TaxTMI 
TaxTMI 
2013 (9) TMI 534
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....,779, to total income on account of payment exceeding Rs.20,000, to fishermen, cultivators, headman/agent and representative of the fishermen by applying mischief of provision of section 40A(3), ignoring provision contained in Rule 6DD(e) and circular of the CBDT, thereon. And also Rule 6DD (k) of Income Tax Rule 1962. The Learned Commissioner of Income Tax (Appeal) on the basis of affidavit of producers I headmen/agents asked the Learned assessing Officer to submit a Remand Repot. After going through the Remand Report he limited the addition to Rs.3,75,59,478, on estimate, although he accepted the Remand Report which was prepared after the field visit and confrontation with the producers I headmen and agents The Learned Commissioner of Income Tax (Appeal) in his order discussed the direction of Orissa High Court in the case of appellant and referred the decision of Income Tax Appellate Tribunal and High Court, where it was held that where cash payment exceeds the limit prescribed under the Act and nothing on the record to doubt the genuineness of the payment, held that payment could not be disallowed u/s 40A(3) of the Act. The estimate of cash payment for disallowance u/s 40A(3), ....
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....e of Rs.6,92,88,821/-. The total turnover of the appellant Company during the year including all income besides, export turnover which is Rs.206.80 crore, amounts to 231.80 crore. The assessed income by the Learned Asst. Commissioner of Income Tax, was Rs. 74,45,78,650/-, against total turnover from all sources amounting to Rs. 2,318,023,233/-, which amounts to 32.12% of the profit of total turnover. The above net profit ration is a very wide departure from the profit determined by the Assessing Officer in all the preceding years and also it is next to impossible to earn so much of profit by any exporter in the country. In this sea food export Industry, hundreds of the exporters have been vanished incurring huge losses and most of the existing exporters are incurring loss and may be very few have achieved the level of profit, disclosed by the appellant. 2.2. The appellant preferred a writ petition before the High Court of Orissa, Cuttack. The Honourable High Court of Orissa squashed the order and directed the assessment to be completed by another Assessing Officer, within six (6) weeks, for which the Learned Addl. Commissioner of Income Tax assumed the power of Assessing Officer a....
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....sessment within 6 weeks. The Learned Assessing Officer only issued one notice on 27th February 2011, to comply with the following clarification. i. Please reconcile the difference appearing with regard to quantitative purchase as shown in the tax Audit report and the submission filed by your on 20.09.2010, along with all the supporting documents; ii. Please produce conversion ratio as adopted by you of head on prawn to headless prawn, keeping in view MPEDA norms on conversion ratio. Your submission is to be supported with evidence in the form of books of account maintained on daily basis for head on prawn to headless prawn; iii. In view of field visit made by Asst. Commissioner of Income Tax, Circle -1 (1), Bhubaneswar and the reports relied upon by the ACIT, Circle -1 (1), BBSR, the order passed u/s 143 (3) on 06.12.2010, as well as keeping in view order of the Honourable High Court of Orissa. Please specify circumstances under which the payment was made in cash and the manner prescribed u/s 40A(3) of the IT Act was not practicable in your case and would have caused genuine difficulties to you. Please produce the supporting evidence in this regard. The Learned Assessing Office....
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....equired for Production as per MPEDA norms. Item Purchase Requirement Production of Frozen Prawn Less HL Prawn Purchase Conversion Ratio Headon Headon Shellon(st) 64447.145 64447.145 99 65098 Headless Shellon 3332974.886 1000324.000 * 65 1538960 Pud BT 116662 116662.000 50 233324 Other Raw 803403 803403.000 35 2295437 Other Cooked 257322 257322.000 30 857740 Total PUD 1177387 1177387 3386501 Peeled Devended(BT) 1078177.061 1078177.061 50 2156354 PD Tail Less(BT) 507766.677 507766.677 50 1015533 Total: - 6160752.769 8162446.745 * 3332974.886 (-) 2332650 Note: Headon Purchase ( 8162446.745 Less own material 980762 I,e 71,81,684.745kgs Note: Total Headless Prawn Purchase of 25,91,834.898 Kgs & production Quantity thereof is 23,32,650 due to 10% of Drip & Other Loss. Note: - Ribbon Fish Production 168041 kgs not considered in above calculation. The Income Tax Appellate Tribunal Cuttack Bench in the Case of M/s. Chanchhala Combines ITA. No./294/CTK/06 A.Y. 2003-04 held that certificate issued by the MPEDA is the bench mark of Govt. of India. In the same case ITAT held that if Shri....
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.... shrimp, the requirement is taken at 30% as per the MEPEDA guideline. The whole exercise requires head on material 81,62,446.745 kgs. out of this own material is 9,80,762.000 kgs. And purchase is required 7181684.745 Kgs. against which we have purchased 6047781.93 kgs". The Learned Assessing Officer Simply brushed aside the explanation of the appellant in the following manner : The appellant has produced 9,80,762 Kg. of Headon prawn from its own cultured ponds. The culture expenses are debited under the head feed consumed, seed consumed, culture expense and other allied expenses, for which the value of own cultured material has been disclosed at zero (0). The above fact can be corroborated from the cash book and ledger, retained by the Learned Assessing Officer and also statements furnished at all stages. The Learned Assessing Officer, while computing over statement of purchase of Headon prawn, relying on the clarification issues by the MPEDA, which is benchmarked regarding production loss and recovery of finished products from processing of prawn, ignored to reduce Headon prawn from its own cultured prawn from total quality available for processing. i. The appellant during the ....
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....rvation that the terms of Section 40-A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bonafide transactions are not taken out of the sweep of the section. It is open for the petitioner to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in Section 40A (3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Keeping in view the aforesaid observations made in the aforesaid paragraph of the Supreme Court, the petitioner before Assessing Officer is required to prove the genuine and bonafide transaction and also satisfy the Assessing Officer the circumstances under which the payment in the manner prescribed in Section 40-A (3) of the Act was not practicable and would have caused genuine difficulty to the payee. This aspect is required to be proved before the Assessing Officer by producing positive & cogent evidence". The fishermen and farmers in most cases are subsistence artisans, often engaged in their trade for generations. While the....
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....uding weather. In respect of farms the shrimp under culture (biomass) in the culture ponds is delicate and needs constant attention considering that even minor changes in weather can pose stress to the biomass. The stress may lead to retardation of growth or even mortality, both affecting revenue of the farmer. In respect of fishing the fishermen would like sail out as soon as possible to take advantage of the favourable catch conditions and in respect of farms, the farmers would like to get the farms ready for culture as soon as possible after a harvest of previous crop. As evident from this, the fishermen and the farmers spend almost their entire time during season and culture period in pursuing fishing and farming activity respectively. They resent any interruption to the pursuit of their activity because it leads to irrecoverable loss of income. Consequently they are also required to realize the sale proceeds of their catch or harvest at the earliest and disburse it towards wages of labour they engage, for repairs and maintenance and such other critical operating expenses. It must be noted that fishermen and farmers operate in remote locations; and that their operations are no....
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....tivities due to their illiteracy and also lack of time, they entrust these activities to a person of their choice. This person may be one of the fishermen or farmers, or anyone who understands their trade, practices and business dynamics and responds appropriately to their various situations. This is a traditional practice in the industry for decades. The fishermen or farmers may determine the buyer to whom their materials will be sold at the point of landing or harvesting the fish or shrimp. The person of their choice facilitates all related activities from movement of the materials through realization of proceeds to disbursement of the proceeds to the fishermen or farmers as the case may be. It should be noted that the person chosen by a group of fishermen or farmers may represent a large number of them and each of the fisherman or farmer in turn must disburse cash to labour, for repairs and maintenance and so on at remote locations where they operate and at the times of day that do not often correspond to normal business hours. The payments through bank will disrupt the free flow of business activity of the fishermen and farmers. Considering that eventually payments have to mak....
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....ch remote locations not served by banks, obligations cannot be discharged by any mode other than cash. The recipients being mostly illiterates do not understand banking transactions and are not at all; comfortable accepting cheques, demands drafts etc. If the buyers insist upon payments through cheques, demand draft etc. they cannot procure the material because of the refusal of suppliers. Hence, the payments in cash are dictated by compulsions of business expediency. Again, this trade is dominated by small and marginal farmers and fishermen who are so large in number that is neither convenient nor practicable to deal with them individually. Dealing with them individually, would involve large number of accounts to be maintained for each person for each of their transaction which would be impractical. Therefore, for the purpose of convenience, as well as business expediency, any assessee, including the present assessee, would like to deal with a fewer persons, who represent and act as a representatives for a number of farmers and fisherman, divided into a number of groups. No doubt that the legislature appreciates the above factors and keeping in view the ground realities, nature ....
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.... into loss of fishing opportunity to the fishermen, which in turn translates into potential loss of livelihood for fishermen and loss of supply source for the assessee. As to the status of so called Mahajans or Sahukars, attention was invited to page 12 of the assessment order dated 6th December 2010 wherein it was recorded that fishermen would go out early in the morning to catch fishes, once fish is brought to the shore the sahukar (also called 'mahajan') takes all the prawn to the buyers' godown, sahukar arranges for payment to be collected and disbursed to the fishermen and sahukar may also provide finance to the fishermen to enable them to carry on their trade. These activities of the so called Mahajans or Sahukars show that they operate as an integral part of the fishermen and that there is mutual trust between fishermen and these persons. On page 14 of the report it was acknowledged that fishermen require quick cash, which reiterates the assessee's foregoing submissions. The assessee submitted that the so called Mahajans or Sahukars can at best be regarded as representatives of various groups of fishermen and that number of fishermen forming several groups, are under their....
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.... fishermen directly to exporters, the learned ACIT apprehended that the aforesaid 4 persons from whom prawns were procured are either MahajanasorSahukars and on the basis of this assumption alone, he preferred to disallow the payments made to them by applying the mischief of Section- 40A (3). It is pertinent to state that a mere assumption that the said four persons are Sahukars, Mahajans and thus middlemen, is thoroughly misplaced. We believe that they are representatives of various groups of fishermen and that number of fishermen forming several groups, are under their control since long. They come to our godown with sorted material along with the said fishermen or their representatives and deliver the same at our base at Balugoan. On arrival, the assessee checks the quality of material as to its count, size, grade etc. and declares a rate depending upon market condition. The said fishermen supply their material; and a challan is prepared with rate and quantity and handed over to the leader of the fishermen under whose leadership they are supplying. The said leader is paid for the total quantity purchased by the assessee who in turn makes the payment to individual fisherman. Th....
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....an by cash, then there would be avoidable delay. This will result in two potential consequences - one, loss of business opportunity for the trawler and two, loss of supplier for the assessee. For reasons aforesaid, the assessee submitted that in aforesaid centres, cash payments were entirely unavoidable and were necessitated to ensure that payments were made to the fishermen at the earliest. Without cash payments the fishermen would be put to undue hardship which would affect their as well as the assessee's business; consequently cash payments were made to fishermen or their representative to mitigate mutual hardship. Without foregoing the essence of above, we submit that at page -15 of the assessment order passed by the learned the ACIT, the ACIT has made an observation in one single paragraph to disallow purchase of a huge amount of Rs.7,17,39,349/-. He has only commented that certain purchases in Paradeep were made from Trawler Owners directly though much of the purchases were made from others such as Pravakar Jena &Bimal Jena who operated as traders. The ACIT in his letter dtd. 25-10-2010 had only asked us the details of one Pravakar Jena, and we had furnished his name and ad....
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....e assessee company, only one supplier namely Babuni Behera (Shuvendu Bhusan Behera ) responded. From the copy of the report of Income Tax Officer, Bhadrak, it is noted that the learned Assistant Commissioner of Income Tax has taken the addresses from the ledger of the assessee, submitted before him, where the names of the suppliers have been mentioned along with name of the base i.e. Dhamara . Obviously, no letter can be served at such in-complete address, since; the cultivators are located in different places including the remote areas, who delivered the cultured materials at the base of the assessee company at Dhamara. We deny that these addresses were provided by us. Babuni Behera, who complied with the summon though his Chartered Accountant confirmed that the quantity and value of prawn supplied to Falcon is in conformity with books of account of the assessee company. The learned Assistant Commissioner of Income Tax, by considering the Profit & Loss Account of the Babuni Behera for the Assessment Year, 2009-10, has somehow assumed and concluded that there is a sale and purchase in the trading and Profit & Loss Account, for which he is a trader. When the learned Assistant Commi....
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....ade on surmises and assumptions treating these persons, as middle-men without collecting any evidence about them. Also, other two additions namely, Kar Aquatic and Tuku Mohanty, are only on surmise when, these persons are carrying out cultivation of prawn and are particularly well known in the locality. In view of the above, Section 40A (3) can not be applied without knowing the background of the person from whom prawns are purchased for export and to the best of the knowledge of the assessee company, they are all cultivating prawn. Most of them are also carrying out the same activity as on date. Given the complex dynamics of the farming business cycle, the farmers entrust some of their activities such as sale to one of the farmers or any other representative. This representative gathers the materials from several farms, delivers to the buyer, follows up for realisation of payment and disburses the payment to the other farmers. The farmers in turn incur costs for their farming activity in cash due to remoteness of their locations. For these and other reasons explained, the assessee made cash payments to the farmers or their representatives. If the assessee were to make payments ....
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....the District of 24 Praganas. Within a radius of 30 km., of the factory, Prawn Gheries are located. Brackish water from sea enters into the fields through creaks (at the time of full moon and black moon). Prawns and other fishes enter into the field through creaks and naturally grow there. When the water recedes, farmers catch fish and prawns. The persons mentioned in assessment order are leaders of the farmers, representing such farmers. Each person mentioned in the order is a leader of group of small farmers. The said farmers bring the material to factory in presence of the said leaders. On arrival, the material is checked and challans are prepared in the name of the leader of the Group with price fixed by the asseessee. The said persons receive cash from the company at factory located at Kharibari. These persons, coming from far flung remote areas, have no bank account at factory location for which cash from company account at State Bank of India, Kolkata is drawn and paid to the said persons. This type of transactions is prevailing since long and is an established tradition in the trade. Any deviation from the system shall deprive the assessee to procure material at its factory....
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....not considered Rule 6DD (k) and Circular of the Board regarding purchase from the headmen and agents. Taking into account the submission and order of the Learned Assessing Officer, he has not discharged his duty to frame a proper order, with an intension to support the order of his ACIT. c. The appellant purchased material from Paradip trawler association, amounting to Rs.98,40,800/-. The function of the trawler association and mode of operation are furnished in the submission. The Learned Assessing Officer brushed aside the entire explanation in one sentence in para - F of point 4 i. e. "SMUBBPSS plant is a trawler association and not a primary producer". d. It is pertinent to mentioned that the Learned Assessing Officer has noted from the ledger that Kalijai, Balugaon, there was a credit balance (opening) of Rs. 22,29,025/- and it stayed for a long period. In fact on 10.04.2007 and 01.05.2007, Rs. 12,00,000/-and Rs.10,00,000/-, respectively paid against opening balance and at the end of the year there is a credit balance in the name of same party amounting to Rs.21,243.25. The headman/agent may be making payment to his fishermen on receipt of payment from the appellant Company.....
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....y seeds. In these circumstances, it is not proper on the part of the Learned Assessing Officer to make such huge additions without applying his own mind. 10. Cash payment exceeding Rs.20,000/- towards expenditure [disallowed u/s 40A(3) The appellant has not been given proper opportunity either by the Learned Addl. Commissioner of Income Tax or by his ACIT, the situation under which cash payment exceeding Rs. 20,000/-, is made and how the mischief of provision 40A(3) shall not be applicable. Each addition is explained as under: The payment of Rs.300,000/- , on 05.04.2007 and Rs.2,50,000/-, on 04.03.2008, to Krishna Service Station, Basudevpur, on account of diesel, reflected as advance and the same are adjusted against small bills each of which may not exceed Rs.20,000/-. Moreover an advance cannot be disallowed u/s 40A(3). 11. Long term capital gain .. Rs.10,34,582/- The similar issue was raised in preceding year and complete submission is furnished before the Learned Commissioner of Income Tax (A), which is pending for adjudication. The appellant relies upon his submission, made before the Learned Commissioner of Income Tax (A), for which the same matter is not repeated here.....
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....to have granted relief of 90% holding a view that only the disallowance was Rs.1.75 Crores on account of seed purchases. With respect to the interest ground agitated by the learned Counsel of the assessee was the specific finding of fact u/s.40A(3) insofar as the payments were made exceeding sum of Rs.20,000 each was taken cognizance of by the Assessing Officer when the learned CIT(A) partly reduced to the addition u/s.40A(3) by confirming Rs.26,68,903. She prayed that this issue ought to have been considered on the basis of remand by the Assessing Officer requisitioned by the learned CIT(A) insofar as it was not the case of the learned CIT(A) to express an opinion on the remaining amount insofar as the specific finding of fact was to be considered by the Assessing Officer was in violation to Rule 46A of the Income-tax Rules,1962. 4. We have heard the rival parties and perused the material available on record. Taking cognizance of the totality of the facts as have been brought on record, we are of the considered view that the effort by the Assessing Officer was more of investigating to discover violation of Section 40A(3) when the facts remain that the assessee is a 100% Exporter ....
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....lature to allow payment in cash while payment by account payee cheque would have frustrated the very intention of getting export orders for a natural product. 4.1. Similarly the learned CIT(A) by restricting the seeds purchase in cash to10% being the wild seeds as pointed out by the learned CIT-DR did not distinguished whether the cash purchases were to be held as bogus or as per the finding of the Assessing Officer the method of utilisation of the seeds purchased from hatcheries and wild was not proper. The learned CIT-DR has submitted that the whole of the purchases as wild seed should have been considered disallowable primarily because it is not explained properly to the assessing authorities as can be perused in the remand report noted by the learned CIT(A). We are unable to satisfy ourselves to this proposition insofar as the business conducted by the assessee is of such magnitude that it was nobody's case that wild seeds has to sprout in accordance with the arithmetical projection. The Assessing Officer tried to compute the price of each seed purchased from the hatcheries but ultimately gave a finding the number of prawns exported which the assessee could not explain was con....