2013 (9) TMI 534 - AT - Income Tax

Violation of provisions of section 40A(3) of the Income Tax Act read with Rule 8DD - Payment in cash - Assessee is a 100% Exporter of fish and fish products which are allowed to be purchased in cash as per the provisions of Rule 6DD Held that - Assessee is covered by sub-clause (3) of Rule 6DD when fish or fish products can be purchased in cash and the payment can be made to the cultivators, grower or producers of such articles produced or products when the producers of fish or fish products has been specifically defined would include besides the fisherman any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea-shore itself and then sells the fish or fish products to traders, exporters, etc As per genuineness and the business practices insofar as the assessee being an exporter of such magnitude would have received all payments by way of export in bank which he would have withdrawn from the bank for incurring such expenditure - Intention of the legislation to allow benefit to such exporter keeping in mind the cash is incurred for procuring fish and fish products was delicate and risk involved therein was to be allowed Decided in favor of Assessee. Restricting the seeds purchase in cash to10% being the wild seeds Held that - Business conducted by the assessee is of such magnitude that it was nobody s case that wild seeds has to sprout in accordance with the arithmetical projection - Other purchases being the fish and fish products insofar as he explained that the value of the hatchery seeds which is higher and the wild seed may or may not grow was nobody s case which was again at the mercy of the nature when the seller of the prawn seeds also raises his hand for not hatching into prawns of desired quality. Therefore, keeping in view the magnitude of the export made by the assessee that 10% sustenance on account of seed purchase is fit for deletion. Disallowance u/s 40A(3) of the Income Tax Act Held that - Various facts leading to this part sustenance of the disallowance not maintainable insofar as payment for diesel, labour and places where banking facilities are not available are allowed under the provisions of Rule 6DD - There is no violation of Rule 46A insofar as the learned CIT(A) had on the basis of finding tried to assign a percentage for sustaining the disallowance which is not in accordance with the provisions of the I.T.Act for disallowance u/s.40A(3) - Directed the Assessing Officer to delete the addition so made and partly sustained by the learned CIT(A) on the issues as mentioned.

Summary

Issues Involved:
1. Addition of Rs. 60,14,889 for undisclosed closing stock of feed.
2. Addition of Rs. 37,55,94,779 for cash purchases exceeding Rs. 20,000 under Section 40A(3).
3. Addition of Rs. 1,75,88,651 for seed purchases in cash.
4. Addition of Rs. 41,97,653 for cash payments exceeding Rs. 20,000.
5. Other miscellaneous additions including long-term capital gain and non-deduction of TDS.

Detailed Analysis:

1. Addition of Rs. 60,14,889 for Undisclosed Closing Stock of Feed:
The assessee argued that the closing stock of feed was due to returns from cultivators and was properly accounted for by debiting the stock account and crediting the parties who returned the materials. The CIT(A) rejected this explanation, alleging artificial inflation of income. The Tribunal found that the proper procedure for stock control was maintained without infringing accounting standards and directed the deletion of this addition.

2. Addition of Rs. 37,55,94,779 for Cash Purchases Exceeding Rs. 20,000 under Section 40A(3):
The Assessing Officer initially disallowed the entire amount but the CIT(A) reduced it to Rs. 3,75,59,478 based on affidavits and remand reports. The Tribunal noted that the assessee, being a 100% exporter of fish and fish products, was allowed to make cash purchases under Rule 6DD. It was emphasized that payments to fishermen and farmers in remote locations were necessary and practical. The Tribunal directed the deletion of the sustained addition, recognizing the genuine business practices and the impracticality of non-cash transactions in this context.

3. Addition of Rs. 1,75,88,651 for Seed Purchases in Cash:
The Assessing Officer disallowed the entire amount, but the CIT(A) limited the disallowance to 10% of the total purchases. The Tribunal found that the business's nature and magnitude justified the purchases and noted that the wild seeds' growth was subject to natural factors. It directed the deletion of the 10% sustained disallowance, acknowledging the practical challenges in the industry.

4. Addition of Rs. 41,97,653 for Cash Payments Exceeding Rs. 20,000:
The CIT(A) reduced this disallowance to Rs. 26,68,903. The Tribunal found that the payments were made in compliance with Rule 6DD, which allows cash payments in specific circumstances, such as in remote locations without banking facilities. It directed the deletion of the sustained addition, considering the genuine business needs and the impracticality of non-cash payments in the given context.

5. Other Miscellaneous Additions:
- Long-term Capital Gain (Rs. 10,34,582): The issue was similar to the preceding year and was pending adjudication before the CIT(A). The Tribunal did not provide a detailed ruling on this matter.
- Non-deduction of TDS (Rs. 21,01,601): This issue was also similar to the preceding year and pending before the CIT(A). The Tribunal did not address it in detail.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the deletion of the additions made by the Assessing Officer and partly sustained by the CIT(A). The judgment emphasized the practical challenges and genuine business practices in the marine products industry, particularly concerning cash transactions in remote locations.