High Court Of Madras
CIT vs. Sri Shanmuga Ginning Factory
Assessment Year : 1998-99
Section : 40A(3)
Mrs. R. Banumathi And K. Ravichandrabaabu, JJ.
Tax Case (Appeal) No. 255 Of 2010
February 18, 2013
JUDGMENT
K. Ravichandrabaabu J. – The Revenue is on appeal in respect of the assessment year 1998-99. The following is the substantial question of law raised in the above appeal :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the additions under section 40A(3) by applying the exemption rule 6DD(i), when the assessee has not proved that (i) the payee had acted as agents of the assessee, (ii) cash payment were to be paid to the growers by the payee on behalf of the assessee, in the capacity of agent ?”
2. The assessee, a partnership firm, was engaged in the business of cotton ginning during the previous year. The assessee filed the return of income for the assessment year 1998-99 on December 31, 1999, declaring a total income of Rs. 11,540. The case was taken up for scrutiny. On a perusal of the books of account produced by the assessee-firm, the Assessing Officer noticed that some payments exceeding Rs. 20,000 were made by the assessee in cash during the previous year towards purchase of raw cotton. This payment, according to the Assessing Officer, was in violation of the provisions of section 40A(3) of the Income-tax Act. The assessee claimed that the persons to whom the disputed payments made were acting as agents of the assessee in procuring the raw cotton from the growers and, therefore, such payments are covered under rule 6DD(i) of the Income-tax Rules. The Assessing Officer did not accept the claim of the assessee by observing that those persons were not agents of the assessee and the said payments did not appear to have been made on behalf of the assessee. He further proceeded to hold that the provisions of rule 6DD of the said Rules have no application to the cash payments under consideration and those payments are in violation of the provisions of section 40A(3) of the Income-tax Act. Accordingly, he disallowed 20 per cent. of the aggregate of such payments which works out to Rs. 26,10,552.
3. The assessee went on appeal before the Commissioner of Income-tax (Appeals). The first appellate authority elaborately considered the issue. He pointed out that the ginning factories and traders and the growers are members of the Tiruchengode Agricultural Producers Marketing Society Ltd., to whom the assessee had paid a sum of Rs. 54,22,101 in cash. He also pointed out that a perusal of copy of the letter dated April 25, 2003, from the said co-operative society would show that there was no element of sale present in the transaction with the bidders as well as the agriculturist.
4. In so far as the payment made to M/s. P. K. R. Murugan Commission Mundy is concerned, the Commissioner of Income-tax (Appeals), on verifying the copy of the return filed by the said person for the assessment year 1998-99, has found that the credit side of the profit and loss account shows the receipts from agriculturists as cotton commission receipts and receipts from the bidders as merchant commission. The Commissioner of Income-tax (Appeals) also examined the sales tax assessment orders and found that the sales tax made therein was to the effect that the total turnover as per the accounts representing the local sales of the cotton kappas as agents of agriculturists/principals. Therefore, considering all these factual circumstances, and also by observing that either the genuineness of the transaction or the authentication of the sales tax order by the Sales Tax Department indicating that the society as well as the private commission mundis were only agents was not in doubt, the first appellate authority deleted the addition made by the Assessing Officer by holding that the assessee is not covered by rule 6DD(j) or rule 6DD(i). The Revenue went on further appeal before the Tribunal.
5. It was pointed out by the Tribunal that the payments under dispute were made to five parties and all of them have charged 1 per cent. commission from the assessee which means that such persons including the co-operative society were acting on behalf of the assessee in the process of auction. Since those persons were charging commission from the assessee, it cannot be said that they were not acting on behalf of the assessee. It was also pointed out by the Tribunal that such persons in turn were required to make payment to the agriculturists in cash. Consequently, the Tribunal found that the payments made through the agents are clearly covered by the provision of rule 6DD(i) and addition should not have been made in respect of those payments.
6. However, in so far as the payment made to Kannan Traders on April 6, 1997 and April 22, 1997, amounting to Rs. 1,79,159 and Rs. 1,75,000 respectively are concerned, the Tribunal remitted the matter to the Assessing Officer with a direction to verify whether each payment is less than Rs.20,000 and if so, the Assessing Officer should consider the same for section 40A(3) in the light of the decision made in the case of CIT v. Kothari Sanitation & Tiles (P.) Ltd. [2006] 282 ITR 117 (Mad.).
7. Aggrieved against the said order of the Tribunal the Revenue filed the above appeal before this court, however, confining its dispute only with regard to the payments made in cash to M/s. P. K. R. Murugan Commission Mundy, to the extent of Rs. 66,64,100 and to Tiruchengode Agricultural Producers Marketing Society Ltd., in respect of the payment to the extent of Rs. 54,22,101.
8. Heard the learned counsel appearing for the Revenue. There was no representation for the assessee.
9. In this appeal, the Revenue is contesting against the payments made by the assessee in cash to M/s. P. K. R. Murugan Commission Mundy and to Tiruchengode Agricultural Producers Co-operative Marketing Society alone on the reason that such payments violate the provisions of section 40A(3) of the Income-tax Act, which states that if the assessee incurs any expenditure in respect of which payment was made in a sum exceeding twenty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, twenty per cent. of such expenditure shall not be allowed as a deduction.
10. No doubt, in this case, the assessee had made payments in cash to five persons out of wham the present appeal is confined to the payments made to M/s. P. K. R. Murugan Commission Mundy and to Tiruchengode Agricultural Producers Co-operative Marketing Society. The claim of the assessee is that such payments were made to those persons as the assessee’s agents and, therefore, the said payments were protected under rule 6DD(i) of the Income-tax Rules. A perusal of rule 6DD(i) shows that no disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person. Therefore, what is to be seen in this case is as to whether those two persons have acted as agents of the assessee in procuring the raw cotton on behalf of the assessee.
11. No doubt, the Assessing Officer had pointed out that none of the persons to whom the disputed payment was made by the assessee were agents of the assessee and such payment also did not appear to have been made on behalf of the assessee. On the other hand, the first appellate authority had gone into the factual aspects in detail and found that those persons were only agents of the assessee and, consequently, he ordered the deletion of the addition made by the Assessing Officer. The first appellate authority had elaborately discussed at paragraph 4.2 of his order about the nature of the transaction done by the said co-operative society and also by perusing the letter dated April 25, 2003, of the co-operative society, he found that element of sale was not present in the transaction with the bidders as well as the agriculturists. In the absence of an element of sale in the transaction between the said society and the assessee, as found by the first appellate authority, the contention of the assessee that the said co-operative society was acting as the agent of the assessee has to be necessarily accepted. That has been rightly done by the first appellate authority.
12. In so far as the other persons, viz., P. K. R. Murugan Commission Mundy is concerned, the first appellate authority on verification of the return filed by the said person for the above assessment year 1998-99, found that the credit side of the profit and loss account showed receipts from agriculturists as cotton commission receipts and receipts from bidders as merchant commission. The first appellate authority also found that the sales tax assessment orders supported the case of the assessee to the effect that the total turnover as per the accounts representing local sales of cotton kappas as agents of agriculturist/principals.
13. Therefore, after rendering such factual finding on the status of those persons as agents, the first appellate authority rejected the contention of the Assessing Officer. On further appeal, the Tribunal further found that all those persons to whom the disputed payment made by the assessee had charged 1 per cent. commission from the assessee and, therefore, such persons were acting on behalf of the assessee in the process of auction. When that being the factual finding in respect of the status of those persons, concurrently, by the first appellate authority as well as by the Tribunal by holding that those persons have acted as agents of the assessee, we have no hesitation in holding that the assessee is entitled to protection under rule 6DD(i) of the said Rules as the disputed payments were made only to its agents. Apart from that aspect, by going through the nature of business and transaction between the parties, an element of commercial expediency was also involved in this case, which we can take judicial notice. There are no other materials placed before us by the Revenue to take a different view, moreover when those findings rendered by the first appellate authority as well as the Tribunal is totally a finding of fact, we are not inclined to interfere with the same. Consequently, we find no merits in this appeal and the question of law is answered against the Revenue. Accordingly, the tax case appeal is dismissed. No costs.
[Citation : 355 ITR 96]
