ITAT Jaipur Remands ₹19.13 Lakh Cash Payments for Rule 6DD(k) Verification

Rekha Agarwal Vs ITO (ITAT Jaipur)

Cash Payments Through Agent: ITAT Rejects Rule 6DD(e) Plea, Remands ₹19.14 Lakh Disallowance for Rule 6DD(k) Verification

The Income Tax Appellate Tribunal (ITAT), Jaipur Bench, has held that cash payments made through an intermediary for purchasing agricultural produce do not qualify for the exception under Rule 6DD(e) merely because the intermediary subsequently distributes the money to farmers.

However, the Tribunal directed fresh examination of the assessee’s alternative claim under Rule 6DD(k), which concerns payments to an agent required to make cash payments on the assessee’s behalf.

In Rekha Agarwal vs. ITO, the Tribunal restored the disputed Section 40A(3) disallowance of ₹19,13,684 to the Assessing Officer for this limited verification. The appeal was partly allowed for statistical purposes.

Background: CPC Disallowed Cash Purchase Payments

The assessee was engaged in the wholesale business of agricultural products, including bajra, barley and chana, and provided storage and warehousing services through her proprietorship concern, M/s R.K. Warehouse.

She filed her return on 16 December 2021, declaring total income of ₹1,50,000.

While processing the return under Section 143(1), the Centralised Processing Centre made adjustments based on disallowances reported in the tax audit report but not considered while computing the returned income.

These comprised ₹19,13,684 under Section 40A(3) and ₹45,000 under Section 40(a)(ia). The resulting assessed income was ₹21,08,680, with a demand of ₹5,80,390.

The first appellate authority deleted the ₹45,000 disallowance but sustained the cash-payment disallowance. Only the latter dispute came before the Tribunal.

Assessee Claimed Payments Were Ultimately Made to Farmers

The assessee explained that the disputed cash payments were made to Shri Pradeep Kumar, who allegedly acted as her agent for purchasing agricultural produce from farmers.

According to her, he received the money and distributed it to the farmers supplying the produce.

She claimed that the payments qualified for the exception under Rule 6DD(e). In support, she furnished an affidavit from Pradeep Kumar and a list of farmers during the first appellate proceedings.

The first appellate authority rejected this explanation. It held that the exception applied to payments made directly to cultivators, growers or producers, whereas the assessee had paid an intermediary.

Consequently, it upheld the ₹19,13,684 disallowance.

Alternative Claim Raised Under Rule 6DD(k)

Before the Tribunal, the assessee reiterated that Pradeep Kumar procured agricultural produce on her behalf and distributed the purchase consideration to farmers.

Alternatively, she relied on Rule 6DD(k), covering payments made to an agent required to make cash payments for goods or services on behalf of the assessee.

She sought admission of additional evidence under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, including affidavits from certain farmers supporting the alleged agency arrangement.

The Revenue submitted that the relationship between the assessee and Pradeep Kumar required verification. This included examination of the alleged agency arrangement and any commission paid to him.

Rule 6DD(e) Requires Payment to the Cultivator or Producer

The Tribunal rejected the assessee’s primary argument under Rule 6DD(e).

It observed that the clause specifically contemplates payments for the purchase of specified produce to the cultivator, grower or producer.

A mere assertion that an intermediary subsequently paid the farmers did not, by itself, bring the transaction within that exception.

Accordingly, the Tribunal upheld the rejection of this particular plea. The alleged ultimate receipt of money by farmers was insufficient to establish eligibility under Rule 6DD(e).

Agency Exception Requires Independent Examination

The Tribunal nevertheless held that the alternative claim under Rule 6DD(k) stood on a distinct footing.

Its application depended on whether Pradeep Kumar was actually the assessee’s agent and whether he was required to make cash payments for goods on her behalf.

The farmers’ affidavits required examination alongside the books of account, agency arrangement and other supporting material. Since these matters had not been verified by the Assessing Officer, the Tribunal considered a fresh examination necessary.

It admitted the additional evidence and restored the issue for the limited purpose of examining Rule 6DD(k).

Directions to the Assessing Officer

The Assessing Officer was directed to verify the genuineness and terms of the alleged agency arrangement, the nature of the payments and fulfilment of the conditions prescribed under Rule 6DD(k).

The assessee must receive a reasonable opportunity of being heard and may furnish other relevant supporting material.

The Tribunal clarified that its rejection of the Rule 6DD(e) plea would remain operative. The alternative agency-based claim must be decided independently in accordance with law.

Thus, the order does not finally delete the disallowance. Relief depends on verification of the agency arrangement and satisfaction of Rule 6DD(k).

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT JAIPUR

This appeal by the assessee is directed against order dated 29.04.2025, passed by the Addl./Joint Commissioner of Income Tax, Appeal-5 Delhi (hereinafter referred to as “Ld. CIT(A)”) for assessment year 2021-22, raising following grounds:-

1. On the Facts and Circumstances of the case and in the law the Ld. CIT(A) has grossly erred in upholding the disallowance of 1 Rs. 19,13,684/- under section 40A(3) of the Income Tax Act, 1961. Such addition is incorrect and against the law hence deserves to be quashed.

2. On the facts and circumstances of the case and in law the Id. CIT(A) has furthered erred in neglecting the provision of Rule 6DD of Income Tax Rules, 1962 while completing the assessment proceedings against the assessee. Therefore, such order passed in complete ignorance to the Rules is invalid, illogical and against the principal of natural justice, hence deserves to be rolled back.

3. That the assessee has a right to add/ alter/modify/ delete any or all the grounds at any time before the hearing.

2. The dispute concerns the disallowance of ₹19,13,684 under section 40A(3) of the Income-tax Act, 1961 (“the Act”), in respect of cash payments allegedly made through Shri Pradeep Kumar for the purchase of agricultural produce from farmers. The assessee has also sought admission of additional evidence under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, comprising affidavits of certain farmers supporting the claim that Shri Pradeep Kumar acted as the assessee’s agent.

3. Briefly stated facts of the case are that assessee is an individual was engaged in the wholesale business of a agricultural products such as Bajra, Barley and chana and also in the business of the storage and warehousing services in name of propriety concern M/s R.K. Warehouse. The assessee filed a return of income for the year under consideration on 16.12.2021 declaring total income of Rs. 1,50,000/-.

4. The return of income was processed by the Centralized Processing Centre(CPC) under Section 143(1) of the Income Tax Act, 1961 (in short the Act) on 11.08.2022, wherein, adjustments was made invoking sub-clause (a) of clause (iv) of Section 143(1) on the ground of disallowance of expenditure incurred in the audit report but not considered while computing the total income in the return. The CPC made adjustment on the basis of tax audit report comprising of (i) disallowance of Rs. 19,13,684/- under Section 40A(3) and (ii) Rs. 45,000/- under Section 40(a)(ia) as proposed by the tax auditor in the tax audit report.

5. Aggrieved the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) though allowed relief in support of Rs. 45,000/- made under Section 40(a)(ia) but upheld the adjustment of Rs. 19,13,684/- in relation to Section 40A(3)., holding that the exception under Rule 6DD(e) was unavailable since the payments had been made to an intermediary rather than directly to the cultivators or producers. The relevant finding of the Ld. CIT(A) is reproduced as under:-

6.1 The appellant, an individual engaged in the wholesale business of agricultural produce such as bajra, barley, chana, and also in the business of storage and warehousing services through her proprietorship concern M/s RK Warehouse, filed her return of income for the Assessment Year 2021-22 on 16.12.2021, declaring a total income of Rs. 1,50,000/-. The return was duly verified and filed electronically. Subsequently, the return was processed under section 143(1) of the Income Tax Act, 1961 In the intimation issued under section 143(1) on 11.08.2022, following two adjustments were made:

(i) disallowance of Rs. 19,13,684/- under section 40A(3) and

(ii) disallowance of Rs. 45,000/- under section 40(a)(ia).

Consequently, the total income was assessed at Rs. 21,08,680/- and a demand of Rs.5,80,390/- was raised. Aggrieved with the said intimation, the appellant preferred an appeal before this forum.

The appellant challenged the additions made by CPC on multiple grounds, mainly contending that the disallowances were made without providing an opportunity of being heard, that the payments in cash fell within the permissible exceptions under Rule 6DD, and that no default was committed warranting disallowance under section 40(a)(ia) of the Act.

During the course of appellate proceedings, the appellant explained that the disallowance of Rs. 19,13,684/- under section 40A(3) arose due to cash payments made to one Mr. Pradeep Kumar, who acted as an agent for purchasing agricultural produce from farmers. It was contended that although the payments were made in cash exceeding the permissible limit of Rs. 10,000/- per day per person, the payments were ultimately meant for farmers, and hence fell within the exception provided under Rule 6DD(e) of the Income Tax Rules, 1962. An affidavit of Mr. Pradeep Kumar and a list of farmers were also furnished in support. INCOME OTMEN

In this regard, it is apt to mention here that as per the provisions of section 40A(3) of the Act, where an assessee incurs any expenditure and payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque, bank draft, or prescribed electronic mode exceeds Rs. 10,000/-, по deduction shall be allowed in respect of such expenditure. The intention behind this provision is to curb cash transactions and promote transparency in business dealings.

However, Rule 6DD of the Income Tax Rules provides specific circumstances where such disallowance shall not apply. Rule 6DD(e) provides exemption for payments made to the cultivator, grower, or producer of agricultural produce.

In the present case, it is evident from the submissions and documents furnished that the cash payments were made to Mr. Pradeep Kumar, who acted as an intermediary and not as a cultivator or producer. The exemption under Rule 6DD(e) is strictly applicable only where the payments are made directly to the farmer, cultivator, or producer. Payment made to an agent or intermediary cannot claim the protection under Rule 6DD(e). Thus, the case of the appellant does not fall within the ambit of the exceptions provided under Rule 6DD.

Further, the Hon’ble Apex Court in various judgments has emphasized strict interpretation of exemptions in fiscal statutes. Since the appellant did not make direct payment to farmers but through an agent, the conditions of Rule 6DD(e) are not fulfilled, and therefore, the disallowance made under section 40A(3) amounting to Rs. 19,13,684/- is legally justified. This ground of appeal is dismissed.

6. Before us, the learned counsel submitted that the payments were made to Shri Pradeep Kumar, who had acted as an agent in procuring agricultural produce from farmers and had, in turn, distributed the amounts to them. It was contended that the payments were covered by Rule 6DD(e) of the Income-tax Rules, 1962. Alternatively, the assessee invoked clause (k) of the said Rule, which provides an exception for payments made to an agent who is required to make cash payments for goods or services on behalf of the assessee. In support of this alternative plea, the assessee furnished additional evidence, including affidavits of certain farmers as follows:

7. The learned Departmental Representative submitted that the nature of the relationship between the assessee and Shri Pradeep Kumar, including the alleged agency arrangement and the commission amount, if any, paid to him, required verification by the Assessing Officer.

8. We have heard the rival submissions and perused the material available on record. The contention that Rule 6DD(e) extends to payments made indirectly to cultivators through an agent cannot be accepted. The clause specifically contemplates payment for the purchase of the specified produce to the cultivator, grower or producer. The mere assertion that an intermediary subsequently disbursed the money to the farmers does not, by itself, bring the payment within this exception. The claim under Rule 6DD(e) is, accordingly, rejected.

9. The alternative claim under Rule 6DD(k), however, stands on a distinct footing. The applicability of this clause depends upon whether Shri Pradeep Kumar was, in fact, the assessee’s agent and was required to make cash payments for goods on her behalf. The additional evidence furnished by the assessee, including the farmers’ affidavits, requires examination along with the relevant books of account, the alleged agency arrangement and other supporting material. These aspects have not been verified by the Assessing Officer. In the interests of justice, the alternative claim requires fresh examination.

10. Accordingly, we set aside the impugned order to the extent of the disputed disallowance and restore the issue to the file of the Assessing Officer for the limited purpose of examining the assessee’s claim under Rule 6DD(k), after considering the additional evidence admitted by the Tribunal and such other relevant material as may be furnished. The Assessing Officer shall verify the genuineness and terms of the alleged agency arrangement, the nature of the payments and whether the conditions prescribed under the said clause are satisfied. The assessee shall be afforded a reasonable opportunity of being heard. Our observations on Rule 6DD(e) shall govern the rejection of that specific plea; the alternative claim under Rule 6DD(k) shall be decided independently in accordance with law.

11. In the result appeal of the assessee is allowed partly for statistical purposes.

Order pronounced in the Open Court on 21.10.2026