RADHAKRISHNA AGRO PRODUCTS,BARDHAMAN vs. ITO, WARD-2(4), BURDWAN. , BURDWAN

2. That, the Ld. CIT(A) erred in having upheld the arbitrary and wrongful addition of Rs.2,65,55,000/- made U/S 40A(3) of the Act on the allegation that the payments made to the agents of the farmers through bearer cheques being payments made to the traders were not coming within the exception clauses of Rule 6DD of the Rules in spite of the fact that the said payments made at the instance of the farmers for business exigency were covered by Rules 6DD(e)(i) and 6DD(k) of the Rules and hence did not fall within the mischief of sec. 40A(3) of the Act.

3. That, the Ld. CIT(A) further erred on facts and in law in having upheld the of Rs.84,000/- u/s 40A(3) of the Act made on the alleged ground of cash payments made to Bardhaman Trading against purchase of rubber roll from them in spite of the fact that such cash payments in a day did not exceed the limit of Rs.10,000/- and hence there was no violation of the provisions of sec.40A(3) of the Act.

4. That, the Ld. CIT(A) without properly verifying the evidences already on record erred in having upheld the disallowance of machinery repairing charges of Rs.53,081/- paid in cash to Universal Engineers on the alleged ground of lack of evidence in support of the said payments when the said transaction and payment thereof stood reflected in the books and ledger with date wise cash memos etc. and these were forming part of the assessment ecords.

5. That the Ld. CIT(A) on surmise and conjectures and without rejecting the audited books of account erred in having upheld the addition of Rs.38,00,000/- made u/s. 69A of the Act in the guise of unexplained cash deposit during the demonetization period without even considering that out of the normal cash retail sales of Rs.1,55,22,790/- in November, 2016 the cash deposited during the demonetization period of Rs.52 lakhs was inclusive of the said cash of Rs.38 lakhs and furthermore the said cash deposited in the bank was part of the income returned for the A.Y. under appeal.

6. That, the Ld. CIT(A) also erred in having upheld the disallowance of business expenditure incurred on donation/subscription and audit fees totalling to Rs.13,000/- and further sum of Rs.30,000/- debited as accounting charges and addition of the same to the total income on the sole allegation that the self-made vouchers produced did not prove the identity of the said expenditure.

7. That, therefore, as the ex parte order of the Ld. CIT(A), Kolkata-27 suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for.

8. That, the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/or rescind any or all of the above grounds.”

Radhakrishna Agro Products, AY 2017-18 3. Brief facts of the case as culled out from records are that assessee owns rice mills and is engaged in the business of manufacturing rice and rice bran from paddy. Return of income was filed on 28.12.2017 reporting total income of Rs.10,63,120/-. In respect of disallowance of Rs.2,65,55,600/- made u/s. 40A(3) of the Act read with Rule 6DD, Ld. AO had noted from the perusal of bank statement of the assessee that bearer cheques were issued exceeding value of Rs.20,000/- throughout the year to six different persons. According to ld. AO, assessee failed to furnish any satisfactory explanation about the payments made in large sums of money through bearer cheques. The details of payments made through bearer cheques to the six different parties are tabulated as under: Sl. No. Name of the person paid Amount Paid (Rs.) Return filed through bearer cheque 1. Biman Bajar 30,73,000/- Yes 2. Purnendu Saha 82,07,600/- Yes 3. Sk Badruddaja 41,05,000/- Yes 4. Sovan Ghosh 28,85,000/- Yes 5. Sunil Das 31,30,000/- No 6. Tarun Kumar Bajar 51,55,000/- Yes 3.1. For all the above six parties, assessee had furnished details in respect of their income tax returns filed by them and their PAN details also. Statements of four of these parties were recorded u/s. 131 of the Act in the course of assessment proceeding wherein these parties had acknowledged in their respective statements that they used to collect paddy from farmers and deliver the said paddy so collected to the assessee and that the cash received through bearer cheques from the assessee were distributed among the farmers after retaining certain percentage as commission. However, Ld. AO was of the opinion that these parties are not farmers but traders, selling paddy to the assessee after collecting the same from farmers and in the process earned income out of the said activity.

Radhakrishna Agro Products, AY 2017-18 3.2. In the course of assessment proceedings, assessee explained its modus operandi of the business according to which assessee procured paddy in large quantity from farmers directly or through its agents/suppliers/joint liability groups/farmer interest groups. Assessee procured paddy from different villages from the farmers through its agents/Artias. These persons go to the earmarked villages and first encash bearer cheques given to them by the assessee, thereafter these agents purchase paddy from farmers on behalf of assessee and gave cash to the farmers. According to the assessee, for its rice mill huge quantities of paddy is required for production of rice. In order to meet such high levels of quantity of paddy, assessee had adopted this mode of procuring paddy from the farmers, since the villages are situated at far-flung areas. 3.3. Assessee also submitted that the business activity of production of rice from paddy is a seasonal activity and, therefore, requires concerted efforts in procuring the maximum produce of paddy from the farmers during each harvest season. According to the assessee, this procurement of paddy from the farmers by engaging the agents/Artias is an agricultural produce which is procured directly as well as indirectly by it and falls in the ken of Rule 6DD(e)(i) as well as Rule 6DD(k) of the Income Tax Rules, 1962 (hereinafter referred to as the “Rules”). According to the assessee, these six parties were acting as a mediator between him and the farmers. These parties have accepted that they sold paddy to the assessee after procuring the same from the farmers which was done on behalf of the assessee. Ld. AO did not find himself satisfied with the submissions made by the assessee and made the disallowance of Rs.2,65,55,000/- u/s. 40A(3) of the Act. 3.4. In the course of assessment proceedings, Ld. AO required the assessee to furnish details of source of cash deposited in the bank Radhakrishna Agro Products, AY 2017-18 during the demonetization period amounting to Rs. 38 lakh. According to the assessee, this entire deposit was out of retail cash sales made by the assessee. According to the assessee, complete date-wise details of cash, details of monthly retail sales made by the assessee were furnished. The relevant details from the retail sales register and cash book as furnished by the assessee and reproduced in the order of Ld. CIT(A) is extracted below:

3.5. Assessee had reported cash sales of Rs.1,36,86,345/- in the month of October, 2016 and had sufficient cash in hand to deposit it during the period from 10.11.2016 to 12.11.2016. It was further stated by the assessee that there was no unusual increase in cash sales or cash deposits during the demonetisation period as compared Radhakrishna Agro Products, AY 2017-18 to the immediately preceding year. In this respect the factual details are summarized as under: Particulars FY 2015-16 FY 2016-17 (relevant year) (In Rs.) Cash Deposits in Banks 1,47,05,000/- 1,10,00,000/- Retail cash Sales 22,57,99,788/- 12,80,69,784/- Cash Deposits during 45,40,000/- 38,00,000/- demonetisation period 3.6. It was further stated that sales made by the assessee during the year and offered to tax as well as assessed as such, is undisputed. Assessee thus, explained the source and nature of deposit of cash in the bank account which according to the Ld. AO was unsatisfactory. He thus proceeded to make an addition of Rs. 38 lakh u/s. 69A of the Act. 3.7. Apart from the above two disallowances/addition, there are several other small additions made by the Ld. AO, all of which pertaining to disallowance u/s. 40A(3) for making payments in cash exceeding Rs.20,000/-. Aggrieved by the addition and disallowance, assessee went in appeal before the Ld. CIT(A) who sustained the same. Aggrieved, assessee is in appeal before the Tribunal.

4.1. Section 250(6) cast a duty on Ld. CIT(A) to pass an order in appeal which should state the points for determination and a decision as well as the reason for arriving at such decision. In the present case before us, even though assessee has made its submissions along with supporting documents, compliance has not been met while disposing of the appeal by Ld. CIT(A). We deprecate the approach adopted by the Ld. CIT(A). In order to avoid multiple proceeding, we, instead of remitting the matter, proceed to decide the appeal on the strength of oral and written submissions made before us. Accordingly, ground no. 1(a) to 1(c) taken by the assessee is allowed for statistical purposes.

Radhakrishna Agro Products, AY 2017-18 5.1. We also take note of the fact that the business of the assessee is a seasonal one, depending upon the harvest of paddy available for only few months during any given year. Assessee has procured paddy directly from farmers as well as through its agents/Artias who in turn have procured it from the farmers and supplied to the assessee. Procurement of paddy by the assessee during the year has been both, by way of payments made through cheques as well as by issuing bearer cheques. Details of sales and purchases as well as stock reported in the audited financial statements have been duly accepted in the course of assessment and are undisputed. The only contest is in respect of mode of payment which is not in compliance with the provisions of section 40A(3), not fall within the exception provided in rule 6DD of the Rules. Hence, disallowed and added to the total income reported by the assessee. 5.2. It is worth noting that Ld. AO had issued summons to the six parties to whom bearer cheques were issued for procurement of paddy from the farmers located in far flung village areas. Statement u/s. 131 had been recorded wherein these parties have confirmed about the modus operandi of the business activity for procurement of paddy adopted by the assessee. From one of the statements recorded in the case of Shri Sunil Das which is reproduced in the impugned assessment order at page 9, it is pertinent to take note of answer to question no. 8 which is reproduced as under: “Q.8. Please state whether you had any business relation with M/s. Radhakrishna Agro Products (PAN-AALFR4797A) of Belari, Aushgram, Burdwan 713141 during the FY 2016-17. Ans. During the FY 2016017, I used to sale paddy grown by me and group of farmers in my village to the mill named M/s. Radhakrishna Agro Products. In turn I was paid the price of the paddy sold to the mill and I subsequently divided the same price amongst farmers as cost of their paddy sold to the mill after keeping some commission and fare of my tractor trolly.” 5.3. From the answer to this question, it is noted that Shri Sunil Das had categorically stated that he himself grows paddy and sold it to the Radhakrishna Agro Products, AY 2017-18 assessee. He also supplied paddy by procuring it from group of farmers. Similar is the statement given by Shri Tarun Kumar Bajar in question no. 9 which is reproduced by Ld. AO at page 13. Thus, on perusal of the statements recorded u/s. 131 of these parties, it is noted that they used to sell paddy grown by themselves or by the farmers to the assessee and in turn they used to receive the price of the paddy from the assessee which was distributed to the farmers after retaining certain percentage of commission. We also note that identity of these parties is established who have acknowledged the transaction of procurement of paddy. 5.4. Before we draw our conclusion on the issue before us, it is worth taking note of rule 6DD(e) and (k) of the Rules which is as under:

5.5. From the perusal of above provision, we note that if payment is made for the purchase of agricultural produce to the cultivator, grower or producers then no disallowance shall be made u/s. 40A(3) of the Act. In clause (k), payments made to the agents for goods or service on behalf of such person also falls in the exception. In the present Radhakrishna Agro Products, AY 2017-18 case before us, the six parties have acted as agents of the assessee for procurement of paddy from the farmers, two of them being farmers themselves. Hence, rigours of section 40A(3) do not apply in the said procurement for which disallowance has been made u/s. 40A(3). We also note that identity of the suppliers, genuineness of the purchases made and payments made to the farmers or the agents are not in dispute. Trading results of the assessee has been accepted and sales made by the assessee are not in doubt. Accordingly, we hold that no disallowance u/s. 40A(3) is warranted as made by Ld. AO by applying provisions of section 40A(3) on the procurement of paddy. Accordingly, ground no. 2 raised by the assessee is allowed. 5.6. To buttress our conclusion, we draw force from the legislative intent for bringing provisions of section 40A(3) which is to check unaccounted money and not to restrict the business activity of the assessee. In this respect, Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh Vs. ITO [1991] 59 Taxman 11 (SC) has observed as under: “"Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from disclosed sources. The terms of section 40A(3 )are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A( 3) and rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black-money for business transactions. Any restraint intended Radhakrishna Agro Products, AY 2017-18 to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business."