TaxTMI 
TaxTMI 
2010 (3) TMI 929
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....these cross-appeals of the Revenue as well as that of the assessee is as regards partially confirming the disallowance under section 40A(3) of the Act. For this, the assessee has raised the following ground No. 2.1 : I. T. A. No. 1497/Ahd/2005 for the assessee: "2.1 In law and in the facts and circumstances of the appellant's case, the learned Commissioner of Income-tax (Appeals) has grossly erred in sustaining, even if partially, the disallowance under section 40A(3) of the Income-tax Act, 1961, on the payments aggregating to Rs. 33,38,014 (the quantum of the disallowance sustained being Rs.6,67,603 at 20 percent of Rs. 33,38,014). She ought to have ordered for the deletion of the disallowance under section 40A(3) in its entirety. And the Revenue has raised the following ground : I. T. A. No. 1591/Ahd/2005 for the Revenue: The learned Commissioner of Income-tax (Appeals) has erred in law and on the facts of the case in holding that (1) Cash payment of Rs. 2,42,55,424 are not hit by the provision of section 40A(3) and hence no disallowance can be made. (2) Relief of Rs. 48,51,084 be granted. (3) The arrangement made by the assessee for making cash payments through intermedia....
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....ad any proof of their being either pramukh/ mantries of these dairies. (ii) None of these dairies were registered in the first place with the appropriate authority of the Government. In most of the cases it was found that there was existing registered dairy co-operative functioning in the villages in which the dairies under consideration are located. (iii) None of them maintained any books of account nor any evidences of the procuring and selling of milk. (iv) In some cases, the assessee produced certificate of the sarpanches of the respective villages which states that the villagers who are producers of milk sell their milk to these dairies under consideration. Besides this no factual evidence of the procession of livestock in such number as could be sufficient to cater to the sales made to Gamdiwala Dairy was produced before the undersigned. (v) None of these dairies have any livestock sufficient enough to sustain the transaction made between the dairies and the assessee. (vi) Some of the dairies like Madhuram Ice Factory (no evidence produced to establish that they are producers), Simoli Corporation are established beyond doubt that they are not producers of milk. Simoli Co....
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....yment to the extent of Rs. 2,75,93,579 are covered under the provision of section 40A(3) of the Act and made addition of Rs. 55,18,715. Aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) partly allowed the claim of the assessee vide paragraph 3.3 of his appellate order as under: "3.3 I have considered rival submissions in some detail and my finding is that the appellant being involved in milk processing is definitely obtaining the requisite quantities through an organised network of collection points or centres. The moot point to be decided is whether the collection centres/dairies are buying the milk from villagers and selling to the appellant in which case an element of profit or commission payments to these centres or dairies is involved or whether these centres are only facilitating the flow of milk from particular rural areas to the appellant's plant in Ahmedabad. From its side the appellant produced confirmations as well as the pramukhs or managers of the dairies, but, the Assessing Officer only examined seven of them. From such a small sample of persons, the Assessing Officer could not have r....
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....also payments made through demand draft to Zalore Dudh Utpadak are being excluded from the application of section 40A(3). Yet, salary payment made by the appellant at Khanusha branch (Sr. No. 2) has been allowed only to the extent of Rs. 5,20,000 while Rs. 2,13,820 out of the same payment is disallowed. Similarly, inter branch transfer (Sr. No. 1) of Rs. 48,95,000 has been allowed to the extent of Rs.43,75,000 while Rs. 5,20,000 is disallowed. Again GEB bill paid in respect of Khanusha branch (Sr.No. 3) is allowed to the extent of Rs.47,978 and Rs. 2,86,691 is disallowed. Similarly, sales commission to hawkers (Sr. No. 4) is disallowed completely. Since the appellant has contended that none of these single payments exceeded Rs.20,000 and the Assessing Officer has noted nothing to the contrary, the whole payment of Rs. 2,93,148 is allowed. The transaction at Sr. No. 5 to M/s. Patel and Co. is repayment of loan and is not a purchase. Therefore, section 40A(3) will not be applicable to it. Sr. No. 6 pertains to Shreshtha Corner, a retail outlet of the appellant. This amount again does not represent expenditure and is in fact a bank transaction wrongly posted in the appellant's books a....
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....0 percent of the balance disallowance, viz., 1. Sardar Kishan Dairy Rs. 22,40,741 2. Simoli Corporation Rs. 2,00,228 3. Gangotri Dairy Rs. 1,05,000 4. Zalore Sirohi Jilla Rs. 7,67,100 5. Jyoti Prime Fin. Rs. 24,945 Total Rs. 33,38,014 The appellant, therefore, gets relief to the extent mentioned above." Aggrieved, against the partial confirmation, the assessee for Rs.33,38,014 to fall under section 40A(3) of the Act, the assessee came and for the balance deletion of Rs. 2,42,55,424 the Revenue came, in the second appeal before us. We have heard the rival contentions and gone through the facts and circumstances of the case. We have also perused the case records including the assessment order, the order of the Commissioner of Income-tax (Appeals) and paper books filed by learned counsel for the assessee consisting of pages 1 to 474. We find that the assessee before the Assessing Officer as well as the Commissioner of Income-tax (Appeals), furnished explanation that the payments made to the farmers and villagers were covered by exceptions as provided under section 40A(3) read with rule 6DD(f) of the Rules. Learned counsel for the assessee, Shri S. N. Soparkar state....
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.... make payment to the farmers for the milk sold by them through such mutually agreed upon persons amongst the said farmers of each village. According to him, the aforesaid arrangement was put into operation by the farmers of each village. They decided to give high sounding names to such collection centres such as Umiya Kishan Dairy-Perojpura, Ramkishan Dairy-Cot, Jay Kishan Dairy-Ridrol and so on. In short, learned counsel argued that the farmers or the producers of milk did not lose their individual identities and each such farmer was paid for the milk sold by them at a fixed price depending upon the quality of the milk, viz., fat content and quantity. He further narrated that this fact coupled with the fact that none of the alleged societies are registered societies or legal entities of any sort, none has maintained any regular books of account, none has purchased the milk from the farmers independently and made over to the assessee, none of the entities maintained independent accounts of the farmers except the noting of the milk contributed by the farmers in terms of quantity and quality, viz., fat contents they were paid by the assessee through the persons who collected the milk....
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....n the statements and he argued that, it may be perused from these statements that they have stated more or less the following: (a) Statement of Shri Dahyabhai Gobardas Patel of Umiya Kisan Dairy-Perojpura, Tal. Vijapur, Dist. Mehsana. "(1) We the villagers about 30 members are there in the Umiya Kisan Dairy. I am a member of this, I am selling milk through this Mandali. (2) Umiya Kisan Dairy has no assets of its own. (3) No our is a collection centre for milk. We are not earning any profit by selling milk. One man namely Shri Jayeshkumar Kantilal Patel is keeping day-to-day accounts of members and he is paid Rs.500 per month which is collected from all the members. (4) We villagers sell milk individually at a collection point at . . . owned by one of the members and no rent is paid to anyone. Ours is a co-operative working mandali without profit making. (5) Members of the mandali individually brings milk to the collection point. (6) Yes, we sell milk to Gamdi Dairy financial year 2000-01. (7) We get payments in cash, at the interval of 5th, 15th and 25th of the month generally. We get it distributed among members. There is no profit-making body. Ours is a collected effort f....
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....nfirmations from parties at Sr. Nos. 9 to 23 were enclosed in the paper book. Learned counsel for the assessee made further arguments that out of the seven persons who were examined as members of the societies and the said societies were supplied of milk in the same fashion to Royal Dairy Ltd., in whose case the assessment for the assessment year 1998-99 was finalised on February 28, 2000 accepting the fact that the milk is collected from the producers. The Assessing Officer after examining the details filed in that case had accepted that they were the persons producing the milk and the evidence in their case were accepted by him. Learned counsel further argued that if the Assessing Officer of the Royal Dairy Ltd. had after examining the facts held that they were producers of milk and suppliers thereof to the assessee, the facts would not differ in the case of the assessee and there was no justification for the Assessing Officer for taking a different view in this case. A copy of the assessment order in the case of Royal Dairy Ltd. was enclosed in the paper book of the assessee. According to learned counsel, in view of this clear finding of one of the Assessing Officers of the Dep....
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....h is a collecting centre and has an establishment of cold storage of the milk collected from Mehsana District. The assessee has paid salary of Rs. 2,13,820 which is included in the total payment of Rs.2,54,020 details along with vouchers are enclosed (ENCL). It may be observed that these are salary payments and none of the employees of the assessee in that branch was paid amount exceeding the prescribed limits under section 40A(3) of the Income-tax Act. Therefore, the disallowance of Rs. 42,764 being 20 percent of Rs. 2,13,820 is uncalled for. It is the result of lack of appreciation of the facts. (iii) Regarding Sr. No. 3-Payment of electricity bills of Kanusha Branch: The payments were made to the Gujarat Electricity Board who do not accept cheques. Necessary details of electricity payment and vouchers are enclosed (ENCL). There is no justification in disallowing Rs. 67,338 being 20 percent of Rs. 2,86,691 particularly when the Assessing Officer himself has allowed the expenditure of Rs. 47,978 incurred by the assessee under the same head in a similar manner. The disallowance deserves to be deleted. (iv) Regarding Sr. No. 4-Sales commission to hawkers : These are details of t....
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....20 percent of Rs.22,359 is uncalled for. (iv) Regarding Sr. No. 9-Salary expenses (Ahd): The position is same as Khanusha branch salary. There is no justification in disallowing Rs. 5,008 being 20 percent of Rs. 25,039 invoking the provisions of section 40A(3) when no individual employee is paid the salary exceeding the prescribed limit and the Assessing Officer himself has deleted Rs. 25,174 for the salary paid in the similar manner as an allowable expenditure. The disallowance is uncalled for. In view of what is stated above, disallowance of Rs. 2,90,508 being 20 percent of Rs. 14,52,538 (5,20,000 + 2,13,820 + 2,88,691 + 2,93,148 + 35,585 + 30,960 + 24,945 + 22,359 + 25,039) is uncalled for. On the other hand, the learned senior Departmental representative Shri Govind Singhal argued that in none of the cases it has been established that the payments are in fact made to producers of milk and it is also a fact that none of the parties is a producer of milk rather these are organised dairies and it is very obvious that any product should primarily be purchased from a producer only. He stated that the assessee's excuse that another party has merely purchased it from the producer ....
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....n centres for milk because it is not possible either for the assessee or for the individual producers of milk to do so. The assessee and the producers of milk mutually agreed upon the arrangement that the producers of milk in a particular village collectively selected any one of them to look after the collection of milk from the farmers and in turn supplying the milk to the assessee and the assessee agreed to make payment to the farmers for the milk sold by them through such mutually agreed upon persons amongst the said farmers of each village. We find from the records that the aforesaid arrangement was put into operation by the farmers of each village and they decided to give high sounding names to such collection centres such as Umiya Kishan Dairy-Perojpura, Ramkishan Dairy-Cot, Jay Kishan Dairy -Ridrol and so on. In view of the above fact it is clear that the farmers or the producers of milk did not lose their individual identities and each such farmer was paid for the milk sold by them at a fixed price depending upon the quality of the milk, viz., fat contents and quantity and this fact coupled with the fact that none of the alleged societies are registered societies or legal e....
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....k market at Kalupur, the milk which is collected from milk producers who bring their milk by train early in the morning is sold, and the fact is that the market functions from morning, hence, the payments are to be made in cash and there was no justification for the disallowance of Rs. 2,77,702, the payments are not non-genuine. As regards the payments to parties at Sr. Nos. 25 to 27 involve cash payments of Rs. 9,77,328 as detailed below : Sr. No. 25 Rs. 2,00,228 Sr. No. 26 Rs. 1,05,000 Sr. No. 27 Rs. 6,72,100 (Rs. 7,67,100 as mentioned by the Assessing Officer less payments by D.D. Rs. 95,000) Rs. 9,77,328 The payments though made in cash are accepted to be genuine. It being so, there is no justification for disallowing Rs. 1,95,466 being 20 percent of Rs. 9,77,328. Similarly, the other payments, which are smaller payments, the learned senior Departmental representative has not made any serious doubts or arguments. Accordingly, we are of the view that the disallowance made by the Assessing Officer has rightly been deleted by the Commissioner of Income-tax (Appeals). Furthermore, we find from the assessment order in the case of Royal Dairy Ltd. dated February 28, 2000 fo....
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....ness, profession or vocation, in any such village or town ;" We find from the above provisions of rule 6DD, that in the assessee's case the farmers or the producers of milk did not lose their individual identities and each such farmer was paid for the milk sold by them at a fixed price depending upon the quality of the milk, viz., fat contents and quantity and this fact coupled with the fact that none of the alleged societies are registered societies or legal entities of any sort, none has maintained any regular books of account, none has purchased the milk from the farmers independently and made over to the assessee, none of the entities maintained independent accounts of the farmers except the noting of the milk contributed by the farmers in terms of quantity and quality, viz., fat contents they were paid by the assessee through the persons who collected the milk from the farmers and supplied to the assessee. Accordingly, these notings in rough sheets can never by any stretch of imagination be equated to maintaining books of account, etc., when considered in totality it would be clear that the milk was purchased by the assessee from the producers of milk. We further find that th....
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....t at 8.01 percent for Malanka branch, as against the gross profit at 16.20 percent for the rest of the business of the assessee for the immediate preceding year. The Assessing Officer also noted that the gross profit rate for Ahmedabad office was at 11.78 percent for the year under consideration and he also noted that there was no increasing of packing materials, he required the assessee to explain low gross profit of Malanka branch. The assessee could not adduce any substantial explanation and accordingly he rejected the book results and adopted a gross profit for Malanka branch as that of Ahmedabad branch. Aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) also confirmed the action of the Assessing Officer by giving the following findings in pages 12 and 13 : "In my opinion, the bottom line is that all these circumstances existed in respect of the Malanka office in the preceding assessment year too and yet the gross profit rate returned by it was double that of the year under consideration. The appellant has finally also contended that the gross profit of the business as a whole should be consider....
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.... he would have realised that the very basis for his invoking the provisions of section 145 of the Act for rejecting the assessee's books and estimating the income of its Malanka branch did not at all exists. The real issue involved did not pertain to gross profit as such but to other items of expenses debited to the profit and loss accounts of the Ahmedabad branch and Malanka branch of the assessee and that just because the expenditure pertaining to one branch may have come to be accounted in another branch or just because, on account of other valid reasons, earlier year expenditure had to be accounted this year in one branch and for such or other reasons, the operating results of the two branches came to be dissimilar, books of account cannot be rejected and income could not be estimated on that ground. Accordingly, the book results rejected by the Assessing Officer, is without any basis and we accept the book results and delete the addition made and confirmed by the lower authorities. This issue of the assessee's appeal is allowed. The next issue in this appeal of the assessee is against the order of the Commissioner of Income-tax (Appeals) in sustaining the disallowance of depr....