2015 (4) TMI 336 - HC - Income Tax

Applicability of provision of Section 40A(3) - purchase of fish in cash - Whether the Tribunal was justified in setting aside the order of the Appellate Tribunal which had disallowed 20% of the total purchases of fish on the ground that the entire purchases are made by cash contrary to sub-section (3) of Section 40A, when the payment of entire consideration by cash was not in dispute? - Held that - The material on record discloses that the assessee procures fish from sea shore bordering Goa to Kochi and has been able to make export turn over of more than ₹ 10 crores. The 'producers' of 'fish or fish products' for the purpose of rule 6DD(e) of the Rules would include, besides the fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea shore itself and then sells the fish or fish products to traders, exporters etc. It is only when fish is purchased from a trader; broker or any other middleman, the benefit of the aforesaid provision is not available. The assessee is a trader/exporter of fish. The assessee has purchased the fish from the fishermen or the headman of the fisher and once the purchase is made of fish from the aforesaid persons, no disallowance under sub-section (5) shall be made, even if any portion in a sum exceeding twenty thousand rupees is made to a person in a day, otherwise than by a crossed cheque drawn on a bank or an crossed bank draft in the cases of bank draft. Therefore, the order passed by the Tribunal holding that Section 40A(3) is not attracted to the facts of this case, is proper and cannot be found fault with. - Decided in favour of the assessee.

Summary

Issues:
1. Interpretation of Section 40A(3) of the Income-tax Act, 1961.
2. Application of Rule 6DD(f) of the Income-Tax Rules, 1962.
3. Determination of eligibility for benefit under Rule 6DD(f) for purchases of fish.
4. Assessment of purchases made by cash and disallowance under Section 40A(3).
5. Admissibility of appeal by the Revenue against the Tribunal's decision.

Interpretation of Section 40A(3) of the Income-tax Act, 1961:
The case involved an appeal by the Revenue against a Tribunal order that held Section 40A(3) of the Income-tax Act was not applicable to the facts of the case. The assessing authority disallowed a cash payment made by the assessee for purchases of fish, citing lack of identity and genuineness of purchases. The first appellate authority deleted part of the addition but invoked Section 40A(3) to disallow a portion of the expenditure. The Tribunal, considering purchases made through banking channels, set aside the assessing authority's order. The Court upheld the Tribunal's decision, emphasizing the provision's applicability when payments are not made to the producer directly.

Application of Rule 6DD(f) of the Income-Tax Rules, 1962:
Rule 6DD(f) of the Income-Tax Rules was crucial in determining the eligibility for benefit under Section 40A(3) for purchases of fish. The circular clarified that 'fish or fish products' included marine products like shrimp, prawn, and crab. The Court highlighted that the benefit of the rule is not available when fish is purchased from traders or middlemen, but only when bought directly from fishermen or headmen of fishers. In this case, since the assessee purchased fish from the fishermen or their headmen, the disallowance under Section 40A(3) was deemed improper.

Determination of eligibility for benefit under Rule 6DD(f) for purchases of fish:
The Court analyzed the procurement process of the assessee, who sourced fish from the sea shore and achieved significant export turnover. It clarified that 'producers' of fish or fish products included not just fishermen but also headmen who sell the catch directly to traders or exporters. As the assessee purchased fish from these primary sources, the benefit of Rule 6DD(f) applied, and no disallowance was warranted under Section 40A(3).

Assessment of purchases made by cash and disallowance under Section 40A(3):
The assessing authority disallowed a cash payment made by the assessee for purchases of fish, questioning the genuineness of the transactions. The Tribunal's decision to set aside this disallowance was upheld by the Court, emphasizing that Section 40A(3) is not attracted when purchases are made directly from producers without involving middlemen or traders. Therefore, the disallowance under the provision was deemed unjustified in this case.

Admissibility of appeal by the Revenue against the Tribunal's decision:
The Revenue appealed against the Tribunal's order, questioning the disallowance under Section 40A(3). However, the Court found no merit in the appeal and dismissed it, affirming the Tribunal's decision that the provision did not apply to the assessee's purchases of fish directly from fishermen or their headmen. The substantial question of law was answered in favor of the assessee, concluding the matter in their favor.