2022 (11) TMI 1508 - HC - Income Tax

Addition u/s 40A(3) - cash payments made to the two companies from which assessee had purchased dairy product i.e., cream, exceeding Rs. 20,000/ - Whether cash payments made to these two companies can be termed as payments made to a cultivator, grower or producer of dairy produce or products? - HELD THAT - On the facts before us it is evident that these two companies are purchasers of intermediaries from the actual farmers, namely, milk which is processed into cream which in turn is purchased by the appellant for the purpose of converting cream into butter and ghee and thereafter selling in the market. The two companies cannot be said to be a cultivator or grower or producer of milk or cream which are undoubtedly dairy products. In the circumstances, any payment made to the two companies would not be a payment made to a cultivator or grower or producer of a dairy product so as to bring the cash transaction within the mischief of Rule 6DD(f)(ii) of the Rules. If that be the position, no fault can be found with the view taken by the Tribunal in affirming the disallowance made by the assessing officer as confirmed by CIT(A). We find from the assessment order that assessing officer had considered each individual payment made by the appellant exceeding Rs. 20,000.00 and not the sum total of the payment. Incurring of expenditure by the assessee was above Rs. 20,000.00 and splitting the payment into smaller amounts would not take the case out of the mischief of Section 40A(3) of the Act. Decided in favour of revenue.

Summary

Issues Involved:

1. Justification of the Tribunal in affirming the disallowance of payments beyond Rs. 20,000.00 in cash under Rule 6DD(f)(ii) of the Income Tax Rules, 1962.
2. Applicability of the benefit of exemption under Rule 6DD(f)(ii) when total payment made exceeds Rs. 20,000.00.

Issue-wise Detailed Analysis:

1. Justification of the Tribunal in affirming the disallowance of payments beyond Rs. 20,000.00 in cash under Rule 6DD(f)(ii) of the Income Tax Rules, 1962:

The appellant, a firm engaged in the sale of butter and conversion of butter into ghee, made cash payments exceeding Rs. 20,000.00 to two companies for the procurement of cream. The assessing officer disallowed these payments under Section 40A(3) of the Income Tax Act, 1961, adding Rs. 9,58,395.00 to the appellant's total income. The appellant sought exemption under Rule 6DD(f)(ii) of the Income Tax Rules, 1962. The Commissioner of Income Tax (Appeals) confirmed the disallowance.

The Tribunal held that Rule 6DD(f)(ii) applies only if the seller is engaged in dairy farming, which was not the case with the two companies from which the appellant purchased cream. Thus, the Tribunal rejected the appellant's ground of appeal. The Tribunal also noted that the appellant failed to prove the auditor's certificate incorrect.

The High Court examined the statutory provisions, including Section 40A(3) and Rule 6DD(f)(ii). It concluded that the exemption under Rule 6DD(f)(ii) applies to payments made to cultivators, growers, or producers of dairy products. Since the two companies were intermediaries and not producers of dairy products, the payments did not qualify for the exemption. Therefore, the Tribunal's decision to affirm the disallowance was upheld.

2. Applicability of the benefit of exemption under Rule 6DD(f)(ii) when total payment made exceeds Rs. 20,000.00:

The appellant argued that Rule 6DD(f)(ii) should be interpreted to apply to individual transactions exceeding Rs. 20,000.00, not the total payments. The High Court noted that the assessing officer had considered each individual payment exceeding Rs. 20,000.00 and not the sum total of the payments. The relevant portion of the assessment order confirmed this approach.

The High Court found that the Tribunal's observation about splitting payments into smaller amounts was unnecessary and did not affect the case's outcome. The Court concluded that the appellant's payments to the two companies did not qualify for the exemption under Rule 6DD(f)(ii) because the companies were not producers of dairy products.

Conclusion:

Both questions were answered against the assessee and in favor of the revenue. The appeal was dismissed, and any pending miscellaneous applications were closed without any order as to costs.