2013 (6) TMI 942 - AT - Income Tax

Cash Payments to Dairy Manufacturer Disallowed: Section 40A(3) Exemption Rejected for Exceeding Statutory Threshold

The Income Tax Officer, Business Ward-IV (2), Chennai Versus Shri Arasappan Madhivanan Prop. Of M/s. Sakthi Enterprises

The Income Tax Officer, Business Ward-IV (2), Chennai Versus Shri Arasappan Madhivanan Prop. Of M/s. Sakthi Enterprises - TMI ISSUES PRESENTED and CONSIDEREDThe core legal issue considered in this judgment was whether the payments made by the assessee to M/s. Hatsun Agro Products Ltd. could be disallowed under Section 40A(3) of the Income Tax Act, 1961, due to the payments being made in cash exceeding Rs. 20,000, and whether the exceptions provided under Rule 6DD of the Income Tax Rules applied to the assessee's case.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsSection 40A(3) of the Income Tax Act, 1961, mandates that any expenditure incurred by an assessee in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque or an account payee bank draft, exceeds Rs. 20,000, shall not be allowed as a deduction. Rule 6DD of the Income Tax Rules provides exceptions to this provision, allowing certain payments to be made in cash without attracting disallowance under Section 40A(3).Court's Interpretation and ReasoningThe Tribunal examined whether the payments made by the assessee fell within the exceptions provided under Rule 6DD. The assessee argued that the payments were made to a producer of dairy products and thus qualified for exemption under Rule 6DD(e). However, the Tribunal found that M/s. Hatsun Agro Products Ltd. was a manufacturer and not a producer of milk, which is a critical distinction under the rule. The Tribunal emphasized that the rule specifically exempts payments made to cultivators, growers, or producers, categories that did not include the company in question.Key Evidence and FindingsThe Tribunal noted that the assessee had entered into 18 transactions with M/s. Hatsun Agro Products Ltd., paying a total of Rs. 21,65,22,164, with Rs. 1,11,13,675 being paid in cash. The CIT(Appeals) had previously deleted the disallowance on the grounds that the genuineness and identity of the payee were established. However, the Tribunal concluded that the genuineness and identity of the payee were irrelevant under Section 40A(3) if the payment did not fall within the exceptions of Rule 6DD.Application of Law to FactsThe Tribunal applied the provisions of Section 40A(3) and Rule 6DD to the facts, determining that the payments made by the assessee did not qualify for exemption under Rule 6DD(e) because M/s. Hatsun Agro Products Ltd. was not a producer of milk but a manufacturer. The Tribunal held that the assessee's payments did not meet the criteria for exemption, as the rule clearly delineates the types of payees to whom cash payments can be made without disallowance.Treatment of Competing ArgumentsThe Tribunal considered the arguments presented by both the Revenue and the assessee. The Revenue contended that the CIT(Appeals) erred in deleting the disallowance because the statutory provision of Rule 6DD did not apply. The assessee argued that the payments were covered by Rule 6DD(e) and cited various case laws. However, the Tribunal found that the case laws cited by the assessee were not applicable, as they involved payments to cultivators, growers, or producers, unlike the present case.ConclusionsThe Tribunal concluded that the CIT(Appeals) had incorrectly deleted the addition made by the Assessing Officer. The payments made by the assessee did not qualify for exemption under Rule 6DD(e), as M/s. Hatsun Agro Products Ltd. was not a producer of milk. Consequently, the Tribunal restored the findings of the Assessing Officer, allowing the Revenue's appeal.SIGNIFICANT HOLDINGSThe Tribunal held that:'The benefit provided in Rule 6DD does not cover the case of the assessee who has made payment to a company which is not a cultivator, grower or producer of the milk.'The Tribunal established that the exceptions under Rule 6DD must be strictly construed, and payments to entities not falling within the specified categories cannot be exempted from disallowance under Section 40A(3).The final determination was that the Revenue's appeal was allowed, and the disallowance made by the Assessing Officer was restored.