Ita/77/2009 Of Commissioner Of Income Tax, Kottayam v. M/S.interseas, Chandiroor, Alappuzha

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN FRIDAY, THE 6TH NOVEMBER 2009 / 15TH KARTHIKA 1931 ITA.No. 77 of 2009() -------------------- ITA.740/COCH/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT --------------------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): RESPONDENT ------------------------- M/S.INTERSEAS, SEA FOOD EXPORTERS, CHANDIROOR, ALLEPPEY. ADV. SRI.JOSEPH VELLAPALLY, SENIOR ADVOCATE FOR R SRI.CHANDRAMOHAN.R. FOR R SRI.PREMJIT NAGENDRAN FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06/11/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &V.K.MOHANAN, JJ. ....................................................................I.T. Appeal No.77 of 2009 ....................................................................Dated this the 6th day of November, 2009. C.R. JUDGMENT Ramachandran Nair, J. The respondent-assessee is mainly engaged in processing andexport of marine products. Goods purchased and exported byrespondent include processed shell fish like prawns and lobsterssupplied to respondent by processors who purchase the whole fish andprocess the same by removing the head, tail, shell etc. During theprevious year relevant for the assessment year 2001-2002, assesseemade massive purchases from various suppliers of processed fish bypaying cash instead of making payment through Account PayeeCheques or Demand Drafts as required under Section 40A(3) of theIncome Tax Act (hereinafter called "the Act"). When proposal wasmade in assessment to make disallowance of purchases in excess ofRs.20,000/- through payment of cash, the assessee claimed the benefitof exemption provided under Rule 6DD(f)(iii) of the Income Tax Rules (hereinafter called "the Rules") prescribed under sub-section(3) ofSection 40A of the Act which provides for exemption for paymentsmade to producers of fish or fish products for the purchases other thanthrough Account Payee Cheques or Demand Drafts. The AssessingOfficer, however, took the view that the processor of fish who suppliedthe same after removal of head, tail and shell to whom payments weremade, is not the producer falling under the Rule abovereferred and somuch so, the entire cash payments were made subject to disallowanceunder Section 40A(3) of the Act. 2. When assessee filed first appeal before the Commissioner ofIncome Tax (Appeals), he felt that fish produce referred to in the aboveRule covers prawn meat, lobster meat, etc. purchased by the assesseeand so much so, the assessee is entitled to claim the benefit ofexemption under the Rule. However, the appellate authority directedthe Assessing Officer to conduct enquiry with the suppliers based onthe details furnished by the assessee, based on which a remand report 2. When assessee filed first appeal before the Commissioner ofIncome Tax (Appeals), he felt that fish produce referred to in the aboveRule covers prawn meat, lobster meat, etc. purchased by the assesseeand so much so, the assessee is entitled to claim the benefit ofexemption under the Rule. However, the appellate authority directedthe Assessing Officer to conduct enquiry with the suppliers based onthe details furnished by the assessee, based on which a remand report was called for from the Assessing Officer. On examining the detailscontained in the remand report and after hearing the assessee, theappellate authority held that payments made for so much of thesupplies which do not stand confirmed by the suppliers should bedisallowed. While the original disallowance was Rs.2,20,42,473/-,appellate authority reduced and refixed the disallowance atRs.41,84,915/-. The assessee as well as the department filed secondappeals before the Tribunal. The Tribunal agreed with the firstappellate authority on it's finding that the goods purchased is fishproduce entitling the assessee for the benefit of exemption under theRule abovereferred and consequently dismissed the department appeal.Simultaneously on considering the assessee's appeal, the Tribunalfound that having regard to the nature of business, it would beimpossible for the assessee to prove before the department the identityof the persons who have supplied the fish meat against which paymentswere made. Accordingly the Tribunal allowed the assessee's appeal by cancelling the part disallowance made by the first appellate authority based on details collected from remand report submitted by theAssessing Officer after enquiry. It is against this common order of the Tribunal the department has filed this appeal. We have heardSri.P.K.R.Menon, Senior Standing Counsel appearing for the appellantand Sri.Joseph Vellappally, Senior counsel appearing along with Adv.Sri.Premjit Nagendran for the respondent-assessee. 3. Even though several questions are raised by the department, in our view only two issues arise from the order of the Tribunal for ourdecision which are redrafted by us as follows: 1) Whether the goods purchased by the assessee forexport namely, processed sea food which is the meat obtainedfrom prawns, lobsters, skud fish etc. after removing the head,tail, shell and other inedible portions, fall within the definitionof fish products entitling the assessee to get the benefit ofexemption from the operation of Section 40A(3) of theIncome Tax Act provided under Rule 6DD(f)(iii) of theIncome Tax Rules? 2) Whether on the facts and in the circumstances of thecase, was the Tribunal justified in cancelling the partdisallowance confirmed by the C.I.T.(Appeals) on the ground that the assessee has discharged their burden of purchase offish products from the suppliers in terms of Rule 6DD(f)(iii)of the Income Tax Rules? 4. Before proceeding to consider the issue, we have to refer to theundisputed facts in the case which are the following. The assessee is amarine exporter who directly export marine products and is alsoengaged in supplying marine products to Export Houses for export as asupporting manufacturer. The total export turnover on which incometax exemption is granted to the assessee during the assessment year isabove Rs.14 crores. Besides processing the fish by itself, the assesseeis engaged in purchase of processed fish which is nothing but fresh fishmeat obtained after removal of inedible portions like head, tail, shelletc. In fact, the fish meat so purchased are of prawns, lobsters, skudfish etc. The suppliers of the processed fish to the assessee are notactually fishermen but are those who purchase fish from fishermen,process the same and sell the same to the assessee. According to theassessee, suppliers are in the unorganised sector who did not issue bills for sales nor accept payment for the value of the fish supplied inCheques or Demand Drafts. Therefore, payments are made in cash asand when processed fish, which is a perishable commodity, is suppliedto the freezing plant of the assessee. No doubt, the assessee's claimfinds acceptability with the Government because Rule 6DD amongother items provide in clause (f)(iii) for purchase of fish and fishproducts by making payments other than through Account PayeeCheques and Demand Drafts as required under Section 40A(3) of theAct. Since the decision on the first question raised above depends onthe interpretation of Rule 6DD(f)(iii), we extract hereunder the relevant portion of the said Rule as it stood during the relevant time: "6DD. No disallowance under sub-section (3) of Section 40Ashall be made where any payment in a sum exceeding twenty thousandrupees is made otherwise than by a crossed cheque drawn on a bank orby a crossed bank draft in the cases and circumstances specifiedhereunder, namely:- (f) where the payment is made for the purchase of-- (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including 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 orproducts." 5. Senior Counsel appearing for the department contended that the item purchased by the assessee is not a fish product and is only fishand since the payment is not made to the cultivator, grower or producerof the article, purchase by the assessee from the processors of fishwould not be covered by the exemption clause. On the other handSenior counsel appearing for the assessee contended that fish meat isnothing but a produce or product of fish and so much so, paymentmade to the processor qualify for exemption under Rule abovereferred.Rule 6DD is certainly an exception clause which entitles an assesseefor claiming deduction of expenditure incurred in excess of Rs.20,000/-in cash, if the payments are for the purchases and to the persons mentioned in the Rules. No doubt, in order to qualify for exemption,all the conditions of the Rule have to be satisfied because it is madevery clear in Rule 6DD that in order to get the exemption, theexpenditure in respect of which claim is made should have beenincurred in the cases and circumstances specified under the Rules. Onexamining the Rule in detail, we notice that in order to qualify for thebenefit of exemption, two conditions have to be satisfied. In the firstplace, the exemption is available only for the purchase of itemsreferred to therein. Secondly, the payment should be made only to thepersons referred to therein who are cultivator, grower or producer ofsuch articles, produce or products mentioned therein. Necessarilythere has to be one to one correspondence between the items involvedand the person who supplies the same to whom payment is made. Inother words, unless the supplier of the item referred to therein is theperson falling within the description of cultivator, grower or producerof such article, produce or products, the purchase is not covered by the exemption clause. We have to, therefore, consider two questionsherein; one is whether the item purchased in this case is fish or fishproduct and the payment is to it's producer. Obviously no one has acase that fish purchased by the assessee are grown in a farm and soldby the producer of it. On the other hand, fish involved is caught fromthe ocean by the fishermen, purchased by the processors who processthe same by removing the inedible portions and supply to the assesseein meat form. On the face of it and admittedly, the supply by theprocessor to the assessee is not in the form in which the fish ispurchased by him. In other words, what is sold, though not amanufactured product of fish, is processed fish which is meat obtainedafter removal of inedible portions like head, tail, shell etc. for thepurpose of export. 6. Senior Standing Counsel appearing for the appellant relied ondecision of the Supreme Court in COMMISSIONER OF INCOME-TAX V. RELISH FOODS reported in (1999) 237 ITR 59 and another decision of this court in AMEENA ENTERPRISES V.COMMISSIONER OF INCOME-TAX reported in (2005) 275 ITR 8and contended that removal of head, tail, peeling, deveining, cleaningetc. of prawns and other variety of fish do not involve anymanufacturing activity and so much so, the fish meat purchased cannotbe treated as a fish product. Senior counsel appearing for the assesseeon the other hand relied on Notification S.O. 730(E) dated 21.8.1995issued by the Central Government under Section 17 of the Export(Quality Control and Inspection) Act, 1963 and contended that anyfishery product which has undergone an operation affecting itsanatomical wholeness, such as gutting, heading, slicing, filleting,chopping etc., is a prepared product. In our view, the decision of theSupreme Court referred to by the Senior Counsel for the Revenuecannot be applied here because the context in which the Supreme Courtdecided the issue is with reference to Section 5(3) of the CST Act andthe question involved was whether the commodity purchased namely, the fish, changes it's identity and character in the process of cleaning,peeling, deveining etc. to disentitle the assessee for exemption forexport after the said processing. The Supreme Court held thatprocessing do not involve any manufacture or production of an articlehaving a different identity and so much so, exemption under Section 5(3) is available on purchase of fish and export of the same afterprocessing. In other words, the provision involved was given liberalconstruction so far as exemption on export is concerned. In this casewe have to examine whether the products referred to in Rule 6DD(f)(iii) are only manufactured products of fish and not processed fish. Itis worthwhile to note that produce of animal husbandry covered bysub-clause (ii) of clause (f) takes in even hides and skins. Hides andskins are obtained in the process of taking meat from the slaughteredanimal. Payments made to even industries engaged in manufacture offish products are covered by the exemption clause contained in clause(iii). We feel the exemption clause generally covers a class of goods in all forms without confining itself to any particular form leaving otherforms of it from the very same class. When fish and evenmanufactured products of fish are covered by the exception clause andthe payments to it's producers in excess of the limit of Rs.20,000/- arecovered by the exception clause, we see no reason why the processedfish which is an intermediary, should be taken out of the scope of theSection. In our view, the Rule makers never intended processed fish tobe taken out of the scope of sub-clause (iii) of clause (f) of Rule 6DDbecause the Government under the Rule considers fish only in twoforms, either fish as such or in it's product form. In other words, sub-Rule (iii) of Rule 6DD(f) covers all forms of fish, though the broadclassification is only between fish and fish products. So much so, inour view, since the processed fish purchased is not fish in the sameform it is obtained, it falls within the meaning of fish product under theabove Rule. Since we have accepted the contention of the assessee thatthe processed fish purchased is fish product within the meaning of that term in the Rule, we have to necessarily hold that the supplier namely,the processor of the fish, is certainly producer to whom payments aremade. Therefore, we are of the view that the Tribunal rightly held thatRule 6DDf(iii) of the Income Tax Rules squarely apply to theprocessed fish purchased by the assesee and so much so, they areentitled to exemption available under Section 40A(3). We, therefore,answer the first question stated above in favour of the assessee andagainst Revenue. 7. The next question raised pertains to the part disallowancesustained by the C.I.T.(Appeals) and reversed by the Tribunal on theground that the assessee cannot be expected to prove purchase againstpayment of cash. No doubt, on going through the details contained inthe remand report extracted in the C.I.T.(Appeals)'s order, it is clearthat very many suppliers whose names and addresses were furnished bythe assessee, fully or partly disowned the transactions. It is seen thatthe purchases made in an year from the very same person runs into several lakhs of rupees. In some cases even though the suppliers haveconfirmed that they have supplied goods to the assessee, they havestated that they do not maintain the accounts to confirm the turnover ofsupply to the assessee during the previous year. Similarly in one caseatleast we have seen that the supply is made by the wife of the personwho is even an assessee under the Income Tax Act, whereas thepurchase accounted by the assessee is from husband. Obviously thehusband of the supplier arranged supply of the goods to the assesseeand probably in order to avoid accounting of the transaction by his wifewho is stated to be an income tax assessee, he got the documents inregard to supply written by the assessee in his name. We find force inthe contention of the assessee that having regard to the nature of trade,the assessee would not be able to get the suppliers confirm the suppliesto the assessee because they are not within the control of the assessee.After making supplies and after collecting cash payments the suppliersare absolutely free to disown the transaction and assessee obviously cannot be blamed for the same. It is seen from the contents of theremand report extracted by the C.I.T.(Appeals) in it's order that inmany cases suppliers owned up the transactions, even though not to theextent covered by the documents produced by the assessee. Theassessee normally should purchase goods based on supplier's bills, butif suppliers do not raise bills, assessee can only keep purchasevouchers. The only fool proof evidence to establish purchase from aperson is the payment made through Account Payee Cheque orDemand Draft which is the requirement of Section 40A(3). However,Government has chosen to liberalise the operation of Section 40A(3) toaugment trade. After granting this facility, we are of the view that thedepartment cannot insist the assessees to get the suppliers confirm tothe department about the supplies made to the assessee and thepayments received by them. In our view, the assessee should be takento have discharged their burden by furnishing the copies of purchasebills or vouchers issued containing the names and addresses of the suppliers with date, value, quantity etc. Besides this, the departmentcannot demand the assessee to get the supplier confirm to thedepartment about the supplies, which the suppliers are free to deny. Ina case where the suppliers deny that the supplies have not been made tothe assessee, the remedy open to the department is to proceed forconducting a survey and enquiry against the activities of the supplier,establish with materials the details of business carried on by himincluding the supplies made to the assessee and proceed to makeassessment on suppliers. No doubt, if assessee's claim of purchasefrom a particular person is found to be bogus, then it is certainly opento the department to disallow the expenditure in respect of suchpurchase. However, in this case it is the finding of the Tribunal that theassessee in fact purchased the quantity accounted by them and the sameis seen exported and the assessee has accounted the export proceeds.So much so, in our view, the Tribunal rightly held that the departmentcannot call upon the assessee to prove what is beyond their capacity i.e. to get the suppliers confirm the supplies made to the assessee in termsof the claim of the assessee. In our view, there is no logic in thedepartment disbelieving the assessee with regard to the purchases, butat the same time believe the denial of the supply and receipt ofconsideration by the suppliers. Besides the denial of full or part supplyby the suppliers, we do not find any case of bogus purchases accountedby the assessee as found by any of the lower authorities. We, therefore,uphold the order of the Tribunal on this issue as well by answering thesecond question also in favour of the assessee and against the Revenue.Consequently appeal is dismissed. C.N.RAMACHANDRAN NAIRJudge pms V.K.MOHANANJudge