tribunal.Final Conclusion: The appeals are resolved on a mixed basis: where Government fixation/approval for FCP is contemporaneously produced and unrebutted the deduction is allowed; where such proof or contemporaneous commercial computation is absent the existence of a prima facie profit-embedded element is upheld but quantification must be redetermined by the Assessing Officer using the non-member benchmark method outlined above after affording the assessee a final opportunity to place evidence. The stated methodology applies to connected appeals with necessary factual adaptation.Ratio Decidendi: Where additional cane price is paid over FRP, deductibility requires factual segregation of any embedded surplus; the rate paid to non-members/outsiders shall serve as the commercial benchmark for identifying the profit-embedded component payable to members, unless an unrebutted Government fixation/approval under the statutory scheme (or contemporaneous evidentiary material) establishes entitlement to deduction up to the approved price.