The Commissioner Of Income-Tax - I,Coimbatore v. M/S.sakthi Sugars Limited

T.C.A. No.1002 of 2010 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 12.06.2025 CORAM THE HON'BLE MR.K.R.SHRIRAM, CHIEF JUSTICE AND THE HON'BLE MR.JUSTICE SUNDER MOHAN Tax Case Appeal No.1002 of 2010 The Commissioner of Income-tax - I,Coimbatore... Appellant -vs- M/s.Sakthi Sugars Limited,No.180, Race Course Road,Coimbatore 641 018.(PAN ) .. Respondent Prayer: Appeal filed under Section 260A of the Income Tax Act, 1961, against the order dated 31.03.2010 passed in ITA No.1280/Mds/2009 on the file of Income Tax Appellate Tribunal, 'B' Bench, Chennai for the Assessment Year 2006-07. For Appellant :Mr.R.Karthik For Respondent : Mr.R.Vijayaraghavanfor M/s.Subbaraya Aiyar Padmanabhan& Ramamani Page 1 of 17 JUDGMENT T.C.A. No.1002 of 2010 (Judgment of the Court was delivered by the Hon'ble Chief Justice) Assessee carried on business of manufacture of sugar, industrial alcohol and soya products. For Assessment Year 2005-06 and Assessment Year 2006-07, assessee filed its return of income declaring loss for both Assessment Years. The return was initially processed under Section 143(1) of the Income Tax Act, 1961 ('the Act' in short) and later, taken up for scrutiny. 2. The Assessing Officer, while computing the assessment for AY 2005-06 and AY 2006-07, disallowed assessee's claim for depreciation on the assets of beverages division on the ground that commercial production had not commenced subsequent to the trial run. 3. For AY 2006-07, assessee had claimed a sum of Rs.48.35 crores as expenditure incurred, as a result of Clause 5A notified under the Sugarcane (Control) Order, 1966 ('the Order' in short). Initially, assessee paid its Page 2 of 17 T.C.A. No.1002 of 2010 statutory minimum price of sugarcane to the growers. Later, the Government fixed a final price for cane on 27.07.2004. As a result of this notification under Clause 5A of the Order, assessee had to pay additional cane price over and above the statutory minimum price amounting to Rs.48.35 crores. Out of this Rs.48.35 crores, assessee debited Rs.23.35 crores representing the amount paid to the cane growers at the minimum statutory price (MSP) to the profit and loss account under the head 'cost of raw material' and balance Rs.25 crores was not credited to Profit and Loss Account and not claimed in original return. Assessee filed a revised return and claimed deduction of Rs.25 crores as cane arrears in the income-tax computation statement and the amount was debited to profit and loss appropriation account. Since clause 5A of the Order was passed on 27.07.2004, according to the Assessing Officer, the payment of Rs.48.35 crores crystallised for payment in the Financial Year 2004-05, relevant to AY 2005-06. As the assessee claimed deduction of the said amount for AY 2006-07, the Assessing Officer rejected the claim as prior period expenses. 4. For AY 2006-07, assessee claimed deduction of Rs.76.38 crores on an intangible asset (goodwill). This amount represented the amount paid Page 3 of 17 T.C.A. No.1002 of 2010 by assessee to cane growers as agreed price, over and above the statutory minimum price and the price fixed under Clause 5A of the Order and was not claimed as an expenditure in the respective years of payment in the books of accounts. It was recorded as advances to farmers in those years. The assessee treated this amount of Rs.76.38 crores as intangible asset under the name of 'goodwill' and claimed the entire amount as deduction as revenue expenditure. The Assessing Officer did not dispute the payment, but disallowed the amount on the ground that the expenditure pertained to earlier years and not to the period relevant to AY 2006-07. 5. The Assessee had also claimed deduction of Rs.25 crores of cane equilisation fund from the net profit while working out profit under Section T.C.A. No.1002 of 2010 by assessee to cane growers as agreed price, over and above the statutory minimum price and the price fixed under Clause 5A of the Order and was not claimed as an expenditure in the respective years of payment in the books of accounts. It was recorded as advances to farmers in those years. The assessee treated this amount of Rs.76.38 crores as intangible asset under the name of 'goodwill' and claimed the entire amount as deduction as revenue expenditure. The Assessing Officer did not dispute the payment, but disallowed the amount on the ground that the expenditure pertained to earlier years and not to the period relevant to AY 2006-07. 5. The Assessee had also claimed deduction of Rs.25 crores of cane equilisation fund from the net profit while working out profit under Section 115JB of the Act contending it to be in accordance with Clause (i) of Explanation-1 to Section 115JB of the Act. The Assessing Officer disallowed the claim as the sum was not credited to Profit and Loss as reserve, but was debited in the Profit and Loss Appropriation account. 6. Against the order of the Assessing Officer, assessee filed an appeal before the Commissioner of Income-tax [CIT (A)] and the CIT(A) Page 4 of 17 T.C.A. No.1002 of 2010 confirmed the findings of the Assessing Officer on all the issues. Against that order, assessee preferred an appeal to the Income Tax Appellate Tribunal (ITAT) and the ITAT answered all the four issues against the Revenue and in favour of assessee. It is this ITAT's order pronounced on 31.03.2010 that is impugned before us in this appeal. 7. The following four substantial questions of law were framed on 29.11.2010:- "1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the assessee is entitled for depreciation on the assets of the beverages divisions at Rs.1,82,53,201/- even though the assessee has failed to establish that they were put to use for business activities of the company from the period relevant to assessment year 2006-07? 2. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee has the option of choosing any other accounting period when the expenditure stands crystallized during the financial year 2004-05 (Assessment Year 2005-06), even though the liability has clearly crystallized in the earlier years in view of the orders passed under Clause 5A of the Sugar Cane (Control) Order, 1996 on 27.07.2004 and 29.10.2004 and following the mercantile system of accounting? 3. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the liability of earlier years can be deducted by treating the payment as Goodwill when the fact it represents the Page 5 of 17 T.C.A. No.1002 of 2010 agreed purchase consideration between the assessee and the farmers and the amount already disbursed in the respective years, and now debited to Profit and Loss Account for the assessment years 2006-07 is valid? and 4. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is entitled to deduction of Rs.25 crores of Cane Equalization Fund from nete profit while working out book profit under Section 115JB of the Act, is valid ?" 8. As regards the first issue, namely, disallowance of depreciation Page 5 of 17 T.C.A. No.1002 of 2010 agreed purchase consideration between the assessee and the farmers and the amount already disbursed in the respective years, and now debited to Profit and Loss Account for the assessment years 2006-07 is valid? and 4. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is entitled to deduction of Rs.25 crores of Cane Equalization Fund from nete profit while working out book profit under Section 115JB of the Act, is valid ?" 8. As regards the first issue, namely, disallowance of depreciation claimed on the assets of the beverage division, assessee had set up a beverages division pursuant to an agreement dated 25.06.2002 that it had entered with Hindustan Coca Cola Beverages Private Limited. The object of venturing into the manufacturing and bottling of soft drinks was for effective marketing of sugar and use of available infrastructure facilities to get the maximum benefit to the assessee company. Admittedly, all permissions from the various departments including the Tamil Nadu Pollution Control Board, Electricity Board, Ministry of Food Processing Industry, etc., were in place and it was established that the beverages division had no hurdle or impediment in the commencement of commercial production. The commercial production, however, could not be commenced due to some public agitation.Page 6 of 17 T.C.A. No.1002 of 2010 9. Assessee had even done a trial run which was not disputed by the lower authorities and it was established that during the trial run of the beverages division that the assessee undertook, raw material was consumed and production during the trial run was sent for analysis and found suitable for marketing purposes. We agree with the ITAT that it was clearly beyond doubt that the beverages division was ready for commencement for commercial production, but due to unavoidable circumstances which were beyond the control of assessee, commercial production did not commence. The reason, as noted earlier, was due to certain public agitation. When assessee had completed all the required formalities for start of commercial production, then, merely because the commercial production could not commence due to the circumstances for which assessee is not responsible, the claim of depreciation, as rightly held by the ITAT, cannot be denied solely on that basis. The ITAT has rightly held that in order to get depreciation under Section 32 of the Act, it is not necessary that the machinery in question should have been actually used in the relevant Page 7 of 17 T.C.A. No.1002 of 2010 previous year for the purpose of business and it is sufficient if the same is kept ready for use during the relevant previous year, though not actually used due to circumstances beyond assessee's control. Moreover, assessee had not started or commenced new business, but had only established a new division in its on-going business. Indisputably, the beverages division had become part of block assets and was so treated by assessee in its books of accounts. Therefore, once depreciation is allowable on entire block of assets, even if some of the assets of the block have not been used, existence of an individual asset in the block of assets itself amounts to use for the purpose of business. Therefore, the assessee would be entitled for depreciation on beverages division. 10. The first issue is answered against the Revenue and in favour of assessee. 11. As regards the second issue, that is, disallowing of expenditure due to cane price fixed vide order passed under Clause 5A of the Order, assessee company, for AY 06-07, had to pay the sugarcane price, the statutory minimum price, at initial stage to the farmers, as notified by the Page 8 of 17 T.C.A. No.1002 of 2010 10. The first issue is answered against the Revenue and in favour of assessee. 11. As regards the second issue, that is, disallowing of expenditure due to cane price fixed vide order passed under Clause 5A of the Order, assessee company, for AY 06-07, had to pay the sugarcane price, the statutory minimum price, at initial stage to the farmers, as notified by the Page 8 of 17 T.C.A. No.1002 of 2010 Central Government. The sugarcane price was finally fixed by the Government under Clause 5A of the Order. The notification under Clause 5A of the Order for the years 1997-98 to 2000-01 was issued by the Government on 27.07.2004 and 29.10.2004. As a result of the notification under Clause 5A, assessee had to pay additional cane price amounting to Rs.48.35 crores over and above the statutory minimum price. Assessee claimed before the lower authorities that since the orders were received by assessee on 06.05.2005 and 15.06.2005 respectively, the expenditure on this account is allowable in AY 2006-07. The lower authorities denied the claim of assessee on the ground that the said expenditure crystallized on 27.07.2004 and 29.10.2004 and accordingly, pertained to AY 2005-06 and not to AY 2006-07. 12. The fact that the orders under Clause 5A of the Order were received by assessee during May and June 2005 has been factually found to be correct. We also find no reason as to why assessee should charge the expenditure in the subsequent year if the orders were received in the earlier year when the expenditure is allowable without any dispute. We find that the lower authorities denied the claim of assessee on the ground that the Page 9 of 17 T.C.A. No.1002 of 2010orders cannot be received in the month of May and June, 2005 when they were issued in July and October, 2004. The denial is only on the basis of conjecture and surmises and without any material or evidence to substantiate the disallowance of claim of the assessee. 13. Sri.Karthik Ranganathan submitted that the claim of assessee is not liable in the assessment year under consideration, that is, AY 2006-07, because the orders were notified in July and October, 2004 and that pertained to AY 2005-06. 14. The liability arising out of the said orders is in the nature of a statutory liability. When there is no dispute that this additional expenditure due to the Government orders of fixing the cane price is allowable whenever such orders are passed, then, in the absence of any finding by the lower authorities or any material to show that assessee has not claimed such expenditure in the AY 2005-06 due to ulterior motive or malafide, the explanation and facts asserted by assessee cannot be disbelieved in those circumstances. It is not the case of the revenue that assessee received the orders immediately after it was notified, as the Page 10 of 17 T.C.A. No.1002 of 2010Assessing Officer has not given any finding that the orders dated 27.07.2004 and 29.10.2004 were dispatched by the Government immediately after the date of notification. We see no reason to disbelieve the assessee that these orders were received by assessee on 06.05.2005 and 15.06.2005. Therefore, as the expenditure is allowable in either AYs 2005-06 or 2006-07, there is no reason as to why assessee will claim the expenditure in a different year than the year in which it actually crystallized. Therefore, we agree with the finding, in the facts and circumstances of the case, that the expenditure as a result of order passed under Clause 5A of the Order has been crystallized only when the assessee received the Government orders. 15. Accordingly, the second question of law is answered in favour of the assessee and against the Revenue. 15. Accordingly, the second question of law is answered in favour of the assessee and against the Revenue. 16. As regards the third issue of disallowance of deduction claimed on an intangible asset (goodwill), the relevant facts are that for every sugar factory, the State Government demarcates an area for procurement of sugarcane. Before commencement of sugarcane season, the sugarcane Page 11 of 17 T.C.A. No.1002 of 2010 growers are registered with the factory for supply of cane. For every season, the Central Government fixes the prices under the statutory minimum price to be paid to the sugarcane growers for every State. The statutory minimum price is not a final price to be paid by the sugarcane factories to farmers, but it is to be paid subject to the additional payment to be made as per the Order by the State Government. the statutory advisory price is over and above the price fixed under Clause 5A of the Order. 17. As per the practice in the industry, to ensure continuous and uninterrupted supply of sugarcane, sugarcane factories make payment to the cane growers over and above the statutory minimum price as well as the price fixed under Clause 5A of the Order. In the period relevant to AY 2006-07, assessee made a deduction of Rs.76.3 crores on an intangible asset (goodwill). This amount represents, admittedly, payment made to the cane farmers as an agreed price over and above the statutory minimum price and also the price fixed under Clause 5A of the Order. Assessee classified this amount as 'goodwill' and claimed the entire 'goodwill' amount as deduction stating that this amount has already been paid in the earlier year for cane as agreed price.Page 12 of 17 T.C.A. No.1002 of 2010 18. Sri.Ranganathan submitted that when this expenditure pertained to earlier year being the price paid to the farmers, then treatment of the same as 'goodwill' is not permissible and the expenditure claimed by assessee for the AY 2006-07 is not allowable. We are surprised as to why assessee did not claim the entire amount as expenditure for cane procurement than splitting it as cane procurement and goodwill. 19. The payment of the advance to farmers is not disputed and the fact that expenditure is a revenue expenditure is also not disputed by the revenue and particularly, by the Assessing Officer. The claim has been denied only on the ground that the expenditure pertained to earlier years. There is no dispute that this payment was made towards purchase of sugarcane though in advance and subject to the price fixed under Clause 5A of the Order. It is also not disputed that for AYs 1997-98 to 2000-01, the price fixed by the State Government under Clause 5A of the Order was only on 27.07.2004 and 29.10.2004, which were received by assessee in the months of May and June,2005. Therefore, the expenditure was crystallized Page 13 of 17 19. The payment of the advance to farmers is not disputed and the fact that expenditure is a revenue expenditure is also not disputed by the revenue and particularly, by the Assessing Officer. The claim has been denied only on the ground that the expenditure pertained to earlier years. There is no dispute that this payment was made towards purchase of sugarcane though in advance and subject to the price fixed under Clause 5A of the Order. It is also not disputed that for AYs 1997-98 to 2000-01, the price fixed by the State Government under Clause 5A of the Order was only on 27.07.2004 and 29.10.2004, which were received by assessee in the months of May and June,2005. Therefore, the expenditure was crystallized Page 13 of 17 T.C.A. No.1002 of 2010during the period relevant to assessment year under consideration and the difference between the advance paid by assessee and the price fixed under Clause 5A of the Order was ascertainable only after the orders were received by the assessee. We find that the assessee has been consistently maintaining this method of accounting and treating the extra price paid as advance to farmers during the period of orders under Clause 5A were awaited. It is clear, therefore, that the payment on this account was made by assessee for procurement and uninterrupted supply of sugarcane and therefore, the expenditure was closely related to the business of assessee. When the payment is not disputed and the purpose of payment is also not in dispute, we see no justification in denying the claim of the said expenditure as business expenditure only on the ground that the assessee treated the said payment as advance to the farmers under the nomenclature of 'goodwill'. Since the excess amount was crystallized only after the sugarcane price was fixed under Clause 5A of the Order, then, when the additional expenditure is allowable as per the order under Clause 5A, the excess payment made by assessee, which cannot be recovered in the facts and circumstances, nature of transaction and practice in the business of assessee, is also allowable as business expenditure.Page 14 of 17 20. The third question of law is also answered in favour of the assessee and against the revenue. 21. As regards the fourth issue, relating to computation of book profit under Section 115JB of the Act for the AY 2006-07, in view of our answers given to the first three issues, we decide this issue also in favour of assessee and against the revenue, when the amount of Rs.25 crores once added into the net profit has to be excluded again from net profit while computing the book profit under Section 115JB. Accordingly, appeal is dismissed. There shall be no order as to costs. (K.R.SHRIRAM, CJ.) (SUNDER MOHAN, J.)12.06.2025 IndexNeutral Citation : Yes/No: Yes/No sra Page 15 of 17 To 1. The Income Tax Appellate Tribunal, 'B' Bench, Chennai. 2. The Commissioner of Income-tax - I, Coimbatore. Coimbatore. Page 16 of 17 T.C.A. No.1002 of 2010 Page 17 of 17 T.C.A. No.1002 of 2010 The Hon'ble Chief Justiceand Sunder Mohan, J. (sra) T.C.A. No.1002 of 2010 12.06.2025