ITO, CHITRADURGA vs. M/S SRI. MARUTHI TRADERS, CHITRADURGA

The appeal by the revenue and cross objection by the assessee are directed against the order dated 31.08.2015 of the CIT(Appeals), Davangere for the assessment year 2010-11.

The assessee is a partnership firm, engaged in trading of coconuts. For the relevant assessment year, the assessee filed the return of income declaring income of Rs.60,300. The scrutiny assessment u/s.143(3) r.w.s.144A was completed on 28/3/2013 by computing a total income of Rs.81,84,540 after disallowances of an amount of Rs.13,95,106/- out of de- husking charges, Rs.3,09,429/- out of Hamali, Loading & unloading charges and Rs.63,79,700/- u/s.40A(3) of the Act.

As far as dehusking charges are concerned, the assessee submitted before the AO that the assessee’s labourers are employed to de-husk the coconuts at the purchase point and that the husk is left with the sellers and therefore accounting sales or closing stock of husk does not arise. However, the assessee has not explained as to why the assessee has to employ its own labourers to de-husk the coconuts and thereafter take the coconuts only and let the husk with the sellers. According to the AO, the assessee is purchasing coconuts that have already been de-husked. The AO did not accept the assessee’s statement that the de-husking charges are accounted and claimed as expenditure and the husk which is used in CO No.3/Bang/2016 Page 3 of 12 various industries including coir industry is left with the sellers. The AO observed that the assessee is running a coir products unit and the husk is the main raw material for that industry. Therefore, the assessee’s stand that the husk is left with the sellers was not believable/acceptable especially when the labourers produced by the assessee before the A.O. stated that they are employed to issue husk to the coir industry run by the assessee. In view of the above, the sum of Rs.13,95,106/- claimed towards de-husking charges was disallowed and added back to the total income by the AO.

During the appellate proceedings before the CIT(Appeals), the assessee filed written submissions as under:-

The CIT(Appeals) observed that the assessee has brought out detailed facts that it has purchased coconuts after being de-husked to facilitate transportation to carry more coconuts. He noted that the A.O. made the addition on presumption that de-husked items bring better revenue which will be used in various industries including coir industry. But the assessee has explained how purchase of de-husked coconuts are beneficial, cost wise as well as transporting the coconuts from purchase point to shop. The CIT(A) has pointed out that the A.O. has not recorded the statement of labourers to ascertain the veracity of payment of de- husking charges, but simply written their names against their signatures. The CIT(A) held that A.O. failed to prove that de-husking charges have not been incurred. However, the CIT(A) observed that in this kind of business, where the assessee makes vouchers at his freewill, inflation of expenses cannot be ruled out and therefore held that Rs.2,79,020/- being 20% of de- husking charges can reasonably be presumed to be excessive and upheld the addition to this extent. Relief granted to the assessee was Rs.11,16,080/-.

Aggrieved, the department is in appeal and has raised ground No.2 before us which is as follows:-

The assessee in its CO in ground No.2 raised objection, as it is aggrieved by the order of CIT(Appeals) sustaining an addition of Rs.2,79,020 with respect to dehusking charges.

We have heard both the parties and perused the material on record. The ld. AR for the assessee reiterated the submissions made before the CIT(Appeals). The assessee had submitted the details of purchase of coconuts after dehusking. It was explained that the dehusked coconuts are beneficial to the assessee in as much as transportation is easier and is more viable cost-wise also. A list of 1173 nos. of vouchers was produced before the AO. It was submitted that the dehusking is done at the purchase point and labourers of the assessee were sent in trucks to do dehusking. The AO has not recorded the statement of labourers produced before him, but simply wrote their names against the signature. The CIT(Appeals) was of the view that there would be some inflation in the expenses claimed by the assessee and made a fair estimate that 20% of dehusking charges to be excessive and therefore upheld the addition to the extent of 20% of dehusking charges. We are of the opinion that in this kind of business

The next issue relates to disallowance of hamali, loading and unloading charges. The AO found an amount of Rs. 5,77,854/- and Rs. 6,59,863/- was claimed as expenditure towards loading and unloading charges and Hamali charges respectively. The assessee produced 805 vouchers for Hamali payments and 244 vouchers for the loading & unloading charges before the AO for examination. It was submitted that the expenses are in the nature of payment to coolies which assessee has been following for the last 30 years consistently and no addition has been made in scrutiny for the A.Y.2009-10 on this account. The assessee also submitted that he was ready to produce all the labourers for examination and also produced 10 to 15 labourers before the AO for examination.

On appeal before the CIT(Appeals), the assessee also produced copy of vouchers for Hamali Charges and loading & unloading charges.

The CIT(Appeals) noted that the sample vouchers produced before him were in order, however, he observed that the vouchers are self made ones and in most of the vouchers, full name is not written and only address is written. He further observed that from the style of signatures, the labourers are illiterates and came to the conclusion that the labourers signed the vouchers without knowing the content. He was of the view that inflation of expenses could not be ruled out. The CIT(A) therefore restricted the disallowance to 10% of total expenditure.

Aggrieved by the order of the CIT(Appeals), both the revenue and the assessee by way of CO are in appeal before us.

We have heard the rival submissions and perused the material on record. The ld. AR for the assessee submitted before us that though labourers were produced before the AO, but the AO failed to record their statement. He submitted that sample vouchers were produced before the CO No.3/Bang/2016 Page 8 of 12 CIT(Appeals), but the CIT(A) though found them to be in order, he however was of the view that the labourers were illiterates and would have signed the vouchers without knowing the contents. He was of the view that when self-made vouchers are made, there is a temptation to inflate the expenses.

We subscribe to the view of the CIT(Appeals) that in the self-made vouchers, the probability of inflation has to be taken into account. The CIT(A) has reasonably restricted the disallowance to the extent of 10% of the total expenditure. Hence, we confirm the order of the CIT(Appeals) and dismiss the respective grounds raised by the department in its appeal as well as by the assessee in its CO on this issue.

The next issue is regarding cash payments in contravention of provisions of section 40A(3). The AO noted that all the payments made towards purchase of coconuts are made by cash and the payment in 239 cash bills/vouchers exceeds Rs.20,000/- totalling to Rs.63,79,700/-. The assessee’s contention was that wherever bills exceed Rs.20,000/-, the name of the route is mentioned and on the reverse of the bill a list of sellers and amounts paid to them are noted. The AO was of the opinion that the assessee does not purchase coconuts directly from farmers and that the nuts are brought to the assessee by a trader or agent. Moreover, the 18 farmers produced before the A.O. have filed a copy of RTCs. On CO No.3/Bang/2016 Page 9 of 12 verification of the same, it was seen that only in six RTCs the crop grown is shown as coconut and all the RTCs show that the land held are dry lands and various other crops including areca are being cultivated by the holders of the RTC. Hence the assessee has failed to prove that the coconuts are purchased from the farmers. The AO further observed that the assessee’s claim that whenever the bill amount exceeds Rs.20,000/- a list of sellers are noted on the reverse of the bills actually goes to prove the fact that coconuts are not purchased individually from farmers but are being purchased at particular purchase point. Further the name of the route of purchase is only mentioned on the bills and names of the sellers are not mentioned, it is only written on the reverse of the bills. None of the farmers who appeared before the A.O. have produced any bill or voucher or any kind of evidence to show that they have sold coconuts to the assessee.

The contentions of the assessee before the CIT(A) are that, coconuts are products of farmers in rural areas and the farmers need to be paid only in cash and each payment was less than Rs.20,000/- even though each transaction mentioned in the voucher was for more than

During appellate proceedings, the assessee has furnished a booklet containing copies of all vouchers for purchase of coconuts. The CIT(Appeals) on examination of the same found that, wherever bill exceeded Rs.20,000/-, the voucher is made in the name of purchase route not in any individual name on the reverse of the bill, but 3 to 4 transactions are recorded wherein the name of the persons and amount are mentioned which are less than Rs.20,000/- in each case. These vouchers were submitted to the AO during the assessment proceedings.

The CIT(Appeals) held that the assessee is into this business for the past over 30 years. This is for the second time that the provisions of sec.

We have heard the rival submissions and perused the orders of lower authorities. We find the fact remains that the coconuts are products of farmers in rural areas and they need to be paid in cash only and each payment on the reverse of the bill is less than Rs.20,000, even though each transaction mentioned in the voucher was more than Rs.20,000 since the vouchers were prepared for transactions in respect of 3 to 4 farmers.