OCEANIC BIO HARVEST LTD,CHENNAI vs. DCIT, CORP CIR-1(1), CHENNAI

This appeal filed by the assessee is directed against order of learned Commissioner of Income Tax (Appeals)-3, Chennai, dated 10.12.2018 and pertains to assessment year 2012-13.

The assessee has raised the following grounds of appeal:-

The brief facts of the case are that the assessee company is engaged in the business of aqua culture of prawn and prawn seeds. The assessee has filed its return of income for the assessment year 2012-13 on 31.03.2014 declaring a total income of Rs.1,12,76,510/-. The case was taken up for scrutiny and during the course of assessment proceedings, the AO noticed that assessee has debited pond and farm maintenance expenses of Rs.20.21 crores, as compared to a sum of sum of Rs.17.39 lakhs in the previous financial year. Since, there is an exorbitant increase of 115 times in expenses when compared to the earlier year, the AO vide office notice u/s.142(1) of the Income Tax Act, 1961 (hereinafter the ‘Act’) dated 24.02.2015, has called upon the assessee to file details of expenditure along with supporting bills and vouchers. In response, the authorized representative of the assessee submitted ledger copy of the pond and farm maintenance expenses, however not filed supporting bills and vouchers but claimed that expenditure debited under the head ‘pond and farm maintenance expenses’ is paid to farmers and allowable as deduction u/s.40A(3) r.w.rule 6DD(e) of the Income Tax Rules, 1962 (hereinafter the ‘Rules’).

The AO, however was not convinced with the explanation furnished by the assessee. According to her, the assessee has not furnished bills and vouchers to establish the genuineness of the transaction. She further observed that as per Rule 6DD(e), for payment to be covered under said rules, it should be made for the purchase of agriculture of forest produce or produce of animal husbandry or dairy or poultry farming or fish or fish products or the produce of horticulture or apiculture. But, however as per the account copy furnished by the assessee, it is seen that the payments have been made to labours for cleaning of pond, for JCB baffling charges, for purchase of sand, bricks, jally, purchase of salt, etc. The AO further observed that the assessee has not provided any evidences to prove that said payments have been made to the cultivator, grower or producer in order to be excluded u/s.40A(3) of the Act, by virtue of Rule 6DD(e). Accordingly, the AO disallowed expenditure debited under the head ‘pond and farm maintenance’ of Rs.20.21 crores u/s.40A(3) along with 40(a)(ia) of the Act, for non-deduction of tax at source on JCB baffling charges.

Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld.CIT(A), the assessee vide its letter dated 15.05.2017, has filed additional details on pond preparation and maintenance expenses which have been forwarded to the AO to give her comments. The AO vide letter dated 20.09.2017 has furnished remand report and rejected additional details filed by the assessee on the ground that the assessee had not furnished bills and vouchers to establish the genuineness of the transaction and also failed to file any evidences to prove that impugned payments are outside the scope of Section 40A(3) / 40(a)(ia) of the Act. The ld.CIT(A) has forwarded copy of the remand report to the assessee for its comment. The assessee vide letter dated 15.11.2017 filed the rejoinder and argued that, we were unable to make further submission of the documents which we possess, due to initiation of Corporate Insolvency Resolution process among two of our group companies, based on the insolvency and bankruptcy code. Since the staffs of the assessee company were involved in the process of IBC proceedings, we are unable to file additional evidences before the AO during remand proceedings. However, before we could submit our additional submission and proof of AO has submitted her remand report reiterating her comments made on disallowance of expenses u/s.40A(3) of the Act.

The ld.CIT(A) after considering relevant submissions of the assessee and also taken note of the remand report issued by the AO, vide office letter dated 01.11.2018, called upon the assessee to furnish relevant evidences in support of the expenditure claimed at Rs.20.21 crores under the head ‘pond and farm maintenance’. In spite of another opportunity to produce evidences, the assessee has failed to file any evidence in support of huge expenditure debited under the head ‘pond and farm maintenance’. Therefore, the ld.CIT(A) opined that the assessee did not have any evidences in support of the expenditure and hence sustained addition made towards disallowance of pond and farm maintenance expenses u/s.40A(3) / 40(a)(ia) of the Act. Aggrieved by the CIT(A) order, the assessee is in appeal before us.

The ld.AR for the assessee submitted that the ld.CIT(A) has dismissed the appeal filed by the assessee without giving adequate opportunity of hearing to produce necessary evidences in support of expenditure debited under the head ‘pond and farm maintenance expenses’. Therefore, one more opportunity may be given to the assessee to go back to the AO to file necessary evidences in support of expenses debited into the profit & loss account. The ld.AR further submitted that even during assessment proceedings, the AO has not given adequate opportunity of hearing to produce necessary evidences. Further, the assessee was pre-occupied with IBC proceedings in connection with two of its group companies and hence, could not gather necessary evidences to support the expenditure. Therefore, in all fairness, the issue may be set aside to the file of the AO to reconsider the issue.

The ld.DR on the other hand strongly supporting order of the CIT(A) submitted that the assessee has failed to file any evidences before AO or ld.CIT(A) to justify the claim of expenditure. Further, even during assessment proceeding no evidence has been filed despite the AO has called upon the assessee to file evidences. Further, during the appellate proceedings, the ld.CIT(A) has given another opportunity to the assessee to produce necessary evidences but the assessee neither produced evidences nor justified the claim of expenditure. Even before the Tribunal, no evidence has been placed on record. But the assessee is seeking restoration of appeal to the AO without bringing on record any evidences to justify the claim of expenses. Therefore, there is no merit in the arguments taken by the ld.AR for the assessee to set aside the appeal to the file of the AO and hence the addition made by the AO and sustained by the ld.CIT(A) should be confirmed.

Having said so, let us examine the nature of expenditure incurred by the assessee under the head ‘pond and farm maintenance expenses’. Admittedly, the assessee has incurred huge expenditure of Rs.20.21 crores and such expenditure has been incurred in cash in contravention to provision of section 40A(3) of the Act, which is evident from the fact that the ledger account copy filed by the assessee clearly shows that majority of the payments have been made in excess of Rs.20,000/- in cash in violation of section 40A(3) of the Act. Although, the assessee claimed before the AO that said payments have been made to farmers, but the AO has negated arguments of the assessee in light of evidences filed during the course of assessment proceedings that impugned payments have been made to labours for cleaning of pond, for JCB baffling charges, for purchase of sand, bricks, jally, purchase of salt. No evidence has been placed on record to prove that payments have been made to cultivator, grower or producer as per Rule 6DD(e) in order to exclude said payments from the provision of section 40A(3) of the Act. Further, as per Rule 6DD(e), in order to exclude cash payment from the purview of section 40A(3) of the Act, said payment should be made for purchase of agriculture or forest produce or produce of animal husbandry or dairy or poultry farming or fish or fish products or the produce of horticulture or apiculture. But, as JCB baffling charges. Therefore, we are of the considered view that expenditure debited under the head ‘pond and farm maintenance expenses’ cannot come under the exclusion provided under Rule 6DD(e) of IT Rules, 1962. Therefore, we are of the considered view that there is no error in the findings recorded by the AO and affirmed by the ld.CIT(A) to make disallowance of expenses u/s.40A(3) / 40(a)(ia) of the Act. Hence, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the assessee.

In the result, the appeal filed by the assessee is dismissed.