Dama Seshadri Naidu, J
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 Rs. 20,000/- through an account payee cheque or demand draft. Rule 6DD of the Income Tax Rules provides for exemptions. The question in these appeals is whether the assessee's transactions are exempted under Rule 6DD. And has the assessee discharged it statutory burden?
(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 the Income Tax Act ("the IT Act"), the Assessing Officer picked 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 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:
Disallowance under section 40 A (3)
Partly allowed: reduced the cash payments from 75% to 25% From Rs. 17.38 cr to Rs. 5.79 cr
The addition of Rs. 3,89,16,190/- was affirmed.
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 split verdict-the majority members allowed the assessee's appeal and rejected 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.
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 purchased the padding from 14,621 farmers, he could not produce the particulars of even a handful of those farmers. According to him, all the receipts produced by the assessee had been fabricated.
6. There was no occasion, further contends Sri Menon, for either the appellate authority or the Tribunal to interfere with the well considered assessment made by the assessing authority. According to him, the assessee improved its case before the Tribunal without, in the first place, any factual foundation 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 vs. Interseas, Sea Food Exporters (2010) 188 Taxman 343, and M/s. Attar Singh Gurmukh Singh vs. Income Tax Officer, Ludhiana. 191 ITR 667 The Assessee's:
7. Sri Harisanker vs. 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 the prescribed limit of Rs. 20,000/-. Further, all the transactions, according to him, are with farmers, who stand exempted from the vigours of section 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 stock declared by the assessee was reckoned. He has also found fault with 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 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 conclude, Sri Harisanker has heavily relied on Interseas to contend that the issues raised in these appeals have squarely been answered earlier by this Court. Eventually, the learned counsel has urged us not to interfere with the Tribunal findings, which, according to him, are well-reasoned and exhaustive. Substantial Questions of Law:
1. Is the Tribunal, under law, right in deleting the entire addition made under 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 of the Assessing Officer with regard to section 145 of the Income Tax Act?
Purchase of Paddy & The Truth Behind the Transaction:
11. The assessee, a rice miller, filed its 'return' for the assessment year 2008-09 disclosing Rs. 47,85,240/- as income. On scrutiny, the Assessing Officer subjected the assessee to penalty proceedings: the tax demanded being Rs. 9,87,61,270/-
12. The Appellate Authority reduced the disallowance from 75% to 25% but affirmed the Assessing Authority's findings on the unreported yield. Both the assessee and the Revenue approached the Tribunal, which allowed the assessee's second appeal and dismissed the Revenue's.
13. The assessee purchased paddy for Rs. 51,69,96,981/-, out of which paddy for Rs. 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 Rs. 10.56 per kg from the registered dealers; however, from the farmers it is purchased at Rs. 10.47 per Kg. In the scrutiny, the Assessing Officer required the assessee to produce, randomly, the proof of 26 farmers. But the assessee furnished the ration cards of six farmers to prove their identity.
14. Of the six people, whose identity the assessee supplied, the Assessing Officer examined none. Nor did he ascertain the prevailing market price of the rice per kilogram to conclude that the assessee supressed the sale price or falsified the accounts. On the other hand, he has concluded that the assessee has failed to produce records such as gate-pass register, vehicle/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 deals with expenses or payment not deductible in certain circumstances. Section 40-A (3), relevant for our purpose, reads:
"(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure."
16. As is evident, when an assessee spends or pays money exceeding Rs. 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 Rs. 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. That apart, even if the spending were above Rs. 20,000/- in a day, there would be no escaping from another statutory safeguard the assessee enjoys. Section 6DD of the Income Tax Rules, 1962, enlists the cases and circumstances in which payment exceeding Rs. 20,000/- may be 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 the extent relevant, the Rule reads:
"6DD. Cases and circumstances 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,-- 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; 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.
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 made only six purchases from 'farmers' involving more than Rs. 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 Rs. 20,000/-. Indeed, there can be no quarrel that all the transactions-even if a few exceeded Rs. 20,000/- -are beyond the mischief of Section 40-A (3) of the Act. So, the AO could not have insisted that the assessee should have produced cogent proof about his purchasing the paddy directly from the farmers. Precedential Position:
20. Since both parties have relied on Interseas, we may dwell a little deeper into this case. Factually, Interseas closely accords with this case, the only difference being the produce: fish replaces the paddy. But Rule 6DD covers both. 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 the suppliers are in the unorganised sector and did not issue bills for sales; nor did they accept payment in cheques or demand drafts for the fish they supplied. In response, Interseas held that "the assessee's claim, no doubt, finds acceptability with the Government because Rule 6DD among other items provide in Clause (f)(iii) for purchase of fish and fish products by making payments other than through Account Payee Cheques and Demand Drafts as required under Section 40A(3) of the Act."
22. 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 transactions. It is seen that the purchases made in a year from the very same person runs into several lakhs of rupees. In some cases, even though the suppliers have confirmed that they have supplied goods to the assessee, they have stated that they have not maintained the accounts to confirm the turnover of supply to the assessee during the previous year. Other irregularities, too, have been noticed. In this factual backdrop, Interseas observed:
"We find force in the contention of the assessee that having 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 requirement of Section 40A(3). However, Government has chosen to liberalise the operation of Section 40A(3) to augment trade. After granting this facility, we are of the view that the department cannot insist the assessees to get the suppliers confirm to the department about the supplies made to the assessee and the payments received by them. In our view, the assessee should be taken to have discharged their burden by furnishing the copies of purchase bills or vouchers issued containing the names and 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 person is found to be bogus, then it is certainly open to the department to disallow the expenditure in respect of such purchase. However, in this case it is the finding of the Tribunal that the assessee in fact purchased the quantity accounted by them and the same is seen exported and the assessee has accounted the export proceeds...
In our view, there is no logic in the department disbelieving the assessee with regard to the purchases, but at the same time believe the denial of the supply and receipt 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 expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine 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. The genuine and bona fide transactions are not taken out of the sweep of the Section.
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 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 the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. The Price is the Prime Factor:
26. We may remember that the quantity of paddy purchased by the assessee was not suspected, but its price was. The assessee did purchase from the registered dealers about 55% paddy, and this was not doubted. It paid Rs. 10.56 per kg to the registered dealers. It paid to the farmers slightly lower: Rs. 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 cards of six farmers-the assessee had supplied.
Conclusions on Paddy Purchase:
27. To conclude, we may observe 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 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 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 Supplyco., a Government undertaking.
30. Before proceeding further, we must observe that the issue of yield is a pure question of fact. And the Tribunal, indeed, has meticulously analysed the issue, leaving no room for doubt. Yet, we discuss the issue in brief.
31. KNT Agro Mills disclosed the rice yield at 66.69% during the relevant period; KKR Agro Mills disclosed the yield of 68% on the turnover of 42.95 crores. 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.
32. The Revenue's other crucial contention is that the assessee itself showed a yield of 68% regarding supply it made to the Supplyco of Kerala Civil Supplies Corporation. But the Tribunal, after analysing the records, has found that the rice supplied to the Supplyco included 10% broken rice, 10% foreign matter, 0.5% damaged grain, and so forth. According to it, 'sortex' rice accepted by the Supplyco is only 60% 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 and the Supplyco., the 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 into making the total yield of 68%. The Tribunal has also found that the Kerala State Civil Supplies Corporation has expected the hullers to supply 60% return in sortex grade rice. The assessee's yield of 62.66% is more 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, we decline to interfere with the Tribunal's findings on the question yield, too.
So we answer the questions of law in the assessee's favour and dismiss both the appeals. No order on costs.