R.DEIVASIGAMANI (HUF),CHENNAI vs. ITO, CUDDALORE

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

for want of supporting evidence and passed order u/sec.144 of the Act dated 31.12.2011. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

circumstances does not fall in exceptions of Rules 6DD and confirmed the addition of the ld. Assessing Officer.

3.1. On second disputed issue, the assessee has disclosed in the return of income agricultural income of �82,22,866/- and produced bills for sale of paddy from different parties to the extent of �78,91,705/-. The ld. Commissioner of Income Tax (Appeals) relied on the comments of the ld. Assessing Officer in remand report duly supported with sale receipts and were ld. Assessing Officer concluded that expenses are not fully vouched and Estimated agricultural income disallowance to the extent of �34,40,902/- and restricted the agricultural income to �57,25,953/- but the ld. Commissioner of Income Tax (Appeals) has allowed credit of agricultural income on sale of paddy, sugarcane, coconut to the extent of �40,00,000/- and considered �17,25,953/- as income from other sources out of disallowance of �34,40,902/- by the ld. Assessing Officer. Further, ld. Commissioner of Income Tax (Appeals) has deleted �17,14,949/- and partly allowed the appeal on other disputed grounds. Aggrieved by the Commissioner of Income Tax (Appeals) order, the assessee filed an appeal before Tribunal.

3.2. Before us, the ld. Authorised Representative of assessee appeared and reiterated the submissions made in the assessment to 1074/Mds/2016. :- 5 -: proceedings and appellate proceedings and also Highlighted the objections raised on the remand report. On the first disputed issue of disallowance u/sec. 40A(3) of the Act, the ld. Authorised Representative explained that the assessee regularly purchase fire wood and clay for brick line operations from villagers who carry on agricultural activities.

The farmers and Agriculturalist residing in Villages do not have bank account and the ld. Assessing Officer has filed the remand report with the statement of details on payments, name of the seller and nature of procurement and value. The ld. Assessing Officer instead of considering genuineness of payment has become suspicious on the transactions and disallowed the amount applying the provisions of Sec. 40(A)(3) of the Act.

The ld. Commissioner of Income Tax (Appeals) relied on the provisions but concurred with the findings of the ld. Assessing Officer which is bad in law and prayed for allowing the grounds.

3.3 Contra, the ld. Departmental Representative relied on the orders of Assessing Officer and opposed the grounds.

3.4 We heard the rival submissions, perused the material on record and evidence. The assessee is a Kartha of HUF and in the business of bricks and textiles and deriving agricultural income. The facts that the to 1074/Mds/2016. :- 6 -: assessee purchases fire wood for the use in brick line as regular business transactions. The fire wood is purchased from farmers of the villages who are illiterate and does not have bank account and believe only in cash transactions. The cash payments are mandatorily made due to Business exigencies and the transactions are with farmers who are mostly uneducated and the Bank transactions are not appreciated by the farmers for supply of Raw material and always insist for cash and move from place to place. The farmers who supply fire woods at brick line do not have permanent place of business and deal in cash and it is not practical to educate the farmers at that instant for opening the Bank account. The ld.Authorised Representative contention that the payments are made to agriculturist and villagers for forest produce within Rule 6DD of Income Tax Rules. The assessee considered business expediency and cash payments are made in peculiar situations were villages mandatorily insist for cash payments. We perused the provisions of Sec. 40A(3) of the Act read as:-

‘’Where the assessee incurs any expenditure in respect of which a payment of aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure’’. to 1074/Mds/2016. :- 7 -: and Rule 6DD and exception under Income Tax Rules

No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment59 or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder, namely :— (a)where the payment is made to— (i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); (ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949); (v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956); (b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender; (c) where the payment is made by— (i) any letter of credit arrangements through a bank; (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank; (v) the use of electronic clearing system through a bank account; (vi) a credit card; (vii) a debit card. Explanation.—For the purposes of this clause and clause (g), the term “bank” means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company65 as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949)], whether incorporated or not, which is established outside India; (d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee; 6(e) where the payment is made for the purchase of— (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or (iii) fish or fish products68; or to 1074/Mds/2016. :- 8 -:

(iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; 69(g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; (h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty thousand rupees; (i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee— (i) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and (ii) does not maintain any account in any bank at such place or ship; 70(j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; (k) where the payment is made by any person to his agent71 who is required to make payment in cash for goods or services on behalf of such person; (l) where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.

Further, the ld. Assessing Officer has not doubted the genuineness of payments made to villagers/farmers by cash but the payment should be made through account payee cheques. The assessee is following this business practice from earlier years. Further, the provisions of Sec.40A(3) of the Act must not be read in isolation of excluding Rule 6DD under Income Tax Rules. It is a clear case that these provisions are not interpreted or intended to restrict business activities and the ld. Assessing to 1074/Mds/2016. :- 9 -:

Officer is allowed only to disallow the claim and not to restrict the Business of the assessee and shall considered the genuineness and business expediency. No doubt the payment also includes transport of sand since the assessee is having diversified business and should not activate the system of the cash transactions in violation of provisions of Sec. 40A(3) of the Act even though there are exemptions available and the ld. Departmental Representative emphasized that the assessee could not file any evidence and reasons for making cash payments in line with the provisions of Rule 6DD. We having considered the apparent facts, material and evidence and provisions of law, Direct the ld. Assessing Officer to restrict the disallowance to the extent of 50% only and pass the orders and the ground of the assessee is partly allowed.

land and lease land which are in order and in the name of members of HUF and Bill wise list of sale of paddy were filed. The ld. Authorised Representative drew our attention to the annexure I of the remand report were the details were furnished with Sl. No. date, Bill No, Name of the purchaser, name of the seller, number of bags, bill amount and also reconciliation explained in the last page were the assessee has offered and disclosed agricultural income of all the crops �82,16,138/-.

The ld. Assessing Officer in the assessment proceedings accepted the gross income with supporting Bills and formed an opinion that the claim of the assessee cannot be completely accepted and disallowed �34,40,902/-. Against the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

4.1 In the appellate proceedings, the ld. Commissioner of Income Tax (Appeals) formed an opinion based on the findings of the ld. Assessing Officer in assessment proceedings and remand report that agricultural expenses are not fully vouched and estimated agricultural income irrespective of fact of disallowance by the ld. Assessing Officer and considered net agricultural income of �40,00,000/-and sustained addition of �17,25,593/- as income from other sources. Against the order of Commissioner of Income Tax (Appeals), the assessee assailed an appeal before Tribunal. to 1074/Mds/2016. :- 11 -:

4.2 Before us, the ld. Authorised Representative argued that CIT(A) erred on the facts that the assessee has furnished details of agricultural lands owned and agricultural crop produce alongwith Government records supporting the Agricultural income. The assessee has been receiving agricultural income from earlier years. The ld. Authorised Representative produced copy of assessment order passed u/s.143(3) of the Act for the assessment year 2007-2008 were the then ld. Assessing Officer has accepted the agricultural income of �29,13,540/- in his order u/s.143(3) of the Act dated 28.10.2009 and the assessee also produced the profit and loss account and Balance sheet to support the agricultural income. We considering the apparent facts, the nature of income and evidence filed by the assessee before ld. Assessing Officer and ld. Commissioner of Income Tax (Appeals).

The income of the assessee from agricultural activities cannot be doubted as the income offered by the assessee considered by the ld. Assessing Officer in earlier assessment years and there exist genuineness of Agricultural income. The action of the ld. Commissioner of Income Tax (Appeals) in estimating the agricultural income and sustaining the addition of �17,25,953/- and treating as income from other sources cannot be prime facie be accepted, considering the extent of holding of land by assessee and his to 1074/Mds/2016. :- 12 -: members of HUF and mortgage lands. We are the opinion that since the assessing authority has accepted the ownership of Agricultural lands and the agricultural income disclosed by the assessee was accepted in earlier years. The ld. Assessing Officer shall re-examine the case for limited purpose and we remit the disputed issue of �17,25,953/- to the file of Assessing Officer to verify the genuineness supported by the ownership and sale bills and pass the order on merits after providing adequate opportunity of being heard to the assessee.

The ground of the assessee is allowed for statistical purpose.

4.3 In the result, the appeal of the assessee in is allowed for statistical purpose.

5.1 In the result, the appeal of the assessee in is allowed for statistical purpose.

6.1 The first ground raised by the assessee is that Commissioner of Income Tax (Appeals) erred in confirming the disallowance of �2,47,735/- without mentioning the reasons and specific heads of expenditure.

6.2 In the assessment proceedings, the ld. Assessing Officer based on the verification of bills and vouchers produced in support of claim of expense reflected in profit and loss account. The reason envisage by the ld. Assessing Officer that vouchers are not properly supported and are self made and Due to inability to produce proper vouchers by the assessee, the ld. Assessing Officer has disallowed the claim. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

6.3 In the appellate proceedings, the ld. Commissioner of Income Tax (Appeals) not convinced with the submissions of the ld. Authorised Representative on disallowance and relied on the findings of the ld. Assessing Officer on self made vouchers. Even in appellate to 1074/Mds/2016. :- 14 -: proceedings, the assessee could not submit proper explanations and the action of ld. Assessing Officer was confirmed. Aggrieved by the order of Commissioner of Income Tax (Appeals), the assessee assailed an appeal before Tribunal.

6.4 Before us, the ld. Authorised Representative explained that the assessee is running business of Bricks and textiles and filed Profit and Loss Account for both the business separately. Wereas the ld. Assessing Officer has made disallowance of �2,47,735/- without referring to any specific expenses and the assessee is maintaining proper Books of account as in earlier years and were accepted by the Revenue. Therefore, the action of the ld. Assessing Officer making adhoc disallowance of expenses is incorrect and prayed for allowing the appeal.

6.5 Contra, ld. Departmental Representative relied on the orders of Commissioner of Income Tax (Appeals) and vehemently opposed the grounds.

6.6 We heard the rival submissions, perused the material on record. The ld. Assessing Officer had disallowed the expenses of �2,47,775/- without referring to any specific head of expenditure. On perusal of assessment order, it is not clear whether it is a specific to 1074/Mds/2016. :- 15 -: disallowance out of consolidated expenditure or adhoc disallowance.

Therefore, we are of the opinion that the matter has to be re-examined by the ld. Assessing Officer on the genuineness of expenses and identity of Head of expenditure. Therefore, we remit the disputed issue to the file of the ld. Assessing Officer for examination and ld. Assessing Officer shall pass the order after providing opportunity of being heard. The ground of the assessee is allowed for statistical purpose.

6.7 The second ground raised by the assessee that the ld. Commissioner of Income Tax (Appeals) erred in confirming the disallowance of �5,27,000/- u/sec. 40A(3) of the Act.

6.8 We have considered the facts and submissions made by the ld. Authorised Representative and Departmental Representative, similar issue was adjudicated by us for the assessment year 2009-2010 in at para 3.4 and we partly allow the ground of the assessee.

6.9 The last ground raised by the assessee is that Commissioner of Income Tax (Appeals) erred in confirming the addition of �5,27,000/- made towards notional interest of agricultural income. to 1074/Mds/2016. :- 16 -:

6.10 The ld. Assessing Officer found that the assessee has declared �91,19,399/- as agricultural income and produced details of agricultural land and Revenue records and explained that the land acquired are under mortgage from local villagers who gave the land possession to the assessee and also promissory notes executed as evidence. The ld. Assessing Officer found on perusal of promissory notes interest at 1% per month would be charged on loan amount and the ld. Assessing Officer presumed that the assessee has not offered any interest income or disclosed loan in Balance Sheet and the ld. Assessing Officer calculated nominal interest at 12% per annum out of agricultural income and a sum of �5,27,000/- treated as income from other sources and added to the returned income. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

6.11 In the appellate proceedings, the ld. Authorised Representative argued the grounds and explained that the ld. Assessing Officer erred in making an addition of �5,27,000/- towards interest income which was not received and also there is uncertainty of receiving any amount. The ld. Commissioner of Income Tax (Appeals) having considered the submissions, findings of the ld. Assessing Officer, land records and proof of income and overlooked the fact that there is no such clause in to 1074/Mds/2016. :- 17 -: promissory notes executed in this year by agriculturists and filed copies of promissory notes. The ld. Commissioner of Income Tax (Appeals) found that the promissory notes are executed in different names of family members and in the absence of any full proof documentary evidence presumed that the assessee might have received interest and confirmed the addition of the ld. Assessing Officer. Aggrieved by the Commissioner of Income Tax (Appeals) order, the assessee assailed an appeal before Tribunal.

6.12. Before us, the ld. Authorised Representative argued the grounds and reiterated the submissions on the interest income and explained that the ld. Assessing Officer has accepted the lands were possessed on mortgage from local villagers on promissory notes and these promissory notes were received for abundant caution as security measures and the assessee does not charge or receive any interest from mortgaged land as in earlier years. The assessee is carrying on agricultural operations and earning agricultural income from earlier years and were accepted by the Revenue and prayed for allowing the appeal. to 1074/Mds/2016. :- 18 -:

6.13. Contra, ld. Departmental Representative relied on the orders of Commissioner of Income Tax (Appeals) and vehemently opposed the grounds.

6.14 We heard the rival submissions, perused the material on record and evidence filed. The main crux of the issue being charging of interest on promissory notes by the ld. Assessing Officer. The ld. Authorised Representative explained that as a security measure and abundant caution these promissory notes were accepted as the land were utilized under mortgage from local villagers on basis of promissory notes. The ld. Authorised Representative explained that the ld. Assessing Officer has estimated the income based on promissory notes. We on perusal found that the ld. Assessing Officer has not made inquiry on payment of interest with villagers or sources of assessee as interest income and also estimated income based on the evidence produced in good faith in the assessment proceedings.

Considering the apparent facts, we are not convinced with the explanations of lower authorities were addition was made without investigation. Therefore, we remit the entire disputed issue to the file of the ld. Assessing Officer to verify whether genuinely interest has been collected by the assessee with authentic documentary proof. So, to 1074/Mds/2016. :- 19 -: we set aside the order of ld.CIT(A) on this ground and allow the ground of the assessee for statistical purpose.

6.15 In the result, the appeal of the assessee in is allowed for statistical purpose.

Order pronounced on Thursday, the 21st day of July, 2016 at Chennai.