Payments made to co-operative societies for procuring paddy is not subject to S. 40A (3) an analysis of recent order of Calcutta high Court and alternate plea suggested by author. - Section 40A(3) does not serve its purpose-some suggestions.

[C.A. DEV KUMAR KOTHARI]

Summary:

Payment made in cash to producers or growers of agricultural produce is not subject to disallowance under section 40A (3) in view of exemption provided in Rule 6DD. Similarly payment made to banks, co-operative banks, co-operative credit societies etc. also find exemption in Rule 6DD. The A.O. found fact that the assessee made payment in cash to three co-operative societies but he disallowed 20% of the same under section 40A (3). The disallowance was deleted by the CIT(A) and Tribunal  confirmed order of the CIT(A). On appeal of revenue the Calcutta High Court held that  the tribunal below  has not committed any substantial error of law in accepting the contention of the assessee and the appeal has been dismissed summarily. However, there appears some confusion as to co-operative society and credit co-operative society as found on reading of the judgment. The author feels that payment made even to general co-operative societies of farmers can be considered as payment made to producer of such agricultural produce, through their agent (the society) and can be exempted from application of Section 40A (3). Besides exemption on other general grounds applicable in any other case can also be applied.

Author feel that merely making disallowance of disclosed and recorded cash payments does not serve purpose of check on tax evasion. If a check is desired then the recipients of cash should be chased, enquired and taxed to improve tax payers base and tax collection. A bogus payment, even if made by crossed cheque can be disallowed, and there is no need of Section 40A (3) for that purpose.

Payments subject to Section 40A(3), Rule 6DD and context of this article:

The readers are well aware of the section 40A (3) and the relevant Ruled 6DD, therefore they are not reproduced in entirety. In this write-up we are mainly concerned with a recent order of the Calcutta High Court by which the appeal of revenue was dismissed summarily on the issue of disallowance under section 40A (3) made by the A.O. which was deleted by the CIT(A) and such deletion was confirmed by the Tribunal vide its  order dated January 30, 2009 in Income-tax Appeal No. ITA 957/ Kol/2008. The revenue preferred appeal before the Calcutta High Court  being ITA No. 141 of 2009 titled CIT  Versus M/S. SHREE HANUMAN RICE MIILS [2009 -TMI - 34450 - CALCUTTA HIGH COURT]. The case was heard and decided by the bench of   The Hon'ble JUSTICE SUBHRO KAMAL MUKHERJEE and The Hon'ble JUSTICE SANKAR PRASAD MITRA on 12th August, 2009.

The appellant revenue was represented by Mr. R. N. Mitra, and  Mr. P. Dhudoria, Advocates. It appears that the assessee made no representation before the High court.

The case pertains to the assessment year 2005-06.  Assessee is a rice miller. Assessee purchased  from time to time paddy from three co-operative societies, and made payment in cash.  On different occasions cash payments  exceeded  in each case the statutory  limit of Rs.20,000/- under section 40A (3). Therefore the A.O. disallowed 20% of such cash payments totaling  Rs.1,22,86,955/-  and made addition of  Rs.24,57,391/- in the income of assessee.

The assessing officer  did not accept the explanation offered by assessee as  satisfactory  regarding cash  payments for  purchasing paddy from three co-operative societies exceeding Rs.20000 at any occasion.

The court noted that although the assessing officer rejected the explanation of the assessee, but he came to the findings of fact that payments were made to co-operative societies for procuring paddy.

 The Commissioner of Income Tax as also the Appellate Tribunal rejected the contention of the revenue on the basis of the exemption as per the Rule 6DD(a)(iv) of the Income Tax Rules.

The Court observed that The Rule 6DD (a)(iv)( at relevant time)  runs as under:

 "6DD. No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the case and circumstances specified hereunder, namely:-

(a) where the payment is made to -

……………………………………………

(iv) any primary agricultural credit society as defined in clause (cii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934), or any primary credit society as defined in clause (civ) of that section."

The court further observed and held as follows:

         a. Admittedly,  the assessee made the payment in cash for procuring paddy to the primary agricultural credit society.

         b. Therefore, they were entitled to exemption from the rigour of the provisions of section 40A(3) of the Income Tax Act, 1961.

         c. That the tribunal below did not committed any substantial error of law in accepting the contention of the assessee.

         d. The appeal was, therefore, summarily dismissed.

         e. The court did not make any order as to costs.

Confusion- Co-operative Societies or Co-operative credit societies:

Likely confusion due to lack of clarity (as per author) is discussed below:

The case was represented by two learned Advocates for the Revenue. The assessee seems to have remained un-represented.  In the order of the Court we do not find any details of submissions made by the Revenue and the assessee. From the judgment we notice that the A.O. came to the findings of fact that payments were made to co-operative societies for procuring paddy. Whereas later on the court has observed that  admittedly,  the assessee made the payment in cash for procuring paddy to the primary agricultural credit society.

Therefore, there appears some lack of clarity causing confusion in mind of the author. If the payees were simply co-operative societies like farmers co-operative society or paddy producers co-operative society then there seems a mistake because such societies cannot be regarded as a primary credit cooperative society as referred to in Rule 6DD read with the provisions of RBI Act and Banking Regulations Act.

Exceptions provided in the Rule:

At this stage it is desirable to have a  look on the specific provisions  of exceptions provided in Rule 6DD pertaining to payments made in cash in relation to agricultural and similar products. 

Relevant part of Rule 6DD as it stood prior to amendment w.e.f. 01.04.2009

          (a) where the payment is made to—

 (iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949);

 (d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee;

 (e) where the payment is made for the purchase of—

          (i) agricultural or forest produce; or

          (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or

          (iii) fish or fish products; or

          (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;

(g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;

New Rule w.e.f. 01.04.2009 is also on similar lines in this regard. The relevant portions reads as follows:

(a) where the payment is made to—

(iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949);

(e) where the payment is made for the purchase of—

          (i) agricultural or forest produce; or—

          (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or

          (iii) fish or fish products; or

          (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;

(g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;

Per author:

In this context we find that payments made  to any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949);  is exempt.

In the Reserve Bank of India Act, now the meaning is adopted from the  Banking Regulation Act. In the Banking Regulation Act the relevant  definitions as found in section 56 reads as follows:                   

          (ccii) "co-operative credit society" means a co-operative society, the primary object of which is to provide financial accommodation to its members and includes a co-operative land mortgage bank ;

          (cciv) "primary agricultural credit society" means a co-operative society,—

(1) the primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including the marketing of crops) ; and

……

From the above definitions we find that the credit  societies as referred to in the Rule 6DD in this regard as per definition found in the Banking Regulation Act means such societies whose primary object is to provide financial accommodation to its members. In fact such credit co-operative societies are in nature of mini banks for farmers.

Whereas there can be other co-operative societies like farmers co-operative societies. Such societies are generally not credit societies rather they are service societies who render services to members in a co-operative manner by procuring materials for them and be selling their produce etc. Such co-operative societies are not credit co-operative societies. Therefore, in view of author there is somehow lack of clarity in the judgment as to what the finding of the A.O. meant. Whether, he meant that the payments were made to simple co-operative societies or societies engaged primarily in providing financial accommodation. On this aspect the order of the High Court is silent.  

Whether payments made to simple co-operative society can be exempted:

In clause (e) we find relevant exemption for the payment  made for the purchase of agricultural produce  (Paddy in this case)  to the cultivator, grower or producer of such articles, produce or product (Paddy in this case.

Therefore, suppose payment was made to farmers who produced the paddy, the payments would be exempt.

Simple societies (other than credit society) like agricultural Producers co-operative society, farmers co-operative society etc.  can be considered as an agent of cultivator or grower of agricultural produce. Therefore, cash payment made to such societies can be considered as payment to producer or grower and therefore  can be considered as exempt  under clause (e) of  Rule 6DD.

However, it is worth to note that the High Court has not confirmed exemption under this category of exemption but on the reasoning that admittedly, the assessee made the payment in cash for procuring paddy to the primary agricultural credit society.

Section 40A(3) does not serves its purpose of  check on tax avoidance:

Section 40A (3) is intended to put a check on dealings with black money. However, the way it is worked upon it does not serve the purpose. A person who has made a payment and recorded the same in his books of account has used his disclosed money used in paying the sum. A disallowance from such sum doe not serve purpose of placing a check on black money. Had the payment been made from black money, it would not find an entry in books of account.  Therefore, real purpose of Section 40A (3) is not achieved by disallowing any payment made in cash which is recorded in books of account of assessee. Real purpose can be achieved only if the recipients of such cash payments are chased, enquired about income disclosure and taxed. A bogus payment, even if made by crossed cheque can be disallowed, and there is no need of Section 40A (3) for that purpose. The Section 40A (3) deserve to be deleted from the Act.