2011 (11) TMI 371 - HC - Income Tax

Applicability of provisions of Section 40A(3) to the purchase of stock-in-trade Benefit of Rule 6DD to payment made to M/s Hoshiarpur District Cooperative Milk Producers Union Ltd - Held that - When moneys are paid/spent for purchase of stock-in-trade then also the provisions of Section 40A(3) will apply since this amounts to expenditure Decided against the Assessee. Benefit of Rule 6DD is available if the payment is made to the grower or producer of such articles - It is apparent from Model Bye-laws of society it is only the registered milk producers society and the State Government, which can be the members of the Union. The constitution of the Union does not permit individual producers to be its members. Therefore, the Union, by no stretch of imagination, can be considered to be a producer of the milk. Therefore, benefit of rule 6DD is not available - Decided against the Assessee.

Summary

Issues:
1. Applicability of Section 40A(3) of the Income Tax Act to purchase of stock-in-trade.
2. Treatment of payment made to M/s Hoshiarpur District Cooperative Milk Producers Union Ltd. under Rule 6DD of the Income Tax Act.

Analysis:

Issue 1: Applicability of Section 40A(3) to purchase of stock-in-trade
The primary contention raised was whether the provisions of Section 40A(3) of the Income Tax Act, 1961 applied to the purchase of stock-in-trade. The appellant argued that since milk was the stock-in-trade, the expenditure incurred for its purchase should not fall under Section 40A(3). Reference was made to a judgment by the Gauhati High Court which supported this argument. However, the High Court of Himachal Pradesh disagreed with the Gauhati High Court's interpretation. Citing various judgments from different High Courts, it was concluded that money spent on the purchase of stock-in-trade also constituted expenditure under Section 40A(3). Therefore, the first question was answered against the assessee and in favor of the revenue.

Issue 2: Treatment of payment to M/s Hoshiarpur District Cooperative Milk Producers Union Ltd.
The second issue revolved around whether the payment made to M/s Hoshiarpur District Cooperative Milk Producers Union Ltd. could be considered as payment to the producer of milk under Rule 6DD of the Income Tax Act. The court examined the constitution of the Union and found that individual producers of milk were not members, only registered milk producers' societies and the State Government were members. Based on this, the court determined that the Union could not be deemed a producer of milk. Consequently, the second question was also answered against the assessee and in favor of the revenue. As a result, the appeal filed by the assessee was dismissed by the High Court of Himachal Pradesh.