2004 (8) TMI 319 - AT - Income Tax

Purchase of agricultural produce - Procurement of paddy from agriculturists in cash, through their Agent - Disallowance the payment to agriculturist in cash u/s 40A(3) and charging of interest u/s 234A and 234B - payment not made by crossed cheque/draft - HELD THAT - As per the regulation of trade in agricultural produce, market yards are set up and the State RMC Act also regulates such business. Thus for purchase and sale of agricultural produce, the transaction can be only through dealers and agents licensed to operate in the market yard. Thus, the person operating there, is not only the agent of the cultivator or grower but also of the persons purchasing the agricultural produce. Clause (f) of rule 6DD provides that where the payment is made for the purchase of agricultural produce to the cultivator, section 40A(3) will not apply. Similarly, Clause (l) of Rule 6DD provides that where the payment is made by any person to his agent who is required to make payment in cash or goods, section 40A(3) will not apply. Since the assessee has paid the sum to his agent who is the payee in the present case, and who in his turn is required to make payment to the cultivator, indirectly, the assessee has paid for the purchase of agricultural produce to the cultivator through the agent. Thus, a combined reading of clauses (f) and (l) of Rule 6DD will take away the transaction from the clutches of section 40A(3). From the bills produced by the assessee to the Assessing Officer it was submitted that the assessee apart from paying price of the products also pays commission to the payee. Thus, the payee has become the agent of assessee also. Such agent is required to pay the cultivator in cash. Accordingly, there is no violation of section 40A(3). We accordingly delete the disallowance in respect of payment made to KP. Charging of interest under sections 234A and 234B - The return was filed late, attracting interest u/s 234A. However, interest u/s 234B was not applicable as the declared income was minimal, below the threshold for advance tax payment. Since the assessee was not obligated to pay advance tax, interest u/s 234B was deleted. In conclusion, the Tribunal partly allowed the appeal, deleting the disallowance u/s 40A(3) and interest charged u/s 234B

Summary

Issues: Disallowance u/s 40A(3) and charging of interest u/s 234A and 234B.

Disallowance u/s 40A(3): The assessee, a rice mill business, paid cash to M/s. K. Parameswarappa & Co. for rice purchase. The Assessing Officer disallowed Rs. 2.04 lakhs under section 40A(3) as payment was not made by crossed cheque/draft. The assessee argued KP acted as an agent, covered under Rule 6DD(f), and payments were routed through banking channels. The Departmental Representative contended KP was a trader, not an agent, thus disallowance was upheld. The Tribunal referred to Supreme Court's interpretation of section 40A(3), emphasizing genuine transactions and routing payments through banking channels. As the payment was made directly to KP's bank account, ensuring traceability, the disallowance was not justified.

Charging of Interest u/s 234A and 234B: The return was filed late, attracting interest u/s 234A. However, interest u/s 234B was not applicable as the declared income was minimal, below the threshold for advance tax payment. Since the assessee was not obligated to pay advance tax, interest u/s 234B was deleted.

In conclusion, the Tribunal partly allowed the appeal, deleting the disallowance u/s 40A(3) and interest charged u/s 234B.