TaxTMI 
TaxTMI 
2013 (9) TMI 534
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....essing Officer had made addition of Rs.37,55,94,779, 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 estimat....
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....puting the taxable income at Rs. 74,45,78,650/-, against return income 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 Ad....
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....of the country. The Learned Assessing Officer did not supply documents in time as per the direction of the Honourable High Court and it was delayed substantially when compared to the duration of completion of assessment within 6 weeks. The Learned Assessing Officer only issued one notice on 27^th 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 a....
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....e Sheet. Therefore the total prawn purchase in quantity 88,17,366 kgs (97,98,128kgs -9,80,762kgs.) at a value of Rs.14,85,856,808.89. We are furnishing the requirement of Head on prawn as per the MPEDA norm as under:- Raw Material Required 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....
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....ction the computation of PUD is required 33,86,501 Kgs ,for PD is required 2156,354 Kgs. and for PDTL is required 10,15,533 Kgs. The percentage applied is 50% for B.T (PD, PDTL & PUD) for other material like Deep sea, kadi, Povalon, karkadi, marada, kantala etc. is taken as 35% whereas as per MPEDA guideline the same varies from 25 to 35% . The cooked and peeled 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 A....
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....ow that the payments made in cash which is not in conformity with Section 40A(3) read with rule 6DD of the Income Tax Act and Rules respectively wherein the Hon'ble Supreme Court in support of the said contention relied upon the judgment of the Supreme Court in the case of Attar Singh Gurmukhand others v. Income Tax Officer, Ludhiana and others, (1991) 4 SCC 385 with an observation 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 wh....
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....the assessee to make payments in cash, it is imperative to take into consideration the nature of the marine products industry and the practices prevalent in the industry for several years. The fishermen and the farmers are unorganised and located in remote locations. The sea catches are highly seasonal and within the season the catch-volumes are affected by several natural factors including 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 act....
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....rmers without in any way contributing to the efficacy of the transactions from the perspective of the Department, the assessee or the fishermen and farmers. The fishermen and farmers are also largely illiterate. The sale of raw fish and shrimp, and the efforts to realize the proceeds are time consuming activities. Given that fishermen and farmers have little or no time to pursue sales related activities 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 lar....
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.... the persons of their choice so that they can in turn meet their own obligations to their labour and other service providers without any further loss of time than what the aforesaid and other such constraints impose on them. Apart from above, it is also a matter of fact that most people involved in this trade live in far flung remote areas not served by any bank. Since the payments are required to be made at such 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 transact....
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....rmen only and thus its findings cannot be stretched to serve other purposes. Assuming but not admitting that above report is entirely accurate, it highlights the fact that Mahajans or Sahukars are required to make payments to fishermen by cash. If the assessee were to make payments to these persons through the bank, then it would entail some loss of time before cash can be disbursed to the fishermen. This loss of time translates 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 int....
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.... brushed aside the explanation of the assessee relying upon the report of Socio-economic conditions of Fishers in and around Chilika collected from CDA Orissa which is allegedly prepared by two experts. This report allegedly states that 40% of fishermen sell their catch directly to exporters and the remaining 60% of the catch is sold through MahajansorSahukars. Even though the report relied upon by the learned ACIT, admits that fish is sold by 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 arr....
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....l out immediately after refuelling and taking rations on board. Therefore the payments for crew and provisions are made in cash immediately after purchase of shrimp. It is submitted that there is very often a delay from the date of purchase to the date of actual payment of the consideration for this purchase. This imposes an urgency to ensure that the supplier get payment as soon as possible and without any further delay. If payment is made otherwise than 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 learne....
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....f Gheries are located in Dhamra. He has reproduced the report of DFID, narrating the manner and modus operandi of prawn culture. A Commission u/s.131 was sent by the learned Assistant Commissioner of Income Tax to Income Tax Officer, Bhadrak to enquire the whereabouts of these farmers. The learned Assistant Commissioner of Income tax has mentioned in the body of the order that when the Income Tax Officer, Bhadrak summoned the suppliers, at the address provided by the 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 t....
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.... supply was made to Falcon Marine Exports Limited. The learned Assistant Commissioner of Income Tax by ignoring the report of the Inspector, concluded that supplies made on account of Kar Aquatic, Tuku Mohanty & Babuni Behera are in the nature of trading in prawn. Regarding 8 other suppliers, on whose account additions are made, no enquiry has been made, either from the Income Tax Officer, Bhadrak or from the assessee company. Therefore, all these additions are merely made 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 sa....
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....es that the said seven parties are not proved to be producers of fish and fish products as described in Rule 6DD while in his own order, he has mentioned that the said seven parties transport marine products to Kolkata through insulated van where assessee makes purchases. In fact the assumption of the learned ACIT is not correct. The assessee has a plant at - At. Kharibari, Po.-Mudiahat (North), 24 Praganas, West Bengal. All the collection of prawn is delivered at factory located in 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 pric....
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....an important role in the supply chain. Again, ITO Bhadrak Report, relating to Babuni Behera, speaks his turnover relating to subsequent years and confirms the transaction made with the appellant relating to above Assessment Year. The Report of the Bhadrak ITO, speaks that, due to insufficient address, he could not communicate with the cultivators or suppliers of prawn. The report also confirms that certain materials are purchased through agents. In this case the Learned Assessing Officer has 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 ....
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..... Commissioner of Income Tax had made research regarding consumption of seeds and derived requirement in a cumbersome manner. He has ignored major factors like death of seeds in disease and also supply of deeds collected locally from the river mouth, which is the breeding ground of the seeds. Since the size of the seeds are larger, than hatchery seeds, its value is higher. Neither any local enquiry is made in this regard nor was any explanation asked to the appellant to explain the requirement of non hatchery 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, refle....
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.... held by the assessee against undisclosed income. She therefore submitted that the learned CIT(A) had rightly confirmed the same. With respect to the seeds purchased in cash, the learned CIT(A) again erred in holding a view whether only 10% could be disallowed as bogus purchases when the total purchases being the seeds purchased from hatcheries and from wild seeds from the mouth of the river in the sea were nothing but enhancement of expenditure was established by the Assessing Officer. The learned CIT(A) therefore ought not 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 opi....
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....ing an exporter of such magnitudewould have received all payments by way of export in bank which he would have withdrawn from the bank for incurring such expenditure. We have been apprising of the fact that the intention of the legislation to allow benefit to such exporter keeping in mind the cash is incurred for procuring fish and fish products was delicate and risk involved therein was to be allowed. Export of perishable items is on adopting a technical procedure of maintaining the quality which was the intention of the legislature 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 explain....
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.... the assessee being a manufacturer and exporter of perishable fish and fish products the bills are raised on the quantity which quantity may differ therefore was to be valued and quantified at the close of the financial year was duly recorded by debiting the stock account and crediting those cultivators who have returned the feed without utilisation. The income had already been rendered by way of drawing a sale bill on them was not to be found fault with by the Assessing Officer which was further complicated by the learned CIT(A) by indicating that the sales return ought to have been debited in the sales account. We do not find any infirmity in the contention of the learned Counsel of the assessee insofar as the proper procedure for the control of the stock has been maintained by the assessee without infringing the accounting standard as noted by the authorities below. The same is directed to be deleted. 4.3. With respect to the remaining cash payment disallowed under the provisions of Section 40A(3) the part sustenance by the learned CIT(A) we are of the considered view that after having the remand report and after having adjudicated at length the assessee being exporter of mar....