ORDER
M.K. Chaturvedi, V.P.
Under section 255(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act), the President of the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal) has constituted this Special Bench to consider the following questions ..
'1. Whether provision of section 40A(2) of Income Tax Act, 1961 are applicable to payments made by a co-operative society to its members towards purchase price of cane supplied or as Khodki charges?
2. If the answer to Q. No. 1 is in the affirmative, whether on the facts and in the circumstances of the case, any portion of the price actually paid by the assessee for sugarcane supplied as fixed by Commissioner of Sugar (who is also the registrar of Co-op. Sugar Factories representing the state) is liable to be disallowed under section 40A(2) as excessive or unreasonable having regard to the legitimate business needs?
3. Whether, on the facts and in the circumstances of the case, any portion of sugarcane price and khodki charges fixed as above and actually paid by the assessees is liable to be disallowed as non-business expenditure?
4. Whether, on the facts and in the circumstances of the case, any portion of cane price/Khodki charges actually paid is liable to be disallowed as 'bonus' as defined under section 2(4) of Maharashtra Co-op. Societies Act, 1960?
5. Whether the additional amount paid on account of purchase of sugarcane after finalising the financial results of the year be allowed as price for the procurement of sugarcane?
6. Whether the additional amount paid on the basis of profit for the year after finalisation of financial results amounts to application of profit?
7. Whether, on the facts and in the circumstances of the case, additional amount paid by the society for procurement of sugarcane is liable to be disallowed under section 40A(2) of Income Tax Act, 1961 as excessive or unreasonable expenditure?'
2. On the recommendation of the Bench dated 9-7-2004, Honble President, vide order dated 12-7-2004, modified questions Nos. 5 and 6 referred to earlier as under :
'Whether, on the facts and in the circumstances of the case, the excess amount of expenditure on sugarcane purchase price as disallowed by the Commissioner (Appeals) constitutes a charge on profits or appropriation of profits?'
3. The questions referred to us in respect of all the assessees are common. All the assessees are engaged in the manufacture of sugar. Returns were filed under the status 'Co-operative Societies Code 11'. Modus operandi is the same in all the cases. In the process of manufacturing sugar, they also obtained molasses, bagasse, etc. as bye-products. There are two sugar seasons 1990-91 and 1991-92 in the financial year relevant to assessment year 1992-93. Sugar season starts from 1st October, to 31st September.
4. Assessing officer found that these Sugar Co-operatives paid widely varying prices for the procurement of sugarcane. He computed average purchase price on yield basis. In his opinion the assessee-co-operatives did pay higher price for the purchase of sugarcane from the members. As such, he made the disallowance by resorting to the provisions of section 40A(2)(a) of the Act.
5. Questions Nos. 1, 2 and 7, as listed in para 1 relate to the applicability of section 40A(2) of the Act, in the context of payments made by the assessee-co-operative societies to its members towards the purchase price of cane supplied or as khodki charges.
6. We have heard the rival submissions in the light of material placed before us and precedents relied upon. Section 40A(2) of the Act was enacted to plug loopholes in the Act. It was felt that tax liability is sometimes artificially reduced by diverting business profits to relatives and associate concerns in the form of excessive payments for goods and services, etc. In order to check such evasion, section 40A(2) was inserted by the Finance Act, 1968, with effect from 1-4-1968. The crucial words in section 40A(2)(a) are 'fair market value of the goods, services or facilities'. The goods, services or facilities are those which have a market value and which are commercial in character. So far as the legitimate business needs of an assessee or the benefit derived by or accruing to the assessee from goods, services or facilities, etc., are concerned, these are not to be judged from the viewpoint of a revenue officer but from the view point of a businessman.
7. The assessee societies are registered under the Maharashtra, Co-operative Societies Act, 1960. The principal object is to encourage members to improve method of agriculture by adopting principles of co-operative farming. No person is admitted as producer member unless he holds agricultural lands and produced sugarcane in the area of operation of the sugar mill. The members are bound by the societies bye-laws to sell sugarcane to the society.
8. The society purchases sugarcane only from the farmers who cultivated in its area of operation. It cannot purchase sugarcane cultivated outside the area of operation under the normal circumstances. As such, price paid by one factory cannot be compared with the price paid by the other factory, which is beyond the area of operation. Price is determined as per the specific norms set up by the government.
9. In the case of CIT v. Shree Panchaganga Sahakari Sakhar Karkhana Ltd. : [2001]250ITR772(Bom) , Honble High Court was concerned with the question whether the Karkhana charged the sugarcane price in excess of the price fixed by the government and if so, whether the excess price constituted income/trading receipt in the hands of the Karkhana? Honble High Court has held that the reasonableness of the expenditure has to be judged from the point of view of businessmen. The payment was not a sham. The payment was purely for business purposes. Under the Income Tax Act, one has to see whether the expenditure was incurred only and exclusively for the purposes of business. If the expenditure has been incurred out of commercial expediency, then it cannot be disallowed merely because the payment was in breach of some bye-laws. The breach of the bye-law, if any, cannot be a ground for disallowing a bona fide expenditure.
10. Tribunal, in the case of Shri Chhatrapati Shahu SSK Ltd. v. Dy. CIT in ITA Nos. 1922 to 1926, 552, 553 & 996/Pune/1990, dated 8-8-1996 (copy of the judgment is placed at Vol. II, p. 53) has held that khodki charges are paid to the cultivators for the purpose of cleaning the fields after sugarcane is cut and sent to sugar factory. While cutting sugarcane, it is difficult to cut it from root. A part of the stem of about 9' is kept in the ground, which is called khodki and only the upper portion is required to clean the field by taking out the khodki. It is necessary to clean the entire field by picking up the loose pieces and dried leaves of sugarcane. The cultivators are required to clean the field by taking out the khodki. They are paid khodki charges to cover up their expenses for this work. The Tribunal held that even those khodki charges, which are paid to non-members, were paid out of commercial expediency, as such allowable.
11. In the case of CIT v. Shree Panchaganga Sahakari Sakhar Karkhana Ltd. : [2002]254ITR572(Bom) , the Honble High Court has held as under :
'Question No. 5 .. Whether labour charges paid to the labourers of the members by the Karkhana could be disallowed on the ground that such charges were paid to non-members amounting to gratuitous payment?
Answer : The Sakhar Karkhana has incurred khodki charges. They are paid to the labourers. These labourers help the members of the society who are the farmers. It cannot be said that such khodki charges are not for business purposes. Hence, the department erred in disallowing khodki charges. Accordingly, question No. 5 is also answered in favour of the assessee and against the department.
12. Whether, section 40A(2)(b) is applicable to a co-operative society? Whether co-operative society comes within the ambit of 'association of persons? These questions were argued before us. It is pertinent to note that the term 'association of persons could include within its ambit company or firm also. Moreover, each Finance Act prescribes a separate and concessional rate of income-tax for co-operative societies from that levied on a company or firm or association of persons. This clearly implies that co-operative society is a distinct entity for the purpose of levy of income-tax, The word 'co-operative society' is independently used in number of sections.
13. Tribunal, in the case of Shivamrut Dudh Utpadak Sahakari Sangh v. Dy. CIT in ITA No. 742/Pune/1991, dated 3-12-1998, (enclosed at p. 40 of the paper book, Volume II), has held that a plain reading of section 40A(2)(a) reveals that this provision applies to 'any person referred to in clause (b) of this sub-section' and in sub-section (b) the persons mentioned are a company, firm, association of persons or HUP. Thus, it is very clear that, in its wisdom, the legislature specifically left out a co-operative society' from the purview of section 40A(2)(a) of the Act. A cooperative society enjoys a special status with its own individuality and distinctness in the scheme of Income Tax Act. A co-operative society is a voluntary association of persons; it is an economic institution formed for social purpose and not motivated by entrepreneurial profits. In other words, it is a democratic organisation owned and controlled by those utilising the services.
14. It was further submitted that against the aforesaid decision of the Tribunal, revenue Preferred appeal before the Honble High Court. In the case of CIT v. Shivamrut Doodh Utpadak Sahakari Sangh Maryadit ITA No. 62 of 1999, vide Bombay High Court judgment dated 7-12-1999, (copy of which is given at p. 43 of the paper book Vol. 2), the Honble High Court has held as under :
'The Tribunal has given good reasons to indicate as to why a co-operative society cannot fall within the ambit of the definition of 'association of persons'. We are in agreement with the Tribunals reasoning that there is conspicuous absence of reference to a co-operative society under section 40A(2)(b).
2. Consequently, we see no substantial question of law arising for our consideration in the present appeal since the Act is clear and specific.
Appeal rejected.'
15. Shri Kapila submitted that the aforesaid precedent should not be followed on the following grounds :
(i) This was a rejection of appeal on the ground that no substantial question of law arises and it is comparable to dismissal of Special Leave Petition by the Supreme Court.
(ii) Tribunal has not considered section 2(19) of the Income Tax Act.
(iii) Tribunal in that case overlooked the provisions of section 2(31), of the Income Tax Act and the assessee clearly falls in the category of person as 'association of persons' and not under any other category.
(iv) The assessees themselves have filed the return declaring the status of association of persons and they cannot now turn around and claim that they are not association of persons for the purpose of section 40A(2) of the Income Tax Act. ,
16. Shri Kapila further submitted that a case is an authority on what it decides and not that which logically comes out from it. it is neither desirable nor permissible to pick out a word or a sentence from the judgment divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions, which were before the court. The decision of a court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision. Reliance was placed on the decision of the Apex Court rendered in the case of CIT v. Sun Engineering Works (P) Ltd. : [1992]198ITR297(SC) . It was further stated by Shri Kapila that each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid temptation as said by Cordozo, by matching the colour of one case against the colour of another. Reliance was also placed on the decision of the Honble Bombay High Court rendered in the case of CIT v. Thana Electricity Supply Ltd. : [1994]206ITR727(Bom) . Our attention was invited on the observation quoted from the decision of Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai : (1976)IILLJ186SC :'It is trite, that a ruling of a superior court is binding law. It is not of scriptural sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors the milieu, we cannot impart eternal vernal value to the decision ................'
17. Having heard both the parties on this point, we find that the contention of Shri Kapila is not correct. It is palpable from the perusal of the order of Honble High Court that the view expressed by the Tribunal was accepted in very candid terms. Honble High Court noted with care before agreeing with the Tribunal, the reasoning that there is conspicuous absence with reference to a co-operative society under section 40A(2)(b) of the Act. Reasons adduced by the Tribunal to buttress the point that a co-operative society cannot fall within the ambit of the definition of 'association of persons' were found to be good reasons by the Honble High Court.
18. Appeal before the High Court can be preferred only if the case involves a substantial, question of law. The train of litigation runs on the rails of fact and law. So long as the rail of law goes straight without any turning or zig zag, its coverage creates a point of law. Question of law arises only when the rail of law passes through a labyrinth, a dark cave or when a route gets divided. Honble High Court did not find any turning or zig zag in the provision of law. In that context, it was observed that no substantial question of law arises out of the order of the Tribunal because the Act is clear and specific on the point.
19. We have also noted that the Tribunal considered the provisions of section 2(19) of the Act. This section gives the meaning of the word 'co-operative society'. Tribunal pointed out various reasons for holding that the legislature has made deliberate distinction between an association of persons and a co-operative society. Wherever the legislature wanted a particular section to apply to a co-operative society, the expression 'co-operative society' is specifically used. Tribunal also noted the provisions of section 2(31) of the Act.
20. Apropos the status stated by the assessee in return, we have noted that two different codes are assigned to association of persons and co-operative societies, being Nos. 8 and 11 respectively. Assessee did mention in the return Code No. 11 and not Code No. 8. We have examined the copy of the return filed before us. We have also noted that in all, Finance Acts, the co-operative societies are taxed at different rates than applicable to association of persons.
21. In regard to the objection of Shri Kapila that the Honble High Court did not consider this aspect in detail and all the relevant arguments, it would be pertinent here to refer the decision of the Honble Apex Court rendered in the case of Ambika Prasad Mishra v. State of UP. AIP 1980 SC 1762, wherein it was held :-'Every new discovery of argumentative novelty cannot undo or compel reconsideration of a binding precedent A decision does not loose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned .........'
22. In view of the above, we take the decision of the Honble High Court rendered in the case of Shivamrut Doodh Utpadak Sahakar Sangh Maryadit cited supra, as a binding precedent. It would be pertinent here to note that the Honble Supreme Court in the case of Union of India v. Kamalakshi Finance Corpn. Ltd. (1991) 53 ELT 433 (SC), has held as under :
'Judicial propriety demands that the order of the Tribunal should not only be respected but it should be followed by a lower authority. If the authority subordinate to the Tribunal is allowed to pick up holes, gaps or some infirmities or is of the view that different line of thinking is possible, t en there will be judicial chaos and there will not be any finality to litigation. This process, if permitted, will lead to unnecessary harassment to the taxpayer which is not envisaged by the statute nor permitted by law. The Commissioner (Appeals) is duty bound to follow the decision of the Tribunal. It is well settled that the decision of the higher authorities is binding on a lower authority in the judicial hierarchy. Therefore, the decision of the Tribunal is binding on the revenue authority which they should scrupulously follow.'
23. In the present case, we find that the decision of the Tribunal, approved by the jurisdictional High Court, is direct on the point. No contrary decision of binding nature was brought before us. We, therefore, respectfully following the precedent, hold that the provisions of section 40A(2) of the Act are not applicable to payments made by a co-operative society to its members towards purchase price of cane supplied or as khodki charges. The payment cannot be termed as excessive or unreasonable expenditure. As such, it cannot be disallowed under section 40A(2) of the Act.
24. The next issue projected in Question No. 3 relates to the allowability of sugarcane price and khodki charges as fixed by the government.
25. We have heard the rival submissions in the light of material placed before us and precedents relied upon. The core of controversy hinges on the expression 'actually paid' by an assessee; whether the sugarcane price paid in cash is to be considered as paid or whether the liability for sugarcane price is to be considered as expenditure. Indisputably the assessee follows mercantile system of accounting. Our attention was invited to p. 203 of the paper book No. 1 to demonstrate that the State Government has always determined the full cane price which for one sugar season was Rs. 522 per Metric Ton. Out of this price, certain deductions were made as per the directions of the State Government. Our attention was invited on the case of Manjara Shetkari Sahakari Sakhar Karkhana Ltd. In this case, out of the cane purchase price payable, the assessee deducted following amounts from the cane purchase price :
Rs.
NRD
27,36,975
CM Fund
8,39,845
Hutment Fund
47,358
Mowad Relief Fund
94,732
Cane Development Fund
14,30,611
Area Development Fund
32,44,973
Famine Water Relief Fund
78,878
Indira Awas Fund
1,31,451
Total
86,05,923
26. Shri Kapila contended that the expression 'actually paid' is not to be understood in a physical sense. To buttress this proposition, Shri Kapila relied on the decision of the Honble Madras High Court rendered in the case of Pereira & Roche v. CIT : [1966]61ITR371(Mad) . In this case the Honble High Court has held that the word 'actually paid' used in section 10(5) of the Income Tax Act, 1922, is not to be understood in a physical sense, but in the sense that expenditure is actually incurred.
27. Shri Kapila argued that the amounts retained as per the order of the State Government should not be considered as price paid. For this purpose he placed his reliance on the decision of the jurisdictional High Court rendered in the case of CIT v. Shri Chhatrapati Sahakari Sakhar Karkhana Ltd. : [2000]245ITR498(Bom) . In this case the Honble High Court has held that non-refundable deposits collected by the society from its members constituted trading receipt of the society. The amount collected on account of area development fund, cane development fund, Chief Ministers relief fund, etc. are not assessable in the hands of the society. On this basis, it was argued that the deposits not refundable to the members should not be construed to be the amount actually paid.
28. Shri Inamdar invited our attention on 245 ITR 515, wherein the Honble High Court has held that the said deductions constitute consideration for supply of sugarcane.
29. From the perusal of the said judgment, it is clear that these deductions are out of price and the deductions also constitute consideration for supply of sugarcane. However, a prayer was made by Shri Kapila on the last day of hearing to the effect that the following issue may also be taken up for the decision of the Special Bench :
'Whether, on the facts and in the circumstances of the case, the Commissioner (Appeals) was justified in holding that only cash component of the cane price actually paid which can be allowed by way of deduction and the balance sum of the cane price collected by way of refundable/non-refundable deposits together with interest thereon is exigible to tax?'
30. Shri Inamdar objected to raising this issue at such a late stage and denied that it was another facet of the issue before the Special Bench. He explained briefly the history of co-operative sugar factories. It was submitted that the issue whether non-refundable deposits and refundable deposits or other deductions can be considered as trading receipt is entirely different and separate issue. It cannot be clubbed with the present issue. This issue springs from the decision of the Apex Court rendered in the case of CIT v. Bazpur Cooperative Sugar Factory Ltd. : [1988]172ITR321(SC) . In this case the Honble Supreme Court dealt with deductions from cane price towards loss equalisation fund, Honble Bombay High Court dealt this issue on the footing that these deposits collected under the bye-laws and out of cane price constituted a series of periodical return, therefore, assumes the character of 'trading receipts'.
31. The issue posed before the Special Bench is apropos the question that whether any portion of the cane price and khodki charges fixed by the State Government and actually paid by the assessee could be disallowed as non-business expenditure? The other issue, which is to be considered, is whether any portion of the cane price paid as determined by the State Government can be disallowed as excessive or as an appropriation of net profits?
32. These two issues are entirely different. In order to decide the issue that whether the amount of non-refundable deposit constitute payment or not, the Tribunal is required to investigate fresh facts such as refund of deposits made, deposits converted into shares, etc. Shri Inamdar demonstrated this aspect with reference to p. 89 of the paper book No. 1 vide para 5.6, the assessing officer has worked out the deduction at Rs. 86,75,923. It was stated that if the Bombay High Court judgment is to be followed, then only Rs. 27,36,975 can be treated as 'trading receipts'. However, the disallowance under dispute before the Tribunal is in relation to Rs. 3,09,63,548. Thus, even arithmetically, the issue is not the same. It was, therefore, urged that this is not an issue referred to the Special Bench, as such the Bench should not take any cognisance of the prayer made in this regard by Shri Kapila.
33. We are inclined to agree with the submissions made by Shri Inamdar. The issue suggested by Shri Kapila was not referred to the Special Bench. The price actually paid for the procurement of the sugarcane is to be allowed as business expenditure. However, the point as to whether the cane price collected byway of refundable/non-refundable deposits, together with interest thereon is exigible to tax or not, can be placed before the Division Bench for its consideration. We decline to answer this question, as it was not referred to the Special Bench.
34. In regard to Question No. 4, Shri Kapila relied on the order of Commissioner (Appeals). Shri Inamdar argued that part of sugarcane price, which was considered as excess payment, cannot be construed to be as bonus, as contemplated under the Cooperative Societies Act. Reference was made to section 65(2) of the Maharashtra Cooperative Societies Act. This reads as under :
'65. Ascertainment and appropriation of profits-(1) ...........
(2) A society may appropriate its net profits to the reserve fund or any other fund to payment of dividends to members on their shares to the payment of bonus on the basis of support received from members and persons who are not members to its business, to payment of honoraria and towards any other purpose which may be specified in the rules or bye-laws;
Provided that no part of the profits shall be appropriated except with the approval of the annual general meeting and in conformity with the Act, rules and bye-laws.'
35. As per the prescription of the aforesaid section, if the net profit is appropriated as per the mandate of the section, then it can be considered as bonus. It can be given to members as well as to non-members. But it must be out of the appropriation to the reserve fund or any other fund. Part of sugarcane price which is considered as excess cannot be construed as bonus as per section 65(2) of the Maharashtra Co-operative Societies Act. It was further argued that even if it is considered as bonus, it is not exigible to tax in view of the CBDT Circular No. 117 (F. No, 201/5/73-ITA(AII) dated 22-8-1973. This circular reads as under :
'284. Rebate allowed to members by consumer co-operative storesWhether allowable as business deductions.
1. I am directed to say that an instance has come to the notice of the Board wherein the Income Tax Officer in the case of consumer co-operative store had disallowed the claim of deduction on account of rebate allowed on the purchases made by the members of the store.
2. The Board in consultation with the Department of Community Development and Co-operation has decided that rebate or bonus (which is in the nature of deferred discount) passed on by the consumer co-operative stores to their members on the value of the purchases made by them during a year should be allowed as a deduction in computing the business income of such a society.'
36. Having heard both the parties on this question, we hold that in view of the prescription of section 65(2) of the Maharashtra Co-operative Societies Act and CBDT Circular No. 117, dated 22-8-1973, any portion of the cane price/khodki charges actually paid cannot be disallowed as 'bonus' as defined under section 2(4) of the Maharashtra Co-operative Societies Act, 1960.
37. Question No. 5 and 6 stands modified as under :
'Whether, on the facts and in the circumstances of the case, the excess amount of expenditure on sugarcane purchase price as disallowed by the Commissioner (Appeals) constitutes a charge on profits or appropriation of profits?'
38. We have heard the rival submissions in the light of material placed before us and precedents relied upon. At the outset we have noted with due care the factual backdrop of the case. The demand for a minimum price was made in 1933 and accepted by the Government by legislating the Sugarcane Act, 1934. The Act conferred powers on the then provincial Government to fix minimum price for cane. Since 1950, the minimum price is fixed under the Control Orders issued from time to time by the Government of India. In 1966, Sugarcane (Control Order) was passed. It broadened the base for price fixation by providing that the minimum price of cane shall be fixed having regard to : (i) the cost of production of sugarcane; (ii) the return to the grower from alternative crops; (iii) the availability of sugar to the consumer at a fair price; and (iv) the price at which sugarcane is sold by the producer of sugar. It regulated the distribution and movement of sugarcane by empowering the State Governments to notify and reserve any area where sugarcane is grown for a particular factory, having regard to the crushing capacity of the factory. The purpose was to maintain the equilibrium between demand and supply of sugarcane.
39. Subsequently, the Sugar Industry Enquiry Commission 1974 (popularly known as Bhargava Committee) suggested that the minimum price be fixed for sugarcane relating to a basic recovery of 8.5 per cent with a premium for every 0.1 per cent increase in recovery on proportionate basis. It also recommenced that, in view of release of quota of sugar for free sale, the realisation from sugar after expenses should be equally charged with the cane growers who execute agreement for supply of cane and fulfil their contract. Both the recommendations have been incorporated as clause 3(a) and clause 5A respectively, in the Sugarcane (Control) Order, 1966.
40. In the State of Maharashtra, there were cyclical ups and downs in sugarcane production that adversely affected some of the sugar factories. In order to ensure that the factories Were not starved of sugarcane, the State Government legislated the Zoning Order, which limited the zone in which the cane grower could sell the sugarcane. It was intended to reserve areas from which the factory could access the sugarcane of the members and nonmembers. There were differences in the price of sugarcane paid to the members of a co-operative society and to the non-members.
41. It is necessary to understand the mechanism for pricing of sugarcane followed in the State of Maharashtra. The process of price fixation could be divided into three parts, viz., (i) The fixation of the minimum ex-factory price by the Central Government under clause 3 of 1966 order for all sugar factories linking it with basic recovery of 8.5 per cent with a proportionate increase for every 0.1 per cent of extra recovery. Therefore, the minimum price of cane paid by two factories would not be the same, since it would be dependent upon the recovery factor. The difference in the yield gets reflected in the price fixation. For example, the difference of 1.28 per cent in the recovery of sugar by two factories would result in difference of 12.8 kgs. per tonne of sugar production, which in turn would result in additional sales realisation. This difference in the additional realisation gets reflected in the Price fixation by way of additional premium. (ii) Then, there is, a State Advised Price. Every State has its own method of determining it. In Maharashtra 95 per cent of sugar factories are in the co-operative sector. They are governed by Co-operative Societies Act and bye-laws framed thereunder. Bye-laws 63, 64, 64A, 65A and 65B deal with fixation of price of cane. Bye-law 64 empowers the State Government to fix the price of cane so long as the amount invested by it in setting up of sugar factory is not repaid. The exercise is undertaken by a Committee constituted by the Government known as 'Ministerial Cabinet Committee'. While fixing the price, the Committee takes into account the ex-gate minimum price declared by the Central Government, estimated sugarcane production and its availability for production by the sugar factories, estimated average price of sugar factory, estimated conversion charges and the present day levy and free sale sugar price. The Supreme Court noted that the State Advised Price is fixed ex-field in Maharashtra. This means that a cane grower is paid harvesting and transportation charges in addition to the ex-field price determined by the State Government or such expenses is taken care of by the society. It was submitted before us that the price paid for sugarcane in the State of Maharashtra is the highest in the country. The payment to the cane growers is irrespective of whether they are members of any co-operative society or not. (iii) Adverting to the price which is paid at the end of the season, Bhargava Committee recommended payment of additional price on 50 : 50 profit sharing basis between the growers and the factories. This is to be worked out in accordance with the prescription of Schedule II to the 1966 Order, It was clarified that in the State of Maharashtra there is practice to pay advance at the beginning of the season, and then the cost of transportation and harvesting in the middle of the season and the price is worked out finally at the end of the season, by the Ministerial Cabinet Committee on statements submitted by each factory and recommendations made by the committee after discussing the matter with the members of State Federation of Co-operative Sugar Factories and representatives of the State Co-operative Bank. It was submitted that, in view of this, the additional price is the State Advised Price.
42. Our attention was also invited on the Circular No. O. No. DS/2090/Finance 4/91-92-Advance/91, dated 24-10-1991, issued by the Commissioner of Sugar, Government of Maharashtra, Pune-42, in regard to the advance to be given to the concerned farmers for the sugarcane to be supplied to Co-operative Sugar Factories in 1991-92 crushing season. Next Circular being Outward No. CS/2090/Finance-4/91-92/Second Adv/92, dated 23-6-1992, was in respect of the second advance to sugarcane supplier farmers for the season 1991-92 and the final price was fixed vide Resolution No. 31 of Board of Directors Meeting dated 23-10-1991. It, was submitted by the learned counsel that sugar is essential commodity. The government took the power to order to sugar factory to sell sugar at levy price, so it could be made available to all. He explained the concept of levy sugar and free sugar. The factories are bound to sell sugar to the government at the levy price.
43. The peculiar features of the sugar industries were explained. It was submitted that the State protects the interest of the growers. After cutting sugarcane, it is necessary that it must be crushed within 48 hours. As such, it can only be sold within the adjoining area. This necessitated the concept of zoning. The government made it compulsory that the farmers should sell the sugarcane to the factory of their zone area of operation.
44. It was alleged that there is no such thing as market value for sugar. In the State of Maharashtra, 169 Sugar Factories are under the Co-operative Society. Only two factories were stated to be under public sector. Out of that, one Ravalgaon is engaged in the business of candies. On this factual backdrop the farmers and mill owners join together to form a society. Inspiration was taken from other countries like Australia, Indonesia, USA, Cuba, Mexico, Philippines, Mauritius South Africa and Puerto Rico.
45. In Australia, sugarcane is grown only for the purpose of supplying it to the mills. The relationship between the grower and the miller is controlled under the Sugarcane Prices Act of 1915, as amended from time to time. The marketing of sugar is undertaken by the Sugar Board, which acquires the total output of raw sugar, arranges for refining and sales and determines the interim price to be paid for sugar. Cane prices are fixed according to the quality of cane. The supply is subjected to cane and juice analysis. The price payable to a grower is determined in accordance with the formula which secures the division of raw sugar proceeds in the ratio of 2 : 1 between the farmer and the miller, when the cane is of 12 ccs per cent and the mill recovery is 90 per cent. In case the cane is of higher CCS, the entire advantage goes to the farmer and vice versa. Similarly, the entire advantage of higher mill efficiency is passed on to the miller.
46. In Indonesia, most of the factories grow their own, cane. The price of sugarcane payable to the grower is worked out according to the formula which gives the grower 55 per cent of the price of the recoverable sugar content of the cane. The formula is as under :
Prices of cane per quintal =
R x H x 55
1000
Where R is the recoverable sugar content of cane supplied by the farmer and H the average price of sugar fixed by the government for the season.
47. In USA, payment for sugarcane is regulated in the chief cane producing states in Louisiana, Florida and Hawaii. The basic price for standard sugarcane is fixed by the government per ton per each one cent per pound of raw sugar. The raw sugar price taken is the weekly or seasons average price quoted by Louisiana Sugar Exchange. Same system is followed at Florida. The standard sugarcane is defined as cane containing 12.5 per cent sucrose in the normal juice.
48. In Cuba, cane farms are generally owned by non-millers. The farmers receive payment in accordance with the pro visions of Sugar Co-ordination Law. In 1954, farmers share was around 50 per cent. In Mexico, 80 per cent of sugarcane drawn is used in sugar production. The payment of cane takes place in terms of a government decree appearing every year. About 50 per cent of the ex-factory proceeds of sugar and by-products is paid to the cane grower subject to certain minimum recovery. In Philippines, the growers raise the cane and take it to the miller for processing it into sugar. The relationship between the farmer and the miller is governed by a Milling Contract. In Mauritius, payment is made on recovery basis and the grower gets 2/3rd value of the sugar computed to have been made from his cane on the basis of the test figures. The recovery is calculated on the basis of brix, pol and purity of the absolute juice.'
49. The Commissioner (Appeals) opined that the higher price paid by the Government in India was in accordance with the co-operative principles, as such, she took the amount excess of the minimum price fixed by Government of India as appropriation of profits and its distribution was treated as application of income.
50. Reference was made to the decision of the Apex Court rendered in the case of Shri Malaprabha Co-op. Sugar Factory Ltd. v. Union of India : AIR1994SC1311 . In this case the Honble Supreme Court has held that the government cannot fix an arbitrary price nor can a price be fixed on extraneous considerations. If such a price does not secure a reasonable return on the capital employed, such a fixation is liable to be challenged both on the ground of its being inconsistent with the guidelines built in this sub-section and also as violative of Articles 19(1)(f), 19(1)(g) and 31 of the Constitution. It was further held that for fixing the price under section 3(3-C), the government must have regard to the four factors mentioned under section 3(3-C) of the Act. Those factors are : (i) minimum price of sugarcane; (ii) manufacturing costs; (iii) taxes and duties; and (iv) reasonable return on the capital employed. The price fixation is a legislative function. Therefore, what is permissible for the court to examine is whether regard has been made to these four factors or not.
51. Dealing with clause 5-A of Essential Commodities-Sugar (Control). Order, 1966, the Honble Supreme Court has held that the producer of sugar will be entitled to retain an amount equivalent to the amount paid to the cane grower under clause 5-A. The producer had become statutorily entitled to 50 per cent of such excess realisation from 1-10-1974. That amount cannot be taken into consideration for determination of the price of levy sugar. The government could not, in law, proceed to a determination of the levy price by mopping up 100 per cent of the excess realisation of free sale sugar. At p. 659 of the said order, vide para 47, the Honble Supreme Court has observed as under :
'47. As regards cases arising from Maharashtra, it is incorrect to state that the factors mentioned in clauses (a) to (d) of section 3(3-C) were not borne in mind. In view of the decision of this court in Sitaram not only those factors but other factors, which have a bearing, were also taken into consideration. When the appellants talk of reasonable return, it should be noted that reasonable return refers to the entire production of sugar. That would be sufficient compliance with law as laid down in Panipat case. Under clause 5-A of the Sugarcane Control Order, sugar producer is required to pay to the sugarcane growers in addition to the minimum sugarcane price fixed under clause 3(a), an additional price if found due in accordance with second schedule to that order. This surplus is calculated in terms of Bhargava Commission formula. The obligation to pay the cane growers arises only if the statutory minimum cane price plus the surplus exceeds the actual cane price already paid to the grower. Therefore, only to the extent of excess, the payment is required to be made.'
52. At p. 670, vide para 92 and 93, and at pp. 675 to 677, vide para 103(5), 104 and 104.2.39, the Hon'ble apex court has held as under :
'92. In the State of Maharashtra initially an ex-field advance is fixed uniformly for all co-operative sugar factories. At the end of the season, the actual working results are assessed and the entire profits are passed on to the cane growers as additional cane prices. Thus, the farmers get profits in the form of additional cane prices and this fluctuates widely from factory to factory. In view of this it can be categorically stated that actual cane prices are not available in Maharashtra, particularly for co-operative (sic) as it is of a profit sharing nature (excess over the initial ex-field advance).
93. Therefore, it is not correct on the part of the appellants to contend that notional prices were taken into consideration without regard to the actualities. Even otherwise, as stated above, if regard has been had to this factor, that would be sufficient in law. We may add that this court cannot determine the price by redoing that exercise.
'103. (5) No additional price determined under sub-clause (2) shall become payable by a producer of sugar who pays a price higher than the minimum sugarcane price fixed under clause 3 to the sugarcane grower,
Provided that the price so paid shall in no case be less than the total price comprising the minimum sugarcane price fixed under clause 3 and the additional price determined under sub-clause (2).
104. It is true that clause 5-A deals with additional price payable to the sugarcane grower. However, if the recommendations made by the Bhargava Commission and the method of computation are taken into consideration, it will be clear that the producer of sugar will be entitled to retain an amount equivalent to the amount paid to the cane grower under clause 5-A. That amount cannot be taken into consideration for determination of the price of levy sugar. This will be evident from paras. 2.17, 2.20, 2.21 and 2.39 of Chapter i of Bhargava Commission Report. They are extracted below :...........
2.39. After considering all these facts we have decided that the extra realisations on the sale of sugar be divided between the growers and the industry in the ratio of 50 : 50. A provision of this effect has been made in clause (9) of the Scheme. It should be mentioned that after deducting the tax obligations to be borne by the industry, the actual accruals will be in the proportion of 70 to the cane growers and 30 to the industry. This share of cane growers approximates the share of the cost of cane in the cost of sugar.'
53. Further, our attention was invited on the observation of Justice E S Venkataramiah, quoted in the said decision, wherein. it is said : 'that the Bhargava commission recommended that the factory owner should share the extra realisation with the cane grower. The expression 'to share' means 'to participate in'. It, therefore, fallows that a sum equivalent to the amount paid by way of additional price would go to the benefit of the producer. It is further added that the additional price payable to the cane grower under clause 5-A will arise after the expiry of the sugar year. Sugar price will have to be met only from the extra realisation made by the producer by the sale of sugar in free market which will naturally be more than the levy price.'
54. In the case of UP Co-operative Cane Unions v. West UP Co-operative Sugar Mills Association, Civil Appeal No. 460 of 1997, dated 5-5-2004, the controversy was raised by way of SLP, in regard to the competence of the State Government to fix the State Advised Price for purchase of sugarcane by an occupier of a sugar factory over and above the minimum price fixed by the Central Government. The Apex Court took into consideration the concept of price as enunciated under section 2(g) of the Sugar Control Order, 1966 and has held that in view of the definition of 'price' given in clause 2(g) and also the language used in clauses 3 and 3-A, the 1966 order clearly contemplates that there can be a price other than the minimum price of sugarcane fixed under clause 3(1), viz., the 'price agreed to between the producer and the sugarcane grower or the sugarcane growers Co-operative Society'.
55. In the case of Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Ltd. v. State of Maharashtra : [1995]3SCR377 , our attention was invited on p. 483. The relevant portion reads as under :
'Bhargava Commission also recommended that the sales realisation from sugar after expenses should be shared with the cane growers who execute agreement for supply of cane and fulfil their contract. Both these recommendations were accepted. The latter has been incorporated in para, 5-A in the Sugarcane (Control) Order, 1966.'
56. We have also considered the various other precedents relied upon at the time of hearing on behalf of the revenue to buttress the point that the additional price constitute appropriation of profits and it is not a charge on profits. It is pertinent to note that the Apex Court in the case of Union of India v. Amrit Lal Manchanda : 2004CriLJ1426 , para 15 has held : 'observations of Courts are neither to be read as Euclids theorems nor as provisions of the statute and that too taken out of their context. The observations must be read in the context in which they appear to have been stated'.
'Judges interpret statutes, they do not interpret judgments. They interpret words of the statutes., their words are not to be interpreted as statutes'.
57. In the present case we are concerned with the question as to whether the excess amount of expenditure on sugarcane purchase price could be construed to be appropriation of profits.
58. Indisputably the amount is paid towards the price. For the fixation of additional price, modus is prescribed in Schedule II of the Sugar (Control) Order, 1966, in the following manner :
'The amount to be paid on account of additional price (per quintal of sugarcane) under clause 5-A by a producer of sugar shall be computed in accordance with the following formula, namely;
X =
R - L + 2A + B
2C
ExplanationIn this formula
1. X is the additional price in rupees per quintal of sugarcane payable by the producer of sugar to the sugarcane grower.
2. R is the amount in rupees of sugar produced during the sugar year excluding the excise duty paid or payable to the factory by the purchaser.
2. L is the value in rupees of sugar produced during the sugar year, as calculated on the basis of the unit cost per quintal ex-factory, exclusive of excise duty determined with reference to the minimum sugarcane price fixed under clause 3, the final working results of the year and the Cost Schedule and return recommended by such Authority ad the Central Government may specify from time to time.
4. A is the amount found payable for the previous year but not actually paid (vide sub-clause (9)).'
59. The pro-format statement of receipt and expenses gives the mechanism of determining cane price. As per section 9 of the Sale of Goods Act, 1930, the parties may, by agreement, fix such price for the goods as they may please. They are the best judges of their interests. But in the present case, parties accepted the price fixed by the state. They have no choice. Profit is a component for the determination of the price. This theory of price fixation was devised by the State in the interest of the public. It is based on the price fixation mechanism of sugarcane followed in other countries. Just because profit is one of the components in ascertaining the price, it cannot be said that profit is separately distributed in the guise of additional price. The amount paid by the assessee co-operatives to the sugarcane growers is consideration for the procurement of sugarcane. It cannot be construed to be appropriation of profits. In our opinion, it constitutes a charge on profits.
60. All the issues were not referred for the consideration of the Special Bench. Therefore, the Division Bench will decide the remaining issues. We direct the registry to place these appeals before the Division Bench for deciding the remaining issues.