Cash Payments for Purchase of Agricultural Produce Through Kaccha Arahtias Protected By Statutory Exceptions u/s 40: ITAT Deletes ₹14 Cr Disallowance [Read Order]

The Income Tax Appellate Tribunal (ITAT) Kolkata Bench deleted a disallowance of ₹14.08 crore made under Section 40A(3) of the Income Tax Act 1961 held that cash payments made through Kaccha Arahtias for procurement of agricultural produce are protected under the statutory exceptions provided in the Act and Rules.

The assessee Bishnu Rice Mill engaged in the business of manufacturing rice and rice bran from paddy, had filed its return declaring an income of ₹17.64 lakh for the Assessment Year 2014-15. During scrutiny proceedings the Assessing Officer noticed that the assessee had made cash payments exceeding ₹20,000 in a single day towards purchase of paddy and consequently invoked Section 40A(3) disallowing ₹14.08 crore.

According to the Revenue the payments were made to suppliers and not directly to farmers, thereby attracting the rigour of Section 40A(3). The Assessing Officer observed that substantial cash and bearer cheque payments were routed through several intermediaries including agents engaged in paddy procurement.

The assessee contended that the said intermediaries were merely Kaccha Arahtias or mediators acting on behalf of the rice mill for procuring paddy from farmers located in remote villages. It was argued that the agents collected paddy from cultivators and disbursed cash payments to them because farmers insisted on immediate cash consideration and were unwilling to accept cheque payments.

The assessee further submitted weighment certificates, purchase details, names of farmers and records of commission payments described as Jalpan to establish the genuineness of the transactions. It argued that the payments were squarely covered under the statutory exceptions applicable to purchase of agricultural produce and payments made through agents.

The Tribunal noted that the genuineness of paddy purchases, identity of farmers and the business necessity behind the cash payments were never disputed by the department. The Bench also observed that in the assessee’s own case for AY 2016-17 the Revenue had already accepted the modus operandi adopted for procurement of paddy through agents.

The Tribunal held that procurement of agricultural produce through mediators and agents falls within the protective exceptions to Section 40A(3).

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