2012 (9) TMI 324 - AT - Income Tax

Addition u/s 40A(3) - cash purchases above Rs 20,000 - business of commission agency and trading of vegetables and foods - Held that - CIT(A) has correctly held that the case of the assessee is not covered either under Rule 6DD(f) or Rule 6DD(k) of Income-tax Rules, 1962. Firstly, Rule 6DD(f) is applicable only in the cases when the payments are made in cash for the purchase of the agricultural produce directly to the cultivators, growers or producers of the agricultural produce, whereas in present case, appellant has made no such payments to the cultivators, growers or producers of the agricultural produce. Secondly, appellant has made final purchases from the Arhatiyas (commission agents / traders) and same cannot be treated as agents of the assessee firm within the meaning of Rule 6DD(k). Circular No. 34 dated 5.3.1970 makes it clear that the payment to Arhatiyas do not fall for exclusion under above sub clause. Thirdly, there is no material on record to show that there was exception or unavoidable circumstances for making payments in cash. Payments to same party were made by cheques and by cash also. Therefore, invoking the provisions of section 40A(3) of the Act was justified. On contention of assessee that authorities below have not doubted the genuineness of the payments made in cash it is held that those genuine and bonafide payments could not be taken out of purview of section 40A(3) after amendment of the Rules by the Finance Act, (1995) which was clarified vide Board s Circular No. 117 dated 14.8.1995 - Decided against assessee

Summary

Issues:
Challenge to addition made under section 40A(3) of the Income Tax Act, 1961.

Analysis:
The case involved the appellant challenging the addition made by the Assessing Officer under section 40A(3) of the Income Tax Act, 1961. The appellant, a firm engaged in commission agency and trading of vegetables and foods, had made cash purchases exceeding Rs. 20,000. The Assessing Officer disallowed Rs. 3,28,071, being 20% of the total expenditure in cash, citing non-compliance with section 40A(3). The appellant contended that the purchases were genuine and covered under Rule 6DD of the Income-tax Rules, 1962. However, the CIT(A) upheld the disallowance, emphasizing the lack of justification for cash payments and manipulation of cash entries. The CIT(A) noted that the appellant's case did not fall under Rule 6DD(f) or Rule 6DD(k) and that the payments to commission agents/traders did not qualify as exceptions under the rules.

The appellant relied on various case laws to support their argument, but the CIT(A) found them inapplicable to the facts of the case. The appellant's contention that the payments were necessary for business purposes was rejected, and it was observed that the appellant failed to meet the criteria specified under Rule 6DD. The CIT(A) highlighted that the payments in cash exceeded Rs. 20,000 to the same party, violating section 40A(3). The appellant's argument regarding the small amounts of purchase bills was deemed devoid of merit. The CIT(A) concluded that the disallowance made by the Assessing Officer was justified and upheld.

During the appeal, the appellant reiterated their submissions, emphasizing Rule 6DD(k) to argue against the addition. The Revenue strongly supported the lower authorities' orders, asserting the inapplicability of the appellant's cited decisions to the case. The Tribunal noted the cash purchases made above Rs. 20,000 from various parties and concurred with the CIT(A)'s findings that the appellant's case did not fall under Rule 6DD(f) or Rule 6DD(k). The Tribunal upheld the CIT(A)'s decision, stating that the payments did not meet the exceptions under the rules and were rightly disallowed under section 40A(3). The Tribunal dismissed the appeal, affirming the lower authorities' orders.