Income Tax Appellate Tribunal - Bangalore
Sri Renukeswara Rice Mills vs Income-Tax Officer on 27 August, 2004
Equivalent citations: [2005]93ITD263(BANG), [2005]278ITR77(BANG), (2005)93TTJ(BANG)912
ORDER
Deepak R. Shah, Accountant Member
1. This appeal by the assessee is arising out of the order of Learned Commissioner of Income Tax (A), Davangere, dated 02.01.2002 pertaining to assessment year 1998-99.
2. The only issues in appeal is regarding disallowance of Rs. 2.04 lakhs being 20% of the sum paid to M/s. K. Parameswarappa & Co. (KP) invoking provision of Section 40A(3) and charging of interest under Section 234A and 234B.
3. The assessee is carrying on business of rice mill at Bhadravathi, a small town in Shimoga District of Karnataka. The assessee for the purpose of purchase of rice approached the Regional Market Yard at Davangere. It is stated that purchase and sale of rice being agricultural commodity is regulated under the RMC Act and transaction takes place at market yard only. The assessee instead of paying cash/cheque/draft to KP prepares a challan and deposits the cash to the account of KP. Such receipted challan is produced to KP and goods are purchased. The assessing officer on the basis of accounting entries in the books of KP noted that they have recorded the receipt by way of cash. Thus the assessee is said to have purchased the goods by paying cash and not by way of crossed cheque/draft. He therefore invoking the provision of Section 40A(3) disallowed a sum of Rs. 2,04,000/- being 20% of the sum of Rs. 10.20 lakhs paid to KP. The assessing officer did not entertain the argument of the assessee as to the exception provided in Clause (f) and Clause (1) of Rule 6DD. He noted that KP is not agent of assessee. He also held that the assessee has not purchased the goods from agriculturists but KP who is a full-fledged dealer and not merely a commission agent. Even the contention that amount is remitted into the bank account of KP was turned down. Learned CIT(A) held that payment to the party by way of DD/cheque only has to be considered and if the payment is made otherwise than by cheque/draft it is in contravention of provision of Section 40(A)(3). The assessee is in further appeal before us.
4. Learned counsel for the assessee Shri. A. Shankar submitted that the assessee has dealt with M/s. K. Parameswarapa & Co., (KP) as an Agent, who is required to make payment in cash to the agriculturists for procurement of paddy and hence, on account of exigencies of business, payments were deposited directly into the bank accounts of the agents by cash. The payment to KP is also covered under the exceptions granted under Rule 6DD(f) of the Income Tax Rules, in as much as they constitute payment made for purchase of agricultural produce, through their Agent. The payments made to KP are to an Agent only as KP is registered as an agent under the Karnataka APMC Act and further, the nature of bills issued by them indicates that they are charging commission separately on the assessee. Further, the price of the goods is passed on to the agriculturists and the commission is retained by KP which clearly indicates that, KP is acting as an agent of the assessee. In the end he submitted that the spirit and intent of the entire provision of Section 40A(3) of the Act, is to ensure monies are routed through Banking channels, which has been complied in all respects in as much as the amounts were deposited into the bank accounts of the supplier in a place other than, where the assessee is carrying on the business and the entire proof of the same has been furnished to the assessing officer which has not been disputed and hence, ought not to have invoked the provision of Section 40A(3) of the Act.
5. Learned Departmental Representative on the other hand strongly supported the orders of authorities below. He submitted that the assessee is purchasing the goods from open market at market yard. KP has issued total bill for the goods sold and not merely commission. Thus KP has sold goods not as an agent but as a trader. Clause (1) of Rule 6DD will apply provided the payment is made by the assessee to his agent and not agent of somebody else. In this case KP is agent of farmers and not that of the assessee. Hence, Clause (1) of Rule 6DD will not apply. Similarly, Clause (f) of Rule 6DD will also not apply as the payment is not made by the assessee to the cultivator or grower of the product. Since the payment is made in cash though to the bank account of KP, the same is not in accordance with Section 40A(3) and hence the disallowance is to be upheld.
6. We have carefully considered rival submissions and relevant facts of the case. Hon'ble Supreme Court while, interpreting the provision of Section 40A(3) in the case of Attar Singh Gurmukh Singh v. ITO 191 ITR 667 at page 672 and 673 held thus "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 dear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading 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 undisclosed sources. The terms of Section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee 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 received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be dear from the provisions of Section 40A(3) and Rule 6DD that they are intended to regulate business transactions and to prevent the use of un-accounted money or reduce the chances to use black money for business transactions. (See Mudiam Oil Company v. ITO [1973] 92 ITR 519 (AP). If the payment is made by a crossed cheque drawn on a bank or crossed bank draft, then it will be easier to ascertain, when deduction is claimed, whether the payment was genuine and whether it was out of the income from disclosed sources. In interpreting a taxing statute, the court cannot be oblivious of the proliferation of black money which is under circulation in our country. Any restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business." (emphasis supplied) The Hon'ble Supreme Court noted that the intention to make payment by crossed cheque or crossed DD is to enable the assessing authority to ascertain that the payment is genuine and not out of the undisclosed source. It is also noted that Section 40A(3) is intended to regulate business transactions and to prevent the use of un-accounted monies or to reduce the chances of use of block money for business transactions. In the present case, it is seen that the assessee for purchase of rice, paid the amount directly to the bank account of the payee. The effect of issue of crossed cheque/DD is that the payee named therein receives the payment through banking channels. The purpose is dual. In the first instance it is to see that the payee and payee alone receives the payment and to ensure that the payment is routed through bank channel so as to trace the origin and conclusion of the transaction. In the case before us, it is seen that instead of issuing cheque/DD the assessee prepared a challan and along with the cash the challan was presented to the bank of the payee for the credit of the same in the account of payee. In the result it is ensured that the payee and payee alone receives the payment and the origin and conclusion of transaction is traceable. Thus payment of sum directly in the bank account of payee fulfils the criteria for ensuring the object of introduction of Section 40A(3). This is not a direct payment to the payee but only to the credit of this bank account without the payee actually receiving the cash. We accordingly hold that such payment is not in violation of provision of Section 40A(3) and hence no disallowance is called for.
7. It is seen that the payment is made for purchase of agricultural produce. The payment is made to the agent operating at the market yard. As per the regulation of trade in agricultural produce, market yards are set up and the State RMC Act also regulates such business. Thus for purchase and sale of agricultural produce, the transaction can be only through dealers and agents licensed to operate in the market yard. Thus, the person operating there, is not only the agent of the cultivator or grower but also of the persons purchasing the agricultural produce. Clause (f) of Rule 6DD provides that where the payment is made for the purchase of agricultural produce to the cultivator, Section 40A(3) will not apply. Similarly, Clause (1) of Rule 6 DD provides that where the payment is made by any person to his agent who is required to make payment in cash for goods, Section 40A(3) will not apply. Since the assessee has paid the sum to his agent who is the payee in the present case, and who in his turn is required to make payment to the cultivator, indirectly, the assessee has paid for the purchase of agricultural produce to the cultivator through the agent. Thus, a combined reading of Clauses (f) and (1) of Rule 6DD will take away the transaction from the clutches of Section 40A(3). From the bills produced by the assessee to the assessing officer it was submitted that the assessee apart from paying price of the products also pays commission to the payee. Thus, the payee has become the agent of assessee also. Such agent is required to pay the cultivator in cash. Accordingly, there is no violation of Section 40A(3). We accordingly delete the disallowance of Rs. 2,04,000/- in respect of payment made to KP.
8. The next ground of appeal is against charging of interest under Section 234A and 234B. It is an admitted fact that the return of income was delayed and filed after the due date prescribed under Section 139(1). The interest under Section 234A is accordingly chargeable.
8.1 As regards charging of interest under Section 234B, it is seen that the income declared by the assessee was Rs. 5,700/- only. The assessee cannot foresee the disallowance under Section 40A(3). The tax payable on returned income is less than Rs. 5000/-. Accordingly, the assessee was not under obligation to pay advance tax as required under Section 208 of the Act. Since the assessee was not required to pay advance tax under Section 208, interest under Section 234B is not chargeable. We accordingly delete the interest charged under Section 234B.
In the result, the appeal is partly allowed.