TaxTMI 
TaxTMI 
2017 (10) TMI 597
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....e, a private limited company, runs a rice mill. It filed its 'return' on 25.09.2010 disclosing an income of Rs. 47,85,240. After processing the return under section 143 (1) of the Income Tax Act ("the IT Act"), the Assessing Officer picked it up for scrutiny. On 29.08.2011, he issued notice under section 143(2), heard the assessee, and computed the taxable income. This exercise resulted in penalty proceedings under section 271 (1) (c) of the IT Act against the assessee, the tax demanded being Rs. 9,87,61,270/-. The Appellate Authority: 3. Aggrieved, the assessee filed an appeal, ITA No.40/R/CIT(A)- 11/2013-14 before the Commissioner of Income Tax (Appeals)-II, Kochi. The Appellate Authority answered thus: Limitation Rejected Disallowance under section 40 A (3) Partly allowed: reduced the cash payments from 75% to 25% From Rs. 17.38 cr to Rs. 5.79 cr Unreported yield The addition of Rs. 3,89,16,190/- was affirmed. The Second Appeal - The Tribunal: 4. Against the order of the appellate authority, both the assessee and the revenue filed second appeals: ITA No.145/Coch/2014 and ITA No.295/Coch/2014. The Three-Member Tribunal rendered a split verdict-the major....
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....he learned counsel has also further contended that the Supplyco of the Kerala Civil Supplies Corporation has only expected 60% of the yield to be 'sortex' rice. 10. To conclude, Sri Harisanker has heavily relied on Interseas to contend that the issues raised in these appeals have squarely been answered earlier by this Court. Eventually, the learned counsel has urged us not to interfere with the Tribunal findings, which, according to him, are well-reasoned and exhaustive. Substantial Questions of Law: 1. Is the Tribunal, under law, right in deleting the entire addition made under section 40A(3) of the Income Tax Act?. 2. Has the assessee discharged its burden of proof? 3. Is the Tribunal right in law and fact in interfering with the stand of the Assessing Officer with regard to section 145 of the Income Tax Act? Discussion: Purchase of Paddy & The Truth Behind the Transaction: 11. The assessee, a rice miller, filed its 'return' for the assessment year 2008-09 disclosing Rs. 47,85,240/- as income. On scrutiny, the Assessing Officer subjected the assessee to penalty proceedings: the tax demanded being Rs. 9,87,61,270/-. Category Amount A....
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....r account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure." 16. As is evident, when an assessee spends or pays money exceeding Rs. 20,000/- on any day, he must have that spending or paying only through an account payee cheque. Here, the AO suspects that the assessee might have paid beyond Rs. 20,000/- to more than six farmers. To sustain that suspicion, the AO must be sure that the very spending falls within the mischief of section 40-A (3) of the IT Act. Assuming that it does, we, however, found from the record that the AO has not examined the authenticity of those farmers whose particulars the assessee provided. 17. That apart, even if the spending were above Rs. 20,000/- in a day, there would be no escaping from another statutory safeguard the assessee enjoys. Section 6DD of the Income Tax Rules, 1962, enlists the cases and circumstances in which payment exceeding Rs. 20,000/- may be made otherwise than by an account payee cheque or by a bank draft. So, it pays to examine Rule 6DD of the Income Tax Rules, 1962. To the extent relevant, the Rule reads: "6DD. Cases and circumstances in which payment in a ....
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....pliers in terms of Rule 6DD(f)(iii) of the Income Tax Rules? 21. Interseas answered both the questions in the affirmative. In fact, the assessee contended that the suppliers are in the unorganised sector and did not issue bills for sales; nor did they accept payment in cheques or demand drafts for the fish they supplied. In response, Interseas held that "the assessee's claim, no doubt, finds acceptability with the Government because Rule 6DD among other items provide in Clause (f)(iii) for purchase of fish and fish products by making payments other than through Account Payee Cheques and Demand Drafts as required under Section 40A(3) of the Act." 22. Interseas observes that to qualify for exemption, all the conditions of the Rule, no doubt, have to be satisfied. First, the exemption is available only for the purchase of items referred to. Second, the payment should be made only to the persons who are cultivators, growers, or producers of such articles, produce, or products mentioned. 23. Then Interseas factually observes that very many suppliers whose names and addresses were furnished by the assessee fully or partly disowned the transactions. It is seen that the purcha....
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....rd to the purchases, but at the same time believe the denial of the supply and receipt of consideration by the suppliers." 24. Similarly, in Attar Singh Gurmukh Singh, the Supreme Court has examined both Section 40-A(3) and Rule 6DD. It has held that Section 40A(3) must not be read in isolation or to the exclusion of Rule 6DD; the Section must be read along with the Rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. Section 40A(3) only empowers the assessing officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the Section. 25. It is open to the assessee, Attar Singh Gurmukh Singh further observes, to furnish to the satisfaction of....