ITAT AGRA BENCH
Income Tax Officer, Ward 1, Aligarh
Sunil Kumar Agarwal
IT Appeal No. 319 (Agra.) of 2009
[ASSESSMENT YEAR 2006-07]
JANUARY 11, 2013
Bhavnesh Saini, Judicial Member – This appeal by the Revenue is directed against the order of ld. CIT(A), Muzaffarnagar dated 21.05.2009 for the assessment year 2006-07, challenging the order of the ld. CIT(A) in deleting the addition of Rs.1,03,59,365/- on account of disallowance of purchase u/s. 40A(3) of the IT Act.
2. The facts of the case, in brief, are that the assessee is a proprietor of M/s. Durgaji Traders which is engaged in the trading of food grains. Return declaring income at Rs. 1,95,376/- was filed on 31.07.2006. As per the facts stated in the assessment order, the assessee has traded food grains, both on its own account as well as on account of its principals, i.e., on commission basis. The amount of total purchases made during the year is Rs. 8,26,04,408/- out of which purchases made on its own behalf and then sold, i.e., purchases made on trading account is to the extent of Rs. 5,17,96,824/- and rest i.e., Rs. 3,08,07,584/- are purchases on behalf of the principals, i.e., purchases on commission basis. The assessee made purchases from Khair Mandi, which is the place for first arrival of food grains. All the purchases were made by way of cash payments exceeding Rs. 20,000/-.
2.1 The A.O. held that in respect of purchases made on behalf of other parties (Rs. 3,08,07,583/-) did not attract section 40A(3), as only commission had been shown in the profit & loss account. However, purchases made on its own trading account i.e. Rs. 5,17,96,824/- attracted disallowance u/s. 40A(3).
2.2 The assessee’s plea was that the purchases were made, through ‘kachcha arhatia’, who are agents for their farmers constituent and who work under strict supervision of mandi Samiti rules and norms. According to the assessee these kuchha arahtia do not accept cheques payments, as they have to deliver cash payments to the respective farmers and hence payments were in cash under the bonafide belief that the payments were covered by rule 6DD.
2.3 The AO rejected the contention arguing that C.B.D.T. Circular No. 34 dated 05.03.1970 had, long ago made it clear that the payments to arahtia are not exempted from the provisions of section 40A(3). According to the AO, rule 6DD was not applicable in this case. The assessee could easily have made payments through cheques as local cheques are cleared either on the same day or latest by next day. Further, according to the A.O., the sellers were having bank accounts and so the assessee’s contention that it was not having any option but to make payments in cash, was not correct. The AO made disallowance to the extent of 20% of Rs. 5,17,96,824/-, the amount of disallowance worked out to Rs. 1,03,59,365/-.
3. The assessee challenged the addition before the ld. CIT(A) and written submissions of the assessee are reproduced in the appellate order in which the assessee briefly submitted that affidavits of Kachcha Arhatias certifying that they were not having bank accounts have been filed. The assessee deals in food grain business in his own account and on commission basis. Most of the purchases of agricultural produce were made through Kachcha Arahtias, who acted on behalf of the farmers. A few purchases were also made directly from the farmers. It was submitted that Khair Mandi from where assessee did his business during the year under consideration is a primary farmers arrivals Mandi, hence it is a trade practice therein that all the transactions are to be made in cash only. The assessee maintained proper books of account. During the year under consideration, the assessee is a Pakka Arahtia and he had purchased the agricultural crops through Kachcha Arahtias who are assisting their farmers constituent, who used to bring their crops to the Mandi for sale. In other words, he is acting an agent of the assessee also to make purchases from farmers on commission basis. All the agricultural produces were purchased in the supervision of a Government Agency, known as Krishi Utpadan Mandi Samiti. Copy of commission bill (9R) is retained by the said Government Agency on every purchase which was made by the assessee during the year. This fact proves that all the purchases made by the assessee were genuine and copies of 9R and 6R were produced for verification. Therefore, all were genuine transactions recorded in the books of account. Kachcha Arahtia is actually authorized to sell the products of the farmers on the strength of 9Rs and in respect of purchase to issue Form 6R to the farmers. Price of 6R and 9R is absolutely same and Kachcha Arahtia has added his commission @ 1.5%, brokerage @ 0.5%, Mandi Shulk @ 2% and Vikas Cess @ 0.5% in 9R and accordingly he actually worked as agent of Pakka Arahtia. Kachcha Arahtia has no right or liberty to charge purchase/sale price of the product as given in 6R. The assessee is regularly assessed to tax and there is no change in the system and business activities. The payments to farmers through Kachcha Arahtia have to be made in cash only because of the reasons that Kachcha Arahtia/agent as well as farmers are not having bank accounts in their names. There is no banking facilities available in the area of Krishi Utpadan Mandi ASthal Khair. Kachcha Arahtia/agent has insisted to receive payment in cash in the interest of business as well being carried on traditionally since long. The payments to the farmers have to be given only in cash. The cash payments have been given in the interest of business requirements/expediency. All the statutory forms have been maintained by the assessee and similar business activities have been accepted in past by the Revenue in the proceedings u/s. 143(3) of the IT Act. The assessee relied upon the decision of ITAT, Bangalore Bench in the case of SriRenukeshwara Rice Mills v. ITO  93 ITD 263 and submitted that Kachcha Arahtia have filed their affidavits and acknowledged that they had insisted to take cash payments only in turn to make payments to the farmers. It was submitted that the AO has wrongly applied Circular No. 34 as it was not applicable to the case of the assessee. The AO has failed to appreciate that some of the cash payments were made directly to the farmers and some payments were made on bank holidays and also the AO failed to appreciate that Kachcha Arahtia and farmers have not maintained any bank accounts. The details of cash payments made on bank holidays and directly to their farmers have been given in the written submissions. It was, therefore, submitted that the AO has misunderstood the provisions of section 40A(3) of the IT Act. Several decisions were relied upon before the ld. CIT(A) and reproduced in the written submissions. The Board’s Circular No. 220 dated 31.05.1977 was also relied upon which clarified certain circumstances in which conditions laid down in Rule 6DD(J) could be relaxed, i.e., transactions and payments made on bank holidays; the seller has refused to accept payment by way of crossed cheques/drafts and that the seller acting as a commission agent, is required to pay in turn to the person from whom he purchased the goods. It was, therefore, submitted that the assessee’s case clearly falls in the exception as given in Rule 6DD(j) and Rule 6DD(k) of the IT Act. The written submission of the assessee was forwarded to the AO for his comments, in which the assessing officer reiterated the same submissions as made in the assessment order and assessee also filed rejoinder to the same, which is reproduced in the appellate order, in which the assessee reiterated his stand seeking deletion of the addition.
3.1 The ld. CIT(A), considering the explanation of the assessee in the light of the nature of the business of the assessee and exceptions as provided in Rule 6DD of the IT Rules, deleted the entire addition. The findings of the ld. CIT(A) in the impugned order in para 8 to 9 are reproduced as under :
“8. I have applied my mind carefully to all the relevant facts and evidence relating this case, as well as rival submissions. I have also perused the legal ratio available in respect of provisions of section 40A(3) read with rule 6DD. My findings are as under:-
8.1 Before I go into the interesting aspect of 40A(3); I would clarify that the appellant’s arguments regarding cash payments actually being below Rs. 20,000/- and reliance on ‘Kachhi Rokar’ for the same, is to be taken as an after-thought. I agree with the A.O. that had this ‘Kachhi Rokar’ been in possession with the assessee he would have produced the same or mentioned in any of the replies. Thus the case is to be proceeded on the premise that the assessee had made payments in cash exceeding Rs. 20,000/- and hence the issue under consideration is whether any or more of the clauses of rule 6DD are applicable, or not.
8.2 Regarding the issue of applicability of provisions of section 40A (3) read with rule 6DD; the first and the foremost factor would be to understand the true nature of (a) business of the assessee, (b) business set-up of the mandi where assessee had made all the purchases, and (c) the status of ‘kuchha arahtia’ from whom the relevant purchases have been made and to whom relevant payments have been made. I shall discuss this aspect one by one hereunder:-
(b) & (c) I will start with the set up and constitution of Krishi Utpadan Mandi Samiti, Khair and of its various constituents, mainly “Kacha Arahtia”. I have gone through not only the submission made any documents filed by the appellant, but also the original tax of Uttar Pradesh Krishi Utpadan Mandi Act, 1964 and also various licenses issued by Khair Mandi Samiti. I find that all these Mandi Samitis including Khair Mandi Samiti, functions under the strict norms and rules.
Khair Mandi is a mandi of food grains of primary arrival (Pahli Avak), in which farmers bring their products for first sale.
It is a Mandi of ‘First Arrivals’, meaning that here farmers bring their produce for sale for the first time. It is different than mandis of ‘Second Arrivals’, which are more of free trading markets. The produce, sold to Pacca Arahtias/wholesalers; in mandis of ‘First Arrivals’; reach to mandis of ‘Second Arrivals’ for free trading.
The sale transactions in mandis of ‘First Arrivals’, like Khair Mandi, are much more guided and controlled by various rules/procedures; all with the motto to fetch maximum returns for the farmers.
For such sale by the farmers, exhaustive rules and procedures have been laid down. Kuchha arahtias are issued specific licenses by the mandi samiti. The job of kuchha arahtia is only to make auction of the food grains at specified formats. It is very important to note that these kuchha arahtias are to get only commissions/brokerage. These kuchha arahtias cannot individually trade on their own. In other words they can only mediate between the sellers (i.e. farmers) and the purchasers. Kuchha arahtia issues specific Form No.6R to the farmers and Form No.9R to the purchasers, with copies to mandi samiti.
This is important to infer that each and every bout of agricultural produce sold, can be related through these 6R’s and 9R’s, to specific farmer and specific purchaser. To put it differently, through the cadre of these kuchha arahtia, it can be ascertained as to who has purchased, how much from which farmer; and thus which farmer has to receive how much payment, from which purchaser.
Thus, kuchha arahtias are ‘agents’ in its true sense; i.e. it mediates between two constituents-on one side there are farmers and on other there are purchasers (wholesalers/pacca arahtias). In all practical sense, kuchha arahtias are not only agents for the farmers but they are also acting agents of the purchasers (wholesalers or pacca arahtias) because it is only the kuchha arahtia who can effect collection of money from purchasers and disburse the same to the specified farmers.
(a) The assessee is also a purchaser of food grains in this set up of Khair Mandi being, mandi of primary arrival. I have seen the licence issued by Khair Mandi Samiti to the assessee; the status of the assessee is ‘pacca arahtia/wholesaler’. Sometimes the assessee makes purchase on behalf of some other principals; at that time, he is a pacca arahtia. Some of the times, the assessee takes a position i.e. it makes purchases and then sells for profit; at that time, he is acting as a wholesaler.
7.3 In the above back drop, following are some important conclusions/observations made:-
(a) There is a world of difference between status and role of a Kuccha Arahtia, and that of a Pacca Arahtia/wholesaler. Although both are called and termed Arahtia; these two cannot be equated at all.
Kuchha Arahtias do not trade; they are only fascilators of auctions/sales of agricultural produce, which farmers bring to mandi and, thus Kuchha Arahtia are only agents for farmers. Kuchha Arahtia is to safeguard the interests of farmers, who are otherwise illiterate, naive and thus, vulnerable to be exploited by way of cheap returns, and default/delay in recovery of sale consideration.
At the same time, a Kuchha Arahtia receives commission from Pacca Arahtia, ensures delivery of agricultural produce to Pacca Arahtia, and ensures delivery of sale consideration to the farmers. In this way, Kuchha Arahtia acts as agent for Pacca Arahtia also.
(b) This is verifiable from the record that whatever purchase price assessee pays, are passed on in Toto, to the respective farmers; assessee pays commission and brokerage separately to kuchha arahtias as per specific guidelines and rates laid down by the mandi samiti.
Kuchha arahtias receive cash payments from the assessee, on behalf of the farmers. They keep their commission and brokerage, and disburse the purchase consideration to respective farmers.
(c) It has been stated on oath (affidavits) by these kuchha arahtia that they have insisted on cash payment to be made by the assessee, because farmers did not have bank accounts and hence are not ready to accept cheques/drafts. Kuchha arahtias have also filed affidavits to the effect that they also do not have any bank accounts.
7.4 In such a scenario I find substantial force in the appellant’s contention that cash purchases made by the assessee would be exempt from the rigors of section 40A(3), mainly because of applicability of clause (1) of rule 6DD. For ready reference, clause (1) is reproduced as under :-
“** ** **
(1) where the payment was required to be made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person………………………………”
7.4.1 As discussed above, the kuchha arahtias to whom the assessee has made payments have acted as an agent, who is required to make the payments in cash to the farmers.
This view is fully supported by the following judicial decisions:-
(i) Sri Renukeshwara Rice Mills v. Income Tax Officer  93 TTJ (bang) 912
“** ** **
Business expenditure – disallowance under s. 40A (3) – Direct payment into bank account of payee – Payment was made by assessee too KP by depositing cash along with challan in its bank account directly – Transaction is traceable from origin to conclusion – It is not a direct payment to the payee – Hence, s. 40A(3) is not applicable – Moreover, payment in question was made for purchase of agricultural produce to KP, an agent operating in the market yard set up under State RMC Act – Person operating there is an agent of cultivator or grower as well as of buyer – Such agent is required to pay the cultivator in cash – Thus, payment made to KP is indirect payment to the cultivator through the agent – Hence, s. 40A(3) is not applicable on a combined reading of cls. (f) of r. 6DD……………..”(emphasis supplied by me)
(ii) Deputy Commissioner of Income-tax, Cir. 12(1), New Delhi v. Hind Industries Ltd.  26 SOT 196 (Delhi)
“…………………………………………………………………………….. In this case, the assessee company was engaged in the business of processing and export of meant and meat products. During the assessment proceedings the Assessing Officer noted that the assessee had made all the purchases in cash and had regularly withdrawn huge cash from bank and ostensibly made payments for supply of carcass. After processing these, the assessee supplied the products to various countries. The Assessing Officer was of the view that the payments made in cash would be hit by provisions of section 40A (3). On appeal, the Commissioner (appeals) opined that since the assessing officer had stated and assessee had also admitted that the payments had been made to the agents in respect of purchase of carcass, there was no room to interpret clause (f) of rule 6DD in favour of the assessee. However, so far as the assessee’s claim for exclusion from applicability of section 40A (3), read with clause (1) of rule 6DD, was concerned, the commissioner (Appeals) held that payment in cash to agents for purchases of products of animal husbandry could not be taken away from the purview of the exclusion clause contained in clause (1) of rule 6DD. Therefore, the disallowance under section 40A (3) was unjustified.
On the Revenue’s appeal, Held that
“…………….. The case of the assessee fell under both the categories i.e. clause (f) and Clause (1) of rule 6DD. Clause (1) has been inserted by the IT (Twenty-first Amendment) Rules, 1995 with effect from 1-12-1995. The Assessing Officer had disallowed the claim of the assessee in view of the decision of the Allahabad High Court in the case of CIT v. Pehlaj Raj Daryanmal  190 ITR 242. The decision by the Allahabad High Court was rendered in 1991 whereas clause (1) was inserted by the IT Amendment Rules in the year 1995. Therefore, the ratio of the decision of the Allahabad High Court would not be applicable to the facts of the instant case, as the year under consideration related to the assessment year 2003-04. As stated above clause (1) was inserted from the year 1995 and was still on statute. Therefore, the decision of the Tribunal, Bangalore Bench in the case of Sri Renukeshwara Rice Mills v. ITO  93 ITD 263 was squarely applicable to the instant case as facts were similar. [Para 13.3]
The contention of the department, that there was no agent, did not sound good because the Assessing Officer himself had disallowed the payments for the reason that they were not made directly to producers/cultivators but through intermediaries or agents. [Para 13.4]
Further, as per clause (f) of rule 6DD, no disallowance could be made under section 40A (3). Though the Commissioner (Appeals) had rejected the claim under clause (f), yet, in view of rule 27 of Income-tax (Appellate Tribunal) Rules, 1963 and in view of the decision of the Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd  66 ITR 710 the claim of the assessee was allowable as per clause (f) of rule 6DD. [Para 13.6]
Further, rule 27 of the Appellate Tribunal rules is very specific and clear. Whatever point has been rejected by the Commissioner (Appeals), the respondent-assessee could support his arguments against the appeal filed by the appellant, i.e., the department. Though the Commissioner (Appeals) has rejected the claim of the assessee under clause(f) of rule 6DD of the Income-tax Rules, yet in view of rule 27 of the Appellate Tribunal Rules, the assessee could raise/support his claim. [Para 13.10]…………………”
The issue was also covered by the decision of the Tribunal Delhi Bench ‘B’ in the case of Jt.CIT v. Al-Noor Exports [IT Appeal No.89(Delhi) of 2001, dated 26-10-2004] [Para 13.12] G In view of the above and decision of Tribunal in the case of Al-Noor Exports (supra), no disallowance could be made under section 40A(3).
Accordingly the order of Commissioner (Appeals) was to be confirmed [Para 13.13]………………………….”
The above two cases have similar facts and circumstances, as that of present appellant’s case.
The ratio of above two decisions is in favour of the stipulation that
(a) cash payments made by appellant to Kuchha Arahtias are, in effect, payments made directly to the farmers, and, thus, are favourably covered by clause (f) of rule 6DD, and,
(b) Furthermore, and more importantly, Kuchha Arahtias are agents of both farmers as well as Pacca Arahtias, and, therefore, cash payments made to them are favourably covered by clause (1) of rule 6DD.
Thus, I hold that the impugned cash payments made by assessee are favourably covered by clause (1) read with clause (f) of Rule 6DD.
7.5 At this juncture let me deal with A.O. main objection that Circular No.34 of 05-03-1970 has categorically clarified that kuchha arahtia is not agent of farmers.
First of all, I find that the A.O. is making this specific assertion from his own side; there are no such wordings (as mentioned by the A.O.) in the Circular No.34 dated 5-03-1970!!
Let us see the exact wordings of Circular No. 34 dated 5-3-1970:-
“A large portion of trade in agricultural commodities is channeled through the institution of ‘arahtiyas’. While the payments made to the cultivators or growers of agricultural produce are specifically excluded from the purview of section 40A(3) by clause (f) of rule 6DD, the payments made to the “arahtiyas” for purchases made from the cultivators in cash until the cheques are encashed and this procedure involves severe hardship. However, this difficulty can be met by obtaining the advances from the purchasers, which should of course conform to requirements of section 40A (3). the extension of the exemption to the purchasers would defeat the objective of the provisions.”
Thus, from the perusal of above; we can see that this circular, although does talk about payments to arahtia; but does not make any assertion to the effect that kuchha arahtia are not agent of the farmers. So; I hold that the assertion made by the A.O., is overzealous and requires to be brushed aside.
7.5.1 To analyze further, ‘arahtia’ word in this circular is clearly referring to a wholesaler agent/pacca arahtia; who take their own positions (i.e. trade on their own) after making purchase from the farmers/agriculturists; the said word is not referring to ‘kuchha arahtia’.
This view of mine is strengthened from the discussion made regarding kuchha arahtia and pacca arahtia by the C.B.D.T. in Circular No.452 dated 17-03-1986. it would be desirable to reproduce this circular:-
“Circular/Section 44AB of the Income-tax Act
Applicability of section 44AB in the cases of commission agents, arahtia, etc. Clarification regarding
1. Section 44AB of the Income-tax act, 1961, as inserted by the Finance Act, 1984. casts an obligation on every person carrying on business to get his accounts audited, if his total sales, turnover or gross receipts, as the case may be, exceed Rs.40 lakhs in any previous year relevant to the assessment year commencing on 1-4-1985 or any subsequent assessment year.
2. The Board have received representations from various persons, trade associations, etc., to clarify whether in cases where an agent effects sales/turnover on behalf of his principle, such sales/turnover have to be treated as the sales/turnover of the agent for the purpose of section 44AB.
3. The matter was examined in consultation with the Ministry of Law. There are various trade practices prevalent in the country in regard to agency business and no uniform pattern is followed by the commission agents, consignment agents, brokers, kachha arahtia and pacca arahtias dealing in different commodities in different parts of country. The primary necessity in each instance is to ascertain with precision what are the express terms of the particular contact under consideration. Each transaction, therefore, requires to be examined with reference to its term and conditions and no hard and fast rule can be laid down as to whether agent is acting only as an agent or also as a principal.
4. The Board is advised that so far as kachha arahtia are concerned, the turnover does not include the sales effected on behalf of the principals and only the gross commission has to be considered for the purpose of section 44AB. But the position is different with regard to pacca arahtia. A pacca arahtia is not, in the proper sense of the word, an agent or even del credre agent. The relation between him and his constituent is substantially that between the two principals. on the basis of various Court pronouncements following principals of distinctions can be laid down between a kachha arahtia and a pacca arahtia:
(i) A kachha arahtia acts only as an agent to his constituent and never act as a principal. A pacca arahtia, on the other hand, is entitled to substitute his own goods on his personal accounts and thus he acts as a principal as regards his constituent;
(ii) A kachha arahtia brings a privity of contract between his constituent and the third party so that each becomes liable to the other. The pacca arahtia, on the other hand, makes himself liable person upon the contract not only to the third party but also to his constituent;
(iii) Though the kachha arahtia does not communicate the name of his constituent to the third party, he does communicate the name of the third party to the constituent. In other words, he is an agent for an unnamed principal. The pacca arahtia, on the other hand, does not inform his constituent as to the third party with whom he had entered into a contract on his behalf.
(iv) The remuneration of kuchha arahtia consists solely of commission and he is not interested in the profits and losses made by his constituent as is not the case with the pacca arahtia;
(v) The kachha arahtia, unlike the pacca arahtia, does not have any dominion over the goods;
(vi) The kachha arahtia has no personal interest of his own when he enters into a transaction and his interest is limited to the commission agency’s charges and certain out of pocket expenses where as a pacca arahtia has a personal interest of his own when he enters into a transaction;
(vii) In the event of any loss, the kachha arahtia is entitled to be indemnified by his principal as is not the case with pacca arahtia.
5. The above distinction between a kachha arahtia and pacca arahtia may also be relevant for determining the applicability of section 44AB in case of other types of agents. In the case of agents whose position is similar to that of kachha arahtia, the turnover is only the commission and does not include the sales on behalf of the principals. In the case agents of the type of pacca arahtia, on the other hand, the total sales turnover of the business should be taken into consideration for determining the applicability of the provisions of section 44AB.” (all the emphasis supplied by the undersigned)
The above discussion of two types of arahtia is very relevant for our present case. In the present case, the assessee is certainly a pacca arahtia/wholesaler, while kuchha arahtia to whom cash payments have been made by the assessee for the impugned purchases, are del credre agents who are acting as agent, not only for the farmers, but, also for the pacca arahtias/wholesalers like the assessee; they receive commission from the assessee for such kind of mediating services and they are bringing privity of contract between the farmers and the assessee so that each becomes liable to the other; they are communicating name of the assessee to the farmers and thus they are acting as an assessee’s agent also.
Thus I hold that the assessee’s case, supported by the ratio of above referred judicial pronouncements, is covered by exemption clause (1) of rule 6DD.
7.6 I find it worthwhile to make a further important clarification. The Circular No.34 is dated on 05-03-1970, while clause (1), along with clause (j) and (k) of rule 6DD were brought much afterwards, viz. with effect from 11-02-95, notification No.50946 (E) dated 01-12-1995; (1996) 217 ITR (ST) 2, 3.
Thus not only circular No. 34 is not so relevant to the present scenario (where there is crucial distinction between nomenclature and role kuchha arahtia and pacca arahtia), but also the same is of much earlier period when clause (1) was not there. The assessee’s case is more in tune with clause (1) of rule 6DD which has come into statute in 1995.
7.7. Before I part I would make certain comments regarding A.O’s comments on banking facilities.
It is true that there are certain bank branches in Khair town. But it is also true that the A.O’s point would have been more valid if such banking facilities were available within the mandi premises itself. I find substantial force, atleast on moral ground, in appellant’s pleadings that presence of 2 – 3 small bank branches in Khair town cannot be sufficient to meet the requirements of large cash withdrawals, in case of kachha arahtia are forced to accept payments vide cheque/draft.
This moral and social angle is more forceful if we also consider the risky situation if these kachha arahtia/pacca arahtia/farmers are to carry cash to and fro. Khair town and the mandi premises.
This is also more important to understand that if kuchha arahtias were to accept cheque/draft; it would rather be a welcome situation for the assessee also!! The assessee is carrying ash and is correspondingly running every day risk, and in fact, has to take safety measures. All these can be easily avoided, in case kuchha arahtia do not insist on cash payments. Thus, payment in cash can not be voluntary action of the appellant; it has to be an unfortunate necessity because of prevailing customs, banking facilities, and peculiar facts and circumstances leading to insistence by the kuchha arahtias’.
The above discussion strengthens the view that rigors of 40A (3) are not visited on the assessee also, on the ground that to some extent, if not in full technical sense; even clause (h) applies to appellant’s case. However this is an added argument only; the appellant’s case is being favourably decided by the application of clauses (1) & (f) of rule 6DD.
In any case it supports the contention that assessee is forced to make cash payments to kuchha arahtia, who are required to make the payment in cash.
This can also be constructed as a social and economic plea on behalf of wholesalers like the assessee, to the relevant authorities/agencies, for setting up vigorous facilities within the mandi premises itself so that banking practices spread over, obviating the need for cash transactions. Once banking practices are available in requisite way and extent, inside the mandi premises itself; then we can visualize the favourable attitude of kuchha arahtia in accepting cheques/drafts, because they can then encash such cheques/drafts within the premises itself, and pay to farmers. Probably the farmers would also develop an attitude preferring bank accounts and banking transactions.
7.7 The A.O has challenged this affirmation and has pointed out that these kuchha arahtias are filing their returns and are also accepting refund cheques, which implies that they are having bank accounts.
On this, the assessee has clarified that the proprietors/partners of certain kuchha arahtia may be having bank accounts in their individual names, but the business dealings of kuchha arahti are in the name and style of their proprietary concern; and the bills issued by them to the assessee are in the name of such concerns, and there is no bank account in the name of such proprietary concerns. A chart of various kuchha arahtia having names of their proprietary concerns vis-à-vis names of the concern individuals, clarifies this point. This aspect also goes in favour of appellant.
7.8 Lastly, I observed that although the A.O. has made a distinction between purchases made by the assessee as commission agent vis-à-vis as wholesaler, but, for the issue under consideration i.e. disallowance u/s 40A (3); I opine that the A.O.’s opinion is not correct. The modus operandi of purchases is exactly the same, in both the types of transactions. Hence, from the view point of section40A (3), the two types of transactions need not to be distinguished. Such distinction, can be relevant for the payments made by other principals, who have made purchases from the assessee, and consequently, for any such applicability u/s 40A (3) in their hands; but are irrelevant as far as appellant’s case is concerned.
As far as purchases made by the assessee are concerned; all purchases have been made from kuchha arahtia through the same set up as narrated above.
So the A.O.’s view of bifurcating total purchases into two types – one acting as commission agent and the other acting as trader – is of no relevance as far as applicability of section 40A (3) is concerned.
8. In view of the above discussion, I finally hold that assessee’s cash purchases made from Khair Mandi (of “First Arrivals”), are favourably covered by clause (1), of Rule 6DD; further supported by clauses (f) and (h) of Rule 6DD, and, thus, are exempt from the rigours of disallowance as envisaged u/s 40A (3)of the I.T. Act.
9. In result, the appeal is allowed.”
4. The ld. DR relied upon the order of the AO and referred to pages 17 & 18 of the order of the AO where the details of payments made in cash in violation of section 40A(3) have been mentioned. The ld. DR submitted that the assessee had made purchases on trading account on his behalf in cash, therefore, the provisions of section 40A(3) are applicable. No evidence was produced in support of the contentions raised before the AO. The payments are not made to growers of agricultural produce but to the Kachcha Arahtias, who were not agents of the assessee and are not in need of cash payment. Further, banking facilities are available in the city. Therefore, ld. CIT(A) should not have deleted the addition.
5. On the other hand, the ld. Counsel for the assessee reiterated the submissions made before the authorities below and submitted that it is not in dispute that the assessee acted as Pucca Arahtia and made payment to Kachcha Arahtia, who arranged agricultural produce on behalf of the assessee, who got commission. He has submitted that Kachcha Arahtia is agent of the assessee in between growers of the agricultural produce. He has submitted that Rule 6DD (e) also applies in the case of the assessee. He has submitted that Circular No. 34 do not apply in the case of assessee because it did not speak of Kachcha Arahtia. Circular No. 452 has been correctly applied by the ld. CIT(A) for the purpose of deleting the addition. Proper banking facilities are not available in Khair town. He has submitted that there were many times changes in Rule 6DD and now the relevant provisions of Rule, i.e., 6DD(e) (j) & (k) of the IT Rules would apply in the case of assessee as have been considered by the ld. CIT(A). He has relied upon the order of the ITAT, Vashakhapatnam Bench in the case of ACIT Venkatadari Oils Ltd. v. Penamaluru, IT Appeal No. 422/2007 dated 19-8-2010, in which in identical facts, the Tribunal held that payments made to Commission agents who were the representatives of the farmers are covered by exception under clause (f) of Rule 6DD and hence, the AO was directed to delete the addition u/s. 40A(3) of the IT Act. He has also relied upon the unreported decision of Hon’ble Delhi High Court in the case of R.C. Goel v. CIT  29 taxmann.com 406 in which on identical facts, the appeal of the assessee has been allowed. Findings of the Hon’ble High Court in para 8 to 11 of the order are reproduced as under :
“8. The proviso which was introduced in the year 1999 has remained constant except in the year 2005 when sub-section (3A) was introduced by the Parliament. However, Rule 6DD which was introduced and has been existing on the statute for the nearly two decades has been amended from time to time. Rule 6DD (k) to the extent it is relevant reads as follows: –
“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 payment 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 ill l/it:’ cases and circumstances specified hereunder, namely: –
** ** **
(k) 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 persons.”
9. In the present case, the previously noted discussion would reveal that the assessee engages itself in executing catering contracts for Railways in respect of two trains. In those trains, its personnel are deployed for sale of small articles of daily necessity and use to the passengers, Per force, the payments received by them are necessarily in cash, These amounts are collected and in turn handed over to the assessee. The assessee in terms of its contract is bound to maintain constant supplies in the trains and ensure that at no point in time can the passengers be deprived of these articles (which are food articles, soft drinks and other items necessary for travel). In the course of such transactions, it sources these articles from M/s Shruti Enterprises. Apparently, that concern is also a small time one and insists nil cash payments for ensuring continuity and timely supplies. Whilst, the Court is conscious and does not in any manner wish to comment adversely on the larger public interest element embedded in Section 40A and the underlying principle, at the same time, the Court also notes that the proviso seeks to relieve to a certain extent, the measure of hardship which might be imposed upon small businesses and professionals who are engaged in activities and are dependent entirely on timely cash flow. It is in such cases that Rule 6DD – which was formulated as a proviso to Section 40A (3) – steps in to aid such assessees and concerns. In this context, the statutory mandate in Section 6DD (k), at least in the circumstances of the case, has to be so construed as to mean that but for the cash payment, the assessee would have been deprived the benefit of supplies itself. This Court clarifies that the interpretation of the expression “who is required to make payment in cash” having regard to the circumstances of the case is fact dependent, at least in the present case. The consequence of instances of payment through account payee cheques in small business which are dependent on such supplies would be to completely stifle, if not stop, the business activities. It is in that sense that the expression ”required” would have to be construed.
10. In view of the above discussion, this Court is of the opinion that having regard to the peculiar facts and circumstances, the Tribunal and the lower authorities adopted an unduly narrow and technical interpretation of Rule 6DD(k), the benefit of which the assessee clearly was entitled to. The question of law is accordingly answered in favour of the assessee and against the Revenue.
11. The appeal – ITA 636/2012 – is accordingly allowed.”
6. We have considered the rival submissions and the material available on record. Rule 6DD of the IT Rules, as now applicable, provides the cases and circumstances in which the payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by account payee cheques drawn on a bank or account payee bank draft. It provides that no disallowance u/s. 40A(3) shall be made and no payments shall be deemed to be the profits and gains of business or profession u/s. 40A(3) where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a account payee cheques drawn on a bank or account payee draft in the cases and circumstances specified therein, namely –
(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;
(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 agent who is required to make payment in cash for goods or services on behalf of such person;
6.1 The ld. CIT(A) considered the issue in detail in the light of exceptions provided under Rule 6DD in order to grant relief to the assessee for violation of section 40A(3) of the IT Act. The finding of fact recorded by the ld. CIT(A) to the effect that the assessee was a Pakka Arahtia and made purchases from Kachcha Arahtias have not been disputed by the ld. DR during the course of arguments. It is also not in dispute that the assessee acted as per Krishi Utpadan Mandi Samiti Rules. Therefore, it is not in dispute that Kachcha Arahtia are agents in its true senses – i.e., it mediates between two constituents, i.e., on one side there are farmers and on the other there are purchasers (whole sellers/pakka Arahtias). All statutory forms have been maintained to support the findings of the ld. CIT(A) that the assessee acted as Pakka Arahtia and made purchases of agricultural produce through Kachcha Arahtias. The Kachcha Arahtias in order to facilitate the sale of agricultural produce which farmers brought to the Mandi has taken commission from the Pakka Arahtia, i.e., the assessee. Therefore, the case of the assessee is squarely covered by Rule 6DD(k) of the IT Rules (New). The case of the assessee was, therefore, rightly considered by the ld. CIT(A) in the light of decisions of ITAT, Bangalore Bench in the case of Renukeshwara Rice Mills (supra). The ld. CIT(A), therefore, rightly considered another aspect that the case of the assessee would also be covered by another sub-provision of Rule 6DD because the payments are made for purchase of agricultural produce. The circular No. 34 of Board is not applicable because it did not deal with Kachcha Arahtia and in turn the ld. CIT(A) rightly taken into consideration Board’s circular No. 452 which clearly throw light on the functioning of Kachcha Arahtia and Pakka Arahtia. The Kachcha Arahtias have also filed their affidavits acknowledging that cash payments were made at their insistence as they did not maintain any bank accounts as well as farmers have not maintained bank accounts and in turn Kachcha Arahtia has to make payments to the farmers in cash. Further, the old circular No. 34 was applied before the above Rules have been inserted in the IT Rules. Thus, it is also clear that in the absence of proper banking facilities, the assessee was under business expediency to make cash payment to the Kachcha Arahtias. Certain payments were made directly to the farmers as well as on bank holidays. Therefore, it would also support the finding of the ld. CIT(A) in deleting the addition. Further, the assessee has relied upon the Board’s circular No. 220 dated 31.05.1977, in which certain conditions have been laid down for making cash payments and some of the conditions are that when payments are made on bank holiday and the seller has refused to accept the payment by way of crossed cheques/draft. Further, the seller, acting as a commission agent is required to pay cash in turn to the persons from whom he purchased the goods. This circular would also apply in favour of the assessee because in the facts and circumstances of the case, it is clear that Kachcha Arahtia obtained the agricultural produce from the farmers and have arranged to make sales to the assessee being Pakka Arahtia. Since Kachcha Arahtia insisted for cash payment from the assessee for making cash payments to the farmers, therefore, sub-rule (e) of Rule 6DD would also apply in the case of the assessee. The ld. Counsel for the assessee has also relied upon the order of the ITAT, Vishakhapatnam Bench in the case of Venkatadri Oils Ltd. (supra) in which similar facts have been considered and the departmental appeal has been dismissed. The ld. Counsel for the assessee relied upon the decision of Hon’ble Delhi High Court in the case of R.C. Goel (supra) which also clearly supports the findings of the ld. CIT(A). Considering the facts and circumstances of the case, we are of the view that the case of the assessee is clearly covered by exceptions provided under Rule 6DD of the IT Rules, as noted above. Therefore, the ld. CIT(A) on proper appreciation of facts and material on record rightly deleted the addition. We, therefore, do not find any justification to interfere with the order of the ld. CIT(A). The same is confirmed and the departmental appeal is dismissed.
7. In the result, the departmental appeal is dismissed.