Case Law Details

Case Name : Deputy/Assistant Commissioner of Income-tax, Circle 2(2), Hyderabad Vs Heritage Foods (India) Ltd. (ITAT Hyderabad)
Appeal Number : IT Appeal Nos. 39 & 1433 (Hyd.) of 2008
Date of Judgement/Order : 27/07/2012
Related Assessment Year : 2004-05 & 2005-06
Courts : All ITAT (4448) ITAT Hyderabad (256)

 ITAT HYDERABAD BENCH ‘A’

Deputy/Assistant Commissioner of Income-tax, Circle 2(2), Hyderabad

versus

Heritage Foods (India) Ltd.

IT Appeal Nos. 39 & 1433 (Hyd.) of 2008

[Assessment years 2004-05 & 2005-06]

July 27, 2012

ORDER

D. Karunakara Rao, Accountant Member

These two appeals filed by the Revenue against two separate orders of the Commissioner of Income-tax(Appeals)-III, Hyderabad dated 7.11.2007 for the AY 2004-05 and dated 10.7.2008 for the AY 2005-06. Since only a common issue is involved, these two appeals are being disposed off by this common order for the sake of convenience.

2. Effective grievance of the Revenue in both these appeals relates to the additions made by the assessing officer invoking the provisions of section 40A(3) of the Act in respect of the payments made for purchase of milk from the milk producers. Ground 1 general and the common effective ground taken by the Revenue read as follows-

“2. The Hon’ble CIT(A) effected in directing to delete the disallowance u/s. 40A(3).”

3. Briefly stated, facts of the case are that the assessee is engaged in the business of purchasing milks, and after processing, selling the milk and milk products. During the assessment year 2004-05, the assessee purchased milk, for which payment to the tune of Rs.23.78 crores, were made in cash, for the assessment year 2004-05. Similarly, for the assessment year 2005-06, the payment to the tune of Rs. 42,25,796 were made towards purchase of milk, were made in cash. Considering the fact the impugned payments are made in cash and applicability of the provisions of S.40A(3) of the Act, the AO proceeded to disallow 20% of the said cash payments and made additions of Rs. 4,75,70,440 for the assessment year 2004-05 and of Rs. 8,45,159 for the assessment year 2005-06 and these additions are the subject matter of dispute in the appeals before us. The reasons given by the assessing officer for making the above addition for assessment year 2004-05, as contained in paras 4.3 and 4.4. of his impugned order, read as under-

“4.3 The vouchers furnished were verified. From the vouchers, it is noticed that payments have been made to some persons who in turn has split payment to various persons. Initially, it was claimed that the said payments were made to employees. On verification, it was found that only some of the persons are employees. The balance people were claimed as agents and relief under rule 6DD item – ‘L’ was claimed. On enquiry whether any commission, etc. was paid to these agents, the assessee could not substantiate his replies. From the above facts, it can be gathered that they are not the agents of the assessee company but procure milk for the sake of their own business and sell it to the assessee company. The claim that payments were made in places where banking services are not available is not acceptable as banking facilities are available in nearby centres and the assessee could have made use of those facilities.

4.4 In view of the above, I hold that the provisions of Sec.40A(3) are attracted to the above payments. The disallowance @ 20% on Rs. 23,78,52,203/- works out to Rs. 4,75,70,440/- and the same is added to total income.”

4. The addition made in the assessment year 2005-06 is also for similar reasons. From the above, it may be noted that non-furnishing of details relating to agents and details of commission payment made to the agents, absence of principal-agent relationship and the making payments to the parties in cash despite presence of banking facilities are the reasons for the additions made by the assessing officer.

5. Aggrieved, assessee preferred appeals before the CIT(A) for these two years. During the first appellate proceedings relevant for the assessment year 2004-05, the assessee made various submissions and filed details to prove that the impugned payments are made to the supplier of the milk and the said amounts never exceeded the sum of Rs.20,000 and therefore, the provision of S.40A(3) are inapplicable. The amount paid to the Agents/representative is an irrelevant factor and these people have finally made the payments to the milk suppliers. The CIT(A) called for a remand report on the said details and evidences, and the AO submitted the remand report dated 19.6.2007, wherein the AO held that the case of the assessee is covered by exceptions in Rule 67DD(l) of the I.T. Rules, 1962. On finding that the said report was submitted without conducting requisite verification, the CIT(A) called for a further detailed report to be forwarded through the Additional CIT. AO accordingly submitted detailed report dated 18.7.2007, copy of which was made available to assessee for comments. In response, the assessee’s counsel filed written submissions detailing the mechanism of the purchase of milk and making of the payment to the village representatives/agents and emphasizing the fact that the assessee is covered by exceptions to Rule 6D vide clause (g), (f) and (l) of the I.T. Rules, 1962. As per the said submissions of the assessee before the CIT(A), the case of the assessee is covered under Rule 6DD(f), as the payments in question were made to the producers of dairy milk indirectly through the village representative/ agent, which is a deemed contract payment to the producers of milk. Without prejudice, the assessee invoked the provisions of clause (l) of Rule 6DD stating that the payments in question are made to the agent who is in turn required to make payment in cash for goods on behalf of the purchaser of milk. Further, the learned counsel also mentioned that the village representative is an agent who receives commission for the services rendered. On hearing the assessee and after getting the remand report from the lower authority, the CIT(A) admitted the additional evidences furnished by the assessee and adjudicated on the issue in favour of the assessee, as per the discussion contained in paras 4.6 to 4.11 of the impugned order. Summary of the findings with reasons there of the CIT(A) as contained in those paras is as under-

  ♦  The persons to whom the impugned payments have been made have to be considered as dual representatives/agents on the facts of the case. In the final part of his report dated 18.7.2007, the assessing officer has mentioned that a group of members in a village selects a member as a representative of their milk collection centre in whose name the fat percentage and quality of milk etc., is recorded. The company makes the payment in the name of the representative, and after receipt of the payment, he disburses the amounts to the members as per the entries recorded in the milk collection centre. For this purpose, the company as paying an incentive of 20 to 30 paise per litre to the representative of the milk centre.

  ♦  Although there was no agreement with the company, the representative had to file a form of agent application, after receipt of which the company supplied various material to this person for utilization in milk collection centre. During the financial year 2003-04, the payments were made in cash because at the primary states of milk collection centre, the members insisted on cash payments and gradually bank accounts were opened in nearby banks after which the payments were made through banks only.

  ♦  The assessing officer has also mentioned that all these persons field confirmation letters stating that they were agents of the company.

  ♦  It can be inferred on these facts that the milk representatives appointed by the vendors were acting not only as representatives of the milk vendors at the milk collection centre, but they also acted as agents of the company for the purpose of performing various functions associated with the operation of milk collection centre, including disbursement of payments.

  ♦  As per the provisions of the Indian Contract Act, an agent is a person employed to do any act for another or to represent another in dealing with third persons (section 182). Further, it is stated in this Act (S.186) that the authority of the agent may be expressed or implied. An authority is said to implied when it is to be inferred from the circumstances of the case. In the present case, although there is no agency agreement in writing between the assessee company and the milk representatives working at the collection centres, their conduct and function in procurement of milk and disbursement of amounts to the vendors can be considered as the Act of an agent in the broader sense.

  ♦  Both the company as well as the representatives (payees) confirmed before thee assessing officer that the representatives were acting as the agents of the company at the milk collection centre, for which they have also been provided incentives on the transactions.

  ♦  In the circumstances the representatives to whom cash payments were made by the assessee company for the financial year 2003-04, have to be considered as agents of the assessee company, who is required to make payments in cash for goods(milk) to the cattle owners on behalf of the assessee. Accordingly, the payments made to them would be covered by the exception provided in clause (l) of Rule 6DD of the Income-tax Rules.

  ♦  The Additional Commissioner has himself agreed that the assessee company had recognized the agents who had been elected by the farmers. The fact remains that the persons (representatives) elected by the farmers were actually recognized by the company for various services including disbursement, and were also paid incentives on agreed basis for the services rendered to the company.

  ♦  Thus, the relationship between the assessee company and the representatives was of implied agency, and cannot be considered to be a relationship between principals.

  ♦  Consequently, the exception recogised in clause (l) of Rule 6DD is clearly applicable in the case and the provisions of S.40A(3) would not be attracted to the payments in question.

  ♦  There is merit in the additional ground taken by the assessee that even if the milk representatives are considered as representatives of farmers, the payments made through these persons would become payments made to farmers themselves, and would be covered by exception provided in Rule 6DD(f).

  ♦  Even if it is assumed for argument’s sake that the payees were representatives of farmers and could not be considered as agents of the assessee, the payments in question have to be considered as having been made to these persons with the objective of making final disbursement to the milk vendors for milk products, which is very much evident from the facts of the case narrated by the assessing officer in his report. That being so, the payments have to be taken as payments made for the purchase of dairy produce from the producers of milk which would be covered by clause (f) of Rule 6DD.

In support of the above findings, the CIT(A) placed reliance on the Bangalore Bench decision of the Tribunal in the case of Sri Renukeswara Rice Mills v. ITO [2005] 93 ITD 263 (Bang.). With the above findings, the CIT(A) deleted the addition made by the assessing officer for the assessment year 2004-05.

6. Similarly, for the assessment year 2005-06, following the above order for the assessment year 2004-05 and for similar reasons, the CIT(A), deleted the corresponding addition made by AO for that year.

7. Aggrieved by the above relief granted by the CIT(A), Revenue is in appeal for both the years with the grounds noted in para-2 above.

8. During the proceedings before us, learned Departmental Representative, strongly supporting the orders of assessment submitted that the CIT(A) is not justified in granting relief to the assessee. He submitted that the payments exceeding Rs. 20,000 each made by the assessee in cash on purchase of milk, is clearly in violation of the provisions of S.40A(3) of the Act. He submitted that there was no principal-agent relationship between the assessee and the recipient of the amounts in question. He accordingly submitted that the impugned orders of the CIT(A) on this issue should be set aside and the disallowance made by the assessing officer for both the years should be restored. Further, he mentioned that there exists banking facilities at least in some of the locations and therefore, the order of the CIT(A) requires amendment.

9. Per contra, Ld counsel for the assessee explained the facts of the case sand mentioned that the assessee has representatives at various villages, who supply/sells milk to the assessee. For the administrative convenience of the milk producers of a village, it is done through a representative, who shall file an application of agency and forward the same to the assessee company for the purposes of facilitating payment of money collectively and for ensuring uniform quality of milk for its fat content. Ld counsel explained the provisions and applicability of exceptions provided in Rule 6DD of the I.T. Rules, 1962. In this regard referring to exception contained in clause (f) learned counsel mentioned that this is a case of making payment in cash to the producers of milk and therefore, the provisions of S.40A(3) of the Act are inapplicable. Without prejudice, he also mentioned that the assessee’s case of making payment to the agent is also covered by the exception contained in clause (l) of Rule 6DD, which provided for exemption where the payments is made not in person but through agent, who is required to make payment in cash for supply of goods or services. Further, the learned counsel explained that the provisions of S.40A(3) are inapplicable to the facts of the case, considering the fact that the payments made to the agent/ representative, should be deemed as contract payments to the milk producers. The learned counsel also relied on certain judicial pronouncements to demonstrate that the order of the CIT(A) doe not call for interference. In this regard, the learned counsel relied on the decision of the Bangalore Bench of the Tribunal in the case of Sri Renukeshwara Rice Mills (supra), wherein the payments made to the cultivator of rice through an agent, operating at the market yard, were held as covered by the exceptions provided in clauses (f) and (l) of Rule 6DD of the Act. The learned counsel for the assessee also placed further reliance on following case laws and duly filed copies of the same. They are: Dy. CIT v. Allied Leather Finishers (P.) Ltd. [2009] 32 SOT 549 (Luck.); Gamdiwala Dairy v. Asstt. CIT [2012] 20 Taxman 290 (Ahd.); and CIT v. Gamdiwala Dairy [IT Appeal 1849/2010, dated 18-10-2011)-Guj (DB)].

10. Ld counsel submitted that the Ahemdabad Bench of the Tribunal in the case of Gamdiwala Dairy (supra), noted against (b) above, is analogous on fact to the instant case involving the identical transactions of assessee making payments to the representatives, which is finally to be disbursed to the milk suppliers/producers, held that the cash payments exceeding Rs. 20,000/- when made to the representatives of the milk producers are covered by the exceptions under S.40A(3) read with Rule 6DD(f) of the Income-tax Rules, 1962. He submitted that the said decision of the Ahmedabad Bench of the Tribunal was approved by the Gujarat High Court decision, noted against (c) above, which is evident from the judgment dated 18.10.2011, copy of which is placed at page 51 of the paper/book.

11. We heard both sides and perused the orders of the lower authorities and have also gone through the various paper-books filed before us, besides the impugned orders of the lower authorities and other material on record. The system followed by the assessee for the purchase of milk, as corroborated during the factual field enquiries carried out by the Revenue authorities and recorded by the CIT(A) in para 4.2 of his impugned order for the assessment year 2004-05, involves (a) formation of a group of milk producers in a village selecting one of them as a representative/agent of their Milk Collection Centre -MCC; (b) The members in the group bring the milk to the Milk Collection Centre and the milk is tested in Fat percentage testing machine. The quantity of milk and the Fat percentage will be entered in the Milk Card/Book of the Member and the Register maintained in the Milk Collection Centre. (c) The rate of milk will be calculated as per the Fat percentage available in the milk. The average rate of milk is between Rs.18/- to Rs.19/- per litre. All the milk collected in the Milk Collection Centre is sent to the nearby milk chilling plant. (d) There, the sample of milk is taken and tested in the Fat percentage testing machine and the rate of the milk is calculated as per the Fat percentage and quantity of milk while recording the same in the name of the representative of that Milk Collection Centre. (e) The company makes the payment in the name of the representative into his Bank account as per the Fat percentage and quantity of milk recorded in the milk chilling plant. (f) After receipt of the payment, the agent draws the cash from the bank and disburses the amounts to the members of MCC as per the entries recorded in the members milk card/book land the register maintained in the MCC. The payment is made once in a 10 days. The company pays as incentive of 20 to 30 paisa per litre to the representative of MCC. There is no dispute on the above facts. However, the dispute revolves around if the payments made to the representative or the agents amounts to the payments made to the milk producers which is referred to in clause (f) of Rule 6DD of the Income tax rules 1962. Further, the representatives of the MCC are deemed as the agents referred to in the provisions of Rule 6DD(l) of the Income Tax Rules 1962.

12. Stand of the revenue: Revenue holds that the payments made to the representative/agent of the MCC does not amount to the payments made to the producer of the dairy article i.e. milk as the incentive of 20 to 30 paisa paid to representative is not reflected in the books as the agency commission. Therefore the AO ignored the claim of the assessee in this regard. On the issue of quantity of the amounts paid by the assessee to the said representative, the AO holds that the said amounts paid in cash exceed the specified sum of Rs 20,000/- and further, the said amounts since not paid directly to the producer of the dairy article and factually it was paid to the representative, therefore, as per the revenue, the provisions of clause (f) of rule 6DD imply direct payments to the producers of the dairy article and not through the representatives/agents. Further, the case of the revenue is that the relationship between the assessee and the representative is not that of the principle and agent and consequently, the transactions are outside the scope of the provisions of rule (l) of the said Rule. At the end, Ld DR is of strong views that the claim of the assessee is not allowable under any clause of Rule 6DD of the IT Rules, 1962 when there exists banking facilities in each and every village in India.

13. Stand of the assessee: Per contra, the case of the assessee is that the payments in cash made to the producer of the milk even through the representatives are covered by the said clause (f) and this line of interpretation of the provisions have strength of the judgment of the Hon’ble High court of Gujarath at Ahmedabad in the case of Gamdiwala Dairy (supra) placed at page 51 of the paper book and others being the Bangalore Bench decision in the case of Renukeswara Rice Mills (supra) and Lucknow bench decision in the case of Allied Leather Finishers (P.) Ltd. (supra), Delhi Bench decision in the case of Dy. CIT v. Hind Industries Ltd. [2008] 26 SOT 196/[2009] 120 ITD 89 (Delhi). Further, in view of the above citation, the assessee is of the firm opinion that the ‘representative’ constitutes an agent in dual capacity in the scheme of milk collection centres narrated above i.e. for the assessee on one side and the milk producers on the other. Regarding the argument of the Ld DR on banking facilities, the assessee stand is that the milk producers are economically, educationally and sociologically backward and they readily need milk sale proceeds in cash and further, as such, the banking facilities are not existing in each and every village that supply milk to the assessee.

14. We have examined the above narrated divergent views of the parties in dispute on the issue and find there is no dispute on the facts and the dispute revolves around the scope of the legal provisions of exclusion clauses of Rule 6DD of the IT Rules, 1962. Further, there is dispute also on (a) if the payment in cash made to the representative/agent MCC in this case constitutes direct payments to the milk producer/suppliers of MCC (milk collection centre) and (b) if the representative in question constitutes an agent within the meaning of the said clause (l) of the said Rule. Therefore, we shall adjudicate the above disputes by analysing the scope of the clause (f) and (l) of the said rule in the succeeding paragraphs. Relevant provisions namely clauses (f) and (l) of the rule 6DD of the Income tax Rules 1962 are extracted as follows.

“6DD.No disallowance under sub-section (3) of section 40A shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder, namely:-

(a)  to (e) ** ** **

 (f)  where the payment is made for the purchase of-

(i) ** ** **

(ii)  the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or

(iii)  …; or (iv) ** ** **

 to the cultivator, grower or producer of such articles, produce or products;….

(g)  to (k) ** ** **

  (l)  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….”

15. Bare reading of the provisions of clause (f) indicates that the payments made for purchase of produce of the animal husbandry or dairy etc to its producer are outside the scope of the provisions of section 40A(3) of the Act. It is also settled issue that the expressions ‘to the cultivator, grower or producer of such articles, produce or products’ placed at the end of clause (f) of the rule 6DD commonly apply to all four sub clauses of the said clause (f). Further, where assessee makes the payment cash to his agent who is required to make payment in cash for goods or services on behalf of such person, such payments are outside the scope of the provisions of section 40A(3) of the Act. There is no bar on the said agent to work in dual capacity to the milk producers too. The representatives are admittedly the agents as evident from the confirmation letters filed by them before the lower authorities. Further, there is no dispute on the fact that the milk, for which the impugned payments are made by the assessee, is not a dairy produce. Nothing is brought onto the records by the assessee to show that the representatives/agents of MCC are not required to make payments in cash. As such the requirement of making the payments in cash to the producers of milk is much beyond the existence of Banking facilities in that village or nearby villages. The economic problems of milk producers are such that the Parliament/CBDT felt it necessary to incorporate milk producer should be free receive payments in cash. Of course, such exclusion from the rigour of the provisions of section 40A(3) of the Act, is subjected to certain conditions. The above interpretation has the strength of the decision of the Tribunal and the judgment of Gujarat High Court and other judicial fora, which were heavily relied upon by the Ld Counsel. In view of the cited judgements in the case of Gamdiwala Dairy’s case (supra) which in fact has approved the order of the Ahmedabad Bench of the Tribunal in that case Gamdiwala Dairy’s case (supra). Relevant portions of the Order of the Tribunal and the Judgement of the High Court are reproduced as under:

16. In the case of Gamdiwala Dairy’s case (supra), it has been held by the Ahmedabad Bench of Tribunal, vide head-note, as follows-

“Held that the payments were made to various persons, who managed the collection centres for milk because it was not possible either for the assessee or for the individual producers of milk so to do. The assessee and the producers of milk mutually agreed upon the arrangement that the producers of milk in a particular village would collectively select any one of them to look after the collection of milk from the farmers and, in turn, supplying the milk to the assessee and the assessee agreed to make payment to the farmers for the milk sold by them through such mutually agreed upon persons amongst the said farmers of each village. The aforesaid arrangement was put into operation by the farmers of each village and they decided to give high sounding names to such collection centres. In view of the above fact, it was clear that the farmers or the producers of milk did not lose their individual identity and each such farmer was paid for the milk sold by him at a fixed price, depending upon the quality of the milk, viz. fat contents and quantity and this fat coupled with the fact that none of the alleged societies were registered societies or legal entities of any sort, none had maintained any regular books of count, none had purchased the milk from the farmers independently and made over to the assessee, none of the entities maintained independent accounts of the farmers except the noting of the milk contributed by the farmers in terms of quantity, viz. fat contents they were paid by the assessee through the person who collected the milk from the farmers and supplied to the assessee. Further, the assessee during the course of assessment proceedings had filed the confirmations of various persons, who confirmed that they were procuring milk on behalf of the assessee from various producers of the milk and it was supplied to the assessee and, in turn, the assessee was making payments, which was to be handed over to the producers and they were handing over such amount to the respective milk producers. According to the farmers, the consideration paid for the same was collected by the president and it was handed over to the persons supplying the milk, in the ratio of the milk provided by each person. Thus, they had received the amount in the ratio of milk supplied in the name of dairy. These dairies were thus, only the facilitating stations for the producers of milk and the assessee was making purchases directly from the producers and, accordingly, fell in the exception. In view of the above facts and circumstances, the assessee’s case was covered under the exceptions under section 40A(3), read with rule 6DD(f) of the Income-tax Rules, 1962, and therefore, the disallowance was not justified.”

17. The above decision of the Ahmedabad Bench of the Tribunal has been confirmed on appeal by the Hon’ble Gujarat High Court in the case of Gamdiwala Dairy’s case (supra) its CAV judgment dated 18.10.2011, in the following manner-

“4. Entire issue has been dealt with extensively by the Tribunal and it thereafter allowed the assessee’s appeal giving clear findings that exception provided under Rule 6DD would be made applicable to the case of assessee in the words of the Tribunal. It has held thus

“We find from the above provisions of Rule 6DD, that the assessee’s case is the farmers or the producers of milk did not loose their individual identify and each such farmer was paid for the milk sold by them at a fixed price depending upon the quality of the milk viz. fat contents and quality and this fact coupled with the fact that none has maintained any regular books of account, none has purchased the milk from the farmers independently and made over to the assessee, none of the entities maintained independent accounts of the farmers except he nothing of he milk contributed by the farmers in terms of quantity and quality viz. fat contents they were paid by the assessee through the persons who collected the milk from the farmers and supplied to the assessee. Accordingly, these noting in rough sheets can never by any stretch of imagination be equated to maintaining books of account etc. when considered in totality it would be clear that the milk was purchased by the assessee from the producers of milk. We further find that the assessee during the course of assessment proceedings had filed the confirmations of various persons who confirmed that they were procuring milk on half of the assessee from various producers of the milk and it was supplied to the assessee and in turn the assessee was making payments, which was to be handed over to the producers and they were handing over such amount to the respective milk producers. We find that, according in the farmers, the consideration paid for the same are collected by the president and it was handed over the persons supplying the milk, in the ratio of the milk provided by each person. Thus, they have received the amount in the ratio of milk supplied in the name of dairy. These dairies are thus only the facilitating stations for the producer of milk and the assessee is making purchases directly from the producers and accordingly falls in the exceptions. In view of the above facts and circumstance, we allow this issue of the assessee’s appeal and dismiss that of the Revenue’s appeal.

5. This Court examined in the Tax Appeal No. 1545/2010 similar question. The same has been held in favour of the assessee and against the Revenue in the following manner:

5. It was noticed by the Tribunal that cash payment of Rs. 87,84,655/- was made to different persons for purchase of jaggery and since these purchases were in excess of Rs. 20,000/-, there was contravention of the provisions of Section 40A(3)and hence 20% of such cash purchases were added to the income of the assessee. The Tribunal was of the opinion that the Assessing Officer had specifically asked for the details of the purchase of jaggery and the proof of purchase as there was a direct purchase from various agriculturists. It also noted that the requisite material had been placed before the Assessing Officer with regard to the purchases of jaggery and copies of village form No.7/12 and 8A were also brought forth to prove the facts that they were purchased from the agriculturists. The Tribunal also noted that the same were duly covered under Rule 6DD(f)(i) of the Income Tax Rules and after due satisfaction, the Assessing Officer had allowed this amount and, therefore, the order of the Assessing Officer has been upheld by the Tribunal. Rule 6DD and sub-clause (f) of Rule 6DD are reproduced hereunder:-“

“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 a 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 in the cases and circumstances specified hereunder, namely:-

** ** **

(f)  Where the payment is made for the purchase of the products and manufactured or processed without the aid of power in a cottage industry, to the producer of such products;”

** ** **”

6. Rule 6DD(f) mentions one of the circumstances, which indicates that when the payment is made of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products, injunction specified under Section 40A(3) would not come into play. In other words, if any person purchases any product manufactured or processed from the producers directly, who has processed such a product, without the aid of power in a cottage industry, even if the payment is made in aggregate exceeding Rs. 20,000/- in a day to a particular person otherwise than by way of cheque, the same may not incur disqualification in terms of rejection of disallowance.

7. What can be found here in the case of the present assessee respondent is that the purchases of jaggery had been made by the assessee from the agriculturist themselves and there was sufficient proof adduced by the assessee. What can be further noted is that the said payment was made by way of cash and there was no cheque payment. However, the Tribunal after noting that such explanation is permissible and is covered duly under Rule 6DD(f) of the Income Tax Rules and also holding that when the Assessing Officer had subjectively satisfied himself with the identities of the persons, it correctly held that the jaggery is produced at village level where no chemical process or any mechanical process is involved and in this background factual and legal, the Tribunal has correctly upheld the findings of the Assessing Officer.

8. In the instant case, the nature of transactions being similar and the provisions of law applied to the said dealings are also the identical and as Court earlier had upheld the order of Tribunal in almost similar circumstances, in the present case as the Tribunal has dealt with the issue in accordance with the law, issue requires no interference.”

18. In the case of Sri Renukeswara Rice Mills (supra), Tribunal of Bangalore Bench, which held as follows-

“The payment was made for purchase of agricultural produce. The payment was made to the agent operating at the market yard. As per the regulation of trade in agricultural produce, market yards are set up and the State RMC Act also regulates such business. Thus, for purchase and sale of agricultural produce, the transaction can be only through dealers and agents licensed to operate in the market yard. Thus, the person operating there, is not only the agent of the cultivator or grower but also of the persons purchasing the agricultural produce. Clause (f) of rule 6DD provides that where the payment is made for the purchase of agricultural produce to the cultivator, section 40A(3) will not apply. Similarly, clause (l) of rule 6DD provides that where the payment is made by any person to his agent who is required to make payment in cash for goods, section 40A(3) will not apply. Since the assessee had paid the sum to his agent who was the payee in the instant case, and who in his turn, was required to make payment to the cultivator, indirectly, the assessee had paid for the purchase of agricultural produce to the cultivator through the agent. Thus, a combined reading of clauses (f) and (l) of rule 6DD would take away the transaction from the clutches of section 40A(3). The assessee apart from paying price of the products also paid commission to the payee. Thus, the payee had become the agent of assessee also. Such agent is required to pay the cultivator in cash. Accordingly, there was no violation of section 40A(3). “

19. In the light of the ratio of the above decisions, the payments in cash made by the assessee to the milk producers though the aegis of the composite representatives/agents in dual capacity of the assessee – milk producers combine, should deemed as direct payment to the milk producers within the meaning of the provisions of clause (f) of Rule 6DD of the Income tax rules, 1962. In that sense, the issue in dispute is squarely covered by the judgment of the Hon’ble High Court of Gujarath in the case of Gamdiwala Dairy (supra). As such, no contrary decision in favour of the revenue is brought to our notice by the Departmental Representative.

20. Alternatively, in the given facts of this case, the representatives of the MCC are also should be deemed as the agents of both assessee and milk producers as such persons fill the ‘Form of Agent’ to be initially entertained by the assessee as well as the milk producers. It is a fact on approval by both parties, the assessee hands over the fat-measuring equipments and subsequently, the assessee periodically hands over the requisite cash for disbursal among the milk suppliers and of course, the milk producers hand over the milk for the assessee to the same representative. These representative cannot be considered as middleman considering the fact quite often, he is one among the suppliers of the milk and receive some incentive for the extra services rendered by him for both the assessee and the colleague members of the village. In the language of the cited decisions above, the milk suppliers do not lose their identity because of the representative/agent. That is where the role of the representative as an agent is existent. It is a fact that, quite frequently, the impugned representative works for money, which is an essential fact in the overall scheme of milk collection and supply to the milk chilling centres of the assessee.

21. On perusal of paras 4.5 to 4.11 of the impugned order of the CIT(A), it is noticed in para 4.5 that the assessing officer made the impugned additions without examining the relevant evidences in detail. It was also noted that if the payments at the level of milk producers are considered, each payment never exceeded the specified sum of Rs.20,000. There is, therefore, no violation of S.40A(3) of the Act. Violation arises only if the payments at the point of representative and not otherwise. It is also noticed in para 4.6 that it is a fact that the representative of milk collection centre functions in a dual capacity, both for the assessee as well as the milk supplier for incentives. Further, it is undisputed fact that the said representative filed confirmation letters before the assessing officer asserting that they are the agents of the company alongwith their duties and responsibilities towards suppliers of milk to. It is the requirement of these agents to make the payment in cash for goods, i.e. milk, to the cattle owners, who belong to economically weaker section, on behalf of the assessee. In that view of the matter, the impugned payments are squarely covered by the exceptions provided in clause (l) of Rule 6DD of the Income-tax Rules, 1962. The CIT(A) also reasoned in his order that the exceptions provided in clause (f) of Rule 6DD also apply to the assessee as the representatives are the agents of the assessee, who are required to make payment in cash to the producers of milk. In this regard, the CIT(A) relied heavily on the Bangalore Bench decision of the Tribunal in the case of Sri Renukeshwara Rice Mills (supra), which was decided on the facts of making payments in cash to the agents for purchasing agricultural produce from the market yard. With due respect to the minor factual variations, the CIT(A) adopted the principle enunciated in the said order by the Bangalore Bench for holding that the impugned payments in cash are covered by the provisions of clauses (f) of Rule 6DD of the Income-tax Rules. In our opinion, the order of the CIT(A) appears reasonable considering the elaborate legal interpretation of the relevant provisions narrated above as well as the documentation and additional details furnished by the assessee before the first appellate authority. As such, the confirmation letters filed by the agents in this regard are not questioned by the Revenue. It is also relevant to mention here that the assessee should be entitled for relief even if the impugned payments are covered under any one of the exceptions prescribed in Rule 6DD, viz. either under clause (f) or clause (l) of Rule 6DD, even if not both. Further, it is relevant to mention that in the assessment year 2004-05, the disallowance made in terms of S.40A(3) is Rs. 23.78 crores, as against only Rs. 42,25,796 for assessment year 2005-06. This vast difference in the disallowance between these two years is on account of deviation in the approach of the assessing officer and acceptance of the assessee’s arguments mentioned above. Therefore, on fairer side, the AO should not have considered the payments made in cash to the ‘representative’ for applying the provisions of section 40A(3) of the Act and he should have considered the payments made in cash at the stage of the supplier/producer of the milk. In any case, cash payments of any amount to such producers of milk are covered by the above said clauses of (f) and (l) of the Rule 6DD of I T Rules, 1962 and such payments must enjoy the exclusion benefits.

22. Therefore, also for the reasons mentioned in the preceding paragraphs of this order, we find no infirmity in the impugned order of the CIT(A). We accordingly uphold the same, and consequently, grounds of the Revenue in these two appeals are dismissed.

23. In the result, appeals of the Revenue are dismissed.

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