2012 (8) TMI 283 - AT - Income Tax

Invoking provisions of section 40A(3) - additions made in respect of the payments made for purchase of milk from the milk producers - Held that - AO made the impugned additions without examining the relevant evidences in detail as noted if the payments at the level of milk producers are considered each payment never exceeded the specified sum of 20, 000. There is therefore no violation of S.40A(3) - it is a fact that the representative of milk collection centre functions in a dual capacity both for the assessee as well as the milk supplier for incentives 23.78 crores as against only 42, 25, 796 for assessment year 2005-06 this vast difference in the disallowance between these two years is on account of deviation in the approach of the assessing officer and acceptance of the assessee s arguments mentioned above. Therefore on fairer side the AO should not have considered the payments made in cash to the representative for applying the provisions of section 40A(3)and he should have considered the payments made in cash at the stage of the supplier/producer of the milk - in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 40A(3) of the Income Tax Act.
2. Validity of payments made in cash exceeding Rs. 20,000.
3. Consideration of payments made to agents as payments to milk producers.
4. Applicability of Rule 6DD exceptions.

Detailed Analysis:

Issue 1: Applicability of Section 40A(3) of the Income Tax Act
The primary issue revolves around the applicability of Section 40A(3) which disallows cash payments exceeding Rs. 20,000. The Revenue contends that payments made by the assessee in cash for the purchase of milk violate this provision. The assessee, however, argues that these payments are covered by exceptions under Rule 6DD, particularly clauses (f) and (l).

Issue 2: Validity of Payments Made in Cash Exceeding Rs. 20,000
The Assessing Officer (AO) disallowed 20% of the cash payments made by the assessee, amounting to Rs. 4,75,70,440 for AY 2004-05 and Rs. 8,45,159 for AY 2005-06. The AO's rationale was that the payments were made in cash despite available banking facilities and were not substantiated as payments to agents or under circumstances warranting such payments.

Issue 3: Consideration of Payments Made to Agents as Payments to Milk Producers
The assessee argued that payments were made to village representatives/agents who then disbursed the amounts to individual milk producers. The CIT(A) found that these representatives acted as agents for both the milk producers and the assessee. The CIT(A) noted that the agents were recognized by the company and were paid incentives, thus establishing an implied agency relationship.

Issue 4: Applicability of Rule 6DD Exceptions
The CIT(A) accepted the assessee's argument that the payments were covered under Rule 6DD(f) and (l) which provide exceptions for payments made to producers of dairy products and through agents, respectively. The CIT(A) relied on various judicial precedents, including the Bangalore Bench decision in Sri Renukeshwara Rice Mills V/s. ITO and the Ahmedabad Bench decision in Gamdiwala Dairy V/s ACIT, which were upheld by the Gujarat High Court.

Judgment Summary:
1. Section 40A(3) and Rule 6DD(f): The CIT(A) concluded that payments made to village representatives, who then paid individual milk producers, are covered by Rule 6DD(f). This rule allows exceptions for payments made for the purchase of produce directly from the producers, even if made through agents.

2. Rule 6DD(l): The CIT(A) also found that the payments to agents fall under Rule 6DD(l), which exempts payments made to agents who are required to make cash payments on behalf of the payer. The agents in this case were responsible for distributing payments to individual milk producers, thus fitting the definition under Rule 6DD(l).

3. Agency Relationship: The CIT(A) established that the representatives acted as agents for both the milk producers and the assessee. This dual role justified the payments made in cash, as the agents facilitated the milk collection and payment distribution process.

4. Judicial Precedents: The CIT(A) relied on several judicial precedents to support the decision. Notably, the Gujarat High Court in CIT V/s. Gamdiwala Dairy upheld that payments made through agents to milk producers are covered by the exceptions in Rule 6DD.

5. Revenue's Appeal: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order. The Tribunal found no infirmity in the CIT(A)'s detailed analysis and application of Rule 6DD exceptions.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the payments made by the assessee in cash to village representatives/agents, who then disbursed the amounts to individual milk producers, are covered by the exceptions under Rule 6DD(f) and (l). Consequently, the provisions of Section 40A(3) do not apply to these transactions, and the disallowance made by the AO was rightly deleted. The appeals of the Revenue were dismissed.