PANDURANG DAYANAND HIREMATH,,KOLHAPUR vs. INCOME TAX OFFICER,, KOLHAPUR

The assessee has raised the following grounds of appeal:- 1. The learned CIT(A)-1, Kolhapur erred in law & on facts in sustaining the incorrect disallowance of Rs.26,80,721/- made by the learned AO by invoking Sec 40A(3) of the Income Tax act 1961.

The issue which arises in the present appeal is against the disallowance made under section 40A(3) of the Act at ₹ 26,80,721/-.

Despite service of notice, none appeared on behalf of assessee nor any application was moved for adjournment and because of smallness of the issue, present appeal is decided after hearing the learned Departmental Representative for the Revenue.

Briefly, in the facts of the case, the assessee had furnished return of income declaring total income of ₹ 4,67,127/-. The assessee was engaged in trading of agricultural produce and Soya. On verification of bank accounts, the Assessing Officer noted that the assessee had made payments to different traders in excess of ₹ 20,000/- by cash / bearer cheques. The list of said payments were drawn up by the Assessing Officer and was enclosed as Annexure-A to the assessment order. The total payments made by the assessee in contravention of provisions of section 40A(3) of the Act were ₹ 26,80,726/-. The assessee was confronted with the same. However, the Assessing Officer held the assessee to have defaulted in view of section 40A(3) of the Act and hence, expenditure of ₹ 26,80,726/- was disallowed.

Before the CIT(A), contention of assessee was that the payment was made for agricultural produce to the farmers either directly or indirectly. In support thereof, the assessee filed written submissions dated 18.02.2015 along with confirmation from the traders and the agriculturists. The assessee contended that he was a dealer in agricultural produce i.e. Makka, wherein he purchases agricultural produce from farmers and makes payment to the farmers by withdrawing the amounts from bank. The payments made to farmers for agricultural produce was covered under the provisions of Rule 6DD(e)(i) of the Income Tax Rules, 1962 (in short ‘the Rules’). Annexure-I was attached, which reflects the details of such payments made to farmers. He further explained that on certain occasions, Makka was purchased from a trader, who in turn, acts as commission agent on behalf of farmers. The payment made by the assessee to such trader was directly passed on to the respective farmers and the details along with clarification from the trader that he had made payments to the farmers for agricultural produce were placed in Annexure-2 to the letter. It was further pointed out that payment in two cases of

The assessee is in appeal against the order of CIT(A).

Despite service of notice, none appeared on behalf of assessee nor any application was filed for adjournment. The appeal is decided after hearing the learned Departmental Representative for the Revenue because of the issue involved. The only issue which is raised in the present appeal is against invoking of provisions of section 40A(3) of the Act. As per the said section, there is an embargo on cash payments above ₹ 20,000/-. The said section provides that where the assessee incurs any expenditure, in respect of which payment or aggregate of payment is made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee cheque exceeding ₹ 20,000/-, then no deduction is to be allowed in respect of such expenditure. Rule 6DD of the Rules, however, provides exception to provisions of section 40A(3) of the Act. The said rule lays down that even in cases where payment made to a person in a day otherwise than by an account payee cheque or bank draft exceeds ₹ 20,000/-, then no disallowance was warranted under section 40A(3) of the Act, in the cases and circumstances specified thereunder. We are concerned with clause (e) of Rule 6DD of the Rules, which provides that where the payment is made for purchase of agricultural or forest produce or the produce of animal husbandry or diary or poultry farming, fish or

Now, coming to the second set of payments, where the assessee was engaged in sale and purchase of agricultural produce; the assessee claims that the payments were made either directly to the farmers, who sold their agricultural produce or through traders to the farmers, who in turn, also sold their agricultural produce to the assessee. Under Rule 6DD(e)(i) of the Rules, where payment is made for agricultural or forest produce to the cultivators or the growers though in cash, but the same is not hit by the provisions of section 40A(3) of the Act. The assessee has filed the evidence in this regard but the CIT(A) has commented on the evidence saying that it contains certain bank account numbers. There is no merit in the observations of CIT(A), since the payment to agriculturists was made in cash. The assessee had furnished the details and the evidence in this regard before the CIT(A) as is mentioned in the written submissions filed by the assessee. The assessee was trading in agricultural produce i.e. Makka, against which aforesaid payments were being made. In view thereof, where the business of assessee involved dealing in

Coming to the second set of payments i.e. to the traders, where the payments are made to traders, which in turn, directly passed on to the respective farmers is also not hit by provisions of section 40A(3) of the Act being payments made to the agriculturists. Accordingly, disallowance made by the CIT(A) is reversed. The Assessing Officer is directed to delete the disallowance of ₹ 26,80,721/-.

In the result, appeal of assessee is allowed.