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The Commissioner of Income Tax, Kochi Versus M/s. Keerthi Agro Mills (P) Ltd.

2017 (10) TMI 597 - KERALA HIGH COURT

Addition u/s 40A - Cash purchase - Whether the assessee’s transactions are exempted under Rule 6DD - Paddy Purchase - Held that:- Section 40A(3) is a deeming provision; Rule 6DD clearly exempts the agricultural produce -paddy-from the rigours of section 40A(3) of the IT Act. As to the genuineness of purchases, the paddy quantity, believed by the Revenue for determining the yield, speaks volumes. And on the pricing, the Revenue has no ground to suspect or disbelieve the assessee’ claim, for it ha .....

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res. But the record does not disclose that this yield includes discoloured, sprouted and weevilled grains, immature, broken and discoloured grain, or only the marketable rice. So, we cannot rely on the yield statics of these two mills. - Tribunal has concluded that there was a maximum tolerance limit fixed for the rice yielded. Discoloured, sprouted and weevilled grains, immature, broken and discoloured grain, de-husked grain, moisture content, and so forth are the factors that have gone int .....

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And Sri. Jose Joseph, SC, For Income Tax For The Respondent : sri. Harisankar V. Menon And Smt.Meera V.Menon JUDGMENT Dama Seshadri Naidu, J Introduction: A rice-miller purchases paddy both from registered dealers and 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 to spend or pay money exceeding ₹ 20,000/- through an account payee cheque or demand .....

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it up for scrutiny. On 29.08.2011, he issued notice under section 143(2), heard the assessee, and computed the taxable income. This exercise resulted in penalty proceedings under section 271 (1) (c) of the IT Act against the assessee, the tax demanded being ₹ 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: Limitation Rejected D .....

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ted the Revenue s appeal. But the minority, disagreeing, chose to remand the matter after setting aside the appellate authority s findings. Eventually, the Revenue filed these appeals against the Tribunal s common order. Submissions: Revenue s: 5. Sri P. K. Ravindranatha Menon, the learned Senior Counsel for the Revenue, has submitted that the entire transaction of paddy purcahse pleaded by the assessee is fictitious and unbelievable. Though the assessee pleaded, argues Sri Menon, that it had pu .....

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on or material support before the lower authorities. Sri Menon has also contended that the assessee has failed to discharge the statutory burden cast on it.To support his contentions, Sri Menon relied on Commissioner of Income Tax v. Interseas, Sea Food Exporters (2010) 188 Taxman 343 , and M/s. Attar Singh Gurmukh Singh v. Income Tax Officer, Ludhiana. 191 ITR 667 The Assessee s: 7. Sri Harisanker V. Menon, the learned counsel for the assessee, has straightaway drawn our attention to section 40 .....

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ing 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 other suppliers. But the records have not conclusively disclosed whether the other companies' yield included the broken rice, discoloured or red grain, and so forth. The learned counsel has also further contended that the Supplyco of the Kerala Civil Supplies Corporation has only expected 60% of the yield to be sortex rice. 10. To co .....

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proof? 3. Is the Tribunal right in law and fact in interfering with the stand of the 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 assessment year 2008-09 disclosing ₹ 47,85,240/- as income. On scrutiny, the Assessing Officer subjected the assessee to penalty proceedings: the tax demanded being ₹ 9,87,61,270/-. Category Amount Amount In .....

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y for ₹ 51,69,96,981/-, out of which paddy for ₹ 23,17,32,420/- was directly from 14,621 farmers. And those transactions were in cash. In other words, the assessee purchased 59% paddy directly from farmers by paying cash and 41% from the registered dealers. The assessee claims that the paddy was purchased at ₹ 10.56 per kg from the registered dealers; however, from the farmers it is purchased at ₹ 10.47 per Kg. In the scrutiny, the Assessing Officer required the assessee .....

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icle/truck movement register, weigh bridge slips. As to the falsity of names, out of 26 names provided by the assessee, 18 persons bear the same name: Yashoda. And the remaining eight names, again, are identical: Vinoo. The AO has also concluded that the bills produced by the assessee bear no farmer s signature and must have been fabricated 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 deal .....

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7; 20,000/- on any day, he must have that spending or paying only through an account payee cheque. Here, the AO suspects that the assessee might have paid beyond ₹ 20,000/- to more than six farmers. To sustain that suspicion, the AO must be sure that the very spending 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 AO has not examined the authenticity of those farmers whose particulars the assessee provided. 17 .....

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in a sum exceeding twenty thousand rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft,- 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: * * * (f) where the payment is made for the purchase of- (i) agricultural or forest produce; .....

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ases from farmers involving more than ₹ 20,000/- on a given day. The AO disbelieves the claim. But that the transactions involved farmers remains undisputed. Then, we should look to Rule 6 DD (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 amount exceeds ₹ 20,000/-. Indeed, there can be no quarrel that all the transactions- .....

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A learned Division Bench of this Court has faced these two questions: (1) Is the processed sea food a fish product entitling 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 assessee discharged its burden of proving that it had purchased fish products from the suppliers in terms of Rule 6DD(f)(iii) of the Income Tax Rules? 21. Interseas answered both the questions in the affirmative. In fact, the assessee contended that .....

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Interseas observes that to qualify for exemption, all the conditions of the Rule, no doubt, have to be satisfied. First, the exemption is available only for the purchase of items referred to. Second, the payment should be made only to the persons who are cultivators, growers, or producers of such articles, produce, or products mentioned. 23. Then Interseas factually observes that very many suppliers whose names and addresses were furnished by the assessee fully or partly disowned the transaction .....

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regard to the nature of trade, the assessee would not be able to get the suppliers confirm the supplies to the assessee because they are not within the control of the assessee. After making supplies and after collecting cash payments the suppliers are absolutely free to disown the transaction and assessee obviously cannot be blamed for the same. . . The only foolproof evidence to establish purchase from a person is the payment made through Account Payee Cheque or Demand Draft which is the requir .....

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addresses of the suppliers with date, value, quantity etc. . . In a case where the suppliers deny that the supplies have not been made to the assessee, the remedy open to the department is to proceed for conducting a survey and enquiry against the activities of the supplier, establish with materials the details of business carried on by him including the supplies made to the assessee and proceed to make assessment on suppliers. No doubt, if assessee's claim of purchase from a particular pers .....

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ceipt of consideration by the suppliers. 24. Similarly, in Attar Singh Gurmukh Singh, the Supreme Court has examined both Section 40-A(3) and Rule 6DD. It has held that Section 40A(3) must not be read in isolation or to the exclusion of Rule 6DD; the Section must be read along with the Rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. Section 40A(3) only empowers the assessing officer to disallow the deduction claimed as expenditur .....

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n. 25. It is open to the assessee, Attar Singh Gurmukh Singh further observes, to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed ba .....

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5% paddy, and this was not doubted. It paid ₹ 10.56 per kg to the registered dealers. It paid to the farmers slightly lower: ₹ 10.47 per kg. As rightly pointed out by the Tribunal, the AO has not ascertained the prevailing market price of paddy 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 of the transactions, the AO did not probe into whatever minimal evidence -ration cards and identity c .....

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d 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 from the paddy purchased is 62.66%. Against what is said to be the established standard yield of 68%, the reported yield fares poorly. To conclude thus, two factors have weighed with the AO: the yield disclosed by two neighbouring mills and the assessee s own declared yield of rice it supplied to .....

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