Case Law Details
Bishnu Rice Mill Vs ACIT (ITAT Kolkata)
The appeal concerned the disallowance of ₹14,08,50,854 under Section 40A(3) of the Income-tax Act in respect of cash payments exceeding ₹20,000 made for the purchase of paddy. The assessee, engaged in the business of operating a rice mill and producing rice and rice bran from paddy, challenged the order of the Commissioner of Income Tax (Appeals), which had confirmed the addition.
During scrutiny assessment, the Assessing Officer observed that the assessee had made cash payments aggregating to ₹14,08,50,854 to certain parties in excess of the prescribed limit. These parties included individuals who received payments through cash and bearer cheques for procuring paddy. The Assessing Officer treated them as suppliers and disallowed the payments under Section 40A(3).
The assessee explained that these persons were not suppliers but mediators, agents, or Kaccha Arahtias engaged in collecting paddy from farmers on behalf of the assessee. The assessee furnished consolidated statements, weighment certificates, names of farmers, quantity of paddy purchased, purchase prices, and details of commission payments known as “Jalpan.” It was submitted that the agents collected paddy from farmers and distributed cash payments to them. According to the assessee, the transactions were covered by the exceptions contained in Rule 6DD(e) and Rule 6DD(k) because the purchases involved agricultural produce procured from cultivators through agents.
The Tribunal noted that a related issue had previously arisen in the assessee’s own case during revision proceedings under Section 263. In that matter, a coordinate bench had examined the entire procurement mechanism in detail. The Tribunal had observed that the assessee procured large quantities of paddy through agents operating in distant villages. The agents either encashed bearer cheques or received cash from the assessee and then paid farmers directly while procuring paddy on the assessee’s behalf. The coordinate bench held that the procurement of paddy, an agricultural produce, directly or indirectly through agents fell within the scope of Rule 6DD(e)(i) and Rule 6DD(k). It further held that the Assessing Officer had already examined the issue during assessment proceedings and that the revisionary order under Section 263 was unsustainable.
In the present appeal, the Tribunal observed that the same facts and modus operandi existed. It also noted that in Assessment Year 2016-17 the Assessing Officer had accepted the assessee’s business model of making payments through agents or mediators for procurement of paddy. Although books of account were rejected in that year for separate reasons, the appellate authority had subsequently allowed the assessee’s appeal after finding no defects in the quantitative records relating to purchases, production, sales, or stock.
The Tribunal further noted that the identities of the agents or mediators, the genuineness of paddy purchases, and the payments made to farmers or growers had never been disputed by the tax authorities. It also observed that farmers generally refused to accept cheque payments and that where cheques were accepted, they were issued specifically for paddy purchases. Relying on its earlier decision in the assessee’s own case and the decision in ITO vs. Sunil Kumar Agarwal, the Tribunal held that the cash payments were covered by the exceptions provided under Rule 6DD(e) and Rule 6DD(k).
Accordingly, the Tribunal set aside the order of the CIT(A), directed the Assessing Officer to delete the addition of ₹14,08,50,854 made under Section 40A(3), and allowed the appeal.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 26.09.2025 for the AY 2014-15.
2. The issue raised by the assessee in ground no.1 is against the confirmation of addition of ₹14,08,50,854/- as made by the ld. AO u/s 40A(3) of the Act on account of cash payments exceeding to ₹20,000/- to farmers against the purchase of paddy under the wrong understanding of facts that payments were made to the suppliers and not to the cultivators inspite of the admitted fact that the mediators purchased paddy on behalf of the assessee and were reimbursed in cash by the assessee. The other ground nos. 2 and 3 are in support of ground no.1.
3. The facts in brief are that the assessee is engaged in the business of running a rice mill i.e. production of rice and rice bran from paddy. During the year, the assessee filed the return of income on 13.11.2014, declaring total income at ₹17,64,000/-. The case of the assessee was selected for scrutiny under Computer Assisted Scrutiny Selection (CASS) and statutory notices along with questionnaire were issued which were replied by the assessee by filing the details as called for by the ld. Assessing Officer. On examination of the said details, the ld. AO noted that the assessee has paid ₹14,08,15,854/-to the suppliers of paddy in cash in excess of ₹20,000/- in a single day. The ld. AO further noted that the assessee has paid cash/ bearer cheques to four parties namely i)A Biswas who was paid by bearer cheques of ₹11,70,000/- ii) Abu Kalam Mondal was paid by cash/ bearer cheques of ₹5,20,63,560/- iii) Ajay Agarwal was paid ₹90,00,000/- in cash and iv) ₹Arjun Shaw was paid ₹93,00,834/- in cash. Accordingly, the assessee was asked to furnish the details of payments to these parties and also explain as to why the same should not be disallowed u/s 40A(3) of the Income-tax Act, 1961 . The assessee submitted before the ld. AO that the above four parties along with the few other parties were engaged in collecting paddy from the farmers as per the requirements of the assessee and delivering the same at the rice mill. It was where submitted before the AO that the paddy being agricultural produce used in the making rice and these parties were acting as mediators/ agents between the farmers on one hand and the assessee on the other. The assessee furnished before the ld. AO the consolidated statement and supporting weighment certificates containing names of the individual farmers, weight of paddy, purchase price of paddy, etc. prepared by the assessee as per the information provided by these agents/ suppliers. It was also submitted that for these services, the commission was paid to the suppliers which was shown in the books as known as ‘Jalpan’. It was submitted that the suppliers collected the payment through cash and paid to the farmer in cash. Thus, the suppliers were acting as Kaccha Arahtias/ Agents for the assessee firm for procurement of paddy. It was submitted that the case of the assessee was directly covered by Rule 6DD(e) and 6DD(k) of the Income Tax Rules. However, the submission of the assessee did not find favor with the AO and out of cash payments of ₹26,75,14,300,’-, the ld. AO accepted the payment to the tune of ₹12,66,63,446,’- and disallowed the remaining cash payment of ₹14,08,50,854/- u/s 40A(3) of the Act in the assessment framed.
4. The assessee challenged the assessment before ld. CIT(A). During the pendency of appellate proceedings, the PCIT invoked the jurisdiction u/s 263 of the Act on 18.02.2019 on the ground that the ld. AO has under-calculated the amount u/s 40(3) of the Act to the tune of ₹12.66 crores in respect of cash payments made for paddy. Accordingly, the order u/s 263 of the Act was passed on 27.03.2019, wherein the order passed u/s 143(3) of the Act dated 29.02.2016, was held to be erroneous and prejudicial to the interest of the Revenue with respect to the disallowance u/s 40A(3) of the Act.
5. The said order was challenged by the assessee before the Tribunal and Tribunal quashed the revisionary order passed by the ld. Pr. Commissioner of Income Tax.The operative part is as under:-
“11. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee is engaged in the business of running of rice mill where it manufactures rice from paddy. It is noted that in this assessment year, the assessee firm has claimed gross turnover of Rs.64,93,162,230/- and had purchased paddy for Rs.63,33,84,264/-. During the assessment proceedings, the AO asked the assessee to furnish the details like name, complete address of the persons from whom assessee had purchased paddy. Pursuant to the same, the assessee furnished the details and the AO after going through the list of persons from whom it purchased the paddy and the ledger account of the said persons reflected in assessee’s books of account, the AO noted that the assessee had made payments mostly by way of cash in excess of Rs. 20,000/- on a single day. Further, the AO also noted that certain payments were made by bearer cheques from its bank account held in Oriental Bank of Commerce, Burdwan. The AO noted that certain persons through whom payments were made were in excess of more than a crore. Taking note of this fact the AO observed that there cannot be any farmer who has land which can produce paddy worth more than a crore of rupees. Therefore, he asked the assessee to explain the modus operandi of procurement of paddy. The AO notes that assessee had admitted that these payments were made to suppliers who had collected paddy from the farmers. The AO thereafter, notes that the assessee had admitted that it had made aggregate payment to the suppliers of rice to the tune of Rs.14,08,50,854/- and thereafter he made adisallowance of Rs.14,08,50,854/- which action of the AO has been interfered by the Ld. Pr. CIT while exercising his revisional jurisdiction u/s. 263 of the Act. The Ld. Pr. CIT has found two faults on which he has issued Show Cause Notice (SCN) wherein issue no. 1, the Ld. Pr. CIT noted that though the assessee had made payments in cash exceeding Rs.20,000/- a day to the tune of Rs.26,75,15,300/-the AO has restricted the disallowance only to the tune of Rs.14,08,50,854/- without enquiring the facts when the assessee failed to identify the payments against purchases which were found by the AO to have been covered by any of the exceptional circumstances provided in Rule 6DD. Thus, according to Ld. Pr. CIT, lack of enquiry by the AO on this issue has resulted in under-assessment of Rs.12,66,63,446/-(Rs.26,75,14,300 – Rs.14,08,50,854/-). In this respect we note that the assessee had brought to the notice of the AO during the assessment proceeding that assessee had made purchases of paddy by way of cash of a quantity of 125809 quintal for value of Rs.14,08,50,854/- from the suppliers (agents/kutcha Arahitayas) which has been noted by the Ld. Pr. CIT at page 9 of the impugned order. This fact has also been taken note by the AO in para 3 of his assessment order wherein the AO notes “….. he also admitted that aggregate payments made to such persons during the year was Rs.14,08,50,854/-”. Thus, the AO taking note that the assessee had purchased paddy from suppliers, has disallowed the said amount of Rs.14,08,50,854/-. The AO’s disallowance u/s. 40A(3) of the Act, according to Ld. AR, was that the assessee has not made the purchase of the paddy directly from the farmers of the said amount [which action has been promptly challenged by the assessee before the Ld. CIT(A)]. We note that the AO had accepted the returned income of Rs.17,64,000/- and has not disturbed the gross turnover of Rs.64,93,16,230/- and the purchase of paddy for Rs.63,33,84,264/-. The Ld. Pr. CIT also has not found any fault with the books of account maintained by the assessee in the regular course of business and has accepted the figures shown by the assessee in its books in respect of purchase of paddy. Though the assessee had claimed before the AO that it had purchased paddy through cheque (bearer) as well as cash from farmers as well as suppliers/agents/Arahitayas, and that saidaction of assessee is not hit by Sec. 40A(3) of the Act since the action of assessee falls in the ken of rule 6DD(e)(i) read along with Rule 6DD(k) has not been completely accepted by the AO. We note that AO called for explanation from assessee in respect of cash payment andafter going through the explanations given by assessee on 16.12.2016 and 28.12.2016, the AO has restricted the disallowance to the tune of Rs.14,08,50,854/- which part of payment in cash according to AO, did not qualify to get exception under Rule 6DD meaning after the AO raised his initial intention to disallow the entire cash payment to the tune of Rs.26,75,14,300/- however after going through the replies of assessee dated 16.12.2016 and 28.12.2016 and after going through the ledger account and books of account of the assessee has accepted partly the claim of the assessee to the tune of Rs.12,66,63,446/- and disallowed u/s. 40A(3) of the Act Rs.14,08,50,854/-. However, according to Ld. AR, the entire purchase of paddy to the tune of Rs.26,75,14,300/- falls in the ken of Rule 6DD(e)(i) read along with Rule 6DD(k) and, therefore, could not have been at the first place disallowed by AO u/s. 40A(3) of the Act. In any event, according to Ld. AR, the AO has partly accepted the claim of the assessee and has taken note that out of its purchase in cash of Rs.26,75,14,300/- only Rs.14,08,50,854/- need to be disallowed because the payments have been made by the assessee to the supplier/agent/Arahitayas and not directly to the farmers which action of AO clearly shows due application of mind after evaluation of facts and cannot be termed as erroneous on the ground of lack of enquiry and the action of AO cannot be termed as a case of ‘ No Inquiry’.
12. We note that the Ld. Pr. CIT has found fault with the AO’s action in not disallowing the difference of purchase of paddy in cash to the tune of Rs.12,66,63,446/-. We note that the assessee had brought to the notice of the AO during his enquiry that the assessee had purchased from suppliers who were deputed as its agents/Arahitayas to procure the paddy from different villages from the farmers. Explaining the modus operandi adopted by the assessee firm to procure the paddy for its rice mills, the Ld. AR has submitted that assessee has entrusted persons/individual who act as agents/arahatiyas to procure paddy from earmarked villages which are situated at far flung areas. These agents/Arahitayas go to the earmarked villages and first en-cashes the bearer cheques given to them by the assessee from the Oriental Bank of Commerce. Thereafter, these agents purchases paddy from farmers on behalf of assessee and gives cash to farmers. However, in cases, where the villages are far away from the bank, say more than 100 Kms., the agents had to collect cash from assessee for disbursement of money to the farmers to purchase paddy. And since the assessee rice mill needs thousands of quintals of paddy for production of rice, this mode of collection of paddy is resorted to by the assessee or else its business has to be shut down. The assessee’s action of procurement/collecting paddy which is undisputedly an agricultural produce directly as well as indirectly through its agents falls in the ken of rule 6DD(e)(i) as well as Rule 6DD(k). We note that even though the assessee explained the modus operandi to the AO, he accepted only certain written part of replies and has not bothered to appreciate the modus-operandi explained by Ld. AR of the assessee before him and has disallowed Rs.14,08,50,854/- paid by the assessee to the suppliers/agent/Arahitayas. We note from a perusal of page 95 of the paper book, the ledger of Shri A. Biswas (one of the supplier/agent/Arahitayas) that the assessee had made a payment of cash to the tune of Rs.11,70,000/- on various dates. Page 96 of paper book reveals the weighment of paddy in quintal from four different parties i.e. Dinabandhu Ghosh, Azizul Mallick, Haru Sarkar and Gopal Ghosh had shown that total quantity of 430 qntl is shown and separate amount of jalpani of Rs.2332/- has been reflected which means Mr. A. Biswas (supplier) had collected from four farmers 430 qntl of paddy for a cash payment of Rs.4,67,668/- and has made payments to them. It is also revealed that for his services rendered, the assessee had made payment of Rs.2332/- (jalpani). Page 97 to 100 of paper book are weighment certificate issued by Shri Bishnu Weigh Bridge in respect of paddy procured by Shri A. Biswas. We note that in the aforesaid facts and circumstances the AO’s action of not disallowing Rs.12,66,63,446/- cannot be termed as erroneous since the AO has made enquiries on this issue. To be precise the AO has made enquiries on the cash payments made by the assessee and after eliciting the explanation of the assessee and after going through the records had partly accepted the assessee’s contention, therefore, the AO’s action cannot be termed as erroneous for want of enquiry. Moreover, on this issue since we have made a finding thatthis was not a case of lack of enquiry on the part of the AO, the Ld. Pr. CIT if he wanted to interfere ought to have himself enquired on the facts of this issue and should have recorded a factual finding to upset the decision of the AO to allow Rs.12,66,63,446/- as allowable expenditure and thereby not hit by sec. 40A(3) of the Act. Since in this case, the Ld. Pr. CIT has not been able to upset the finding of the AO who has made enquiry, the action ofthe AO cannot be termed on this issue as a case of ‘no enquiry’. Thus the action of the AO on this issue cannot be termed as erroneous for lack of enquiry. The AO’s action is based on a plausible view in the light of the judicial precedents cited before us. Therefore, the action of AO does not satisfy the twin conditions for invoking revisional jurisdiction u/s. 263 of the Act, in the light of the ratio of the decision of Hon’ble Supreme Court in Malabar Industrial Co. Ltd. (supra). The view of the AO in the light of the facts discussed at any rate cannot be termed as ‘unsustainable in law’ and, therefore, on this issue the AO’s action cannot be faulted with for invocation of sec. 263 jurisdiction by Pr. CIT.
13. Coming to the issue no. 2 the Ld. Pr. CIT found that the assessee had made excess claim under the head purchase of paddy to the tune of Rs.12,14,512/-(Rs.63,33,84,264/- – Rs.63,21,69,752/-). According to ld. AR, the assessee had debited a few expenses inadvertently in the purchase ledger A/c due to which difference of Rs.12,14,512/- arose in the purchase ledger. The breakup of the said sum of Rs.12,14,512/- is tabulated as under:
According to ld. AR, the said difference was explained to the learned AO during assessment and since the difference was reconciled, no addition was made by him in this regard.
14. We note that in the order passed u/s 263 of the Act, it has been alleged that the issue of difference in purchases was not carefully examined by the Assessing Officer before allowing assessee’s claim for purchases in the Purchase Ledger Account and that no query was raised by the AO in this regard which makes the order of AO erroneous. In this context, the Ld. AR submitted that during assessment, the AO noted the said difference and asked the Ld. AR of the assessee to explain the discrepancy. Accordingly, the Ld. AR of the assessee explained and reconciled the difference of Rs.12, 14,512/- in the purchases A/c. Itwas explained before the AO that inadvertently a few expenses had been debited to the Purchases Ledger A/c. We note that these expenses are otherwise allowable u/s 37 of the Act. It was brought to our notice that the AO examined the aforesaid facts with reference to the Purchases Ledger and found no infirmity in the explanations made by the assessee and as such, no addition was made in the assessment order.
15. It has to be kept in mind that where the assessing officer during the scrutiny assessment proceeding raised a query oral/written, which was answered by the assessee to the satisfaction of the AO and the same was not recorded/reflected in the assessment order by the AO, itself cannot be a basis for drawing an adverse conclusion by the Principal Commissioner that no enquiry with respect to the issue was made by the AO to enable him to assume jurisdiction under section 263 of the Act. If the AO allows the claim, on being satisfied with the explanation of the assessee, on an enquiry made during the course of Assessment Proceedings as aforestated, the decision of AO cannot be held to be erroneous, on the ground that there is no discussion in that regard in the assessment order. The AO while scrutinizing the books of the assessee will come across numerous facts which he may raise query and once the assessee or the AR explains to the satisfaction of AO, it is upto the AO to mention about the same in the assessment order or not. Simply because the AO did not discuss the query which he raised during assessment proceedings and did not incorporates the assessee’s explanation or his satisfaction, does not give scope to the Ld. Pr. CIT to invoke sec. 263 jurisdiction on lack of enquiry on the part of AO. We note that the fault no. 2 was spelled out by the Ld. Pr. CIT in the SCN dated 18.02.2019 (supra) and the assessee had replied in details which reply is found placed at pages 11 – 21 of the paper book. To this specific fault no. 2, the assessee’s reply is found at page 18 of the paper book wherein assessee pointed out at para 22, that difference in purchase of paddy figure between statement and P&L Account was due to inadvertent error of booking other allowable expenses into the purchases. When the assessee explained this fact to the AO, the AO accepted the same and did not draw any adverse inference against the assessee, however, the AO did not mention the same while framing the assessment order, which cannot be treated as a case of failure to enquire by AO. Be that as it may be, when the assessee replied to the SCN issued by the Ld. Pr. CIT about lack of enquiry by AO on this discrepancy to the tune of Rs.12,14,512/- and when the assessee asserted that it was queried by the AO and the assessee had explained to the AO and reconciled the inadvertent error, the Ld. Pr. CIT ought to have called the AO to ascertain whether the assessee’s explanation is correct or not i.e. the fact of enquiry by AO and assessee’s explanation. In any way the assessee has explained the difference of Rs.12,14,512/- to Ld. Pr. CIT and contended that certain allowable expenses has been inadvertently booked in the purchase, this fact as shown in the chart (supra) was before the ld. Pr. CIT, which goes on to show that certain allowable expenses have been inadvertently booked into the purchases which fact has not been found to be wrong or erroneous, so the second limb that the prejudicial to the interest of revenue is not satisfied. So, the twin conditions are not satisfied for invoking sec. 263 jurisdiction. In this regard we may gainfully refer to the Hon’ble Delhi High Court in the case of Commissioner of Income Tax vs. Ashish Rajpal (2010) 320 ITR 0674 (Delhi), it was held that,
“The fact that a query was raised during the course of scrutiny which was satisfactorily answered by the assessee but did not get reflected in the assessment order, would not by itself lead to a conclusion that there was no enquiry with respect to transactions carried out by the assessee giving the CIT jurisdiction to invoke s. 263, more so when the Tribunal had found that there had been an enquiry which had not been conducted with ‘undue haste’”.
Therefore, in the facts and circumstances discussed supra, we are of the considerate opinion that the assessment order framed by the AO is neither erroneous nor prejudicial to the interest of the revenue and therefore, the Ld. Pr. CIT’s impugned action of interfering with the order of AO invoking the revisional jurisdiction under section 263 of the Act is without jurisdiction and, therefore, null in the eyes of law and so it is quashed.
16. In the result, appeal of assessee is allowed.”
6. It was held in the above decision by the co-ordinate Bench that the case of the assessee is covered by the exceptions to Section 40A(3) of the Act by virtue of Rule 6DD(e) and Rule 6DD(k) of the rules as extracted above. The co-ordinate bench held that the assessee’s action of procurement/ collecting paddy was undisputedly purchase of agricultural produce and therefore, the payment made by the assessee to the farmers directly as well as indirectly through its agents falls in the ambit of Rule 6DD(e) as well as Rule 6DD(k). These facts were placed before the ld. CIT(A), however, the ld. CIT (A) dismissed the appeal of the assessee and hence, the assessee is in appeal before us.
7. After hearing the rival contentions and perusing the materials available on record, we find that the assessment year involved is A.Y. 2014-15. We note that in assessee’s own case in A.Y. 2016-17, vide order dated 24.12.2018, the ld. AO has accepted the modus operandi of the assessee’s business and cash payments made to the agents/mediators on behalf of farmers for purchasing paddy. However, we also note that since the cash book was not submitted before the ld. AO during the assessment proceedings in that year and he rejected the books of accounts u/s 145(3) of the Act and estimated the GP at the rate of 4% instead of 3.17 % reported by the assessee in the audited accounts and tax audit report. Thus, the AO made an addition of ₹34,02,218/- in A.Y.2016-17. The said order was appealed before the ld. CIT(A) and the ld. CIT(A) vide order dated 14.07.2020, which is available at page no.628 of the Paper Book, allowed the appeal of the assessee by holding that the ld. AO has not pointed out any defect in the books of accounts .i.e. quantity of paddy purchased, consumption of paddy production and sale of rice, rice bran and stock of rice etc. We also note that the co-ordinate bench has already settled the issue in assessee’s own case as stated hereinabove by observing that the payments made by the assessee through agents / mediators for procurement of paddy to the farmers are covered under the explanation to Section 40A(3) of the Act under Rule 6DD(e) and 6DD(k) of the Act. We note that the assessee is making payments in cash where as the farmers are refusing to accept the payments by cheque. We even not that where the payments are accepted by the farmers by cheques , the cheques are issued for purchase of paddy. We also note that identities of the agents/mediators, genuineness of the paddy purchases and payments made to the farmers/growers were not disputed at all by the authorities below. The case of the assessee is squarely covered by the decision of the coordinate bench in ITO Vs Sunil Kumar Agarwal (2013)31 taxmann.com 57(Agra-Tri). Therefore, in our opinion the payments are covered by the exceptions contained in Rule 6DD(e) and Rule 6DD(k) of the Rules. Therefore, we respectfully following the decision of the co-ordinate bench and also the fact that the issue is accepted by the revenue in A.Y. 2016-17 by accepting the modus operandi of assessee’s business by not challenging the order of ld. CIT(A) , set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition. The appeal of the assessee is allowed.
8. In the result, the appeal of the assessee is allowed. Order pronounced on 15.04.2026.
Author Bio
