2022 (12) TMI 1453 - AT - Income Tax

Addition u/s 40A(3) - payment has been made in cash in excess of Rs.20,000/- per day - making cash payment to suppliers, who are principal suppliers / traders and not agent of any farmer, grower etc.- AO noted that the rule refers to agricultural produce and not to agricultural product and therefore, the claim could not be accepted since the rice could not be termed as agricultural produce - HELD THAT - From the fact, it emerges that the assessee is a corporate entity and this is the first year of its operations. Therefore, the submissions that the suppliers insisted on cash payment before delivery of rice and the payment was made as per regular trade practice could not be disregarded. The assessee would have no option but to follow the existing rice trading practice to carry on its business. It could also be seen that agriculture produce is nowhere defined in the Act. In such a case, the assistance could be taken from the provision of Tamil Nadu Agricultural Produce Marketing (Regulation) Act, 1987 which define agricultural produce to mean any produce of agriculture whether processed or unprocessed as specified in the schedule. The schedule specifies Rice in all forms as agricultural produce under Cereals. The same would support the case of the assessee in terms of Rule 6DD(e)(i). The application of Rule 6DD(k) as applied by CIT(A) is duly supported by the decision of this Tribunal in Shri K. Babu 2019 (7) TMI 1995 - ITAT CHENNAI from which an analogy could be drawn that the rice mill acted as agent for the assessee. Therefore, the same could not be faulted with.

Summary

Issues:
- Deletion of disallowance under section 40A(3) by the CIT(A) for cash payments made to suppliers.
- Interpretation of Rule 6DD exemptions for payments to growers, cultivators, or producers of agricultural produce.
- Application of business expediency and relevant facts under Section 40A(3).
- Definition of agricultural produce and its relevance in the case.

Deletion of Disallowance under Section 40A(3):
The appeal by the Revenue challenged the deletion of disallowance under section 40A(3) by the CIT(A) for cash payments exceeding Rs.20,000 per day made to suppliers. The Revenue contended that the payments were not covered by any exceptions in Rule 6DD. The CIT(A) relied on the provisions of Rule 6DD(e)(i) and (k) to exempt the payments made for agricultural produce from disallowance under section 40A(3). The CIT(A) observed that the suppliers acted as agents on behalf of the assessee for procuring paddy and selling rice, thus justifying the exemption. The CIT(A) also highlighted the genuineness of the transactions based on the suppliers' statements recorded by the AO.

Interpretation of Rule 6DD Exemptions:
The case involved a detailed analysis of Rule 6DD exemptions for payments to growers, cultivators, or producers of agricultural produce. The assessee argued that the payments were exempt under Rule 6DD(e)(i) as they were made for agricultural produce, specifically rice. The CIT(A) supported this argument by referencing the Tamil Nadu Agricultural Produce Marketing (Regulation) Act, 1987, which defined rice as agricultural produce. Additionally, the application of Rule 6DD(k) was upheld based on the analogy drawn from a previous Tribunal decision.

Application of Business Expediency and Relevant Facts:
The Tribunal considered the aspect of business expediency and relevant facts under Section 40A(3). It acknowledged that the assessee, being a new corporate entity in its first year of operations, had to adhere to existing trade practices, including making cash payments as insisted by suppliers. The Tribunal emphasized that the genuine difficulty faced by the assessee in following regular trade practices should be taken into account when applying Section 40A(3).

Definition of Agricultural Produce and Relevance:
The absence of a specific definition of agricultural produce in the Act led to a reliance on the Tamil Nadu Agricultural Produce Marketing (Regulation) Act, 1987, which defined rice as agricultural produce. This definition supported the assessee's claim for exemption under Rule 6DD(e)(i). The Tribunal further supported the application of Rule 6DD(k) by establishing that the rice mills acted as agents for the assessee, aligning with previous Tribunal decisions.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance under section 40A(3) for the cash payments made to suppliers. The judgment emphasized the importance of considering business expediency, relevant facts, and the definitions of agricultural produce in determining the applicability of tax provisions.