The Budhewal Coop. Sugar Mills Ltd.,, ... vs Assessee

The Budhewal Coop Sugar Mills Ltd., Vs. The AC IT, Circle-1, Distt. Ludhiana Ludhiana

PAN No. AAAJT0338G

(Appellant) (Respondent)

Appellant By : Shri Subhash Aggarwal Respondent By : Shri Manjit Singh

Date of hearing : 06.04.2015 Date of Pronouncement : 10.04.2015

ORDER

PER T.R.SOOD, A.M.

The appeal by the assessee is directed against the order dated 02.08.2006

passed by the CIT(A)-1, Ludhiana.

2. In this appeal various grounds have been raised but the only dispute is

regarding confirmation of levy of penalty u/s 271(1)(c) on account of addition

made amounting to Rs. 2,53,23,741/- against disallowance of additional price

for purchase of sugarcane.

3. The brief facts of the case are that assessee Societ y is engaged in the

business of manufacturing of sugar. During the course of assessment

proceedings, the Assessing Officer inspected the premises of the assessee u/s

131 and books of account consisting of General Ledger, Day Book, Procedure

Book, Audit book etc. were test checked. During inspection, it was noticed

that assessee has made an entry to the tune of Rs. 2,53,23,741/- in the 'Share

Deduction Account" in General Ledger and carried forward balance of Rs.

3,58,82,389/- which included the opening balance of Rs. 1,03,10,705/- of 2

preceding year. Corresponding to the credit entry of Rs. 2,53,23,741/- in the

share deduction account, the assessee had made the debit entry in the Sugarcane

Account to the tune of Rs. 2,53,28,438/- with the narration "to amount of

Sugarcane purchases at Rs. 9/- and others". The debit comprised of two entries

being Rs. 2,53,23,741/- on account of additional price of sugarcane @ Rs. 9/-

per quintal and Rs. 4697.93 in respect of "Burnt in cane PNB 10240-4240".

4. When assessee was asked to explain the above situation, it was submitted

that sugarcane was purchased at an adhoc price. The Board of Director in the

meeting held on 17.4.1993 decided to increase the sugarcane price by Rs. 9/- per

quintal with the condition that the same be credited to the share deduction

account. It was further explained that subsequentl y shares were issued to the

Members in lieu to the additional cane price which was credited to the share

deduction account. However, Assessing Officer did not find these submissions

correct and made addition amounting to Rs. 2,53,28,438/-. The reasons given

for disallowance can be summarized as under:-

"1.1 The AO vide his assessment order dated 22.12.1994 disallowed the deduction to the tune of Rs.2,53,28,438 on the following grounds:-

i) That the assessee had been making regular payment of sugarcane to various farmers on day-to-day basis. After the closure of the accounting period relevant to the AY: 1993-94, it was realized that a substantial taxable profit had been earned. To reduce the tax liability a back dated entry was made in the books of accounts as on 31.3.1993.

ii) That as on 31.3,1993 there was no such liability to pay the enhanced price of sugarcane,

iii) That another small entry of Rs.4697.93 regarding burnt sugarcane had been made to camouflage that the earlier entry was not back dated.

iv) That the payment of additional sugarcane price had not actually been made to the farmers. The entire amount had been credited to the share deduction account.

3 v) That the share deduction account was not debited in order to make credit entries in the individual share capital account of various share holders or sugarcane suppliers.

vi) That the share holders or sugarcane suppliers had not been informed regarding the credit to their account till the passing of the assessment order.

vii) That in some of the farmer's account, credit entries have been made after the issue had been raked up by the Department on 2 1 . 1 1 . 1 9 9 4 .

According to the AO it was evident that no corresponding entries were made in the share deduction account.

viii) That on 5lh December, 1994 the Managing Director of the Society in his statement had indicated the reasons for non issuance of shares in the name of sugarcane suppliers was that formalities had to be completed regarding the determination of full value of shares, addresses of share holders etc. Therefore, the entries could not be made as on 31.3.1993.

ix) That till the date of inspection u/s 131 and even till the date of finalization of the assessment proceedings, the assesses had not made specific book entries and no evidence had been produced for the dispatch of share certificates to the share holders/farmers.

x) That the main purpose of the assessee was to divert the taxable profit by making these theoretical book entries.

xi) That the liability, if any, had been crystallized only after 17.4.93 i.e. after the close of accounting period and that the entry was one sided act on the part of the assesses without either informing the share holders and without paying the same to them.

xii) That the Board of Directors passed resolution to enhance the sugarcane price merely because the mill had earned substantial profit and the assessee wanted to apply the income toward the enhancement of share capital and not making any payment to the cane growers."

5. On the basis of above addition, penalt y proceedings u/s 271(1)(c) of the

Act were initiated. In response to the show cause notice it was mainl y stated

that there was no intention to conceal the particulars of income. The Managing 4

Director had no personal benefit by increasing the cane price. The main purpose

for such increase was to give benefit to the farmers. The payment can be made

directl y or the same can be invested by such farmers in the form of shares. The

decision of the Board was later on ratified by general body. In fact prices had to

be increased because the sale price of sugarcane was not commensurate with the

cost of production. Thereafter, considering these submissions it was held that

the explanation was false because of the following reasons:-

"1.2.3 The explanation offered vide written replies and personal discussion is false. The reasons are:

i) The Board of Directors took the decision on 17.4.1993 to increase the cane price. This decision was not taken for the benefit of the cane growers as claimed by the counsel but to evade tax. Had the intention been to benefit the cane growers then they would have been paid in cash.

Further, they would have been given an opportunity to decide whether to keep the cash payment or to get the shares allotted in l i e u of cash payment. The explanation is further proved to be false by the By-law of the Society itself. The relevant By-law provides " The application for allotment of shares shall be made to the Managing Director in the Form prescribed by the Mill." In this case the cane growers made no such application. The cane growers did not even know about the increase in cane price. No credit entries were made in their capital accounts till the issue was raked up by the Department. The Board of Directors, hence, did not have the benefit of the cane growers in their mind while they were taking the decision to increase the cane price.

ii ) The farmers were in no way benefited. Neither they got the payment in cash nor did their capital accounts were credited. They were not even informed about the decision.

iii) The decision taken by the Board on 17.4.1993 was ratified by the General Body on 26.7.1995, meaning whereby that the cane growers came to know about such decision after two years and three months later!

iv) The Mill thought of benefiting the cane growers only in the years of huge profits. It thought of bringing the parity between the prices of 5

cane and those of wheat and paddy only in the years in which it had profit

v) The Board of Directors could not take such unilateral decision. It could only recommend to the General Body to deduct the amount from the cane price. The Board of Directors could not impose a condition on the cane growers to increase their share capital rather than getting payment in cash. Further the shares could be issued only if the cane growers applied for issuance of shares. In this case the Board of Directors flouted the By-laws of its own Mill."

6. Thereafter he discussed his reasoning for levy of penalt y and ultimatel y

levied a penalt y @ 100% amounting to Rs. 1,00,62,526/-.

7. On appeal before C IT(A) various submissions were made which have been

summarized by Ld. CIT(A) in para 2.3 which is as under:-

i) That the authorized share capital of the Mill was to be increased. Which was to be contributed by individual sugarcane growers, the State Government, the Financial Institutions and the Central Government.

ii) That the appellant is a semi Govt. Organization being managed by the Managing Director appointed by the Secretary, Deptt. of co-operation / the Registrar of Co-operative Societies of Punjab and all its accounts are immaculately maintained by the Chief Accounts Officer.

iii) That sugarcane is a cash crop whereas the competing wheat and paddy are traditional crops. Cash crop cannot be retained or preserved for a longer period as the other crops.

iv) That it has always been considered disadvantageous by the farmers to gross sugarcane since its cultivation has been far less remunerative.

v) That the increase in the price of sugarcane has not been commensurate with the increase in the production cost and has been a less in proportion to the other crops of wheat and paddy.

vi) That during the crushing season 1992-93 relevant to the Assessment year 1993-

94 the State Advisory Price (SAP) had raised price by Rs. 1/- in the case of sugarcane whereas the increase in the case of wheat / paddy by Rs. 55/- & Rs. 50/- per quintal respectively.

vii) That further as per the directives of IDBI while sanctioning the loan to the mill share capital of came growers members had to be raised to Rs. 112 lacs minimum which could be possible with or from voluntary contributions an / or by deducting proportionately out of cane price payable to the member growers. 6

viii) That the decision of the Board of Directors to pay additional sugarcane price at Rs. 9/- per quintal and the manner in which it was to be paid was duly ratified in the next General Body Meeting of the mills/society held on 26th July, 1995."

8. The Ld. C IT(A) forwarded the submissions to the Assessing Officer to

give his comments vide letter dated 21.2.2006. In the comments it was pointed

out that -

i) If the price was increased to bring parity with other crops like wheat, paddy etc. to stop farmers from switching over to those crops then at least increased price should have been paid to the farmers.

ii) The farmers were never informed regarding the decision to increase the prices.

iii) The decision to increase the price was never rectified by the general body meeting till 26.7.1995.

iv) If it was for the benefit of the farmers why the same was not taken at the beginning of the year relating of the losses and profits. It was noticed that such increase was effected onl y in the years of profits.

v) In respect of increase in share capital, the Assessing Officer objected that decision in this regard could have been taken by the individual share holder in the general body meeting and such share holders were required to make an application to the Managing Director but no such application was made. The Assessing Officer also made various references to the order of Tribunal confirming the addition.

These comments were forwarded to the assessee for its counter comments. In

the counter comments it was submitted that addition was confirmed on the

wrong premises that liabilit y accrued after closing of the accounting period.

The Tribunal also confirmed the addition on these premises which is not

correct. It was contended that what was required to be seen is whether

expenditure was actuall y incurred or not and same was for business

consideration or not.

7

9. The Ld. C IT(A) considering all these arguments observed that assessee

had failed to substantiate the reasons for enhanced payments and the

explanation given was not bonafide, therefore, levy of penalt y was

confirmed.

10. Before us it was submitted that crop of the cane is a cash crop but

cost of production for the same was much more than the price fixed by the

State Government. In this background the farmers were shifting from

growing cane to other crops like wheat etc. To encourage the cane crop, the

government encourages sugar industries through Cooperative sector. Such

Cooperatives were directed and encouraged to provide ruminative price to the

cane growers. The assessee Societ y in this background had increased their

prices during the year by Rs. 9/- per quintal and the decision was taken by

the management. However, the same could be approved by the Board onl y on

7.4.1993 but this should not have been disallowed merel y because the

decision was approved in the Board meeting onl y on 17.4.1993.

11. In this case the assessee have made full disclosure and it cannot be

said that assessee has concealed any particulars of income or furnished

inaccurate particulars and, therefore, levy of penalt y was not justified. In

this regard, he relied on the decision of Hon'ble Supreme Court in the case of

CIT Vs. Reliance Petroproducts Pvt. Ltd in 322 ITR 158 (SC). The Ld.

counsel has also referred to few more decisions of the Tribunals and High

Courts which are as under:-

1. ACIT, Ludhiana vs. Hero Cycles Ltd. ITA No. 175/08, assessment year 2001-02 dated 09.08.10

2. Pahwa Cycles P. Ltd. Vs. ACIT ITA No. 26/2009 A/Y 2005-2006 dated 27.04.2009 (Chd. Bench)

3. Penalty order u/s 271(1)(c) passed by CIT-II, Ludhiana Dated 10.11.2008 in the case of M/s Pahwa Cycles Pvt. Ltd

4. CIT vs. E.I. Dupont India Ltd. ITA No. 418/07 (Delhi High Court)

5. CIT Vs. E.I. Dupont India Ltd. (2009) 308 ITR 14 (Statutes) 8

6. CIT vs. Budhewal Co-operative Sugar Society Ltd. (2008) 6 DTR 31 (P&H) (2009) 312 ITR 92

7. Cement Marketing Co. Of India vs. ACST (1980) 124 ITR 15(SC)

8. CIT vs. Mehta Engineers Ltd. (2008) 300 ITR 308 Hon'ble High Court of Punjab & Haryana

9. ACIT vs. Arisudana Spinning Mills Ltd. (2009) 19 DTR 1(Chd) (Trib) Affirmed in 326 ITR 429

10. H.P State Forest Corporation Ltd vs. DCIT (2005)93 ITD 442(Chd) Approved in (2011) 45 IT Reps. 96 (HP)

11. ACIT vs Porrits and Spencer (A) Ltd. (2009) 40 IT Rep. 539(Del)(2008) 22 SOT 281 (Del)

12. CIT vs. Haryana Warehousing Corp. (2009) 314 ITR 215 (P&H)

12. On the other hand the Ld. DR submitted that addition made in the

assessment has been confirmed by the Tribunal against which the assessee

had filed appeal before the jurisdictional High Court and the appeal of the

assessee was also dismissed. The Ld. DR referred to the various observations

made by the High Court and pointed out that ultimatel y High Court has very

clearl y held that the claim of the expenditure was not made on bonafide

basis. He also pointed out that sugar cane prices were increased onl y in the

years of profits and not in the year of losses which clearl y means that same

was done to reduce the profits. The increased price was never paid to the

farmers and it was adjusted in the share capital account without any approval

from the general body meeting and the farmers were never informed

regarding this decision which clearl y shows that assessee has merel y tried to

reduce its profits by showing increased expenditure of sugar cane which has

never been paid to the farmers. He also strongl y relied on the decision of

Hon'ble Delhi High Court in the case of CIT v Zoom Communication P. Ltd.

327 ITR 510 (Delhi)

13. We have considered the rival submissions carefull y in the light of

material available on record as well as judgments cited by the parties. We

find that when the matter was considered by the Hon'ble e Punjab & Haryana

High Court while deciding the quantum proceedings in ITA No. 84 of 2006 9

vide order dated 16.10.2007, the Hon'ble High Court observed at pages 11 &

12 as under:-

"From the perusal of the above, it would be noticed that the Tribunal after appreciating the material on record has recorded the following findings:-

a) that the assessee had been fixing final price and creating additional liability on account of additional sugarcane price only in those assessment years when the assessee had earned huge profits;

b) that the capital base of the assessee had been enhanced by making a provision on account of additional sugarcane price without there being any actual payment to the sugarcane growers;

c) that there was no information to the sugarcane growers regarding increase in price of additional cane price and allotment of shares to them. Further, in such a situation there could not be any application made by the members for the allotment of additional shares:

d) the resolution passed in the meeting of the Board of Directors which was ratified subsequently, the method adopted for enhancement of sugarcane price was without any cash payment and the enhancement of capital base was without payment of taxes in respect of related amount; and

e) this action of the assessee to enhance the sugarcane price by crediting the same to share deduction account was unilateral.

The tribunal on the basis of the above findings had concluded that the action of the assessee was not bonafide and this device was employed to avoid payment of dues to the exchequer. The findings recorded by the Tribunal are findings of fact and do not give rise to any question of law much less a substantial question of law. We draw support from the binding precedent of a Division Bench of this Court in Shahabad Company- operative Sugar Mills Ltd. v. CIT, [1997] 226 ITR 582 in that regard.

In view of the above, finding no merit in this appeal, the same is hereby dismissed. There shall, however, be no order as to costs."

14. Thus, clearl y Hon'ble High Court has confirmed the findings of the

Tribunal in which it was held that action of the assessee in claiming this

expenditure was not bonafide. Therefore, clearl y this claim is bogus just to

reduce profits.

15. We have already reproduced the reasons given in the penalt y order

for not entertaining the contention of the assessee in the penalty order it was

clearl y noted by the Assessing Officer that assessee had intention to evade

tax. In para 1.3.1 it was observed as under:-

10

"1.3.1 The clause 24 A of By-laws of the Cooperative Society empowers the Board to fix an initial price for sugarcane /beet in accordance with a formula determined by the State Federation of Cooperative Sugar Mills in consultation with the Sugar Mill and the Registrar and to make final payment at the end of crushing season. But the way the whole exercise envisaged in the clause 24 A was undertaken by the assessee for the AY 1993-94 proves that the assessee had the mens rea and this exercise was willful attempt to evade tax. There was a conscious effort on the part of the assessee to gain pecuniary advantage at the cost of exchequer. In the following paras the exercise is discussed in detail to bring about the mens rea on the part of the assessee;.."

16. Further reasons given in para 1.2.3 have already been extracted by

us in para 5 of this order. It has been clearl y noted that increased prices was

never paid to the farmers but adjusted in the share capital account. It is also

noted that such increase was granted in the years of profits. If assessee

reall y wanted to give benefit to the farmers, we fail to understand why

money was not paid to the farmers. If money was to be adjusted in the share

capital account then consent of farmers should have been obtained by way of

general body meeting which was never done and the decision to convert to

increased price was ratified onl y on 26.6.1995 These factors clearl y shows

that assessee has merel y tried to evade tax by showing extra expenditure on

account of enhance price for sugarcane.

17. No doubt the Hon'ble Supreme Court in the case of C IT v Reliance

Petroproducts Pvt Ltd (supra) held that if a disclosure is made then it cannot

be said that assessee has concealed particulars of the income. However, the

Hon'ble Delhi High Court has clearl y held while distinguishing this decision

in the case of CIT v Zoom Communication P. Ltd (supra) that if the claim is

of totall y bogus nature then the ratio of the decision of Hon'ble Supreme

Court in the case of CIT v Reliance Petroproducts Pvt Ltd (supra) cannot be

applied. The assessee has quoted various decisions which basicall y relates to

levy of penalt y in case of disallowance of expenditure or wrong claim of

deduction. All these decisions are distinguishable on facts because this is not

a case of mere disallowance of expenditure or disallowance of a particular 11

deduction rather it is a case of disallowance of bogus expenditure which has

been claimed just to reduce the profits earned by the assessee. Therefore, in

our opinion, the Ld. CIT(A) has correctly confirmed the levy of penalt y u/s

271(1)(c) of the Act and we uphold his action.

18. In the result, appeal of the assessee is dismissed.

Order pronounced in the Open Court on 10-04-2015

Sd/- Sd/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 10 t h April, 2015 Rkk Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR