TaxTMI 
TaxTMI 
TaxTMI 
2013 (10) TMI 767
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....count is to the extent of Rs. 5,17,96,824/- and rest i.e., Rs. 3,08,07,584/- are purchases on behalf of the principals, i.e., purchases on commission basis. The assessee made purchases from Khair Mandi, which is the place for first arrival of food grains. All the purchases were made by way of cash payments exceeding Rs. 20,000/-. 2.1 The A.O. held that in respect of purchases made on behalf of other parties (Rs. 3,08,07,583/-) did not attract section 40A(3), as only commission had been shown in the profit & loss account. However, purchases made on its own trading account i.e. Rs. 5,17,96,824/- attracted disallowance u/s. 40A(3). 2.2 The assessee's plea was that the purchases were made, through 'kachcha arhatia', who are agents for their farmers constituent and who work under strict supervision of mandi Samiti rules and norms. According to the assessee these kuchha arahtia do not accept cheques payments, as they have to deliver cash payments to the respective farmers and hence payments were in cash under the bonafide belief that the payments were covered by rule 6DD. 2.3 The AO rejected the contention arguing that C.B.D.T. Circular No. 34 dated 05.03.1970 had, long ago made it cl....
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....ers. Price of 6R and 9R is absolutely same and Kachcha Arahtia has added his commission @ 1.5%, brokerage @ 0.5%, Mandi Shulk @ 2% and Vikas Cess @ 0.5% in 9R and accordingly he actually worked as agent of Pakka Arahtia. Kachcha Arahtia has no right or liberty to charge purchase/sale price of the product as given in 6R. The assessee is regularly assessed to tax and there is no change in the system and business activities. The payments to farmers through Kachcha Arahtia have to be made in cash only because of the reasons that Kachcha Arahtia/agent as well as farmers are not having bank accounts in their names. There is no banking facilities available in the area of Krishi Utpadan Mandi ASthal Khair. Kachcha Arahtia/agent has insisted to receive payment in cash in the interest of business as well being carried on traditionally since long. The payments to the farmers have to be given only in cash. The cash payments have been given in the interest of business requirements/expediency. All the statutory forms have been maintained by the assessee and similar business activities have been accepted in past by the Revenue in the proceedings u/s. 143(3) of the IT Act. The assessee relied upon....
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....provisions of section 40A(3) read with rule 6DD. My findings are as under:- 8.1 Before I go into the interesting aspect of 40A(3); I would clarify that the appellant's arguments regarding cash payments actually being below Rs. 20,000/- and reliance on 'Kachhi Rokar' for the same, is to be taken as an after-thought. I agree with the A.O. that had this 'Kachhi Rokar' been in possession with the assessee he would have produced the same or mentioned in any of the replies. Thus the case is to be proceeded on the premise that the assessee had made payments in cash exceeding Rs. 20,000/- and hence the issue under consideration is whether any or more of the clauses of rule 6DD are applicable, or not. 8.2 Regarding the issue of applicability of provisions of section 40A (3) read with rule 6DD; the first and the foremost factor would be to understand the true nature of (a) business of the assessee, (b) business set-up of the mandi where assessee had made all the purchases, and (c) the status of 'kuchha arahtia' from whom the relevant purchases have been made and to whom relevant payments have been made. I shall discuss this aspect one by on....
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....nstituents-on one side there are farmers and on other there are purchasers (wholesalers/pacca arahtias). In all practical sense, kuchha arahtias are not only agents for the farmers but they are also acting agents of the purchasers (wholesalers or pacca arahtias) because it is only the kuchha arahtia who can effect collection of money from purchasers and disburse the same to the specified farmers. (a) The assessee is also a purchaser of food grains in this set up of Khair Mandi being, mandi of primary arrival. I have seen the licence issued by Khair Mandi Samiti to the assessee; the status of the assessee is 'pacca arahtia/wholesaler'. Sometimes the assessee makes purchase on behalf of some other principals; at that time, he is a pacca arahtia. Some of the times, the assessee takes a position i.e. it makes purchases and then sells for profit; at that time, he is acting as a wholesaler. 7.3 In the above back drop, following are some important conclusions/observations made:- (a) There is a world of difference between status and role of a Kuccha Arahtia, and that of a Pacca Arahtia/wholesaler. Although both a....
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....has made payments have acted as an agent, who is required to make the payments in cash to the farmers. This view is fully supported by the following judicial decisions:- (i) Sri Renukeshwara Rice Mills v. Income Tax Officer [2005] 93 TTJ (bang) 912 : [2005] 93 ITD 263(bang)) " ................................................... Business expenditure - disallowance under s. 40A (3) - Direct payment into bank account of payee - Payment was made by assessee too KP by depositing cash along with challan in its bank account directly - Transaction is traceable from origin to conclusion - It is not a direct payment to the payee - Hence, s. 40A(3) is not applicable - Moreover, payment in question was made for purchase of agricultural produce to KP, an agent operating in the market yard set up under State RMC Act - Person operating there is an agent of cultivator or grower as well as of buyer - Such agent is required to pay the cultivator in cash - Thus, payment made to KP is indirect payment to the cultivator through the agent - Hence, s. 40A(3) is not app....
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....n statute. Therefore, the decision of the Tribunal, Bangalore Bench in the case of Sri Renukeshwara Rice Mills v. ITO [2005] 93 ITD 263 was squarely applicable to the instant case as facts were similar. [Para 13.3] The contention of the department, that there was no agent, did not sound good because the Assessing Officer himself had disallowed the payments for the reason that they were not made directly to producers/cultivators but through intermediaries or agents. [Para 13.4] Further, as per clause (f) of rule 6DD, no disallowance could be made under section 40A (3). Though the Commissioner (Appeals) had rejected the claim under clause (f), yet, in view of rule 27 of Income-tax (Appellate Tribunal) Rules, 1963 and in view of the decision of the Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd [1997] 66 ITR 710 the claim of the assessee was allowable as per clause (f) of rule 6DD. [Para 13.6] Further, rule 27 of the Appellate Tribunal rules is very specific and clear. Whatever point has been rejected by the Commissioner (Appeals), the respondent-assessee could support his arguments against the appeal filed by the appellant, i.e., the department. Though the Commi....
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.... should of course conform to requirements of section 40A (3). the extension of the exemption to the purchasers would defeat the objective of the provisions." Thus, from the perusal of above; we can see that this circular, although does talk about payments to arahtia; but does not make any assertion to the effect that kuchha arahtia are not agent of the farmers. So; I hold that the assertion made by the A.O., is overzealous and requires to be brushed aside. 7.5.1 To analyze further, 'arahtia' word in this circular is clearly referring to a wholesaler agent/pacca arahtia; who take their own positions (i.e. trade on their own) after making purchase from the farmers/agriculturists; the said word is not referring to 'kuchha arahtia'. This view of mine is strengthened from the discussion made regarding kuchha arahtia and pacca arahtia by the C.B.D.T. in Circular No.452 dated 17-03-1986. it would be desirable to reproduce this circular:- "Circular/Section 44AB of the Income-tax Act Applicability of section 44AB in the cases of commission agents, arahtia, etc. Clarification regarding 1. Section 44AB of the Inc....
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....onstituent and the third party so that each becomes liable to the other. The pacca arahtia, on the other hand, makes himself liable person upon the contract not only to the third party but also to his constituent; (iii) Though the kachha arahtia does not communicate the name of his constituent to the third party, he does communicate the name of the third party to the constituent. In other words, he is an agent for an unnamed principal. The pacca arahtia, on the other hand, does not inform his constituent as to the third party with whom he had entered into a contract on his behalf. (iv) The remuneration of kuchha arahtia consists solely of commission and he is not interested in the profits and losses made by his constituent as is not the case with the pacca arahtia; (v) The kachha arahtia, unlike the pacca arahtia, does not have any dominion over the goods; (vi) The kachha arahtia has no personal interest of his own when he enters into a transaction and his interest is limited to the commission agency's charges and certain out of pocket expenses where as a pacca arahtia has a pers....
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....nbsp; 7.7. Before I part I would make certain comments regarding A.O's comments on banking facilities. It is true that there are certain bank branches in Khair town. But it is also true that the A.O's point would have been more valid if such banking facilities were available within the mandi premises itself. I find substantial force, atleast on moral ground, in appellant's pleadings that presence of 2 - 3 small bank branches in Khair town cannot be sufficient to meet the requirements of large cash withdrawals, in case of kachha arahtia are forced to accept payments vide cheque/draft. This moral and social angle is more forceful if we also consider the risky situation if these kachha arahtia/pacca arahtia/farmers are to carry cash to and fro. Khair town and the mandi premises. This is also more important to understand that if kuchha arahtias were to accept cheque/draft; it would rather be a welcome situation for the assessee also!! The assessee is carrying ash and is correspondingly running every day risk, and in fact, has to take safety measures. All these can be easily avoided, in case kuchha arahtia do not insist on cash payments. Thus, payment in cash can no....
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.... as wholesaler, but, for the issue under consideration i.e. disallowance u/s 40A (3); I opine that the A.O.'s opinion is not correct. The modus operandi of purchases is exactly the same, in both the types of transactions. Hence, from the view point of section40A (3), the two types of transactions need not to be distinguished. Such distinction, can be relevant for the payments made by other principals, who have made purchases from the assessee, and consequently, for any such applicability u/s 40A (3) in their hands; but are irrelevant as far as appellant's case is concerned. As far as purchases made by the assessee are concerned; all purchases have been made from kuchha arahtia through the same set up as narrated above. So the A.O.'s view of bifurcating total purchases into two types - one acting as commission agent and the other acting as trader - is of no relevance as far as applicability of section 40A (3) is concerned. 8. In view of the above discussion, I finally hold that assessee's cash purchases made from Khair Mandi (of "First Arrivals"), are favourably covered by clause (1), of Rule 6DD; further supported by clauses (f) and (h) of Rule 6DD, and,....
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....el v. CIT in ITA No. 636/2012 dated 04.12.2012 in which on identical facts, the appeal of the assessee has been allowed. Findings of the Hon'ble High Court in para 8 to 11 of the order are reproduced as under : "8. The proviso which was introduced in the year 1999 has remained constant except in the year 2005 when sub-section (3A) was introduced by the Parliament. However, Rule 6DD which was introduced and has been existing on the statute for the nearly two decades has been amended from time to time. Rule 6DD (k) to the extent it is relevant reads as follows: - "6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where payment or aggregate of payments made to a person in a day', otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees ill l/it:' cases and circumstances specified hereunder, namely: - Xxxxx xxxxx....
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....op, the business activities. It is in that sense that the expression ''required'' would have to be construed. 10. In view of the above discussion, this Court is of the opinion that having regard to the peculiar facts and circumstances, the Tribunal and the lower authorities adopted an unduly narrow and technical interpretation of Rule 6DD(k), the benefit of which the assessee clearly was entitled to. The question of law is accordingly answered in favour of the assessee and against the Revenue. 11. The appeal - ITA 636/2012 - is accordingly allowed." 6. We have considered the rival submissions and the material available on record. Rule 6DD of the IT Rules, as now applicable, provides the cases and circumstances in which the payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by account payee cheques drawn on a bank or account payee bank draft. It provides that no disallowance u/s. 40A(3) shall be made and no payments shall be deemed to be the profits and gains of business or profession u/s. 40A(3) where any payment in a sum exceeding twenty thousand rupees is made othe....
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.... assessee would also be covered by another sub-provision of Rule 6DD because the payments are made for purchase of agricultural produce. The circular No. 34 of Board is not applicable because it did not deal with Kachcha Arahtia and in turn the ld. CIT(A) rightly taken into consideration Board's circular No. 452 which clearly throw light on the functioning of Kachcha Arahtia and Pakka Arahtia. The Kachcha Arahtias have also filed their affidavits acknowledging that cash payments were made at their insistence as they did not maintain any bank accounts as well as farmers have not maintained bank accounts and in turn Kachcha Arahtia has to make payments to the farmers in cash. Further, the old circular No. 34 was applied before the above Rules have been inserted in the IT Rules. Thus, it is also clear that in the absence of proper banking facilities, the assessee was under business expediency to make cash payment to the Kachcha Arahtias. Certain payments were made directly to the farmers as well as on bank holidays. Therefore, it would also support the finding of the ld. CIT(A) in deleting the addition. Further, the assessee has relied upon the Board's circular No. 220 dated 31.05.197....