INCOME TAX OFFICER, WARD-1(2), VIJAYAWADA vs. BOMMISETTY VENKATA SIVA KUMAR, VIJAYAWADA

PER S. BALAKRISHNAN, Accountant Member :

This appeal filed by the Revenue is against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [Ld. CIT(A)-NFAC] in DIN & Order No. ITBA/NFAC/S/250/2023-24/1054402894(1), dated 17/7/2023

2 arising out of the order passed U/s. 143(3) of the Income Tax Act,

1961 [the Act] for the AY 2014-15.

and filed his return of income for the AY 2014-15 dated

17/09/2014 declaring total income of Rs. 5,91,420/-. The case

was selected for scrutiny through CASS and notices U/s. 143(2)

and 142(1) of the Act were issued to the assessee. During the

scrutiny proceedings, on perusal of the submissions made by the

assessee’s Representative, the Ld. AO observed that the assessee

made purchases of husk from various Grams and certain

varieties of Dal from various farmers which include cash

purchases. The AR of the assessee has produced 331 vouchers in

respect of the purchases made from the farmers. The AR also

submitted before the Ld. AO that the purchases are made from

farmers and the payments are made in cash. Thereafter, the Ld.

AO asked the assessee to furnish the details of persons from

whom the purchases were made, circumstances under which

such cash purchases are made, to produce suppliers for cash

purchases made by the assessee, details of Dal purchases made

in cash and the details of record maintained in respect of cash

purchases etc., vide the letter dated 9/12/2016. In reply, the

3 assessee submitted that the agricultural produce is mainly

purchased from the farmers which visit the assessee directly to

sell the produce. It was further submitted that the suppliers are

none other than the farmers who demanded the assessee to pay

in cash. It was also submitted before the Ld. AO that since the

payment is made for purchase of agricultural produce, no

disallowance can be made U/s. 40A(3) as per the provisions of

Rule 6DD(e) of the Income Tax Rules, 1962. The Ld. AO after

considering the submissions made by the assessee in replies to

the letters issued by the Ld. AO, the Ld. AO issued a show cause

notice as to why the cash purchases stated to be made by the

from the farmers should not be treated as false and also to offer

explanation as to why the provisions of section 40A(3) of the Act

should not be invoked. In reply, the assessee made submissions

through e-mail. On perusal of the submissions of the assessee

and the explanations given thereto, the Ld. AO opined that they

are not acceptable for the reasons stated in the assessment

order. Ld. AO observed that the assessee failed to produce the

farmers, the vouchers produced by the assessee cannot be relied

upon and therefore the Ld. AO concluded the assessment by

disallowing 20% of the total expenditure of Rs. 4,81,31,019/-

treating the same as false purchases. Further, the Ld. AO also

concluded that the since the assessee violated the provisions of

section 40A(3) r.w.r 6DD of the Income Tax Rules, 1962 and

made cash payments against the purchase of husk, which cannot

be considered as a direct agricultural product and also

considering the facts and circumstances of the case, 80% of the

total cash purchases made by the assessee are disallowed by

invoking the provisions of section 40A(3) of the Act. Aggrieved by

the order of the Ld. AO, the assessee filed an appeal before the

Ld. CIT(A)-NFAC. On appeal, the Ld. CIT(A)-NFAC, after

considering the facts and circumstances of the case and the

explanations as well as the submissions made by the assessee,

allowed the appeal of the assessee. On being aggrieved by the

order of the Ld. CIT(A)-NFAC, the Revenue is in appeal before the

Tribunal by raising the following grounds of appeal:

“1. The Ld. CIT(A) has erred in passing the order deleting the addition made by the Ld. AO U/s. 40A(3) disallowance, since the AO has tried his level best to verify the information submitted by the assessee also deputed the Inspector to verify the persons who have made transactions with the assessee are agriculturists and the assessee miserably failed to prove the same. 2. The Ld. CIT(A) ought to have upheld the addition made by the AO as the assessee failed to prove that the assessee made the cash payments to the persons as per section 40A(3) r.w.r 6DD of the IT Rules, 1962. 3. The Ld. CIT(A) relied on the decision of the Supreme Court in the case of CIT vs. Cynamid India Limited (104 Taxmann 94 (1994) (SC)] however, the case law quoted by the Ld.

5 CIT(A) is not relevant to this case as the assessee has provided only Pattadar pass books of five persons and confirmation letters of two person only and not filed or provided any other information / evidences before the Assessing Officer. 4. Any other ground that may be urged at the time of appeal hearing.”

findings of the Ld. CIT(A)-NFAC is whether cash purchases of

husk beyond the prescribed limit of Rs. 20,000/- per day as

contemplated U/s. 40A(3) r.w.r 6DD of the Income Tax Rules,

1962 is applicable to the facts of the case or not? It is the

submission of the assessee that the assessee is merely dealing

with husk of various agricultural produce viz., Bengal Gram

Husk, Green Gram Husk, Massor Husk, Orud Husk, Red Gram

Husk etc. The assessee is carrying on his business in the Market

Yard and many of the agriculturists used to supply their

products to the assessee because of his reputation and his

regularity in making the payments to the agriculturists. The Ld.

AR further submitted that the agriculturists without approaching

any brokers, they used to contact directly the assessee for selling

their products ie., husk from various Grams. The Ld. AR further

submitted that the regular agriculturists were selling their

products to the assessee directly because the assessee was of the

opinion since the husk is an agricultural product it would not be

hit by the provisions of section 40A(3) of the Act. The Ld. AR also

drawn our attention to clause-(e) of Rule-6DD(e) of Income Tax

Rules, 1962 which reads as under:

“6DD. 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 payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or 2[account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA, exceeds ten thousand rupees] in the cases and circumstances specified hereunder, namely:— (a).. (b)… (c)… (d)… (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 products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;”

It was further submitted by the Ld. AR that the assessee made purchases

from agriculturists who separate the husk at the mills. There is no

dispute on the fact that the husk produce is an agricultural produce by

the Ld. AO and the Ld. AO has not doubted the genuineness of the

transactions made by the assessee while procuring the husk from 331

farmers. The only case of the Ld. AO is that there is a violation of

provisions of section 40A(3) of the Act and also the assessee did not

7 produce farmers before him for enquiries and hence the Ld. AO made

disallowance. The Ld AR further submitted that the Ld. AO disallowed

80% of the cash purchases made by the assessee from 331 farmers by

invoking the provisions of section 40A(3) of the Act. However, the Ld. AO

allowed 20% of the purchases. The Ld. AR further argued that the Ld.

AO does not have discretionary power to bifurcate the purchases while

applying the provisions of section 40A(3) of the Act. Further, the Ld. AR

also submitted that these purchases cannot be treated as bogus since

the assessee has disclosed the same while filing the VAT returns. The

Ld.AR also submitted a copy of the Central Sales Tax assessment order is

produced before us which is available in the paper book pages 244 and

the nature of product which is an agricultural produce, the provisions of

section 40A(3) r.w.r 6DD cannot be applied to the instant case.

Per contra, the Ld. Departmental Representative heavily relied on

the order of the Ld. AO. The Ld. DR further submitted that the assessee

has not produced the farmers before the Ld. AO for enquiries and also

the assessee made cash payments beyond Rs. 20,000/- and therefore it

is a clear cut case of violation of the provisions of section 40A(3) of the

Act. The Ld. DR therefore pleaded to set-aside the order passed by the

Ld. CIT(A) and to confirm the order of the Ld. AO.

8 4. We have heard both the sides and perused the material available

on record as well as the orders of the Ld. Revenue Authorities. It is found

from the record that the assessee has made a purchase of Rs. 11.64 Crs

during the impugned assessment year which includes the cash

purchases of Rs. 4.81 Crs. The assessee has also submitted the receipt

for purchases made by the assessee from various farmers aggregating to

331 before the Ld. AO. The Ld. AO simply stated based on the enquiries

made by the Income Tax Inspector that no information is available in the

office of Agricultural Market Committee regarding the farmers. The Ld.

AO further states that even purchases were self-made vouchers and

cannot be relied upon. Further, from the submissions of the Ld. AR, we

find that the Ld. AO has accepted the sales made by the assessee which

is also reflecting in the VAT returns filed by the assessee. The Ld. AR

also submitted that the quantitative details on the turnover of the

assessee were not disputed by the Ld. AO. We find merit in the

argument of the Ld. AR that sales cannot be affected without any valid

purchases and hence we find that the Ld. AO contradicted himself by

stating that the assessee has made bogus purchases. Further, from the

submissions of the Ld. AR, we find that the assessee has produced

Pattadar Pass Books of Five farmers before the Ld. AO. We also find from

the order of the Ld. CIT(A)-NFAC that the Ld. CIT(A)-NFAC relied on the

case of Hon’ble Supreme Court in the case of CIT vs. Cynamid India

9 Ltd (237 ITR 585)(SC) wherein it was held that “husk produced

because of milling of paddy should be held as agricultural

produce”. Following the ratio laid down in that case, the Ld. CIT(A)-

NFAC has considered the husk purchased by the assessee as

agricultural product. It is also undisputed fact that the assessee is in

this line of business for more than 15 years and the Revenue has not

contested the similar issue in any of the assessment years. Further, we

find that the Ld. CIT(A)-NFAC also relied on the decision of the

Coordinate Bench of Delhi in the case of M/s. Geo Connect Ltd vs. DCIT

in ITA No. 2896/Del/2018 for the AY 2014-15 wherein it was held that

the provisions of section 40A(3) should not be invoked when it falls

within the exceptions specified in Rule 6DD of the Income Tax Rules,

1962. Further, the Ld. CIT(A)-NFAC has also relied on various judicial

pronouncements as detailed in his order in para 6.8. Considering the

facts and circumstances of the case, we find that the cash transactions

does not fall within the ambit of section 40A(3) r.w.r 6DD of the Act as it

is covered under Clause-(e) of Rule-6DD of the Income Tax Rules, 1962.

Further, we rely on the decision of the Hon’ble Gujarat High Court in the

case of Principal Commissioner of Income Tax vs. Keshvalal

Mangaldas reported in [2018] 96 taxmann.com 83 (Gujarat) for the

proposition that “Where cash payments exceeding Rs. 20,000 made

by assessee to farmers was clearly covered by exemption provided

under rule 6DD(e)(i), disallowance made under section 40A(3) was

not justified”. For the sake of brevity and reference, the relevant

paras from the judgment of the Hon’ble Gujarat High Court is

reproduced hereunder:

“3. We have heard Mrs. Mauna M. Bhatt, learned advocate appearing on behalf of the Revenue and Shri Manish J. Shah, learned advocate appearing on behalf of the respondent-assessee. We have perused and considered the order passed by the learned A.O., CIT (A) as well as the learned ITAT. 4. It is required to be noted and it is not in dispute that the assessee is engaged in the business as a Commission Agent for purchase/sale of food- grain/agricultural produces and is also holding licence issued by the Agricultural Produce Market Committee. In the Books of Accounts, the assessee has shown the amount of Rs. 2,83,55,337/- paid to various farmers. However, as the payments were exceeding Rs. 20,000/- in cash, the A.O. made the disallowance under Section 40A(3) of the Act. However, considering Rule 6DD(e)(i) of the Income Tax Rules, 1962, and when the payment was made by cash exceeding Rs. 20,000/-, it was permissible if the same was paid for purchase of agricultural produces. It is required to be noted that in the present case, in the Books of Accounts, the said payment was shown to be paid to various farmers and even the receipts were also produced but the assessee could not produce the farmers/list of farmers for which a reasonable explanation was also given. However, without rejecting the Books of Accounts, the learned A.O. made the addition under Section 40A(3) of the Act which is rightly deleted by the CIT (A) and rightly confirmed by the learned ITAT. In the present case, Rule 6DD(e)(i) shall be applicable and the same is rightly applied by the learned CIT (A) as well as the learned ITAT. It cannot be disputed and it is not disputed that as such, the assessee was engaged in the business of Commission Agent for purchase/sale of food-grain and is also holding licence issued by the Agricultural Produce Market Committee. 5. Considering the aforesaid facts and circumstances of the case, when the disallowance made by the learned A.O. under Section 40A(3) of the Income Tax Act has been deleted by the learned CIT (A) and the same has been confirmed by the learned ITAT, it cannot be said that the same is contrary to the provisions of the Act and/or erroneous. No substantial question of law arises. Hence, the present appeal deserves to be dismissed. Accordingly, it is dismissed.”

In the instant case, since the Ld. AO has not disputed the fact that the

husk is an agricultural produce whereas the Ld. CIT(A)-NFAC has also by

11 relying on the decision of CIT vs. Cynamid India Ltd (237 ITR 585)(SC) (supra) held that husk is an agricultural produce, in our opinion the provisions of section 40A(3) r.w.r 6DD of the Income Tax Rules, 1962 cannot be invoked in the instant case as it is covered under Clause-(e) of Rule 6DD of Income Tax Rules, 1962. Therefore, we find no infirmity in the order of the Ld. CIT(A)-NFAC and hence no interference is required in the Ld. CIT(A)-NFAC’s decision. It is ordered accordingly.

Pronounced in the open Court on 29th February, 2024.

Sd/- Sd/- (दु�वू� आर.एल रे�डी) (एस बालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER Dated :29.02.2024 OKK - SPS

आदेश क� ��त�ल�प अ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee – Sri Bommisetty Venkata Siva Kumar, 1. Prop. M/s. Bomisetty Sambasiva Rao Trading Company, 1-4-221-2, RTC Workshop Road, Bhavanipuram, Vijayawada-522012. राज�व/The Revenue – The Income Tax Officer, Ward-1(1), 2nd Floor, 2. CR Buildings, MG Road, Vijayawada – 522 002.

12 3. The Principal Commissioner of Income Tax, आयकर आयु�त (अपील)/ The Commissioner of Income Tax 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, �वशाखापटणम/ DR, ITAT, 5. Visakhapatnam गाड� फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam