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Facts
The Revenue appealed against the CIT(A)'s deletion of an addition of Rs. 10,16,03,090/- made under Section 40A(3) of the Income Tax Act. The addition was based on the Assessing Officer (AO) treating payments to agriculturists as made to non-agriculturists and not satisfying the exceptions under Rule 6DD.
Held
The Tribunal held that the assessee, acting as a commission agent (Kachha Arhatia) for raw cotton sales, made payments to agriculturists for procurement of agricultural produce on behalf of principals. The Tribunal found that the CIT(A) had correctly deleted the addition as the assessee's case fell under the exceptions of Rule 6DD, and no ad-hoc disallowance was justified.
Key Issues
Whether payments made to agriculturists by a commission agent for procurement of agricultural produce fall within the exceptions of Rule 6DD, thereby not being disallowable under Section 40A(3).
Sections Cited
40A(3), 143(2), 142(1), 6DD
AI-generated summary — verify with the full judgment below
PER PAWAN SINGH, JUDICIAL MEMBER:
This appeal by revenue and Cross Objection (C.O.) therein by assessee are directed against the order of ld. Commissioner of Income Tax (Appeals) [for short “CIT(A)”] dated 20.04.2024 for assessment year 2018-19. The revenue has raised following grounds of appeal; (i) The Ld. ClT(A) has erred in deleting the addition of Rs.10,16,03,090/- u/s 40A(3) of the l.T. Act without appreciation of the complete facts of the case as detailed in the assessment order.
CO No. 05/Nag/2024 Padmakar Krushnaji Warbhe (AY 2018-19) (ii) The Ld. ClT(A) has erred in deleting the addition of Rs.10,16,03,090/- u/s 40A(3) of the l.T. Act when the exceptions laid down in Rule 6DD of the income Tax Rules are not satisfied as envisaged in the assessment order. (iii) TheLdCIT(A)has erred in admitting additional evidence during appellate proceedings without following the due procedure laid down in Rule 46A of the Income Tax Rules 1962' (iv) Any other ground that may be raised at the time of hearing' Rival submissions of both the parties have been heard and record perused. The ld. Authorised Representative (AR) of the assessee submits that assessee.
On service of notice of memorandum of appeal of revenue, the assessee filed his Cross Objections raising following grounds , (1) That the order of the learned AO, National Faceless Assessment Centre (NFAC) Delhi passed u/s.143(3) r.w.s. 144B is bad in law and wrong on facts and the learned CIT(A) is justified in deleting the addition made therein. (2) That the learned AO erred in law and on facts in invoking section 40A(3) and making addition of Rs.10,16,03,090/- holding that the payment are made to non-agriculturist. On the facts and circumstances of the case, the learned CIT(A) is justified in holding that the assessee has furnished all the details to establish the nature of transaction and the participants and further holding that the payments are made to agriculturists for procurement of agricultural produce on behalf of the principal. (3) On the facts and circumstances of the case, the learned CIT(A) is justified in holding that the raw cotton is an agricultural produce and therefore the case of the assessee falls in the exceptional clause of Rule 6DD(e). (4) That the learned AO erred in law and on facts in not considering that since the assessee is a licensed Katchha Arhatia who procures goods on behalf of principal and therefore such goods are not purchase of the assessee nor it has been claimed as expenditure in the profit and loss account and therefore in such circumstances no addition could be made u/s.40A(3) of the Income Tax Act. (5) That for any other cross-objection with kind permission of Hon’ble Members at the time of hearing of cross objection.”
3. Rival submissions of both the parties have been heard and record perused. The ld Commissioner of Income –Tax, departmental representative (CIT-DR) for the revenue submits that during the assessment the assessee has not furnished complete details of persons to whom payments made to various agriculturists. In the absence of supporting evidence and confirmation letters the Assessing Officer (‘AO’) treated it as payments made to non-agriculturists. The AO reasonably disallowed only 20% of aggregate payment of Rs. 50.8 crores, thereby disallowing only Rs. 10.16 crores. The ld. CIT(A) deleted the addition without proper appreciation of facts. The ld. CIT(A) accepted the additional evidence without giving opportunity to the AO, to make his CO No. 05/Nag/2024 Padmakar Krushnaji Warbhe (AY 2018-19) submission or objection against accepting additional evidence. The ld. CIT DR for the revenue submits that the matter may be restored to the file of AO for verification of facts and passing the order afresh.
On the other hand, the learned authorised representative ( ld AR) of the assessee supported the order of ld CIT(A). The ld. AR of the assessee submits that the assessee is engaged in the business as a commission agent (Kachha Arhatia). The assessee is a licensed agent for sale of Raw cotton in the Agricultural Produce Market Committee (APMC) wherein agriculturists sell their agricultural produce through commission agents. The raw material (cotton) sold by farmers through the assessee was sent to ultimate purchasers by traders. The traders/purchasers made payment through banking channel to the account of the assessee. The assessee made cash withdrawal from his bank account and made payment to agriculturists. The AO has not disputed the figure of withdrawal of Rs. 50,80,15,450/- from his bank account. The nature of business activities is not disputed by AO. The source of credit in the bank account of assessee is not doubted by AO. The AO also not doubted the payments made to farmers, rather it was disallowed on ad-hoc basis by taking into view that name and complete address of the persons were not provided. We find that the assessee provided all "kapus hisob patti," which contained the names and the addresses of the persons to whom the assessee made cash payment as ‘facilitator’ (commission agent) for sale of raw cotton through him. The AO made ad-hoc disallowance @ 20% of total expenditure, without specifying any reasons. No ad-hoc disallowances under section 40A(3) are justified for such payments.
CO No. 05/Nag/2024 Padmakar Krushnaji Warbhe (AY 2018-19) 5. We have considered rival submissions of the parties and have gone through the orders of lower authorities carefully. We find that the AO made the addition under section 40A(3) of Rs.10,16,03,090/-, being 20% of total payment of Rs. 50.83 crores by taking into view that the assessee has not furnished complete concrete evidence such as complete name of the parties and complete address of persons to whom payments in excess of Rs. 20,000/- were made. The assessee claimed that such payments were made to agriculturists and he had furnished the details of farmers along with copies of ‘kapus hisob patti’ containing name of farmer, address of village with name of purchaser and weight and quality of material. We find that the AO was of the view that in the absence of supporting evidence, confirmation letters and complete addresses of the persons to whom the payments were made were not provided. The AO also held that the case of the assessee is not covered by the exceptions mentioned under rule 6DD of Income Tax Rules, 1962. While making the addition, the AO also referred to the decision of Hon'ble Calcutta High Court in Girdharilal Goenka vs CIT 179 ITR 122 (Kol), wherein it was held that the object of provision of section 40A(3) is to check evasion of taxes so that the payment is made from the disclosed sources. The AO disallowed only 20% total such payment of Rs. 50,80,15,450/- thereby disallowed Rs. 10,16,03,090/- and added to total income.
We find that before ld. CIT(A) the assessee filed detailed statement of facts. In such statement of facts, the assessee stated that he is an individual engaged in the business as commission agent (Kachha Arhatia). He is a licensed agent for sale of Raw cotton in the Agricultural Produce Market CO No. 05/Nag/2024 Padmakar Krushnaji Warbhe (AY 2018-19) Committee (APMC) wherein agriculturists sell their agricultural produce through commission agents. His return of income was selected for scrutiny. A Notice under section 143(2) of the Income Tax Act was issued on 22nd September, 2019 for Limited scrutiny to examine the issue of cash withdrawals and unsecured loans. Notices under section 142(1) were issued from time to time in response to which assessee furnished various documents in support of the return of income as well as the details and the documents required by the AO. The books of accounts, bank accounts, bills, vouchers and other details were furnished in the assessment proceedings. It was further stated that Agricultural Produce Marketing Committee (APMC) was established by the State government under the Maharashtra Agricultural Produce Marketing (Development and regulation) Act 1963. The assessee is a licensed commission agent for the sale of raw cotton and helps the farmers to sell their Raw cotton to the purchasers. Farmers bring raw cotton in the APMC market and the goods are sold by the assessee by arranging auctions for sale of agricultural produce. After completion of the auction, the payment is required by the farmers immediately and therefore, cash payments are made by the assessee. The payments to agriculturists are supported by proper vouchers which were submitted. The weighment register is maintained for each receipt of goods and the same was furnished to the AO. The detailed list of farmers along with copies of 'kapus hisob patti' containing name of farmer, address village, name of purchaser, type of material, weight of material, rate of material and the total amount payable to farmers was duly furnished. "kapus hisob patti" book which is pre-numbered is issued by APMC to the & CO No. 05/Nag/2024 Padmakar Krushnaji Warbhe (AY 2018-19) commission agent. The cash book, bank book, bank statements etc. were furnished in which the details of payment to each agriculturist and its source are recorded. Further, as per the APMC Act, only farmers can bring and sell their goods in the APMC market. The commission agents can act only as the middlemen/agents and cannot purchase and trade on his own account. The commission agent is only facilitator of auction/sale of agricultural produce in the market and it is his responsibility to safeguard the interest of farmers. The payments are received from the purchasers through banking channel on behalf of the farmers and it is his responsibility to distribute the payments so received amongst the farmers. The commission agent is responsible to collect cess on behalf of the APMC committee and deposit the same with the market committee. He is entitled to charge only commission/brokerage. The raw cotton procured by the assessee is not the purchase of the assessee and therefore not claimed as purchase expense in the books of accounts 7. We find that the ld. CIT(A) after considering the finding of the AO and the submissions made by the assessee with supporting details, deleted the additions by holding that the assessee procured the agriculture produce of Raw Cotton by making payment to the cultivators / growers of the agriculture produce and that the assessee falls within the exception of Rule 6DD of Income Tax Rules, 1962 and is thus, excluded from the preview of section 40A(3) and held that no disallowance under section 40A(3) can be made. The ld. CIT(A) also recorded the fact that the AO in his order accepted during assessment the assessee furnished details but the same was not found suitable by him. We find that the AO has not disputed the figure of withdrawal CO No. 05/Nag/2024 Padmakar Krushnaji Warbhe (AY 2018-19) of Rs. 50,80,15,450/- from his bank account. The nature of business activities is not disputed by the AO. The AO also not doubted the payments made to farmers, rather it was disallowed on ad-hoc basis by taking into view that name and completed address of the persons were not provided. It is a known fact that in villages there is no particular house number or a street number, the persons in a village are known by their names only. We find that the assessee provided all "kapus hisob patti," which contained the names and the addresses of the persons to whom the assessee made cash payment as ‘facilitator’ (commission agent) for sale of raw cotton through him. The AO made ad-hoc disallowance @ 20% of total expenditure, without specifying any reasons. No ad-hoc disallowances under section 40A(3) are justified for such payment. We also find that the AO has accepted the withdrawal of huge cash amount from bank. All the payments in the bank account of assessee were received through banking channel.
On independent consideration of facts, we find that no fresh or additional evidence was filed before ld. CIT(A), thus, there is no occasion by ld. CIT(A) to admit additional evidences during first appellate stage. Hence, we do not find any merits in all grounds of appeal
raised by the assessee. Hence, we affirm the order of ld CIT(A), with our additional observation.
9. In the result, the appeal of the revenue is dismissed.
10. Considering the facts that we have affirmed the order of ld. CIT(A) in allowing relief to the assessee, hence, specific adjudication of various grounds raised in cross objection by the assessee needs no specific adjudication and the same are dismissed as infructuous.
CO No. 05/Nag/2024 Padmakar Krushnaji Warbhe (AY 2018-19) 11. In the result, the grounds raised in cross objection are dismissed as infructuous. Order pronounced on 12/03/2026 as per Rule 34 of Income Tax (Appellate Tribunal) Rules-1963.