TMI Blog2013 (10) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... iness expediency to make cash payment to the Kachcha Arahtias - Certain payments were made directly to the farmers as well as on bank holidays. Reliance has also been place upon the Board's circular No. 220 dated 31.05.1977, in which certain conditions have been laid down for making cash payments and some of the conditions are that when payments are made on bank holiday and the seller has refused to accept the payment by way of crossed cheques/draft. Further, the seller, acting as a commission agent is required to pay cash in turn to the persons from whom he purchased the goods - Kachcha Arahtia obtained the agricultural produce from the farmers and have arranged to make sales to the assessee being Pakka Arahtia. Since Kachcha Arahtia insisted for cash payment from the assessee for making cash payments to the farmers, therefore, sub-rule (e) along with sub-rule (k) of Rule 6DD would also apply in the case of the assessee - Considering the facts and circumstances of the case, the case of the assessee is clearly covered by exceptions provided under Rule 6DD of the IT Rules – Decided against the Revenue. - IT Appeal No. 319 (Agra.) of 2009 - - - Dated:- 11-1-2013 - BHAVNESH SAI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heques as local cheques are cleared either on the same day or latest by next day. Further, according to the A.O., the sellers were having bank accounts and so the assessee's contention that it was not having any option but to make payments in cash, was not correct. The AO made disallowance to the extent of 20% of Rs. 5,17,96,824/-, the amount of disallowance worked out to Rs. 1,03,59,365/-. 3. The assessee challenged the addition before the ld. CIT(A) and written submissions of the assessee are reproduced in the appellate order in which the assessee briefly submitted that affidavits of Kachcha Arhatias certifying that they were not having bank accounts have been filed. The assessee deals in food grain business in his own account and on commission basis. Most of the purchases of agricultural produce were made through Kachcha Arahtias, who acted on behalf of the farmers. A few purchases were also made directly from the farmers. It was submitted that Khair Mandi from where assessee did his business during the year under consideration is a primary farmers arrivals Mandi, hence it is a trade practice therein that all the transactions are to be made in cash only. The assessee maintaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to take cash payments only in turn to make payments to the farmers. It was submitted that the AO has wrongly applied Circular No. 34 as it was not applicable to the case of the assessee. The AO has failed to appreciate that some of the cash payments were made directly to the farmers and some payments were made on bank holidays and also the AO failed to appreciate that Kachcha Arahtia and farmers have not maintained any bank accounts. The details of cash payments made on bank holidays and directly to their farmers have been given in the written submissions. It was, therefore, submitted that the AO has misunderstood the provisions of section 40A(3) of the IT Act. Several decisions were relied upon before the ld. CIT(A) and reproduced in the written submissions. The Board's Circular No. 220 dated 31.05.1977 was also relied upon which clarified certain circumstances in which conditions laid down in Rule 6DD(J) could be relaxed, i.e., transactions and payments made on bank holidays; the seller has refused to accept payment by way of crossed cheques/drafts and that the seller acting as a commission agent, is required to pay in turn to the person from whom he purchased the goods. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t also the original tax of Uttar Pradesh Krishi Utpadan Mandi Act, 1964 and also various licenses issued by Khair Mandi Samiti. I find that all these Mandi Samitis including Khair Mandi Samiti, functions under the strict norms and rules. Khair Mandi is a mandi of food grains of primary arrival (Pahli Avak), in which farmers bring their products for first sale. It is a Mandi of 'First Arrivals', meaning that here farmers bring their produce for sale for the first time. It is different than mandis of 'Second Arrivals', which are more of free trading markets. The produce, sold to Pacca Arahtias/wholesalers; in mandis of 'First Arrivals'; reach to mandis of 'Second Arrivals' for free trading. The sale transactions in mandis of 'First Arrivals', like Khair Mandi, are much more guided and controlled by various rules/procedures; all with the motto to fetch maximum returns for the farmers. For such sale by the farmers, exhaustive rules and procedures have been laid down. Kuchha arahtias are issued specific licenses by the mandi samiti. The job of kuchha arahtia is only to make auction of the food grains at specified formats. It is very important to note that these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sale consideration. At the same time, a Kuchha Arahtia receives commission from Pacca Arahtia, ensures delivery of agricultural produce to Pacca Arahtia, and ensures delivery of sale consideration to the farmers. In this way, Kuchha Arahtia acts as agent for Pacca Arahtia also. (b) This is verifiable from the record that whatever purchase price assessee pays, are passed on in Toto, to the respective farmers; assessee pays commission and brokerage separately to kuchha arahtias as per specific guidelines and rates laid down by the mandi samiti. Kuchha arahtias receive cash payments from the assessee, on behalf of the farmers. They keep their commission and brokerage, and disburse the purchase consideration to respective farmers. (c) It has been stated on oath (affidavits) by these kuchha arahtia that they have insisted on cash payment to be made by the assessee, because farmers did not have bank accounts and hence are not ready to accept cheques/drafts. Kuchha arahtias have also filed affidavits to the effect that they also do not have any bank accounts. 7.4 In such a scenario I find substantial force in the appellant's contention that cash purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had also admitted that the payments had been made to the agents in respect of purchase of carcass, there was no room to interpret clause (f) of rule 6DD in favour of the assessee. However, so far as the assessee's claim for exclusion from applicability of section 40A (3), read with clause (1) of rule 6DD, was concerned, the commissioner (Appeals) held that payment in cash to agents for purchases of products of animal husbandry could not be taken away from the purview of the exclusion clause contained in clause (1) of rule 6DD. Therefore, the disallowance under section 40A (3) was unjustified. On the Revenue's appeal, Held that " .. The case of the assessee fell under both the categories i.e. clause (f) and Clause (1) of rule 6DD. Clause (1) has been inserted by the IT (Twenty-first Amendment) Rules, 1995 with effect from 1-12-1995. The Assessing Officer had disallowed the claim of the assessee in view of the decision of the Allahabad High Court in the case of CIT v. Pehlaj Raj Daryanmal [1991] 190 ITR 242. The decision by the Allahabad High Court was rendered in 1991 whereas clause (1) was inserted by the IT Amendment Rules in the year 1995. Therefore, the ratio o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avourably covered by clause (f) of rule 6DD, and, (b) Furthermore, and more importantly, Kuchha Arahtias are agents of both farmers as well as Pacca Arahtias, and, therefore, cash payments made to them are favourably covered by clause (1) of rule 6DD. Thus, I hold that the impugned cash payments made by assessee are favourably covered by clause (1) read with clause (f) of Rule 6DD. 7.5 At this juncture let me deal with A.O. main objection that Circular No.34 of 05-03-1970 has categorically clarified that kuchha arahtia is not agent of farmers. First of all, I find that the A.O. is making this specific assertion from his own side; there are no such wordings (as mentioned by the A.O.) in the Circular No.34 dated 5-03-1970!! Let us see the exact wordings of Circular No. 34 dated 5-3-1970:- "A large portion of trade in agricultural commodities is channeled through the institution of 'arahtiyas'. While the payments made to the cultivators or growers of agricultural produce are specifically excluded from the purview of section 40A(3) by clause (f) of rule 6DD, the payments made to the "arahtiyas" for purchases made from the cultivators in cash until the cheques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contact under consideration. Each transaction, therefore, requires to be examined with reference to its term and conditions and no hard and fast rule can be laid down as to whether agent is acting only as an agent or also as a principal. 4. The Board is advised that so far as kachha arahtia are concerned, the turnover does not include the sales effected on behalf of the principals and only the gross commission has to be considered for the purpose of section 44AB. But the position is different with regard to pacca arahtia. A pacca arahtia is not, in the proper sense of the word, an agent or even del credre agent. The relation between him and his constituent is substantially that between the two principals. on the basis of various Court pronouncements following principals of distinctions can be laid down between a kachha arahtia and a pacca arahtia: (i) A kachha arahtia acts only as an agent to his constituent and never act as a principal. A pacca arahtia, on the other hand, is entitled to substitute his own goods on his personal accounts and thus he acts as a principal as regards his constituent; (ii) A kachha arahtia brings a privity of contract between his con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iating services and they are bringing privity of contract between the farmers and the assessee so that each becomes liable to the other; they are communicating name of the assessee to the farmers and thus they are acting as an assessee's agent also. Thus I hold that the assessee's case, supported by the ratio of above referred judicial pronouncements, is covered by exemption clause (1) of rule 6DD. 7.6 I find it worthwhile to make a further important clarification. The Circular No.34 is dated on 05-03-1970, while clause (1), along with clause (j) and (k) of rule 6DD were brought much afterwards, viz. with effect from 11-02-95, notification No.50946 (E) dated 01-12-1995; (1996) 217 ITR (ST) 2, 3. Thus not only circular No. 34 is not so relevant to the present scenario (where there is crucial distinction between nomenclature and role kuchha arahtia and pacca arahtia), but also the same is of much earlier period when clause (1) was not there. The assessee's case is more in tune with clause (1) of rule 6DD which has come into statute in 1995. 7.7. Before I part I would make certain comments regarding A.O's comments on banking facilities. It is true that there are ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attitude preferring bank accounts and banking transactions. 7.7 The A.O has challenged this affirmation and has pointed out that these kuchha arahtias are filing their returns and are also accepting refund cheques, which implies that they are having bank accounts. On this, the assessee has clarified that the proprietors/partners of certain kuchha arahtia may be having bank accounts in their individual names, but the business dealings of kuchha arahti are in the name and style of their proprietary concern; and the bills issued by them to the assessee are in the name of such concerns, and there is no bank account in the name of such proprietary concerns. A chart of various kuchha arahtia having names of their proprietary concerns vis- -vis names of the concern individuals, clarifies this point. This aspect also goes in favour of appellant. 7.8 Lastly, I observed that although the A.O. has made a distinction between purchases made by the assessee as commission agent vis- -vis as wholesaler, but, for the issue under consideration i.e. disallowance u/s 40A (3); I opine that the A.O.'s opinion is not correct. The modus operandi of purchases is exactly the same, in both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessee because it did not speak of Kachcha Arahtia. Circular No. 452 has been correctly applied by the ld. CIT(A) for the purpose of deleting the addition. Proper banking facilities are not available in Khair town. He has submitted that there were many times changes in Rule 6DD and now the relevant provisions of Rule, i.e., 6DD(e) (j) (k) of the IT Rules would apply in the case of assessee as have been considered by the ld. CIT(A). He has relied upon the order of the ITAT, Vashakhapatnam Bench in the case of ACIT Venkatadari Oils Ltd. v. Penamaluru, IT Appeal No. 422/2007 dated 19-8-2010, in which in identical facts, the Tribunal held that payments made to Commission agents who were the representatives of the farmers are covered by exception under clause (f) of Rule 6DD and hence, the AO was directed to delete the addition u/s. 40A(3) of the IT Act. He has also relied upon the unreported decision of Hon'ble Delhi High Court in the case of R.C. Goel v. CIT in ITA No. 636/2012 dated 04.12.2012 in which on identical facts, the appeal of the assessee has been allowed. Findings of the Hon'ble High Court in para 8 to 11 of the order are reproduced as under : "8. The prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - which was formulated as a proviso to Section 40A (3) - steps in to aid such assessees and concerns. In this context, the statutory mandate in Section 6DD (k), at least in the circumstances of the case, has to be so construed as to mean that but for the cash payment, the assessee would have been deprived the benefit of supplies itself. This Court clarifies that the interpretation of the expression "who is required to make payment in cash" having regard to the circumstances of the case is fact dependent, at least in the present case. The consequence of instances of payment through account payee cheques in small business which are dependent on such supplies would be to completely stifle, if not stop, the business activities. It is in that sense that the expression ''required'' would have to be construed. 10. In view of the above discussion, this Court is of the opinion that having regard to the peculiar facts and circumstances, the Tribunal and the lower authorities adopted an unduly narrow and technical interpretation of Rule 6DD(k), the benefit of which the assessee clearly was entitled to. The question of law is accordingly answered in favour of the assessee and against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ahtias. The Kachcha Arahtias in order to facilitate the sale of agricultural produce which farmers brought to the Mandi has taken commission from the Pakka Arahtia, i.e., the assessee. Therefore, the case of the assessee is squarely covered by Rule 6DD(k) of the IT Rules (New). The case of the assessee was, therefore, rightly considered by the ld. CIT(A) in the light of decisions of ITAT, Bangalore Bench in the case of Renukeshwara Rice Mills (supra). The ld. CIT(A), therefore, rightly considered another aspect that the case of the assessee would also be covered by another sub-provision of Rule 6DD because the payments are made for purchase of agricultural produce. The circular No. 34 of Board is not applicable because it did not deal with Kachcha Arahtia and in turn the ld. CIT(A) rightly taken into consideration Board's circular No. 452 which clearly throw light on the functioning of Kachcha Arahtia and Pakka Arahtia. The Kachcha Arahtias have also filed their affidavits acknowledging that cash payments were made at their insistence as they did not maintain any bank accounts as well as farmers have not maintained bank accounts and in turn Kachcha Arahtia has to make payments to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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