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2025 (4) TMI 409 - HC - Income TaxAddition u/s 40A - disallowing cash payments exceeding Rs.20, 000/- for procurement of milk/milk products - HELD THAT - We are of the considered view that the subject transaction would come squarely within the sweep of that provision. Rule 6DD contemplates various situations where remittances may be made by cash. However it does not exclude a situation where the cash payment is made by a city-based entity to a Company as in the present case. Reliance on the term producer in Rule 6DD(e)(ii) is in our view misconceived. For one we are not concerned with the act of milk production perse but milk being the produce of a dairy farm. The term produce may either be a verb or noun. The term produce in Rule 6DD(e)(ii) is with reference to milk as a consequence of dairy farming. Then again the fact that the milk is pasteurised by the Company and the pasteurised milk is thereafter distributed by the appellant to the dealers is in our considered view immaterial as yet another condition is that the cash payment should have been made to the cultivator grower or producer of such articles produce or products. It is in this context that the appellant relies on the decisions of this Court and of the Calcutta High Court to state that conversion of raw milk to pasteurised milk amounts to production and by engaging in this process it assumes the status of producer . We do not agree as the reference to producer in the conclusion of clause (e) of Rule 6DD is clearly to a dairy farmer and not to a company. The term producer qua dairy farming has to be understood noscitor a sociis with the terms cultivator and grower qua agriculture forestry poultry farming apiculture etc respectively. It cannot by any stretch of the imagination stretch to include a company that is engaged in the activity of pasteurisation of milk particularly bearing in mind the object of section 40A(3) being to discourage cash payments. Both entities the company and the distributor (appellant) have full access to banking facilities. Supreme Court in Attar Singh s case 1991 (8) TMI 5 - SUPREME COURT makes an observation that the Rule provides for an exemption for purchases of agricultural or horticulture commodities in cash where there are no banking facilities available in that place. The operation of Section 40A(3) is thus absolute. Rule 6DD has been brought in to carve out exceptions to the rigour of Section 40A(3) in worthy situations as identified in that Rule itself. Nowhere does Rule 6DD envisage extension of that benefit to cash payments made by a distributor (appellant) to the company. There is no justification for why the payments in the present case were made in cash or what the exigencies were that prevented the entities from transacting through the bank. Decided in favour of the revenue
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment are: i) Whether the Appellate Tribunal was correct in law in sustaining the order of the Respondent in making the addition of Rs.1,11,13,675/- after disallowing cash payments exceeding Rs.20,000/- for procurement of milk/milk products under Section 40A(3) of the Income Tax Act, despite the exceptions provided under Rule 6DD of the Income Tax Rules, 1962. ii) Whether the Appellate Tribunal was correct in law in sustaining the action of the Respondent in adding back Rs.1,11,13,675/- representing cash payments exceeding Rs.20,000/- for procurement of milk/milk products, based on a misinterpretation of the exceptions under Rule 6DD. iii) Whether the Appellate Tribunal was correct in law in disallowing cash payments exceeding Rs.20,000/- for procurement of dairy products from a producer by treating the producer as a manufacturer, despite no statutory distinction in Rule 6DD(e)(ii). ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents Section 40A(3) of the Income Tax Act restricts cash payments exceeding Rs.10,000/- to ensure transparency and reduce black money transactions. Rule 6DD provides exceptions where cash transactions are permissible, such as payments for agricultural produce or products of animal husbandry to the cultivator, grower, or producer. Court's Interpretation and Reasoning The Court interpreted Section 40A(3) as applicable to the appellant's transactions, emphasizing that Rule 6DD exceptions did not apply because the payments were made to a company, not directly to a producer or dairy farmer. The Court highlighted that the term 'producer' in Rule 6DD(e)(ii) refers to a dairy farmer, not a company engaged in pasteurization. Key Evidence and Findings The appellant, a milk distributor, made cash payments to a company for pasteurized milk. The appellant argued that the company was a producer of milk, thus qualifying for the Rule 6DD(e)(ii) exception. However, the Court found that the company was not a producer as envisaged by the rule. Application of Law to Facts The Court applied Section 40A(3) and Rule 6DD, concluding that the appellant's cash payments to the company did not qualify for exemption. The transactions did not involve a direct producer of milk, and both entities had access to banking facilities, negating the need for cash transactions. Treatment of Competing Arguments The appellant's reliance on precedents regarding the definition of 'production' was dismissed. The Court distinguished between production and the role of a producer, emphasizing the intent of Section 40A(3) to discourage cash payments. The respondent's argument that the company was not a producer was upheld. Conclusions The Court concluded that the Tribunal correctly applied Section 40A(3) and upheld the disallowance of cash payments. The appellant's transactions did not meet the exceptions under Rule 6DD, and the substantial questions of law were answered in favor of the revenue. SIGNIFICANT HOLDINGS Core Principles Established The judgment reinforces the principle that Section 40A(3) aims to curb cash transactions and promote transparency. The exceptions under Rule 6DD are narrowly construed, applicable only where direct transactions with producers occur, and not extended to companies with access to banking facilities. Final Determinations on Each Issue The Court determined that the Tribunal's decision to uphold the disallowance of cash payments was correct. The appellant's arguments regarding the application of Rule 6DD were rejected, as the transactions did not involve direct producers of milk, and both parties had access to banking facilities. The appeal was dismissed, with costs awarded to the revenue.
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