Section 155 of the Income Tax Act of 1961 is proposed to be amended in Clause 74 of the Finance Bill 2023 to allow sugar co-operatives to claim payments made to sugarcane farmers prior to the assessment year 2016-17 as expenditure.
1. Sugar factories in certain Indian states that operate in the cooperative sector pay sugarcane growers a final amount known as the Final Cane Price (FCP), which is higher than the Statutory Minimum Price (SMP) set by the Central Government under the Sugarcane Control Order, 1996. FCP is determined based on the working results of the specific factory, which include all revenues and expenditures incurred by the factory.
2. The co-operative sugar factories’ payment of FCP in excess of the SMP for the purchase of sugarcane had resulted in tax litigation. The co-operative sugar factories claimed this excess payment as business expenditure, but it was disallowed in the assessment on the grounds that the excess price paid for the purchase of sugar cane above the SMP is in the nature of profit appropriation/distribution and thus not allowable as deduction.
3. To provide clarity in this matter and to encourage co-operative movement in the sugar sector, a new clause (xvii) was inserted to amend sub-section (1) of section 36 of the Act to provide that the amount paid for the purchase of sugarcane by co-operative societies engaged in the manufacture of sugar at a price equal to or less than the price fixed by or fixed with the approval of the Government shall be allowed as a deduction for computing business income. The aforementioned amendment became effective on April 1, 2016, through the Finance Act 2015, and was applicable beginning with the Assessment Year 2016-17. Pending demands and litigation continued to exist for AYs prior to 2016-17.
4. To bring the matter to a logical conclusion and to extend the benefit of the aforementioned relief to all applicable years, it is proposed to amend section 155 of the Income Tax Act by inserting a new sub-section (19). It shall provide that, in the case of a sugar mill cooperative, where an assessee has claimed a deduction in respect of any expenditure incurred for the purchase of sugarcane and such deduction has been disallowed wholly or partly, the Assessing Officer shall, on the basis of an application made by such assessee in this regard, recalculate such assessee’s total income for such previous year. The Assessing Officer shall allow such deduction if the expenditure is incurred at a price equal to or less than the price fixed or approved by the Government for the preceding year. Furthermore, the provisions of section 154 shall apply to the extent possible, and the period of four years specified in sub-section (7) of section 154 shall be reckoned from the end of the previous year beginning on April 1, 2022.
5. This amendment will go into effect on April 1, 2023.
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