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TMI Blog2010 (3) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... that of the assessee is as regards partially confirming the disallowance under section 40A(3) of the Act. For this, the assessee has raised the following ground No. 2.1 : I. T. A. No. 1497/Ahd/2005 for the assessee: 2.1 In law and in the facts and circumstances of the appellant s case, the learned Commissioner of Income-tax (Appeals) has grossly erred in sustaining, even if partially, the disallowance under section 40A(3) of the Income-tax Act, 1961, on the payments aggregating to Rs. 33,38,014 (the quantum of the disallowance sustained being Rs.6,67,603 at 20 percent of Rs. 33,38,014). She ought to have ordered for the deletion of the disallowance under section 40A(3) in its entirety. And the Revenue has raised the following ground : I. T. A. No. 1591/Ahd/2005 for the Revenue: The learned Commissioner of Income-tax (Appeals) has erred in law and on the facts of the case in holding that (1) Cash payment of Rs. 2,42,55,424 are not hit by the provision of section 40A(3) and hence no disallowance can be made. (2) Relief of Rs. 48,51,084 be granted. (3) The arrangement made by the assessee for making cash payments through intermediaries is not covered by the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramukh/ mantries of these dairies. (ii) None of these dairies were registered in the first place with the appropriate authority of the Government. In most of the cases it was found that there was existing registered dairy co-operative functioning in the villages in which the dairies under consideration are located. (iii) None of them maintained any books of account nor any evidences of the procuring and selling of milk. (iv) In some cases, the assessee produced certificate of the sarpanches of the respective villages which states that the villagers who are producers of milk sell their milk to these dairies under consideration. Besides this no factual evidence of the procession of livestock in such number as could be sufficient to cater to the sales made to Gamdiwala Dairy was produced before the undersigned. (v) None of these dairies have any livestock sufficient enough to sustain the transaction made between the dairies and the assessee. (vi) Some of the dairies like Madhuram Ice Factory (no evidence produced to establish that they are producers), Simoli Corporation are established beyond doubt that they are not producers of milk. Simoli Corporation is owned by Shri Yoge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,75,93,579 are covered under the provision of section 40A(3) of the Act and made addition of Rs. 55,18,715. Aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) partly allowed the claim of the assessee vide paragraph 3.3 of his appellate order as under: 3.3 I have considered rival submissions in some detail and my finding is that the appellant being involved in milk processing is definitely obtaining the requisite quantities through an organised network of collection points or centres. The moot point to be decided is whether the collection centres/dairies are buying the milk from villagers and selling to the appellant in which case an element of profit or commission payments to these centres or dairies is involved or whether these centres are only facilitating the flow of milk from particular rural areas to the appellant s plant in Ahmedabad. From its side the appellant produced confirmations as well as the pramukhs or managers of the dairies, but, the Assessing Officer only examined seven of them. From such a small sample of persons, the Assessing Officer could not have reasonably concluded that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demand draft to Zalore Dudh Utpadak are being excluded from the application of section 40A(3). Yet, salary payment made by the appellant at Khanusha branch (Sr. No. 2) has been allowed only to the extent of Rs. 5,20,000 while Rs. 2,13,820 out of the same payment is disallowed. Similarly, inter branch transfer (Sr. No. 1) of Rs. 48,95,000 has been allowed to the extent of Rs.43,75,000 while Rs. 5,20,000 is disallowed. Again GEB bill paid in respect of Khanusha branch (Sr.No. 3) is allowed to the extent of Rs.47,978 and Rs. 2,86,691 is disallowed. Similarly, sales commission to hawkers (Sr. No. 4) is disallowed completely. Since the appellant has contended that none of these single payments exceeded Rs.20,000 and the Assessing Officer has noted nothing to the contrary, the whole payment of Rs. 2,93,148 is allowed. The transaction at Sr. No. 5 to M/s. Patel and Co. is repayment of loan and is not a purchase. Therefore, section 40A(3) will not be applicable to it. Sr. No. 6 pertains to Shreshtha Corner, a retail outlet of the appellant. This amount again does not represent expenditure and is in fact a bank transaction wrongly posted in the appellant s books and later reversed in its c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,98,273 23. Cash purchase 13,88,510 Others 1. Gamdiwala Dairy (Malanka) 5,20,000 2. Khanusha Branch (salary) 2,13,820 3. Khanusha Branch (GEB bill) 2,86,691 4. Sales commission (hawkers) 2,93,148 5. M/s. M. S. Patel and Co. (loan) 35,585 6. Shreshtha Corner Company (depo) 30,960 7. Chinubhai S Patel (electric bill) 22,350 8. Salary expenses (Ahmedabad) 26,039 9. Total 2,42,55,424 The Assessing Officer is directed to recalculate 20 percent of the balance disallowance, viz., 1. Sardar Kishan Dairy Rs. 22,40,741 2. Simoli Corporation Rs. 2,00,228 3. Gangotri Dairy Rs. 1,05,000 4. Zalore Sirohi Jilla Rs. 7,67,100 5. Jyoti Prime Fin. Rs. 24,945 Total Rs. 33,38,014 The appellant, therefore, gets relief to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the above total cash payment/ outgoings include payments for purchasers of milk at Rs. 2,63,10,904 (noted at pages 5 and 6 of paragraph 6 of this order and details of Sr. Nos. 1 to 27 above) and the balance of the payments of Rs. 59,50,890 is for other outgoings (Sr. Nos. 1 to 13). Learned counsel for the assessee made an argument that the Assessing Officer has failed to appreciate that so far as the assessee is concerned the payments are made to various persons who managed the collection centres for milk because it is not possible either for the assessee or for the individual producers of milk to do so. The assessee and the producers of milk mutually agreed upon the arrangement that the producers of milk in particular village collectively selected any one of them to look after the collection of milk from the farmers and in turn supplying the milk to the assessee and the assessee agreed to make payment to the farmers for the milk sold by them through such mutually agreed upon persons amongst the said farmers of each village. According to him, the aforesaid arrangement was put into operation by the farmers of each village. They decided to give high sounding names to such colle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the confirmation in the above manner in respect of all the above parties listed at Sr. Nos. 1 to 23 and 25 to 27. The Assessing Officer thereafter called upon only seven persons for examination with reference to such confirmation who were examined on behalf of such societies/ dairies. Thus, he further stated that the Assessing Officer was satisfied with the explanation in respect of all the other confirmations furnished before him and he preferred to examine only seven parties who were societies/ mandlis. Therefore, there was no justification for making any disallowance with reference to any other parties referred to in the above list at Sr. Nos. 1 to 27. Learned counsel for the assessee, Shri S. N. Soparkar further referred to the fact that the Assessing Officer recorded the statements of few of the societies, copies of the said statements are enclosed. He narrated what was the fact stated in the statements and he argued that, it may be perused from these statements that they have stated more or less the following: (a) Statement of Shri Dahyabhai Gobardas Patel of Umiya Kisan Dairy-Perojpura, Tal. Vijapur, Dist. Mehsana. (1) We the villagers about 30 members are there in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued that so far as the assessee knows he does not maintain any regular account for the purchase of milk. The society in question is not a registered society. Thus, except for all the tall claims that the alleged society has made the collections through their members is in no way different from the other societies whose statements are enclosed. Even Shri Sureshbhai has confirmed that he collected milk from farmers and handed it over to the assessee and he used to collect the money and handed it over to the farmers. They have confirmed this position by way of separate affidavits (copies being submitted separately). As for the parties appearing at Sr. Nos. 8 and 11 is concerned they were not examined but the position is the same. The party at Sr. No. 12, viz., Madhuram Ice Factory it is only an address from where the milk is collected, necessary confirmation was enclosed before the lower authorities. Copies of confirmations from parties at Sr. Nos. 9 to 23 were enclosed in the paper book. Learned counsel for the assessee made further arguments that out of the seven persons who were examined as members of the societies and the said societies were supplied of milk in the same fashio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The payments though made in cash are accepted to be genuine. It being so, there is no justification for disallowing Rs. 1,95,466 being 20 percent of Rs. 9,77,328. In this regard reliance is placed on the decision of the Calcutta High Court in the case of Giridharilal Goenka v. CIT [1989] 179 ITR 122. In respect of other amounts added by the Assessing Officer, learned counsel for the assessee submitted as under: (i) Regarding Sr. No. 1-Gamdiwala Dairy (Malanka) : Gamdiwala Dairy is the branch of the assessee. The assessee had made payment to that branch office. In other words, the payments are to self. Therefore, there is no justification to invoke section 40A(3) of the Income-tax Act for the payment of Rs. 5,20,000 as there are inter-branch transactions for which the impugned provisions of section 40A(3) of the Income-tax Act do not apply. The disallowance of Rs. 1,04,000 being 20 percent of Rs. 5,20,000 is not called for. (ii) Regarding Sr. No. 2-Salary payment to Kanusha Branch: The Kanusha branch is a collecting centre and has an establishment of cold storage of the milk collected from Mehsana District. The assessee has paid salary of Rs. 2,13,820 which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank transaction wrongly posted in the assessee s books of account, which has been subsequently reversed by hawala in cash book. In any case the amount does not represent expenditure. The provisions of section 40A(3) would not apply. Disallowance of Rs.6,192 being 20 percent of Rs. 30,960 is uncalled for. (vii) Regarding Sr. No. 7-Jyoti Prime Fin. P. Ltd. (GEB bills) : The payments are to Gujarat Electricity Board. This payments were made in cash through Jyoti Prime Fin. P. Ltd. who has been entrusted with the work of payment. Unfortunately their account was debited which has been reversed. Therefore, the disallowance of Rs. 4,989 out of the total payment of Rs. 24,945 deserves to be deleted. (viii) Regarding Sr. No. 8-Chinubhai S. Patel (electric bill): The facts are that the amount was paid in cash to Chinubhai S. Patel for payment of electricity bill. The assessee has not debited the amount as expenditure in its account books. Therefore, the provisions of section 40A(3) do not apply. The disallowance of Rs. 4,470 being 20 percent of Rs.22,359 is uncalled for. (iv) Regarding Sr. No. 9-Salary expenses (Ahd): The position is same as Khanusha branch salary. There is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty supplied milk to Royal Dairy Ltd., in whose case the assessment for the assessment year 1998-99 was finalised on February 28, 2000 and after examining the details filed in that case, the Assessing Officer has accepted that the persons producing the milk are supplying to the societies, is accepted as supplied by the producers of milk. This position is accepted by the Assessing Officer in the case of seven societies in the same fashion that of the assessee. The facts of the present case are no different from the facts of Royal Dairy Ltd., produced before us in the assessee s paper book. We further find that so far as the assessee before us is concerned, the payments are made to various persons who managed the collection since for milk because it is not possible either by the assessee or for the individual as is evident from the assessment record of Royal Dairy Ltd. produced before us in the assessee s paper book. We further find that, so far as the assessee is concerned, the payments are made to various persons, who managed the collection centres for milk because it is not possible either for the assessee or for the individual producers of milk to do so. The assessee and the produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch person. Thus, they have received the amount in the ratio of milk supplied in the name of dairy. The Assessing Officer was thus provided with the confirmation in the above manner in respect of all the above parties listed at Sr. Nos. 1 to 23 and 25 to 27. The Assessing Officer thereafter called upon only seven persons for examination with reference to such confirmation who were examined on behalf of such societies/dairies. Thus, the Assessing Officer was satisfied with the explanation in respect of all the other confirmations furnished before him and he preferred to examine only seven parties who were societies/mandlis. Therefore, there was no justification for making any disallowance with reference to any other parties referred to in the above list at Sr. Nos. 1 to 27. As regards the payments made to the suppliers of milk at Kalupur station of Rs. 13,88,510 the Assessing Officer has disallowed Rs. 2,77,702 (being 20 percent of Rs. 13,88,510) invoking the provisions of section 40A(3) of the Act. We find that the payment made to the milk market at Kalupur, the milk which is collected from milk producers who bring their milk by train early in the morning is sold, and the fact is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce under clause (a) of sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under clause (b) of sub-section (3) of section 40A where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or an account payee bank draft in the cases and circumstances specified hereunder, namely : (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 ; (f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such 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 villa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and thereby estimating the gross profit. For this, the assessee has raised the following grounds: 3.1 In law and in the facts and circumstances of the appellant s case, the learned Commissioner of Income-tax (Appeals) has grossly erred in upholding the learned Assessing Officer s action of rejecting the appellant s books of account under section 145 for assuming jurisdiction to estimate the appellant s income from its Malanka branch 3.4 Without prejudice to the foregoing in law and in the facts and circumstances of the appellant s case, the learned Commissioner of Income-tax (Appeals) has further grossly erred in sustaining the impugned addition of a huge sum of Rs. 18,18,889 made by the learned Assessing Officer on the assumption that the appellant s operations at its Malanka branch ought to have resulted in a profit at the same rate as that of its Ahmedabad branch. The brief facts leading to the above issue are that the Assessing Officer during the course of assessment proceedings noted that the assessee s books of account do not reflect true picture of the financial profits of the assessee, as it has returned gross profit at 8.01 percent for Malanka branch, as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer has noted that almost all bills and vouchers produced by the appellant were defective in various ways. In view of the foregoing, the action of the Assessing Officer is upheld and this ground of appeal is dismissed. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the arguments of learned counsel for the assessee and the paper book of the assessee that the books of account were rejected on the very basis that there is low gross profit in Malanka branch and there was no defect in the books of account pointed out by the Assessing Officer. It is a fact that the assessee s gross profit in this year is better than earlier year. From the working of the rates of gross profit of the operations at both the locations, the gross profit of the assessee s Malanka branch for the present assessment year was in reality at 18.77 percent of its sales and compared very well with the gross profit rate of 19.13 percent of its Ahmedabad branch and therefore the authorities below had really considered the gross profit of the Malanka branch vis-a-vis the gross profit of the Ahmedabad branch, he would have realised that the very ba ..... X X X X Extracts X X X X X X X X Extracts X X X X
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