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TMI Blog2013 (9) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for procuring fish and fish products was delicate and risk involved therein was to be allowed – Decided in favor of Assessee. Restricting the seeds purchase in cash to10% being the wild seeds – Held that:- Business conducted by the assessee is of such magnitude that it was nobody's case that wild seeds has to sprout in accordance with the arithmetical projection - Other purchases being the fish and fish products insofar as he explained that the value of the hatchery seeds which is higher and the wild seed may or may not grow was nobody's case which was again at the mercy of the nature when the seller of the prawn seeds also raises his hand for not hatching into prawns of desired quality. Therefore, keeping in view the magnitude of the export made by the assessee that 10% sustenance on account of seed purchase is fit for deletion. Disallowance u/s 40A(3) of the Income Tax Act – Held that:- Various facts leading to this part sustenance of the disallowance not maintainable insofar as payment for diesel, labour and places where banking facilities are not available are allowed under the provisions of Rule 6DD - There is no violation of Rule 46A insofar as the learned CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to doubt the genuineness of the payment, held that payment could not be disallowed u/s 40A(3) of the Act. The estimate of cash payment for disallowance u/s 40A(3), on surmise, when the entire fact is available, is not correct. 3. Seed purchase in cash Rs.17,58865: The Learned Assessing Officer had made addition of Rs.1,75,88,651, total income on account of cash purchase of seeds, without giving an opportunity to explain him how seeds are purchased from the breeding ground from the local suppliers, leaving aside the purchase from hatcheries. The Learned Commissioner of Income Tax (Appeal) limited the same to Rs.17,58,865, on estimate after receiving the Remand Report, which was prepared by the Learned Assessing Officer after field visit and proper enquiry. The estimation of 10% of purchase of wild seeds, on surmise is not correct. 4. Cash payment exceeding Rs.20,000: The Learned Assessing Officer had disallowed Rs. 41,97,6531- on account of cash payment exceeding Rs.20,000,without appreciating the following facts. i. Payment made where there is no banking facility. ii. Payment made in cheque and taken as payment in cash. iii. Payment made to different parties against ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment to be completed by another Assessing Officer, within six (6) weeks, for which the Learned Addl. Commissioner of Income Tax assumed the power of Assessing Officer and completed the Assessment within 6 weeks, determining the total income at Rs.65,82,61,735/-, adopting the same method of assessment as done by his Learned Asst. Commissioner of Income Tax , by brushing aside the submission made in compliance to the notice as per the High Court direction and without making any effort to consider the submission made by the appellant. 2.3. The appellant preferred appeal before the Commissioner of Income Tax (Appeal). The learned CIT(A) allowed relief and confirmed/reduced additions made by the Assessing Officer on presumption and surmise. The additions made by the Assessing Officer, relief allowed by the learned CIT(A) and the sustenance of additions on which relief sought for by the assessee before the Tribunal are in the following manner: Particular of addition Addition made by A.O. Amount (in Rs.) Relief allowed by the CIT(A) Amount (in Rs.) Relief sought before the Tribunal Amount (in Rs.) 1. Undisclosed closing stock in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fy circumstances under which the payment was made in cash and the manner prescribed u/s 40A(3) of the IT Act was not practicable in your case and would have caused genuine difficulties to you. Please produce the supporting evidence in this regard. The Learned Assessing Officer has not taken any adverse inference of Part - I of query. The appellant made the following submission in compliance to para -2, to his clarification. "In compliance to Para-2 of your above letter, the above named assessee makes following submission regarding requirement of head on materials for production of processed Frozen Shrimps/Prawn as per the MPEDA norm. The above named assessee perused letter no 10/9/10- SRO(BSR)/970 dt.15/11/10 of Marine Product Export Development Authority, Bhubaneswar Sub-regional office, where the Asst. Director, MPEDA replies certain queries made by the learned ACIT, Circle-1(1), Bhubaneswar. As per question no.- 5 - By what ratio will weight be reduced when a prawn is converted into PUD (Peeled, un-deveined) or PD prawn? Answer :-The yield from whole Black Tigers Prawn to PD/PUD is about 56% 1%. The answer of Asst. Director, Bhubaneswar sub-regional office of MPED ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45 * 3332974.886 (-) 2332650 Note: Headon Purchase ( 8162446.745 Less own material 980762 I,e 71,81,684.745kgs Note: Total Headless Prawn Purchase of 25,91,834.898 Kgs production Quantity thereof is 23,32,650 due to 10% of Drip Other Loss. Note: - Ribbon Fish Production 168041 kgs not considered in above calculation. The Income Tax Appellate Tribunal Cuttack Bench in the Case of M/s. Chanchhala Combines ITA. No./294/CTK/06 A.Y. 2003-04 held that certificate issued by the MPEDA is the bench mark of Govt. of India. In the same case ITAT held that if Shrimp is converted to PUD the recovery shall be 30% to 35% percent instead of 50% taken by the learned assessing officer to compute suppression of purchase. It is also pertinent to mentioned that the learned ACIT while making exercise to find out Headon consumption, he has reduced the own culture materials amounting to 9,80,762 kgs from total Headon purchase of 70,28,543.93 kgs where as the said material from own culture is consumed in the process of production. Otherwise the assessee has purchased headon raw material of 60,47,781.00 kgs. , which should have taken to compute alleged suppression. As per above sheet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cultured material has been disclosed at zero (0). The above fact can be corroborated from the cash book and ledger, retained by the Learned Assessing Officer and also statements furnished at all stages. The Learned Assessing Officer, while computing over statement of purchase of Headon prawn, relying on the clarification issues by the MPEDA, which is benchmarked regarding production loss and recovery of finished products from processing of prawn, ignored to reduce Headon prawn from its own cultured prawn from total quality available for processing. i. The appellant during the year procured 25,91,834.898 kg. of headless prawn from different purchase centres, located at a distance varying from 25 kms. to 250 kms. The Learned Assessing Officer presumed that the entire headless prawn, resulted in same quantity of finished product for export rejecting the explanation made by the appellant of deterioration of qualify in transport, hanging loss, processing loss drip loss which varies from 5% to 22%, depending upon so many factors as mentioned in the MPEDA letter. ii. The Learned Assessing Officer while, applying conversion ratio from head on prawn to headless , blatantly, ignored M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the aforesaid paragraph of the Supreme Court, the petitioner before Assessing Officer is required to prove the genuine and bonafide transaction and also satisfy the Assessing Officer the circumstances under which the payment in the manner prescribed in Section 40-A (3) of the Act was not practicable and would have caused genuine difficulty to the payee. This aspect is required to be proved before the Assessing Officer by producing positive cogent evidence". The fishermen and farmers in most cases are subsistence artisans, often engaged in their trade for generations. While they pursue their trade with conventional knowledge, they cannot be expected to be prudent or well versed with contemporary commercial practices. Therefore the marine products industry practices should be viewed from a wider perspective of their specific situations, especially their abilities and limitations. In this background, the assessee submits as follows: The genuineness of purchases, cash payments and recording of transactions in the assessee's books and records is not in question. The assessee submits that the crux of the issue in current assessment is not the genuineness of the purchases - em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fishermen and the farmers spend almost their entire time during season and culture period in pursuing fishing and farming activity respectively. They resent any interruption to the pursuit of their activity because it leads to irrecoverable loss of income. Consequently they are also required to realize the sale proceeds of their catch or harvest at the earliest and disburse it towards wages of labour they engage, for repairs and maintenance and such other critical operating expenses. It must be noted that fishermen and farmers operate in remote locations; and that their operations are not bound by specified working hours. For instance a fishing boat may arrive and sail at odd hours, and a farm may harvest its materials at odd hours. Being a perishable commodity, it is required to be disposed of immediately. For these reasons, it becomes entirely essential to make payments in cash. Section 40A (3) states that cash payments in excess of Rs.20,000 to a person shall not be disallowed in such cases and circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. In purs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realization of proceeds to disbursement of the proceeds to the fishermen or farmers as the case may be. It should be noted that the person chosen by a group of fishermen or farmers may represent a large number of them and each of the fisherman or farmer in turn must disburse cash to labour, for repairs and maintenance and so on at remote locations where they operate and at the times of day that do not often correspond to normal business hours. The payments through bank will disrupt the free flow of business activity of the fishermen and farmers. Considering that eventually payments have to make by cash only, it is highly disruptive to free flow of business to introduce payments through bank for one level in between, without in any way contributing to the efficacy of the transactions from the perspective of the Department, the assessee or the fishermen and farmers. 3. The assessee cannot create a different mode of payment that runs against a practical and established practice without suffering consequences thereof. From the point of view of a buyer of fish or shrimp for processing and export, there is an urgent need to disburse the value of produce bought from the fishermen o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er convenient nor practicable to deal with them individually. Dealing with them individually, would involve large number of accounts to be maintained for each person for each of their transaction which would be impractical. Therefore, for the purpose of convenience, as well as business expediency, any assessee, including the present assessee, would like to deal with a fewer persons, who represent and act as a representatives for a number of farmers and fisherman, divided into a number of groups. No doubt that the legislature appreciates the above factors and keeping in view the ground realities, nature of business, customs and practices prevailing in this business, the law has been liberalised to augment and facilitate the trade by providing exceptions under Section 40A(3). Any restriction, placed by the revenue, in taking a different or narrow view than the liberal view contemplated by the legislature, would act as a nail in the coffin of this business. The assessee was constrained to pay heed to the requirements of fishermen and farmers, and pay cash to them directly or through the persons of their choice though it was not an easy proposition to handle cash in large volumes f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and sahukar may also provide finance to the fishermen to enable them to carry on their trade. These activities of the so called Mahajans or Sahukars show that they operate as an integral part of the fishermen and that there is mutual trust between fishermen and these persons. On page 14 of the report it was acknowledged that fishermen require quick cash, which reiterates the assessee's foregoing submissions. The assessee submitted that the so called Mahajans or Sahukars can at best be regarded as representatives of various groups of fishermen and that number of fishermen forming several groups, are under their control since long. The said representative is paid for the total quantity purchased by the assessee who in turn makes the payment to individual fisherman. In Balugaon, there is a State Bank where the assessee had opened an account earlier. Since the bank could not provide cash withdrawals as per requirements on a number of occasions, the assessee was forced to stop operation of the bank account. The assessee directly makes payments to the representatives of the fishermen who in turn immediately pays to the fishermen. For reasons aforesaid, the assessee submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir control since long. They come to our godown with sorted material along with the said fishermen or their representatives and deliver the same at our base at Balugoan. On arrival, the assessee checks the quality of material as to its count, size, grade etc. and declares a rate depending upon market condition. The said fishermen supply their material; and a challan is prepared with rate and quantity and handed over to the leader of the fishermen under whose leadership they are supplying. The said leader is paid for the total quantity purchased by the assessee who in turn makes the payment to individual fisherman. The above fact can be corroborated from the statement recorded by the learnt ACIT himself, from some fisherman of Chilika. While examining the fisherman of Tentulipada (Page 12 of Assessment order) the fisherman has stated that the so called "Sahukar" takes the prawn to the company godown at Balugoan. The prawns are also sorted in different grades by the said Sahukar. The so-called "Sahukar" shows them the voucher given by the assessee company with details of quantity of prawns of various grades purchased by the company. The fishermen also stated that, so called "Sahuk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmen or their representative to mitigate mutual hardship. Without foregoing the essence of above, we submit that at page -15 of the assessment order passed by the learned the ACIT, the ACIT has made an observation in one single paragraph to disallow purchase of a huge amount of Rs.7,17,39,349/-. He has only commented that certain purchases in Paradeep were made from Trawler Owners directly though much of the purchases were made from others such as Pravakar Jena Bimal Jena who operated as traders. The ACIT in his letter dtd. 25-10-2010 had only asked us the details of one Pravakar Jena, and we had furnished his name and address. We had also in our letter mentioned to extend all support to the ACIT during his visit to different bases in order to record statement of the persons mentioned in his letter dtd. 25-10-2010.While framing assessment order, the learned ACIT has made additions in a blanket manner, in respect of all the purchases from the persons to whom more than Rs.40lacs is paid during the year without examining any of them. The assessee was not asked to provide particulars of any of person except Pravakar Jena before making such a huge addition in the guise of Section 40A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cultured materials at the base of the assessee company at Dhamara. We deny that these addresses were provided by us. Babuni Behera, who complied with the summon though his Chartered Accountant confirmed that the quantity and value of prawn supplied to Falcon is in conformity with books of account of the assessee company. The learned Assistant Commissioner of Income Tax, by considering the Profit Loss Account of the Babuni Behera for the Assessment Year, 2009-10, has somehow assumed and concluded that there is a sale and purchase in the trading and Profit Loss Account, for which he is a trader. When the learned Assistant Commissioner of Income Tax is dealing with assessment for the assessment year, 2008-09, he should not have concluded that there is a trading activity, relying upon the account for the assessment year, 2009-10. To the best of our knowledge Babuni Behera was carrying out the activities of prawn culture during year relevant to assessment year, 2008-09. As informed, he had availed term loan from United Bank of India for prawn culture. Even If the Profit Loss Account relied upon by the Assistant Commissioner of Income Tax is examined, it reflects that there is po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so carrying out the same activity as on date. Given the complex dynamics of the farming business cycle, the farmers entrust some of their activities such as sale to one of the farmers or any other representative. This representative gathers the materials from several farms, delivers to the buyer, follows up for realisation of payment and disburses the payment to the other farmers. The farmers in turn incur costs for their farming activity in cash due to remoteness of their locations. For these and other reasons explained, the assessee made cash payments to the farmers or their representatives. If the assessee were to make payments through banks to the farmers and the representatives of the farmers, they would have in turn have to draw cash from the bank. Thus the assessee would have introduced an unwarranted and impractical step that would have caused hardship to the farmers. E. Purchase from Kolkata Rs. 15,49,20,798/- On perusal of the order of the learned ACIT, it is noted that addition of Rs. 15,49,20,798/- on account of procurement from seven persons is made U/S 40A(3) being amount paid in cash. It has been observed by the learned ACIT that one of the person Mohamad Mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to factory in presence of the said leaders. On arrival, the material is checked and challans are prepared in the name of the leader of the Group with price fixed by the asseessee. The said persons receive cash from the company at factory located at Kharibari. These persons, coming from far flung remote areas, have no bank account at factory location for which cash from company account at State Bank of India, Kolkata is drawn and paid to the said persons. This type of transactions is prevailing since long and is an established tradition in the trade. Any deviation from the system shall deprive the assessee to procure material at its factory. The fact is true in case of all the persons, except BSF who has supplied fish products to us which is otherwise beyond the scope of Section 40A(3). 7. a. The Learned Addl. Commissioner of Income Tax, in the body of the order, again reproduced the order of ACIT regarding finding of Field Visit Report, Report of the Chilka Development Authority, DFID Report on Orissa fisheries, Report of the Income Tax Officer of Bhadrak and brushed aside the above submission with an intension to support the order passed by his ACIT and raise high demand. In pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in one sentence in para - F of point 4 i. e. "SMUBBPSS plant is a trawler association and not a primary producer". d. It is pertinent to mentioned that the Learned Assessing Officer has noted from the ledger that Kalijai, Balugaon, there was a credit balance (opening) of Rs. 22,29,025/- and it stayed for a long period. In fact on 10.04.2007 and 01.05.2007, Rs. 12,00,000/-and Rs.10,00,000/-, respectively paid against opening balance and at the end of the year there is a credit balance in the name of same party amounting to Rs.21,243.25. The headman/agent may be making payment to his fishermen on receipt of payment from the appellant Company. This shall be covered either in Rule 6DD (e) or 6DD (k). e. Without making any discussion regarding submission of purchase from Paradip Astarang and Balaramgadi centre amounting to Rs.7,17,39,349/-, the Learned Assessing Officer confirmed the addition as made by his ACIT, which is against Rule of framing speaking order. f. Similarly, the Learned Assessing Officer has made addition of Rs.15,49,20,798/- on account of purchase from Kolkata, without making any discussion in the body of his order with an intension to support his ACIT, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of Rs.300,000/- , on 05.04.2007 and Rs.2,50,000/-, on 04.03.2008, to Krishna Service Station, Basudevpur, on account of diesel, reflected as advance and the same are adjusted against small bills each of which may not exceed Rs.20,000/-. Moreover an advance cannot be disallowed u/s 40A(3). 11. Long term capital gain .. Rs.10,34,582/- The similar issue was raised in preceding year and complete submission is furnished before the Learned Commissioner of Income Tax (A), which is pending for adjudication. The appellant relies upon his submission, made before the Learned Commissioner of Income Tax (A), for which the same matter is not repeated here. 12. Non deduction of TDS .. Rs.21,01,601/- The similar issue was raised in preceding year and complete submission is furnished before the Learned Commissioner of Income Tax (A), which is pending for adjudication. The appellant relies upon his submission, made before the Learned Commissioner of Income Tax (A), for which the same matter is not repeated here. The learned Counsel for the assessee concluded his arguments n the issues raised in the appeal 3. The learned CIT-DR opposed the contentions of the learned Counsel of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mand by the Assessing Officer requisitioned by the learned CIT(A) insofar as it was not the case of the learned CIT(A) to express an opinion on the remaining amount insofar as the specific finding of fact was to be considered by the Assessing Officer was in violation to Rule 46A of the Income-tax Rules,1962. 4. We have heard the rival parties and perused the material available on record. Taking cognizance of the totality of the facts as have been brought on record, we are of the considered view that the effort by the Assessing Officer was more of investigating to discover violation of Section 40A(3) when the facts remain that the assessee is a 100% Exporter of fish and fish products which are allowed to be purchased in cash as per the provisions of Rule 6DD. The learned CIT-DR has pointed out that the learned CIT(A) ought not to have restricted the disallowance Section 40A(3) to 10% in the case of purchases of Rs.1.75 Crores and on account of other purchase of Rs.3.75 Crores insofar as the learned CIT(A) agreed to the proposition that the assessee is covered by sub-clause (3) of Rule 6DD when fish or fish products can be purchased in cash and the payment can be made to the cultiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted that the whole of the purchases as wild seed should have been considered disallowable primarily because it is not explained properly to the assessing authorities as can be perused in the remand report noted by the learned CIT(A). We are unable to satisfy ourselves to this proposition insofar as the business conducted by the assessee is of such magnitude that it was nobody's case that wild seeds has to sprout in accordance with the arithmetical projection. The Assessing Officer tried to compute the price of each seed purchased from the hatcheries but ultimately gave a finding the number of prawns exported which the assessee could not explain was considered fit for deleting the addition on this score up to 90% by sustaining 10% thereof therefore becomes an arbitrary fact finding by the learned CIT(A) which we are unable to satisfy ourselves to . The learned Counsel of the assessee has explained inter alia that the other purchases being the fish and fish products insofar as he explained that the value of the hatchery seeds which is higher and the wild seed may or may not grow was nobody's case which was again at the mercy of the nature when the seller of the prawn seeds a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the considered view that after having the remand report and after having adjudicated at length the assessee being exporter of marine products it is entitled for making payments in cash insofar as the assessing authorities have tried to disallow cash purchases of capital goods under the deeming provisions of Section 40A(3). The learned Counsel of the assessee submitted the various facts leading to this part sustenance of the disallowance not maintainable insofar as payment for diesel, labour and places where banking facilities are not available are allowed under the provisions of Rule 6DD was brought to the knowledge of the authorities below but was declined. There is no violation of Rule 46A as submitted by the learned CIT-DR insofar as the learned CIT(A) had on the basis of finding tried to assign a percentage for sustaining the disallowance which is not in accordance with the provisions of the I.T.Act for disallowance u/s.40A(3). The case laws cited by the learned Counsel of the assessee at the bar are applicable for the payments so made as noted by the learned CIT(A) insofar as the stand of the learned CIT(A) stands demolished to the extent as to which portion of the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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