TMI Blog2008 (3) TMI 350X X X X Extracts X X X X X X X X Extracts X X X X ..... t be applicable to the year under consideration. What was the exact direction of the supply order in the accounting year relevant to assessment year under consideration would require to be examined. In view of the above, we deem it proper to set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer. Addition u/s 40A - Held that:- For the first time on 13-3-2006, the Assessing Officer asked the assessee to show cause why the payment exceeding ₹ 20,000 otherwise than by crossed or account payee cheque should not be disallowed under section 40A(3). The assessee furnished its explanation on 21-3-2006 claiming that its case falls within Rule 6DD(f)(ii). The Assessing Officer rejected the assessee's contention on the ground that the assessee could not prove that the parties, to whom the payment had been made, were either cultivators, growers or producers of raw hides and skins. However, it is evident that the Assessing Officer did not allow any opportunity whatsoever to the assessee to lead necessary evidence in support of its contention that the persons from whom hides and skins were purchased were the producers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, obviously the provisions of section 40A(3) are attracted only in cases where the genuineness of the expenditure incurred in cash is in doubt. He stated that right at the time of insertion of section 40A(3) in the Act, there was apprehension that the provisions may cause undue hardship and inconvenience to certain assessees in respect of cases where payment by cheque is not feasible due to some genuine reasons. So powers were given to the CBDT to notify in the Income-tax Rules exceptions to the provisions of section 40A(3) having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. Accordingly, the nature and circumstances under which provisions of section 40A(3) will not be operative were specified in the Income-tax Rules vide rule 6DD under Notification No. SO 624, dated 14-2-1969. Apart from the specific exceptions incorporated in the Rules, there was also a residuary exception, i.e., Rule 6DD(j), which stated that where the taxpayer establishes that the payment could not be made by crossed cheque or draft due to exceptional or unavoidable circumstances, no disallowance under section 40A(3) was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy recognized all along for the purpose of allowance of any expenditure now no longer to be a recognized reason while considering the disallowance of such expenditure? He submitted that if the interpretation made by the Assessing Officer is accepted, it would amount that 20 per cent of the genuine and bona fide expenditure incurred by an honest taxpayer would be disallowed merely because the payment was made in cash exceeding Rs. 20,000 even if there was business necessity or commercial expediency making the payment by account payee cheque/draft impracticable. At the same time, 80 per cent of the bogus expenditure by unscrupulous taxpayer would be allowed because of disallowance of just 20 per cent provided in section 40A(3). He, therefore, submitted that section 40A(3) and rules framed thereunder should be interpreted keeping in view the object of introduction of section 40A(3). He stated that Hon'ble Apex Court in the case of Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 while considering the constitutional validity of section 40A(3) has also explained the reasons behind introduction of this provision. Various High Courts in the following cases have also taken the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rule 6DD after amendment by the Finance Act, 1995 and the Income-tax Fourth Amendment Rules, 1995 respectively. 2.6 He further submitted that while upholding the constitutional validity of amendment in section 40A(3), the Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma mentioned the exceptions provided in the second proviso of section 40A(3). Therefore, even after the deletion of clause (j) of Rule 6DD, the exceptions mentioned in second proviso of section 40A(3) would still continue to apply in view of the substantive provisions, i.e., second proviso to section 40A(3). He also relied upon the decision of Hon'ble Apex Court in the case of Union of India v. A. Sanyasi Rao [1996] 219 ITR 330 in support of his argument that the heads of legislation in the lists should not be construed in a narrow and pedantic sense, but should be given a large and liberal interpretation. 2.7 He submitted that section 295 of the Act empowers the CBDT to make rules by notification in the Gazette of India for carrying out the purposes of the Income-tax Act, 1961. The rules are the delegated legislation empowering the Government to specify measures for fulfilling the intended purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od and Supplies for the purchase of kerosene oil, the assessee is required to make the payment in cash. In support of this contention, he produced before us the copies of allotment letters issued by Sub-Divisional Controller, Food and Supply, Jangipur. He stated that the assessee has only given a few allotment letters as an example and in all other allotment letters similar directions are given. In the allotment letter, there is clear direction to the agent to deliver the specified quantity of kerosene oil to the assessee on cash payment. He, therefore, stated that when the assessee is working as a licensee being a part of the public distribution system of the Government of West Bengal, it is bound to make the payment as directed by the Government of West Bengal. The assessee cannot unilaterally decide the mode of payment to the agent. He, therefore, submitted that in the case of the assessee neither the identity of the seller nor the genuineness of the purchase is doubtful. Moreover, the payment has been made as per the rate fixed by the Government of West Bengal. Therefore, in the case of the assessee, provisions of section 40A(3) are not applicable. In any case, the assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hides from the producers thereof. Hides and skins obtained from slaughtered and dead animals would easily rot and decay unless proper precautions are taken. Tanneries are not often located very near to the source of raw hides and skins. So preservation of these articles assumes great importance. The sellers process these raw hides with wet or dry salting or drying, which process is called 'curing'. So the sellers actually 'cure' the raw hides for converting them into saleable commodities. In that view, the sellers are not mere merchants, but at the same time producers of saleable hides. He referred to definition of 'producer' from the Bakshi's The Law Lexicon, Volume-2 and submitted that the word 'producer' has a very wide meaning and will include the person who trades or deals in such production. He, therefore, submitted that the purchase of hides and skins is squarely covered under Rule 6DD(f)(ii). It is further submitted by him that the sellers produced the hides and skins in a cottage industry and, therefore, payment made to them would also be covered by Rule 6DD(g). 3. Shri Gautam Banerjee, C.A., appeared for and on behalf of Chong Hing Tannery v. Asstt. CIT [IT Appeal No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the returned income by making certain disallowances under section 40A(3) and other expenses. He has not recomputed the deduction under section 80HHC on the basis of business income determined by him. The assessee has computed the deduction under section 80HHC on the basis of profits and gains disclosed by the assessee. However, due to disallowances made by the Assessing Officer when the income assessed under the head 'Profits and gains of business' has increased, the Assessing Officer should have recomputed deduction under section 80HHC on the basis of income assessed under the head 'Profits and gains of business'. He, therefore, requested that a suitable direction may be given to the Assessing Officer for recomputation of deduction under section 80HHC. 4. In the case of Sri Shyamal Kr. Dey [IT Appeal No. 1772 (Kol.) of 2007], Sri S.C. Sarkar, advocate appeared and he stated that the assessee is a contractor and in his case the Assessing Officer has determined the income by applying a net profit rate of the turnover. However, in addition to the determination of net profit as a percentage of turnover, the Assessing Officer further made disallowance under section 40A(3). H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. Therefore, sub-section (3) of section 40A would also be applicable while determining profits and gains of business in supersession to other provisions. The constitutional validity of section 40A(3) has been upheld by the Hon'ble Apex Court in the case of Attar Singh Gurmukh Singh. After the amendment by Finance Act, 1995, again the validity of section 40A(3) was challenged and the Hon'ble High Courts have upheld its constitutional validity in the following cases:- (a) Kamath Marbles case. (b) Smt. Ch. Mangayamma's case. He also stated that the ITAT cannot adjudicate upon the constitutional validity of any provisions of the Income-tax Act or Rules. 7.1 As per second proviso to section 40A(3), the exception has been provided in such cases and under such circumstances as may be prescribed. Section 295 of the Income-tax Act empowers the CBDT subject to control of Central Government to make rules for carrying out the purpose of the Income-tax Act. Sub-section (2) of section 295 provides for the specific matters in which the rules can be framed by the Central Government. Clause (p) of section 295 is a residuary clause which provides as under:- "Any other matter which by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also not proved that such person in turn is required to make the payment in cash. With regard to the assessee's claim that its case also falls under Rule 6DD(b), he stated that this claim was not made earlier and the relevant facts are also not on record. He also referred to the copies of allotment memos issued by the Sub-Divisional Controller, Food and Supplies, Government of West Bengal, which is enclosed by the assessee's learned counsel with his written submission, and contended that such allotment letters are of 2007 and, therefore, not relevant to the year under appeal. In view of the above, it is submitted by the ld. Departmental Representative that the order of the CIT(A) should be reversed and that of Assessing Officer should be restored. 7.4 Coming to the cases where the assessee derives income from tanning of leather and manufacturing of leather goods, it is submitted by the ld. Departmental Representative that Rule 6DD(f)(ii) would be applicable only when the assessee made purchases from the producer and not from the merchant or trader of hides and skins. From the copies of the bills produced in the case of Chong Hing Tannery, it is apparent that the sellers of hide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had regular dealing with the suppliers. The materials were purchased in credit and the payment was made after a long gap from the purchase of material. Therefore, the assessee had enough time to make the payment by cheque/draft. He, therefore, submitted that the assessee not only was unable to prove that its case falls within any particular clause of Rule 6DD but also could not prove the business expediency for his inability to make the payment by account payee cheque/draft. 7.6 Referring to the facts of Nadeem Iqbal's case, it is stated by the ld. Departmental Representative that the CIT(A) has allowed relief to the assessee based upon extraneous considerations. The CIT(A) has allowed relief considering the fact that the addition made by the Assessing Officer is more than 300 per cent of the returned income and several times more than the assessee's capital. He submitted that these are irrelevant considerations while deciding the disallowability of an expenditure under section 40A(3) where the payment is made in cash exceeding Rs. 20,000. He, therefore, submitted that the order of the CIT(A) in the case of Nadeem Iqbal should be reversed and that of Assessing Officer be resto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the objects for which section 40A(3) was introduced in the year 1968. 9. Sri S. Bandyopadhyay, advocate, in the rejoinder also stated that the rule should be liberally construed. A common parlance meaning should be given to the word "producer" and not a very narrow meaning be given to it, as given by the revenue. 10. Sri Gautam Banerjee in the rejoinder stated that the Assessing Officer has raised the issue of applicability of section 40A(3) at the fag end of March when the assessment was becoming barred by limitation. Therefore, there was no time left so as to bring on record the material to prove that the suppliers are producers. He, therefore, stated that if the assessee's legal submissions are not accepted, then in alternate the matter can be set aside to the file of the Assessing Officer for examining afresh whether the suppliers of the hides and skins to the assessee are producers or not. 11. We have carefully considered the arguments of both the sides and perused the material placed before us. First we will deal with the arguments of Sri S.K. Tulsiyan, advocate with regard to general applicability and scope of section 40A(3). At the out set we agree with the contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment for any year not being an assessment year commencing prior to 1-4-1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding twenty thousand rupees otherwise than by [an account payee cheque drawn on a bank or account payee bank draft], the allowance originally made shall be deemed to have been wrongly made and the [Assessing] Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made: Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by [an account payee cheque drawn on a bank or account payee bank draft], in such cases and under such circumstances as may be prescribed, having regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions." 12. After the amendment in section 40A(3) by Finance Act, 1995 with effect from 1-4-1996 and the amendment in Rule 6DD of the Income-tax Rules by the Income-tax (Fourteenth Amendment) Rules, 1995, again the constitutional validity of section 40A(3) was challenged. However, the Hon'ble Andhra Pradesh High Court in the case of Smt. Ch. Mangayamma upheld the constitutional validity of section 40A(3) and held as under:- "The main object of section 40A(3) of the Income-tax Act, 1961 is to regulate financial transactions and to prevent the use of unaccounted money or reduce the chanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (k) itself provides sufficient liberalization of the rigor of section 40A(3) which entitles the parties to claim full deduction on cash payments over Rs. 20,000 where banking services are not available in the place where the expenditure is incurred or on the day the expenditure is incurred. In other words, the statute and the rules insist on payment through account payee cheques or demand drafts only in cases where banking services are available to the parties. It cannot be said that insistence on money transaction being carried out through the bank where the facilities are available which is to ensure transparency in transactions any way affects the rights of the parties to carry on any trade or business, the amendment to the rule does not affect the validity of the statute sustained by the Supreme Court." 12.2 No contrary decision is brought to our knowledge. In view of the above, we reject the first limb of the arguments of learned counsels for the assessees that disallowance of expenditure under section 40A(3) would amount to violation of Article 265 of the Constitution of India. .13. Now we come to interpretation of section 40A(3). It has been contended by the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the provisions of section 40A(3). From the plain reading of the section itself it is evident that, it would be applicable where the assessee incurs any expenditure exceeding Rs. 20,000 otherwise than by a crossed cheque or by a crossed bank draft. In such circumstances, 20 per cent of such expenditure shall be disallowed. In our opinion, there is no ambiguity in the language of section 40A(3) and, therefore, relying upon the above referred decisions of Hon'ble Apex Court in the cases of Tara Agencies and Anjum M.H. Ghaswala, we hold that the section is to be interpreted by giving literal meaning to the language used in the section itself. In view of the above, the purpose behind the enactment of section 40A(3) is not relevant. What is relevant is the enactment itself, i.e., section 40A(3). The income-tax authorities have to give effect to the section as enacted by the Parliament. 13.4 Both the parties have relied upon catena of judgments in support of their respective claims. It would be relevant to refer to those decisions. Sri S.K. Tulsiyan, advocate has relied upon the following decisions:- (i) Rhydburg Pharmaceuticals Ltd.'s case. In this case, their Lordships held as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the purchases were made from the unorganized sector, cash payments were indispensable. The order of the Tribunal with regard to the cash payments was justified." In that case assessment year involved was assessment year 2001-02 and, therefore, the ratio of the above decision would be applicable to the appeals under consideration before us. However, we find that in the above case, the ITAT has found as a matter of fact that the above payments were made to small time vendors who came from the surrounding villages and carried out the process of dressing of skin without the aid of power. The Hon'ble High Court taking note of the above-mentioned finding of fact by the ITAT dismissed the revenue's appeal in limini Therefore, it would be necessary to examine the facts of the case under consideration before us whether they are identical to the facts before the Hon'ble High Court. We will revert to the facts of the case subsequently after considering all the decisions relied upon by the parties. (iii) Chaudhary Co.'s case. In this case it has been held as under:- "That the Tribunal had found that the seller had been insisting on cash payment. The identity of the seller had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of maintaining her books of account and having her business transactions and the entire work with regard to payment and collection of money was entrusted to the firm. In such a set of circumstances the firm made payment on behalf of the assessee by account payee cheques. Hence it could not be said that there was any cash or there was any possibility of having chances and opportunities to use or create black money. The amount, which was paid on behalf of the assessee by the firm, was paid in cash but was paid by way of account payee cheques. This factual position could not be denied on behalf of the revenue. Such transactions could not be hit by the provisions of section 40A(3) of the Act. The Income-tax Officer made a mistake in understanding the term "pay order" and the manner in which the payments were made on behalf of the assessee by the firm. It was nothing but an instruction by the assessee to the firm with regard to making payment on behalf of the assessee. Therefore, the Tribunal was justified in confirming the order passed by the Commissioner (Appeals), whereby the disallowance made by the Income-tax Officer had been deleted." From the above it is evident that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was a time-lag between the dates of the bills and the dates of the payments: Held , that the disallowance of the payments in terms of section 40A(3) of the Income-tax Act, 1961, was not justified." This decision of Hon'ble Calcutta High Court is also for assessment year 1975-76, i.e., prior to omission of Rule 6DD(j) and, therefore, the same is not applicable to the assessment years involved in the appeals before us. (ix) CIT v. Sri Basudev Seth [IT Appeal No. 386 ( Cal. ) of 2007] In this case, their Lordships of Hon'ble Calcutta High Court held as under:- "We have heard learned counsel for the appellant. Perused the order passed by the Tribunal. We find that no substantial question of law is involved in this matter. Hence this appeal being ITA No. 386 of 2007 is dismissed." Thus the Hon'ble jurisdictional High Court has approved the order of the ITAT by dismissing the revenue's appeal, holding that no substantial question of law arises. Therefore, it would be relevant to refer the decision of the ITAT, which is approved by their Lordships. The ITAT in the said case, i.e., Sri Basudev Seth's case held as under:- "Heard both the parties, perused the record an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the amount had been rightly disallowed." (ii) Silk Fab Export's case. In this case, it has been held by their Lordships of Hon'ble Kerala High Court as under:- "Dismissing the appeal, that the order of the Assessing Officer and the appellate authorities showed that in many cases details of payees and transactions were not furnished and in cases where payees' addresses were furnished, notices were sent by the Department. But the notices were returned by the postal authorities stating that such parties did not exist or with endorsement that the addressees were not known. In fact there was no necessity for the Department to try to trace the addresses of the suppliers to whom payments were made. It was for the assessee to produce evidence including the addresses of the suppliers and to establish that the case fell under the exception clause. The findings by the authorities were purely on the facts. The claim of exception under rule 6DD(j) was not applicable as the suppliers to whom payments were made were well-established business concerns and the payments were worth lakhs of rupees. Therefore, the assessee was not entitled to benefit under rule 6DD(j)." (iii) Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (f) of rule 6DD from whomsoever they are purchased. The words "cultivator, grower or producer", occurring at the end of rule 6DD(f) qualify the words occurring in all the preceding four sub-clauses and not only sub-clause (iv). The exemption is confined to payment to grower or producer of forest produce." Though this decision is also for assessment year 1970-71, however, in this case, their Lordships of Hon'ble Allahabad High Court has considered the applicability of Rule 6DD(f) which still exists and in some of the cases before us the parties have claimed that Rule 6DD(f) is squarely applicable. Therefore, this decision would be directly applicable while dealing with the cases wherein Rule 6DD(f) is claimed to be applicable. We will revert back to this decision when we discuss the facts of the cases wherein applicability of Rule 6DD(f) is claimed. 15. While referring to the second proviso to section 40A(3), it has been claimed by the learned counsel that this proviso provides certain exceptions where section 40A(3) is not applicable. The exemption from applicability of section 40A(3) is to be allowed having regard to the (i) nature and extent of banking facilities availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances in which payment 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. 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) where the payment is made to- (i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); (ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society as defined in clause (cii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934), or any primary credit society as defined in clause (civ) of that section; (v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956); (vi) the Industrial Finance Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or products; (g) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; (h) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; (i) where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or the heirs of any such employee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the income chargeable under the head "Salaries" of the employee in respect of the financial year in which such retirement, resignation, discharge or death took place or the immediately preceding financial year did not exceed Rs. 7,500; [( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Rule 6DD(b). However on perusal of the orders of the authorities below we find that before the Assessing Officer the assessee did not make a specific claim under which clause of Rule 6DD its case calls. The claim was that the purchase was made from the Government. The assessee's explanation before the Assessing Officer was of general nature explaining the manner in which the business is being carried on by it. The CIT(A) has mentioned that the assessee's case falls within Rule 6DD(k) and also alternatively under Rule 6DD(l). We find that Rule 6DD(k) would be applicable where the payment was required to Be made on a date on which the banks were closed either on account of holiday or strike. Therefore, it would be a matter of factual verification with reference to each payment whether the payment was made on bank holiday or not. The date-wise details of the payments and whether on those dates it was bank holiday or not has not been placed before us. Therefore, we are unable to give any finding whether Rule 6DD(k) is applicable in the case of the assessee. 16.2 Rule 6DD(l) would be applicable where the payment is made by any person to his agent, who is required to make the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the above, we deem it proper to set aside the orders of the authorities below on this point and restore the matter back to the file of the Assessing Officer with the direction that he will examine the facts of the case afresh and will adjudicate upon the assessee's contention that its case falls under clauses (b), (k) and (l) of Rule 6DD. Needless to mention that, he will allow adequate opportunity of being heard to the assessee. 17. Cross objection, i.e. C.O. No. 58/Kol./07 filed by the assessee is only in support of the order of the CIT(A). In view of our finding while disposing of the revenue's appeal, the cross objection filed by the assessee is also simultaneously disposed of. 18. Now we will take up Nadeem Iqbal's case. The assessee is an individual who derives income from trading business in electronic items on wholesale-cum-retail basis. During the accounting year relevant to assessment year under consideration, the assessee made total cash payment of Rs. 1,09,56,190 exceeding Rs. 20,000. The Assessing Officer applying the provisions of section 40A(3) disallowed 20 per cent of the cash payment. Accordingly, the Assessing Officer disallowed the expenditure of Rs. 21, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year under consideration, the assessees made the payments for purchase of raw hides by bearer cheques. Since as per section 40A(3) payment is required to be made by account payee cheque or account payee bank draft, the Assessing Officer treated the payment by bearer cheques to be in violation of section 40A(3) and disallowed 20 per cent of such payment. On appeal, the CIT(A) sustained the same. Hence these two appeals by the assessees. 20. At the time of hearing before us, it was claimed by the learned counsels that the payments made by the assessees are covered by Rule 6DD(f) as well as by Rule 6DD(g). Rule 6DD(f) reads as under:- "(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 or products;" The payment for purchase of hides and skins would be covered by sub-clause (ii) of clause (f) being the produce of animal husbandry. However, as per clause (f), the payment is to be made to the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. Departmental Representative has relied upon the decision of Hon'ble Apex Court in the case of Tara Agencies, wherein their Lordships considered the meaning of the words "manufacture", "production", "process", etc. In that case the assessee derived income from the business of export of tea. It purchased tea of diverse grades and brands and blended the same by mixing different kinds of tea. The assessee was having a small scale industrial undertaking for the above process of tea. It claimed weighted deduction under section 35 of the Income-tax Act, 1961. As per section 35B, weighted deduction was available to a small scale exporter who exports goods manufactured or produced in any small scale industrial undertaking. In this context their Lordships of the Apex Court examined the meaning of the word "produce". At page-451 of 292 ITR, their Lordships referred the dictionary meaning of the word "produce" which is as under:- "In Black's Law Dictionary (5th Edition), the term production has been defined as under: 'Production. Process or act of producing. That which is produced or made; i.e., goods. Fruit of labour, as the productions of the earth, comprehending all vegetables an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actured or processed without the aid of power in the cottage industry to the producer of such products. 20.3 To verify the contention of the learned counsel, we reflected to the assessment orders in the cases of both the assessees. In the case of L.I. Chong Tannery the relevant finding at page 2 of the assessment order reads a under:- "In the course of hearing on 13-3-2006, the A/R Shri Sumantra Guha was requested to show cause why the payments exceeding Rs. 20,000 otherwise than crossed or a/c payee cheques shall not be disallowed under section 40A(3) of the Act. The A/R vide his written submission dated 21-3-2006 explained the nature of payments under section 40A(3) which are as follows: 'Rule 6DD(f)(ii) of the Income-tax Rules stated that "No disallowance under section 40A(3) shall be made when any payment exceeding Rs. 20,000 is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft where the payment is made for the purchase of the produce of Animal Husbandry (including Hides and Skins) to the cultivators, growers or producers of such articles, produces or products. In the instant case, the payments have been made for the purchase of Raw Hides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity to the assessee to produce necessary evidence in support of its claim. Therefore, for the detailed discussions in the case of L.I. Chong Tannery, we set aside the orders of the authorities below in the case of Chong Hing Tannery also on this point and restore the matter back to the file of the Assessing Officer to readjudicate the issue as per our direction above. 21. The learned counsel for the assessee had also raised an additional ground in both the above cases which was with regard to computation of deduction under section 80HHC. The additional ground is admitted by us vide our finding in para 3.1 above. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that at the end of section 80HHC, there is explanation which defines several terms used in section 80HHC. Explanation (baa) defines the words "profits of the business", which reads as under:- "(baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by- (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Bench for consideration and adjudication of the other issues. The issue with regard to disallowance under section 40A(3) is to be restored back to the file of the Assessing Officer to be readjudicated upon as per our observation/direction above. 23. Sri Somenath Ghosh appeared as an Intervener in the case of Mrinal Ghosh. According to him the assessee's case falls under Rule 6DD(k) and Rule 6DD(h). We find that during the accounting year relevant to assessment year under consideration, the assessee made two cash payments exceeding Rs. 20,000 at a time. The first payment was made on 30-4-2000 amounting to Rs. 36,000 and the second payment on 16-6-2000 amounting to Rs. 34,000. The assessee has produced before us the xerox copy of the calendar of the year 2000 and we find that 30-4-2000 was Sunday, i.e. bank holiday. Therefore, the payment made on 30-42000 will squarely fall within clause (k) of Rule 6DD. With regard to other payment made on 16-6-2000, it was contended by the assessee that the payment was made to the decorator who did not have the bank account at the relevant time and, therefore, the assessee's case would fall within the ambit of clause (h) of Rule 6DD. We find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the gross profit rate was applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases made by the assessee." The above decision of Hon'ble Allahabad High Court would be squarely applicable to the case of the assessee. When a net profit rate is applied, there remains no scope for further disallowance of any expenditure. In view of the above, we respectfully following the above decision of Hon'ble Allahabad High Court hold that the CIT(A) was justified in deleting the disallowance under section 40A(3) made by the Assessing Officer. Accordingly, we uphold the order of the CIT(A) and dismiss the revenue's appeal. 25. The results of the aforesaid appeals are summed up as under: (i) Kenaram Saha Subhash Saha's case. (ii) Nadeem Iqbal's case. All the aforesaid revenue's appeals and C.O. of the assessee are allowed for statistical purposes. (iii) Chong Hing Tannery's case. (iv) L.I. Chong Tannery's case. The aforesaid appeals of the assessees are allowed for statistical purposes. (v) Sri Shyamal K ..... X X X X Extracts X X X X X X X X Extracts X X X X
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