RELEVANT PARAGRAPH
9. We have considered the rival submissions and perused the material on record. In our considered view, there is no case for interfering in the order of the Id. Commissioner (Appeals). So far as addition u/s 40A(3) is concerned, the undisputed facts are that assessee has purchased raw hides/skins for the purposes of manufacturing leather and leather products from local producers either directly or through their agents. Even though the Assessing Officer issued letters to various producers and some of these have come back unserved but it does not prove that the producers of the skin from whom assessee had made purchases are non-existent. Assessee had requested to issue commission for examining those persons or to issue letters afresh at the new addresses or permit him to produce the parties who sold the raw skin and hides to the assessee, but this request seems to have been not accepted by the Assessing Officer, The Assessing Officer also did not make any request to the Id. CIT(A) to provide him an opportunity to verify whether new addresses provided or to be provided by the assessee are correct or not. Even on demand, opportunity for producing the producers of hides and skin was not granted by the Assessing Officer or no such request was made to the Id. CIT(A) to give this opportunity to him. It seems that Assessing Officer has simply relied on the non-service of some of the letters for his inference that purchases are not verifiable. It may be noted that Assessing Officer has not rejected the books of account. He has only invoked the provisions of Section 40A(3) which presupposes that purchases are genuine but payments have been in cash in violation of Rule 6DD, therefore, question of considering the addition on account of non-genuineness of purchases does not arise. The Assessing Officer has not made out a case for holding that purchases are not genuine because onus shifted back by the assessee to the Assessing Officer by way of insisting for giving opportunity to produce concerned persons is not discharged. In our considered view, where letters sent to the creditors/sellers of the goods to the assessee returned back unserved then it will not be proper to draw inference that such creditors/sellers of the goods to the assessee are non-existent. The Assessing Officer must give an opportunity to the assessee to produce them or to provide new addresses on which enquiries should have been directed. When assessee fails to produce them coupled with non service of the letters/notices, then it can be fairly inferred that the purchases/credits are not genuine and onus will shift back to the assessee to produce evidence to prove his stand. Therefore, we are unable to accept the findings of the Assessing Officer that purchases made by the assessee are bogus merely because certain letters have come back unserved.
10. When we examine the applicability of Section 40A(3), we find that purchases made directly from producers are covered under Rule 6DD(f)(ii). In this regard, we refer to Rule 6DD(f) as under:
“(f) Where the payment is made for purchase of (i) agriculture or forest produce; or (ii) the produce of Animal Husbandry (including hides and skins) or dairy poultry farming; of
(i) fish or fish products; or
(ii) the produce of Animal Husbandry (including hides and skins) or dairy poultry farming:
(iii) fish or fish products; or
(iv) the produce of horticulture or apiculture;
to the cultivator, grower or producer of such articles, produce or products.’
11. It is nowhere denied that assessee has not purchased part of its raw material directly from the producers. Thus, direct purchases would be covered under Rule 6DD(f)(ii). The Circular No.08/2006 dated 6.10.2006 to the effect that provisions of Rule 6DD(f)(ii) would not be applicable for purchases of animal husbandry product including hides/skins directly from the producers, would be effective w.e.f 6.10.2006 when circular was issued and not to an earlier assessment years. In this regard we refer to the circular no. 4 of 29/03/2006 – 8/2005/ITA-II (2006) 282 IT, as under:
Subject : Clarification regarding the meaning of the expression “the produce of animal husbandry” used in sub-clause (ii) of clause (f) of rule 6DD of the Income-tax Rules, 1962.
To,
All Chief Commissioners/
Directors Genera) of Income-tax.
Subject ‘. Clarification regarding the meaning of the expression “the produce of animal husbandry” used in sub-clause (ii) of clause (f) of rule 6DD of the Income-tax Rules, 1962.
Disallowance of twenty per cent of the expenditure under the provisions of sub-section (3) of section 40A is made in the computation of income in any case where a payment is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for a sum exceeding twenty thousand rupees. However, payment otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft does not attract the aforesaid disallowance in certain circumstances prescribed under rule 6DD of the Income-tax Rules, 1962. Such exceptions, inter alia, refer to payment made to the producer for the purchase of the produce of “animal husbandry (including hides and skins) . . .” under sub-clause (ii) of clause (f) of rule 6DD.
2. Representations have been received from certain quarters that some income-tax authorities are permitting payment of cash beyond rupees twenty thousand for the purchase of livestock and meat by considering them to be covered under the aforesaid sub-clause and at the same time some others are making disallowances. Divergent decisions are being attributed to ambiguity regarding the meaning of the expression “the produce of animal husbandry” used in sub-clause (ii) of clause (f) of rule 6DD.
3. The Board after examination of the issue are of the view that the expression “the produce of animal husbandry” used under rule 6DD(f)(ii) would include “livestock and meat” and in a case where payment exceeding rupees twenty thousand is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for the purchase of such produce, no disallowance should be attracted under section 40A(3) read with rule 6DD. It is further clarified that exception will not be available on the payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman by whatever name called.
(Sd.) Renu Jauhri,
Director (ITA=nT
[F No. 225/78/?005- 1TA-ll]
14. Further, applicability of Rule 6DD(f)(ii) on direct purchases made from the producers is supported by the decision of Hon’ble Madras High Court in the case of K.K.S.K. Leather Processors Pvt. Ltd (supra). The head notes from that decision are reproduced below:
“Held, (i) that as a matter of fact, the Tribunal noted that a large quantity of sale of wet blue was stated to be out of the previous year’s closing stock and current year’s purchases. Further, verification of the regular accounts could not be considered as additional evidence. No addition to income could be made on the ground of undervaluation of stock.
(ii) That the assessee had produced necessary grounds for making cash payment. The Tribunal noted that these payments were made to small time vendors, who came from surrounding villages to sell the skin and the process of dressing the skin done without the aid of power. The Tribunal also noted from the order of the Commissioner, that considering the fact that the purchases were made from the unorganised sector, cash payments were indispensable. The order of the Tribunal with regard to the cash payments was justified.
15. It is clearly held above that where payments were made to small vendors, who came from surrounding villages to sell the skin to the assessee provisions of Sec.40A(3) could not be invokd. Respectfully following the above decision of the Hon’ble Madras High Court, we hold that payment is made in cash for purchases made by the assessee directly from producers would be covered by Rule 6DD(f)(ii) and therefore, disallowance cannot be made out of such payments under Section 40A(3).
17. The Department has not shown any authority for the proposition that under such circumstances Rule 6DD(I) will not be applicable. Rule 6DD(/) will not be applicable. Accordingly, entire payment made by the assessee to producers of the raw hides/skins^ or, to their agents for such purchases would not be hit by the provisions of Section 40A(3). The Id. CIT(A) has rightly deleted the addition.
