Business expenditure — Differential payment to cane-growers — Matter remanded.

[DCIT v. Shri Satpuda Tapi Parisar SSK Ltd., (2010)
326 ITR 42 (SC)]

The Supreme Court after considering the contentions of the
parties at length was of the view that a large number of questions had remained
unanswered in the case and the following questions were required to be
considered by the Department :

Whether the differential payment made by the assessee(s) to
the cane-growers after the close of the financial year or after the balance
sheet date would constitute an expenditure u/s.37 of the Income-tax Act, 1961,
and whether such differential payment would, applying the real income theory,
constitute an expenditure or distribution of profits?

In deciding the above questions, the Assessing Officer will
take into account the manner in which the business works, resolutions of the
State Government, the modalities and the manner in which the S.A.P. and the
S.M.P. are decided, the time difference which will arise on account of the
difference in the accounting years, etc. In a given case, if the assessee has
made provision in its accounts, then the Assessing Officer shall enquire whether
such provision is made out of profits or from gross receipts and whether such
differential payment is relatable to the cost of the sugarcane or whether it is
relatable to the division of profits amongst the members of the society ?

Another point which would also arise for determination by the
Assessing Officer will be on the theory of overriding title in the matter of
accrual or application of income. Therefore, in each of these cases, the
Assessing Officer will decide the question as to whether the obligation is
attached to the income or to its source.

The Supreme Court observed that none of these questions were
examined by the authorities below. These questions were required to be examined
because, in these cases, it was not only concerned with the applicability of S.
40A(2) of the Act, but was primarily required to consider whether the said
differential payments constituted an expense or distribution of profits. The
Supreme Court held that ordinarily it would not have remitted these matters,
particularly when they were for the A.Y. 1992-93, but, for the fact that this
issue was going to arise repeatedly in future. It would also help the
assessee(s) in a way that they would have to re-write their accounts in future
depending upon the outcome of this litigation. Therefore, in the interest of
justice, the Supreme Court remitted the cases to the concerned Commissioner of
Income-tax (Appeals). It was made clear that both parties were at liberty to
amend their pleadings before the Commissioner of Income-tax (Appeals). The
Supreme Court expressed no opinion on the merits of the case. The parties were
at liberty to argue their respective points uninfluenced by any observations
made in the impugned judgments on the applicability of S. 28 or S. 37 of the
Act.

[Note : Decision of the Bombay High Court in CIT v.
Manjara Shetkari Sahakri Karkhana Ltd., (2008) 301 ITR 191 (Bom.) set aside
and matter remanded.]