2013 (10) TMI 767 - AT - Income Tax

Payment exceeding Rs.20000 to fall within the exception of Rule 6DD of the Income Tax Rules Disallowance u/s 40A(3) of the Income Tax Act - Assessee was a Pakka Arahtia and made purchases from Kachcha Arahtias - Kachcha Arahtia acted as agents in its true senses - i.e., it mediates between two constituents, i.e., on one side there are farmers and on the other there are purchasers (whole sellers/pakka Arahtias) - The Kachcha Arahtias in order to facilitate the sale of agricultural produce which farmers brought to the Mandi has taken commission from the Pakka Arahtia, i.e., the assessee Held that - Reliance has been placed upon the judgment in the case of Renukeshwara Rice Mills 2004 (8) TMI 319 - ITAT BANGALORE-B - . The Kachcha Arahtias have also filed their affidavits acknowledging that cash payments were made at their insistence as they did not maintain any bank accounts as well as farmers have not maintained bank accounts and in turn Kachcha Arahtia has to make payments to the farmers in cash Thus, in the absence of proper banking facilities, the assessee was under business expediency to make cash payment to the Kachcha Arahtias - Certain payments were made directly to the farmers as well as on bank holidays. Reliance has also been place upon the Board s circular No. 220 dated 31.05.1977, in which certain conditions have been laid down for making cash payments and some of the conditions are that when payments are made on bank holiday and the seller has refused to accept the payment by way of crossed cheques/draft. Further, the seller, acting as a commission agent is required to pay cash in turn to the persons from whom he purchased the goods - Kachcha Arahtia obtained the agricultural produce from the farmers and have arranged to make sales to the assessee being Pakka Arahtia. Since Kachcha Arahtia insisted for cash payment from the assessee for making cash payments to the farmers, therefore, sub-rule (e) along with sub-rule (k) of Rule 6DD would also apply in the case of the assessee - Considering the facts and circumstances of the case, the case of the assessee is clearly covered by exceptions provided under Rule 6DD of the IT Rules Decided against the Revenue.

Summary

Issues Involved:
1. Applicability of Section 40A(3) of the IT Act.
2. Validity of cash payments exceeding Rs. 20,000 under Rule 6DD.
3. Classification and role of Kachcha Arahtias and Pakka Arahtias.
4. Application of CBDT Circulars No. 34 and No. 452.
5. Business expediency and banking facilities.

Issue-wise Detailed Analysis:

1. Applicability of Section 40A(3) of the IT Act:
The Revenue challenged the deletion of an addition of Rs. 1,03,59,365/- made under Section 40A(3) concerning cash payments exceeding Rs. 20,000. The Assessing Officer (AO) argued that the assessee made purchases on its own trading account, attracting disallowance under Section 40A(3). The AO disallowed 20% of Rs. 5,17,96,824/-, amounting to Rs. 1,03,59,365/-, stating that payments could have been made through cheques as local cheques clear quickly and sellers had bank accounts.

2. Validity of Cash Payments Exceeding Rs. 20,000 Under Rule 6DD:
The assessee contended that the payments were made through Kachcha Arahtias, who insisted on cash due to farmers not having bank accounts, and cited Rule 6DD. The CIT(A) accepted this, noting the assessee's compliance with mandi rules and the necessity of cash transactions due to the lack of banking facilities. The CIT(A) concluded that the case fell under Rule 6DD(k), which exempts payments made to agents who must pay in cash on behalf of the payer.

3. Classification and Role of Kachcha Arahtias and Pakka Arahtias:
The CIT(A) distinguished between Kachcha Arahtias (agents for farmers) and Pakka Arahtias (wholesalers/traders). Kachcha Arahtias facilitate sales between farmers and Pakka Arahtias, receiving commissions and ensuring payment to farmers. The CIT(A) found that Kachcha Arahtias acted as agents for both farmers and Pakka Arahtias, thus qualifying for exemptions under Rule 6DD.

4. Application of CBDT Circulars No. 34 and No. 452:
The AO referenced Circular No. 34 to argue that payments to Arahtias are not exempt from Section 40A(3). However, the CIT(A) clarified that this circular did not specifically address Kachcha Arahtias and instead applied Circular No. 452, which differentiates between Kachcha and Pakka Arahtias. The CIT(A) emphasized that Kachcha Arahtias are agents for both parties, supporting the applicability of Rule 6DD.

5. Business Expediency and Banking Facilities:
The CIT(A) acknowledged the practical difficulties and business expediency necessitating cash payments, noting the lack of adequate banking facilities within the mandi premises. The CIT(A) also considered affidavits from Kachcha Arahtias confirming their lack of bank accounts and the need for cash payments to farmers. The CIT(A) concluded that the assessee's actions were justified under Rule 6DD(e), (j), and (k), which provide exceptions for payments made on bank holidays, to agents, and for agricultural produce.

Conclusion:
The CIT(A) deleted the addition, finding that the assessee's cash payments were covered by exceptions under Rule 6DD, supported by judicial decisions and practical considerations. The ITAT upheld this decision, dismissing the Revenue's appeal and confirming that the assessee's transactions were exempt from the disallowance under Section 40A(3).