CIT vs. Bannari Amman Sugars Ltd. [2012] 349 ITR 708 (SC)
The assessee is a company engaged in the business of manufacture and sale of sugar. The assessee filed its return of income for the assessment year 1997-98. In its return of income, confined to its Karnataka unit, the assessee valued the closing stock of incentive sugar (free sugar) at levy price. The Assessing Officer valued the closing stock of incentive sugar at cost, whereas the assessee claimed that the said stock should be valued at levy price which has less than the cost.
The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee. The Tribunal and the High Court dismissed the appeal of the Revenue. According to the Supreme Court, to answer that above controversy, the following facts are required to be noted. By virtue of the provisions of the Essential Commodities Act, 1955, and the Sugar Control Order read with the Notification issued thereunder, a sugar manufacturer (assessee in this case) was required to sell 40 % of his sugar production at the notified levy price to the public distribution system. At the relevant time, on an average, the levy price came to be less than the manufacturers’ cost of production. Consequently, it was found by the manufacturers that under the above price control regime, the establishment of new sugar manufacturing units was not viable. It was found that even the existing sugar manufacturing units had become unviable and uneconomical. Therefore, an incentive scheme was framed, as suggested by the Sampat Committee, the committee that was set up to examine the economic viability by establishing new sugar factories and expanding the existing factories. The Sampat Committee gave its report. Under the report, an incentive scheme was evolved. The said incentive scheme provided an inducement for persons to set up new sugar factories or to expand the existing one. Under the scheme, 40 % of the total sugar production was permitted to be sold at market price (“incentive sugar” for short). However, the scheme provided that excess amount realised by the manufacturer over the levy price by sale of incentive sugar would be utilised only for repayment of loans taken from the banks/financial institutions for establishing the new units. In regard to utilisation of excess realisation towards repayment of loans, the sugar mills were directed to file certificate of chartered accountant subject to which further release orders would be issued by the Directorate of Sugar. This scheme came up for consideration before the Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) in which it was held that the excess amount realised by the manufacturer over the levy price by sale of incentive sugar should be treated as a capital receipt which was not taxable under the Income-Tax Act, 1961. In that case, one of the arguments advanced on behalf of the Department, as in this case, was that the excess amount realised by the manufacturer over the levy price should be treated as a revenue receipt.
The Supreme Court observed that there are different methods of valuation of closing stock. The popular system is cost or market, whichever is lower. However, adjustments may have to be made in the principle having regard to the special character of assets, the nature of the business, the appropriate allowances permitted, etc., to arrive at taxable profits. The Supreme Court noted that in the present case, it was the case of the assessee, that following the judgment in Ponni Sugar and Chemicals Ltd. (supra), the closing stock of incentive sugar should be allowed to be valued at levy price, which on facts is found to be less than the cost of manufacture of sugar (cost price). According to the Supreme Court, there was merit in this contention. In Ponni Sugars and Chemicals Ltd. (supra), on examination of the scheme, it was held that, the excess realisation was a capital receipt, not liable to be taxed and in view of the said judgment, the Supreme Court held that the assessee was right in valuing the closing stock at levy price.
The Supreme Court dismissed the civil appeals filed by the Department.
