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2014 (11) TMI 139 - AT - Income TaxDisallowance u/s 40A(3) - Genuineness of the purchases - Cash memos were proper and were supported by any documentary evidences or not - Held that - The assessee is mainly in the business of exporting various products of meat to different countries - The main reasons for invoking the provision of section 40A(3) was that, the purchases made from the market were in cash which were not fully verifiable as they were made on self made cash vouchers, which did not contain addresses, proper serial number, and were undated and unsigned - the payments have been made to persons like, Shehnaz Enterprises, Zaib Enterprises, Zain Enterprises, M.S. Traders and various association at Belgaum - All the payments have been made in cash - The confirmation certificate from M/s. Shehnaz Enterprises goes to show that, they have procured the raw meat from various meat producers in and around Belgaum on cash payments as the meat producers will supply only on cash payment - the cash payments have been made to various association only for the purchase of raw meat. Proviso to section 40A(3) provides that no disallowance u/s 40A(3) shall be made, if the payment in cash has been made in circumstances provided in Rule 6DD - The clause (e)(ii) of Rule 6DD provides exception on cash purchases on produce of animal husbandry - If the payment has been made in cash for the purchase of meat which is nothing but a product of animal husbandry, then in our opinion the same falls within the exception provided in clause (e)(ii) of Rule 6DD - The law only provides that, if the payment is made in cash for purchase of produce of animal husbandry like meat etc., then no disallowance and u/s 40A(3) is called for - Rule does not provide that CBDT should lay down the conditions under this clause - the assessee has purchased the meat from various persons which have been exported. The assessee clearly fulfils the conditions for exporting the meat. The assessee had also furnished a certificate from Veterinary Doctor, before the CIT(A),who has mainly rejected on the ground that, the same is not in the format as instructed by the Board Circular - This cannot be the reason for drawing any adverse inference to deny benefit under Rule 6DD, if otherwise all the conditions stands fulfilled, which is by and large in the spirit of CBDT guidelines - the assessee s case falls within the beneficial clause of exceptions provided in Rule 6DD, clause(e)(ii) and therefore, no disallowance u/s 40A(3) can be made - the observation of the CIT(A) appears to be correct, however, it needs to be justified after carrying out some enquiry or bringing any material on record thus, the order of the CIT(A) is set aside Decided in favour of assessee.
Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance under Section 40A(3): The sole issue raised in the appeal is the disallowance of Rs. 26,79,20,745/- made under Section 40A(3) of the Income Tax Act, 1961. The assessee, a partnership firm engaged in exporting frozen buffalo and veal meat, had shown purchases of Rs. 69,66,99,558/-, out of which Rs. 52,36,66,940/- were meat and mutton purchases. The Assessing Officer (AO) noted that for market purchases aggregating Rs. 39,59,07,962/-, no party-wise details, bills, or vouchers were furnished. The AO identified several deficiencies in the cash memos, such as lack of serial numbers, dates, signatures, and supporting transport documents. The AO recorded the statement of the main partner and, citing the Delhi High Court decision in CIT Vs. La Medica, added back Rs. 39,59,07,962/- to the income of the assessee, treating it as purchases from undisclosed sources. Further disallowances were made on account of unexplained expenses aggregating Rs. 35,75,33,149/-. Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee submitted detailed evidences and confirmations from parties. In the remand report, the AO found the transactions concerning unexplained expenses to be genuine, and consequential relief was given, except for minor additions. For market purchases, the assessee argued that purchases were made from small farmers, making it impractical to keep individual records. Confirmations from the respective Jamat (association) were furnished, and the payments were reconciled with the books of account. The CIT(A) required additional documents, including audited balance sheets, profit and loss accounts, and details of gross profit for the last three years. The assessee provided a detailed note on its processing activities and claimed that the provisions of Section 40A(3) would not apply due to exceptions under Rule 6DD(e) & (k). The CIT(A) noted that cash payments exceeding Rs. 20,000/- were made for purchases, which would attract disallowance under Section 40A(3). The CIT(A) issued a show cause notice, and the assessee responded by justifying the cash purchases as falling under the exceptions provided in Rule 6DD. The CIT(A) found that the cash memos were not fully verifiable and the purchases were from traders, not farmers. The CIT(A) disallowed 90% of the cash payments exceeding Rs. 20,000/-, amounting to Rs. 26,69,20,748/-, and an additional Rs. 10,00,000/- for payments made from the opening balance, totaling Rs. 26,79,20,748/-. The CIT(A) further analyzed the reasonableness of the assessee's disclosed income and noted discrepancies in purchase rates and yield of finished meat. However, no additional disallowance was made due to the existing disallowance under Section 40A(3). Before the Tribunal, the assessee's counsel argued that purchases were made from small farmers through agents, and cash payments were necessary. The counsel cited various decisions supporting the assessee's case. The Departmental Representative (DR) supported the CIT(A)'s findings and argued that the assessee violated Section 40A(3). The Tribunal observed that the payments were made for meat purchases, which fall under the exceptions provided in Rule 6DD(e)(ii). The Tribunal noted that the conditions laid down in the CBDT Circular No. 8 of 2006 were not part of the statutory provisions or rules and thus could not restrict the benefit under Rule 6DD. The Tribunal found that the assessee had fulfilled the conditions for exporting meat, as evidenced by certificates from the Department of Animal Husbandry and Veterinary Doctor. The Tribunal concluded that the assessee's case fell within the exceptions provided in Rule 6DD(e)(ii) and deleted the disallowance of Rs. 26,79,20,745/- made by the CIT(A). Other observations regarding purchase rates and sale of by-products were deemed not tenable, and no addition was made based on these observations. Conclusion: The appeal filed by the assessee was allowed, and the disallowance of Rs. 26,79,20,745/- under Section 40A(3) was deleted.
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