K BABU,CHENNAI vs. ACIT, CIRCLE-1, CHENNAI

Brief facts of the case are that the assessee filed its return of income for the assessment year 2005-06 on 31.10.2005 declaring a total income of ₹.2,71,030/-. The return of income filed by the assessee was accepted under section 143(1) of the Act. Subsequently, the assessment was reopened under section 147 of the Act consequent to the survey conducted under section 133A of the Act on 03.11.2009, wherein, the impounded materials show that the assessee had purchased raw materials by cash payment amounting to ₹.99,50,546/-, which is in violation of the provisions of section 40A(3) of the Act. After considering the submissions of the assessee during the course of reassessment proceedings, the Assessing Officer completed the assessment under section 143(3) r.w.s. 147 of the Act and determined the income of the assessee at ₹.22,73,612/- after making disallowances. On appeal, after considering the written submissions of the assessee, the ld. CIT(A) confirmed the disallowance made under section 40A(3) of the Act.

On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that during the course of assessment proceedings, the assessee has provided the confirmation from the parties who had supplied raw skin to the assessee by making cash payments to the butchers. It was further submission that the provisions of Rule 6DD(k) says that the payments made by any person to his agent who is required to make payment in cash for goods or services on behalf of the buyer is exempt from the purview of section 40A(3) of the Act. It was further submission that the item purchased was raw skin/hides and the butchers insist always cash payment rather than account payee cheque. In view of the above, the ld. Counsel prayed for deleting the addition. On the other hand, the ld. DR supported the orders of authorities below.

We have heard both the sides, perused the orders of authorities below and gone through the orders of authorities below. In this case, the assessee is engaged in the business of manufacture and export of finished leather. The issue in appeal pertains to disallowance of purchase of raw skins under section 40A(3) of the Act made in cash in excess of ₹.20,000/- from various suppliers. The Assessing Officer held that the assessee had not made any direct purchases from the butchers but had purchased from other established traders and therefore did not accept the asseessee’s claim of exemption under Rule 6DD(f) of the Act. The Assessing Officer also rejected the claim of exemption under Rule 6DD which exempts payments made to agents on behalf of the buyers for the reason that the said parties from whom the assessee purchased were not agents, but were traders themselves. During the course of appellate proceedings, the assessee provided letters from certain suppliers of raw skin in support of his submission. Accordingly, the ld. CIT(A) forwarded the same to the Assessing Officer for verification and submission of report vide his letter dated 01.09.2010. The remand report of the Assessing Officer was received by the ld. CIT(A) on 02.08.2018, wherein, we find that the Assessing Officer has reiterated what was available in the assessment order and nothing more than that after retention of the additional evidences, surprisingly, for nearly eight years and the reason for that may be best known to him. On perusal of the remand report, as reproduced in the appellate order, the only contention of the Assessing Officer is that the suppliers like M/s. Geetha Leathers, T.M.S. Leather, Prabhu Leathers, Raj Enterprises, JMK Leathers, Belgium Leather, etc. are the suppliers from whom the assessee had purchased hides and they are not butchers. Even though it was purchased from those suppliers, those suppliers would have purchased from the butchers only and there is no other go and nothing is prevented the supplier to function as an agent for supplying the hides to the assessee. Generally, the suppliers/ exporters of finished leather purchase the raw material from the butchers on cash basis and to safeguard them, the Legislature intended to make a provision under Rule 6DD(k) that “where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person”. There is no hard and fast rule that the agent should not be a supplier. In view of the above facts, we delete the addition made under section 40A(3) of the Act.

In the result, the appeal filed by the assessee is allowed. Order pronounced on the 19th July, 2019 at Chennai.