TMI Blog2012 (8) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... x Rules, 1962. The CIT(A) also reasoned in his order that the exceptions provided in clause (f) of Rule 6DD also apply to the assessee as the representatives are the agents of the assessee, who are required to make payment in cash to the producers of milk - the assessee should be entitled for relief even if the impugned payments are covered under any one of the exceptions prescribed in Rule 6DD, viz. either under clause (f) or clause (l) of Rule 6DD, even if not both. In the assessment year 2004-05, the disallowance made in terms of S.40A(3) is ₹ 23.78 crores, as against only ₹ 42,25,796 for assessment year 2005-06 this vast difference in the disallowance between these two years is on account of deviation in the approach of the assessing officer and acceptance of the assessee’s arguments mentioned above. Therefore, on fairer side, the AO should not have considered the payments made in cash to the ‘representative’ for applying the provisions of section 40A(3)and he should have considered the payments made in cash at the stage of the supplier/producer of the milk - in favour of assessee. - ITA No. 39/Hyd/2008, ITA No. 1433/Hyd/2008 - - - Dated:- 27-7-2012 - D. Karun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. was paid to these agents, the assessee could not substantiate his replies. From the above facts, it can be gathered that they are not the agents of the assessee company but procure milk for the sake of their own business and sell it to the assessee company. The claim that payments were made in places where banking services are not available is not acceptable as banking facilities are available in nearby centres and the assessee could have made use of those facilities. 4.4 In view of the above, I hold that the provisions of Sec.40A(3) are attracted to the above payments. The disallowance @ 20% on ₹ 23,78,52,203/- works out to ₹ 4,75,70,440/- and the same is added to total income. 4. The addition made in the assessment year 2005-06 is also for similar reasons. From the above, it may be noted that non-furnishing of details relating to agents and details of commission payment made to the agents, absence of principal-agent relationship and the making payments to the parties in cash despite presence of banking facilities are the reasons for the additions made by the assessing officer. 5. Aggrieved, assessee preferred appeals before the CIT(A) for these two y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons to whom the impugned payments have been made have to be considered as dual representatives/agents on the facts of the case. In the final part of his report dated 18.7.2007, the assessing officer has mentioned that a group of members in a village selects a member as a representative of their milk collection centre in whose name the fat percentage and quality of milk etc., is recorded. The company makes the payment in the name of the representative, and after receipt of the payment, he disburses the amounts to the members as per the entries recorded in the milk collection centre. For this purpose, the company as paying an incentive of 20 to 30 paise per litre to the representative of the milk centre. - Although there was no agreement with the company, the representative had to file a form of agent application, after receipt of which the company supplied various material to this person for utilization in milk collection centre. During the financial year 2003-04, the payments were made in cash because at the primary states of milk collection centre, the members insisted on cash payments and gradually bank accounts were opened in nearby banks after which the payments were mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was of implied agency, and cannot be considered to be a relationship between principals. - Consequently, the exception recogised in clause (l) of Rule 6DD is clearly applicable in the case and the provisions of S.40A(3) would not be attracted to the payments in question. - There is merit in the additional ground taken by the assessee that even if the milk representatives are considered as representatives of farmers, the payments made through these persons would become payments made to farmers themselves, and would be covered by exception provided in Rule 6DD(f). - Even if it is assumed for argument s sake that the payees were representatives of farmers and could not be considered as agents of the assessee, the payments in question have to be considered as having been made to these persons with the objective of making final disbursement to the milk vendors for milk products, which is very much evident from the facts of the case narrated by the assessing officer in his report. That being so, the payments have to be taken as payments made for the purchase of dairy produce from the producers of milk which would be covered by clause (f) of Rule 6DD. In support of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the agent is also covered by the exception contained in clause (l) of Rule 6DD, which provided for exemption where the payments is made not in person but through agent, who is required to make payment in cash for supply of goods or services. Further, the learned counsel explained that the provisions of S.40A(3) are inapplicable to the facts of the case, considering the fact that the payments made to the agent/ representative, should be deemed as contract payments to the milk producers. The learned counsel also relied on certain judicial pronouncements to demonstrate that the order of the CIT(A) doe not call for interference. In this regard, the learned counsel relied on the decision of the Bangalore Bench of the Tribunal in the case of Renukeshwara Rice Mills V/s. ITO (92 ITD 263) , wherein the payments made to the cultivator of rice through an agent, operating at the market yard, were held as covered by the exceptions provided in clauses (f) and (l) of Rule 6DD of the Act. The learned counsel for the assessee also placed further reliance on following case laws and duly filed copies of the same. They are: DCIT V/s. Allied Leather Finishers Pvt. Ltd. (32 SOT 549)-Luck; Gamdiwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative into his Bank account as per the Fat percentage and quantity of milk recorded in the milk chilling plant. (f) After receipt of the payment, the agent draws the cash from the bank and disburses the amounts to the members of MCC as per the entries recorded in the members milk card/book land the register maintained in the MCC. The payment is made once in a 10 days. The company pays as incentive of 20 to 30 paisa per litre to the representative of MCC. There is no dispute on the above facts. However, the dispute revolves around if the payments made to the representative or the agents amounts to the payments made to the milk producers which is referred to in clause (f) of Rule 6DD of the Income tax rules 1962. Further, the representatives of the MCC are deemed as the agents referred to in the provisions of Rule 6DD(l) of the Income Tax Rules 1962. 12. Stand of the revenue: Revenue holds that the payments made to the representative/agent of the MCC does not amount to the payments made to the producer of the dairy article i.e. milk as the incentive of 20 to 30 paisa paid to representative is not reflected in the books as the agency commission. Therefore the AO ignored the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd there is no dispute on the facts and the dispute revolves around the scope of the legal provisions of exclusion clauses of Rule 6DD of the IT Rules, 1962. Further, there is dispute also on (a) if the payment in cash made to the representative/agent MCC in this case constitutes direct payments to the milk producer/suppliers of MCC (milk collection centre) and (b) if the representative in question constitutes an agent within the meaning of the said clause (l) of the said Rule. Therefore, we shall adjudicate the above disputes by analysing the scope of the clause (f) and (l) of the said rule in the succeeding paragraphs. Relevant provisions namely clauses (f) and (l) of the rule 6DD of the Income tax Rules 1962 are extracted as follows. 6DD.No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely:- (a) (e) (f) where the payment is made for the purchase of- (i) .. (ii) the produce of animal husbandry (including hides and skins) or dairy or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Tribunal and the Judgement of the High Court are reproduced as under: 16. In the case of Gamdiwala Dairy V.s. ACIT (20 Taxman.com. 290)(Ahd) , it has been held by the Ahmedabad Bench of Tribunal, vide head-note, as follows- Held that the payments were made to various persons, who managed the collection centres for milk because it was not possible either for the assessee or for the individual producers of milk so to do. The assessee and the producers of milk mutually agreed upon the arrangement that the producers of milk in a particular village would collectively select 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. The aforesaid arrangement was put into operation by the farmers of each village and they decided to give high sounding names to such collection centres. In view of the above fact, it was clear that the farmers or the producers of milk did not lose their individual identity and each such farmer was paid for the milk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducers of milk did not loose their individual identify and each such farmer was paid for the milk sold by them at a fixed price depending upon the quality of the milk viz. fat contents and quality and this fact coupled with the fact that none has maintained any regular books of account, none has purchased the milk from the farmers independently and made over to the assessee, none of the entities maintained independent accounts of the farmers except he nothing of he milk contributed by the farmers in terms of quantity and quality viz. fat contents they were paid by the assessee through the persons who collected the milk from the farmers and supplied to the assessee. Accordingly, these noting in rough sheets can never by any stretch of imagination be equated to maintaining books of account etc. when considered in totality it would be clear that the milk was purchased by the assessee from the producers of milk. We further find that the assessee during the course of assessment proceedings had filed the confirmations of various persons who confirmed that they were procuring milk on half of the assessee from various producers of the milk and it was supplied to the assessee and in turn th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder, namely:- **** **** **** (f) Where the payment is made for the purchase of the products and manufactured or processed without the aid of power in a cottage industry, to the producer of such products; **** **** **** 6. Rule 6DD(f) mentions one of the circumstances, which indicates that when the payment is made of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products, injunction specified under Section 40A(3) would not come into play. In other words, if any person purchases any product manufactured or processed from the producers directly, who has processed such a product, without the aid of power in a cottage industry, even if the payment is made in aggregate exceeding ₹ 20,000/- in a day to a particular person otherwise than by way of cheque, the same may not incur disqualification in terms of rejection of disallowance. 7. What can be found here in the case of the present assessee respondent is that the purchases of jaggery had been made by the assessee fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... away the transaction from the clutches of section 40A(3). The assessee apart from paying price of the products also paid commission to the payee. Thus, the payee had become the agent of assessee also. Such agent is required to pay the cultivator in cash. Accordingly, there was no violation of section 40A(3). 19. In the light of the ratio of the above decisions, the payments in cash made by the assessee to the milk producers though the aegis of the composite representatives/agents in dual capacity of the assessee milk producers combine, should deemed as direct payment to the milk producers within the meaning of the provisions of clause (f) of Rule 6DD of the Income tax rules, 1962. In that sense, the issue in dispute is squarely covered by the judgment of the Hon ble High Court of Gujarat in the case of Gamdiwala Dairy (supra). As such, no contrary decision in favour of the revenue is brought to our notice by the Departmental Representative. 20. Alternatively, in the given facts of this case, the representatives of the MCC are also should be deemed as the agents of both assessee and milk producers as such persons fill the Form of Agent to be initially entertained by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as the representatives are the agents of the assessee, who are required to make payment in cash to the producers of milk. In this regard, the CIT(A) relied heavily on the Bangalore Bench decision of the Tribunal in the case of Sri Renukeshwara Rice Mills (93 ITD 263) , which was decided on the facts of making payments in cash to the agents for purchasing agricultural produce from the market yard. With due respect to the minor factual variations, the CIT(A) adopted the principle enunciated in the said order by the Bangalore Bench for holding that the impugned payments in cash are covered by the provisions of clauses (f) of Rule 6DD of the Income-tax Rules. In our opinion, the order of the CIT(A) appears reasonable considering the elaborate legal interpretation of the relevant provisions narrated above as well as the documentation and additional details furnished by the assessee before the first appellate authority. As such, the confirmation letters filed by the agents in this regard are not questioned by the Revenue. It is also relevant to mention here that the assessee should be entitled for relief even if the impugned payments are covered under any one of the exceptions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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