R1 By Adv. Sri.harisankar v. Menon R1 By Adv. Smt.meera V.menon

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU TUESDAY, THE 3RD DAY OF OCTOBER 2017/11TH ASWINA, 1939 ITA.No. 257 of 2015 () ----------------------- AGAINST THE ORDER/JUDGMENT IN ITA 295/2014 of I.T.A.TRIBUNAL,COCHINBENCH DATED 07-05-2015 APPELLANT(S)/RESPONDENT/REVENUE: -------------------------------------------- THE COMMISSIONER OF INCOME TAX, C.R.BUILDING, I.S.PRESS ROAD, KOCHI - 682 018. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/APPELLANT/ASSESSEE: --------------------------------------------- M/S.KEERTHI AGRO MILLS (P) LTD., MATTOOR KALADY, ERNAKULAM - 683 574. R1 BY ADV. SRI.HARISANKAR V. MENON R1 BY ADV. SMT.MEERA V.MENON THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10-02-2017, ALONG WITH ITA. 39/2016, THE COURT ON 03.10.2017 DELIVERED THE FOLLOWING: : 2 : APPENDIX PETITIONER'S ANNEXURES: ANNEXURE A:COPY OF THE ASSESSMENT ORDER DATED 28.03.2013PASSED BY THE ASSESSING OFFICER FOR THE ASSESSMENTYEAR 2010-2011.PASSED BY THE ASSESSING OFFICER FOR THE ASSESSMENTYEAR 2010-2011. ANNEXURE B:COPY OF THE ORDER OF THE COMMISSIONER OF INCOMETAX (APPEALS)-II DATED 23.01.2014 FOR THE ASSESSMENTYEAR 2010-2011.TAX (APPEALS)-II DATED 23.01.2014 FOR THE ASSESSMENTYEAR 2010-2011.ANNEXURE C:COPY OF THE ORDER OF THE JUDICIAL MEMBER OF THETRIBUNAL DATED AUGUST, 2014 IN ITA 295/COCH/2014.TRIBUNAL DATED AUGUST, 2014 IN ITA 295/COCH/2014.ANNEXURE D:COPY OF THE ORDER OF THE ACCOUNTANT MEMBER OF THETRIBUNAL IN ITA 295/COCH/2014 DATED 17.10.2014.TRIBUNAL IN ITA 295/COCH/2014 DATED 17.10.2014.ANNEXURE E:COPY OF THE JUDICIAL MEMBER OF THE TRIBUNAL DATEDOCTOBER, 2014 IN ITA 295/COCH/2014.OCTOBER, 2014 IN ITA 295/COCH/2014.ANNEXURE F:COPY OF THE ORDER OF THE ACCOUNTANT MEMBER OF THETRIBUNAL IN ITA 295/COCH/2014 DATED 29.10.2014. TRIBUNAL IN ITA 295/COCH/2014 DATED 29.10.2014. ANNEXURE G:COPY OF THE ORDER OF THE THIRD MEMBER OF THETRIBUNAL IN ITA 295/COCH/2014 DATED .... 2015.TRIBUNAL IN ITA 295/COCH/2014 DATED .... 2015.ANNEXURE H:COPY OF THE ORDER OF THE TRIBUNAL IN ITA295/COCH/2014 DATED 07.05.2015 FOR ASST. YEAR 2010-2011. 295/COCH/2014 DATED 07.05.2015 FOR ASST. YEAR 2010-2011. RESPONDENTS' ANNEXURES:NIL //TRUE COPY// P.A. TO JUDGE. Antony Dominic & Dama Seshadri Naidu, JJ. ------------------------------------------- -------------------------------------------- Dated this the 3[rd] day of October, 2017 JUDGMENT Dama Seshadri Naidu, J Introduction: A rice-miller purchases paddy both from registered dealersand farmers themselves directly, mills them, and supplies the rice.His income return for an assessment year is subjected to scrutiny.Section 40-A (3) of the Income Tax Act mandates an assessee tospend or pay money exceeding Rs.20,000/- through an accountpayee cheque or demand draft. Rule 6DD of the Income TaxRules provides for exemptions. The question in these appeals iswhether the assessee’s transactions are exempted under Rule 6DD.And has the assessee discharged it statutory burden? Facts: (a) The Assessment: 2. The assessee, a private limited company, runs a rice mill. It filed its ‘return’ on 25.09.2010 disclosing an income of Rs.47,85,240. After processing the return under section 143 (1) of theIncome Tax Act (“the IT Act”), the Assessing Officer picked it up forscrutiny. On 29.08.2011, he issued notice under section 143(2), heardthe assessee, and computed the taxable income. This exercise resulted inpenalty proceedings under section 271 (1) (c) of the IT Act against theassessee, the tax demanded being Rs.9,87,61,270/-.The Appellate Authority: 3. Aggrieved, the assessee filed an appeal, ITA No.40/R/CIT(A)- 11/2013-14 before the Commissioner of Income Tax (Appeals)-II, Kochi. The Appellate Authority answered thus: The Second Appeal – The Tribunal: Facts: (a) The Assessment: 2. The assessee, a private limited company, runs a rice mill. It filed its ‘return’ on 25.09.2010 disclosing an income of Rs.47,85,240. After processing the return under section 143 (1) of theIncome Tax Act (“the IT Act”), the Assessing Officer picked it up forscrutiny. On 29.08.2011, he issued notice under section 143(2), heardthe assessee, and computed the taxable income. This exercise resulted inpenalty proceedings under section 271 (1) (c) of the IT Act against theassessee, the tax demanded being Rs.9,87,61,270/-.The Appellate Authority: 3. Aggrieved, the assessee filed an appeal, ITA No.40/R/CIT(A)- 11/2013-14 before the Commissioner of Income Tax (Appeals)-II, Kochi. The Appellate Authority answered thus: The Second Appeal – The Tribunal: 4. Against the order of the appellate authority, both the assessee and the revenue filed second appeals: ITA No.145/Coch/2014 and ITA No.295/Coch/2014. The Three-Member Tribunal rendered a splitverdict—the majority members allowed the assessee’s appeal and rejectedthe Revenue’s appeal. But the minority, disagreeing, chose to remandthe matter after setting aside the appellate authority’s findings.Eventually, the Revenue filed these appeals against the Tribunal’scommon order. Submissions: Revenue’s: 5. Sri P. K. Ravindranatha Menon, the learned Senior Counselfor the Revenue, has submitted that the entire transaction of paddypurcahse pleaded by the assessee is fictitious and unbelievable. Thoughthe assessee pleaded, argues Sri Menon, that it had purchased thepadding from 14,621 farmers, he could not produce the particulars of even a handful of those farmers. According to him, all the receiptsproduced by the assessee had been fabricated. 6. There was no occasion, further contends Sri Menon, for eitherthe appellate authority or the Tribunal to interfere with the wellconsidered assessment made by the assessing authority. According to him, the assessee improved its case before the Tribunal without, in thefirst place, any factual foundation or material support before the lowerauthorities. Sri Menon has also contended that the assessee has failedto discharge the statutory burden cast on it.To support his contentions,Sri Menon relied on Commissioner of Income Tax v. Interseas, SeaFood Exporters[1], and M/s. Attar Singh Gurmukh Singh v. Income TaxOfficer, Ludhiana.[2]The Assessee’s: 7. Sri Harisanker V. Menon, the learned counsel for the assessee,has straightaway drawn our attention to section 40A(3) of the IT Act to contend that only six out of 14,621 transactions exceeded theprescribed limit of Rs. 20,000/-. Further, all the transactions, accordingto him, are with farmers, who stand exempted from the vigours ofsection 40A (3) of the IT Act. 8. The transactions doubted, the assessing officer should have doubted the yield, too. Sri Harisanker further asserts that the entire 1(2010) 188 Taxman 343 stock declared by the assessee was reckoned. He has also found faultwith the appellate authority’s estimating the disallowance at 25%. 9. On the issue about the yield, Sri Harisanker contends that the Assessing Officer compared the assessee’s yield with those of two othersuppliers. But the records have not conclusively disclosed whether theother companies' yield included the broken rice, discoloured or redgrain, and so forth. The learned counsel has also further contendedthat the Supplyco of the Kerala Civil Supplies Corporation has onlyexpected 60% of the yield to be ‘sortex’ rice. 10. To conclude, Sri Harisanker has heavily relied on Interseas tocontend that the issues raised in these appeals have squarely beenanswered earlier by this Court. Eventually, the learned counsel hasurged us not to interfere with the Tribunal findings, which, accordingto him, are well-reasoned and exhaustive. Substantial Questions of Law: 1. Is the Tribunal, under law, right in deleting the entire addition madeunder section 40A(3) of the Income Tax Act?. 10. To conclude, Sri Harisanker has heavily relied on Interseas tocontend that the issues raised in these appeals have squarely beenanswered earlier by this Court. Eventually, the learned counsel hasurged us not to interfere with the Tribunal findings, which, accordingto him, are well-reasoned and exhaustive. Substantial Questions of Law: 1. Is the Tribunal, under law, right in deleting the entire addition madeunder section 40A(3) of the Income Tax Act?. 2. Has the assessee discharged its burden of proof? 3. Is the Tribunal right in law and fact in interfering with the stand ofthe Assessing Officer with regard to section 145 of the Income Tax Act? Discussion: Purchase of Paddy & The Truth Behind the Transaction: 11. The assessee, a rice miller, filed its ‘return’ for the assessmentyear 2008-09 disclosing Rs.47,85,240/- as income. On scrutiny, theAssessing Officer subjected the assessee to penalty proceedings: the taxdemanded being Rs.9,87,61,270/-. I.T.A. No. 257/2015 & batch 12. The Appellate Authority reduced the disallowance from 75%to 25% but affirmed the Assessing Authority’s findings on theunreported yield. Both the assessee and the Revenue approached theTribunal, which allowed the assessee’s second appeal and dismissed theRevenue’s. 13. The assessee purchased paddy for Rs.51,69,96,981/-, out ofwhich paddy for Rs.23,17,32,420/- was directly from 14,621 farmers.And those transactions were in cash. In other words, the assesseepurchased 59% paddy directly from farmers by paying cash and 41%from the registered dealers. The assessee claims that the paddy waspurchased at Rs. 10.56 per kg from the registered dealers; however, fromthe farmers it is purchased at Rs. 10.47 per Kg. In the scrutiny, theAssessing Officer required the assessee to produce, randomly, the proofof 26 farmers. But the assessee furnished the ration cards of six farmersto prove their identity. 14. Of the six people, whose identity the assessee supplied, theAssessing Officer examined none. Nor did he ascertain the prevailingmarket price of the rice per kilogram to conclude that the assessee supressed the sale price or falsified the accounts. On the other hand, hehas concluded that the assessee has failed to produce records such asgate-pass register, vehicle/truck movement register, weigh bridge slips.As to the falsity of names, out of 26 names provided by the assessee, 18persons bear the same name: Yashoda. And the remaining eight names,again, are identical: Vinoo. The AO has also concluded that the billsproduced by the assessee bear no farmer’s signature and must have beenfabricated post transaction, only for assessment. The Statutory Saving: 15. In the above backdrop, we will examine the statutory scheme.Section 40-A of the IT Act deals with expenses or payment notdeductible in certain circumstances. Section 40-A (3), relevant for ourpurpose, reads: “(3) Where the assessee incurs any expenditure in respect of whicha payment or aggregate of payments made to a person in a day,otherwise than by an account payee cheque drawn on a bank oraccount payee bank draft, exceeds twenty thousand rupees, nodeduction shall be allowed in respect of such expenditure.” 16. As is evident, when an assessee spends or pays moneyexceeding Rs.20,000/- on any day, he must have that spending or paying only through an account payee cheque. Here, the AO suspectsthat the assessee might have paid beyond Rs.20,000/- to more than sixfarmers. To sustain that suspicion, the AO must be sure that the veryspending falls within the mischief of section 40-A (3) of the IT Act.Assuming that it does, we, however, found from the record that the AOhas not examined the authenticity of those farmers whose particularsthe assessee provided. 16. As is evident, when an assessee spends or pays moneyexceeding Rs.20,000/- on any day, he must have that spending or paying only through an account payee cheque. Here, the AO suspectsthat the assessee might have paid beyond Rs.20,000/- to more than sixfarmers. To sustain that suspicion, the AO must be sure that the veryspending falls within the mischief of section 40-A (3) of the IT Act.Assuming that it does, we, however, found from the record that the AOhas not examined the authenticity of those farmers whose particularsthe assessee provided. 17. That apart, even if the spending were above Rs.20,000/- in aday, there would be no escaping from another statutory safeguard theassessee enjoys. Section 6DD of the Income Tax Rules, 1962, enlists thecases and circumstances in which payment exceeding Rs.20,000/- maybe made otherwise than by an account payee cheque or by a bank draft.So, it pays to examine Rule 6DD of the Income Tax Rules, 1962. To theextent relevant, the Rule reads: “6DD. Cases and circumstances in which payment in a sumexceeding twenty thousand rupees may be made otherwise thanby a crossed cheque drawn on a bank or by a crossed bank draft,--No disallowance under Sub-section (3) of Section 40A shall bemade where any payment in a sum exceeding twenty thousandrupees is made otherwise than by a crossed cheque drawn on abank or by a crossed bank draft in the cases and circumstancesspecified hereunder, 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. (italics supplied) 18. So, the statutory position boils down to this: First, only the transactions involving money above Rs.20,000/- need to be through,say, a bank transaction. Here, the assessee has asserted that he madeonly six purchases from ‘farmers’ involving more than Rs.20,000/- on a given day. The AO disbelieves the claim. But that the transactionsinvolved farmers remains undisputed. Then, we should look to Rule 6DD (f) (i) of the Rules. 19. As extracted above, if the assessee pays to the cultivator to purchase agricultural produce, the assessee should suffer no disallowance under Sub-section (3) of Section 40A even if the amountexceeds Rs.20,000/-. Indeed, there can be no quarrel that all thetransactions—even if a few exceeded Rs.20,000/- —are beyond themischief of Section 40-A (3) of the Act. So, the AO could not haveinsisted that the assessee should have produced cogent proof about hispurchasing the paddy directly from the farmers. Precedential Position: 20. Since both parties have relied on Interseas, we may dwell alittle deeper into this case. Factually, Interseas closely accords with thiscase, the only difference being the produce: fish replaces the paddy. ButRule 6DD covers both. A learned Division Bench of this Court hasfaced these two questions: (1) Is the processed sea food a fish productentitling the assessee to get exempted from section 40A(3) of the IT Act,as provided under Rule 6DD(f)(iii) of the Rules? (2) Has the assesseedischarged its burden of proving that it had purchased fish productsfrom the suppliers in terms of Rule 6DD(f)(iii) of the Income TaxRules? 21. Interseas answered both the questions in the affirmative. Infact, the assessee contended that the suppliers are in the unorganisedsector and did not issue bills for sales; nor did they accept payment incheques or demand drafts for the fish they supplied. In response,Interseas held that “the assessee's claim, no doubt, finds acceptabilitywith the Government because Rule 6DD among other items provide inClause (f)(iii) for purchase of fish and fish products by makingpayments other than through Account Payee Cheques and DemandDrafts as required under Section 40A(3) of the Act.” 21. Interseas answered both the questions in the affirmative. Infact, the assessee contended that the suppliers are in the unorganisedsector and did not issue bills for sales; nor did they accept payment incheques or demand drafts for the fish they supplied. In response,Interseas held that “the assessee's claim, no doubt, finds acceptabilitywith the Government because Rule 6DD among other items provide inClause (f)(iii) for purchase of fish and fish products by makingpayments other than through Account Payee Cheques and DemandDrafts as required under Section 40A(3) of the Act.” 22. Interseas observes that to qualify for exemption, all theconditions of the Rule, no doubt, have to be satisfied. First, theexemption is available only for the purchase of items referred to. Second, the payment should be made only to the persons who arecultivators, growers, or producers of such articles, produce, or productsmentioned. 23. Then Interseas factually observes that very many supplierswhose names and addresses were furnished by the assessee fully orpartly disowned the transactions. It is seen that the purchases made in a year from the very same person runs into several lakhs of rupees. Insome cases, even though the suppliers have confirmed that they havesupplied goods to the assessee, they have stated that they have notmaintained the accounts to confirm the turnover of supply to theassessee during the previous year. Other irregularities, too, have beennoticed. In this factual backdrop, Interseas observed: “We find force in the contention of the assessee that having regardto the nature of trade, the assessee would not be able to get thesuppliers confirm the supplies to the assessee because they are notwithin the control of the assessee. After making supplies and aftercollecting cash payments the suppliers are absolutely free todisown the transaction and assessee obviously cannot be blamedfor the same. . . The only foolproof evidence to establish purchasefrom a person is the payment made through Account PayeeCheque or Demand Draft which is the requirement of Section40A(3). However, Government has chosen to liberalise theoperation of Section 40A(3) to augment trade. After granting thisfacility, we are of the view that the department cannot insist theassessees to get the suppliers confirm to the department about thesupplies made to the assessee and the payments received by them.In our view, the assessee should be taken to have discharged theirburden by furnishing the copies of purchase bills or vouchersissued containing the names and addresses of the suppliers withdate, value, quantity etc. . . In a case where the suppliers deny thatthe supplies have not been made to the assessee, the remedy opento the department is to proceed for conducting a survey andenquiry against the activities of the supplier, establish withmaterials the details of business carried on by him including thesupplies made to the assessee and proceed to make assessment on suppliers. No doubt, if assessee's claim of purchase from aparticular person is found to be bogus, then it is certainly open tothe department to disallow the expenditure in respect of suchpurchase. However, in this case it is the finding of the Tribunalthat the assessee in fact purchased the quantity accounted by themand the same is seen exported and the assessee has accounted theexport proceeds. . . In our view, there is no logic in thedepartment disbelieving the assessee with regard to the purchases,but at the same time believe the denial of the supply and receiptof consideration by the suppliers.” suppliers. No doubt, if assessee's claim of purchase from aparticular person is found to be bogus, then it is certainly open tothe department to disallow the expenditure in respect of suchpurchase. However, in this case it is the finding of the Tribunalthat the assessee in fact purchased the quantity accounted by themand the same is seen exported and the assessee has accounted theexport proceeds. . . In our view, there is no logic in thedepartment disbelieving the assessee with regard to the purchases,but at the same time believe the denial of the supply and receiptof consideration by the suppliers.” 24. Similarly, in Attar Singh Gurmukh Singh, the Supreme Courthas examined both Section 40-A(3) and Rule 6DD. It has held thatSection 40A(3) must not be read in isolation or to the exclusion ofRule 6DD; the Section must be read along with the Rule. If readtogether, it will be clear that the provisions are not intended to restrictthe business activities. Section 40A(3) only empowers the assessingofficer to disallow the deduction claimed as expenditure in respect ofwhich payment is not made by crossed cheque or crossed bank draft.The payment by crossed cheque or crossed bank draft is insisted on toenable the assessing authority to ascertain whether the payment wasgenuine or whether it was out of the income from disclosed sources.The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. Thegenuine and bona fide transactions are not taken out of the sweep ofthe Section. 25. It is open to the assessee, Attar Singh Gurmukh Singhfurther observes, to furnish to the satisfaction of the assessing officerthe circumstances under which the payment in the manner prescribedin Section 40A(3) was not practicable or would have caused genuinedifficulty to the payee. It is also open to the assessee to identify theperson who has received the cash payment. Rule 6DD provides that anassessee can be exempted from the requirement of payment by a crossedcheque or crossed bank draft in the circumstances specified under theRule. It will be clear from the provisions of Section 40A(3) and Rule6DD that they are intended to regulate the business transactions and toprevent the use of unaccounted money or reduce the chances to useblack-money for business transactions. The Price is the Prime Factor: 26. We may remember that the quantity of paddy purchased bythe assessee was not suspected, but its price was. The assessee did purchase from the registered dealers about 55% paddy, and this was notdoubted. It paid Rs.10.56 per kg to the registered dealers. It paid to thefarmers slightly lower: Rs.10.47 per kg. As rightly pointed out by theTribunal, the AO has not ascertained the prevailing market price ofpaddy at that time to doubt, if at all, the price quoted by the assessee.To reiterate, we may also observe that, initially, as to the authenticity ofthe transactions, the AO did not probe into whatever minimal evidence—ration cards and identity cards of six farmers—the assessee hadsupplied. Conclusions on Paddy Purchase: 27. To conclude, we may observe that section 40A(3) is adeeming provision; Rule 6DD clearly exempts the agricultural produce—paddy—from the rigours of section 40A(3) of the IT Act. As to thegenuineness of purchases, the paddy quantity, believed by the Revenuefor determining the yield, speaks volumes. And on the pricing, theRevenue has no ground to suspect or disbelieve the assessee’ claim, forit has not ascertained the market rate prevailing then. 28. So we affirm the Tribunal’s findings on the disallowance:there should be no disallowance. The Yield: Conclusions on Paddy Purchase: 27. To conclude, we may observe that section 40A(3) is adeeming provision; Rule 6DD clearly exempts the agricultural produce—paddy—from the rigours of section 40A(3) of the IT Act. As to thegenuineness of purchases, the paddy quantity, believed by the Revenuefor determining the yield, speaks volumes. And on the pricing, theRevenue has no ground to suspect or disbelieve the assessee’ claim, forit has not ascertained the market rate prevailing then. 28. So we affirm the Tribunal’s findings on the disallowance:there should be no disallowance. The Yield: 29. The AO disbelieved the yield: the reported yield of rice fromthe paddy purchased is 62.66%. Against what is said to be theestablished standard yield of 68%, the reported yield fares poorly. Toconclude thus, two factors have weighed with the AO: the yielddisclosed by two neighbouring mills and the assessee’s own declaredyield of rice it supplied to Supplyco., a Government undertaking. 30. Before proceeding further, we must observe that the issue ofyield is a pure question of fact. And the Tribunal, indeed, hasmeticulously analysed the issue, leaving no room for doubt. Yet, wediscuss the issue in brief. 31. KNT Agro Mills disclosed the rice yield at 66.69% duringthe relevant period; KKR Agro Mills disclosed the yield of 68% on theturnover of 42.95 crores. But the record does not disclose that this yieldincludes discoloured, sprouted and weevilled grains, immature, broken and discoloured grain, or only the marketable rice. So, we cannot relyon the yield statics of these two mills. 32. The Revenue’s other crucial contention is that the assesseeitself showed a yield of 68% regarding supply it made to the Supplycoof Kerala Civil Supplies Corporation. But the Tribunal, after analysingthe records, has found that the rice supplied to the Supplyco included10% broken rice, 10% foreign matter, 0.5% damaged grain, and soforth. According to it, ‘sortex’ rice accepted by the Supplyco is only60% of the input. In other words, only with the broken rice,discoloured or red grains, would the yield go up to 68%. 33. Yet from the agreement entered into between the assessee andthe Supplyco., the Tribunal has concluded that there was a maximumtolerance limit fixed for the rice yielded. Discoloured, sprouted andweevilled grains, immature, broken and discoloured grain, de-huskedgrain, moisture content, and so forth are the factors that have goneinto making the total yield of 68%. The Tribunal has also found thatthe Kerala State Civil Supplies Corporation has expected the hullers to supply 60% return in sortex grade rice. The assessee’s yield of 62.66% ismore than what was fixed by the Government. 34. On this count, too, we concur with the majority of the Tribunal. As the entire issue turns on disputed questions of fact, wedecline to interfere with the Tribunal’s findings on the question yield,too. So we answer the questions of law in the assessee’s favour anddismiss both the appeals. No order on costs. Antony Dominic, Judge. Dama Seshadri Naidu, Judge.