ACIT, New Delhi V. M/s Kalindi Agro Biotech Ltd., New Delhi

ITA 4292/DEL/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3920 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 05-05-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 06-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DEVENDRA SINGH

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH D DELHI ] BEFORE SHRI C. L. SETHI, JM AND SHRI K. D. RANJAN, AM I. T. APPEAL NO. 4292 (DEL) OF 2009. ASSESSMENT YEAR : 2006-07. ASSTT. COMMISSIONER OF INCOME-TAX, M/S. KALINDI AGRO BIOTECH LTD., CIRCLE : 5 (1), VS. F3/2, OKHLA IN DL. AREA, PHASE I, N E W D E L H I. N E W D E L H I. PAN / GIR NO. AAA CK 1219 N. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI RAKESH KUMAR, C. A.; DEPARTMENT BY : SHRI DEVENDRA SINGH, SR. D.R. ; O R D E R. PER K. D. RANJAN, AM : THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 2006 -07 ARISES OUT OF THE ORDER OF THE LD. CIT (APPEALS)-VIII, NEW DELHI. 2. THE GROUNDS OF APPEAL, RAISED BY THE REVENUE, AR E REPRODUCED AS UNDER :- 1. THE ORDER OF THE LD. CIT (APPEALS) IS ERRONE OUS AND CONTRARY TO FACTS AND LAW; 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT (APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS. 23,42,054/- MADE BY THE AO UNDER SECTION 41(A)(IA) OF THE I. T. ACT; 2 I. T. APPEAL NO. 4292 (DEL) OF 2009. 2.1 LD. CIT (APPEALS) HAS FAILED TO APPRECIAT E THE FACT THAT PAYMENT TO DIFFERENT FARMERS WAS MADE IN ACCORDANCE WITH THE T ERMS AND CONDITIONS OF THE CONTRACT; 3. ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD. CIT (APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS.4,28,805/- MADE BY THE AO UNDER SECTION 41(A)(IA) OF THE I. T. ACT; 3.1 THE LD. CIT (APPEALS) DID NOT APPRECIATE THE FACT THAT THE PAYMENTS WERE MADE TO THE SUB CONTRACTORS IN CASH EXCEEDING RS.20,000/- EACH. 3. THE FIRST ISSUE FOR CONSIDERATION RELATES TO THE DELETION OF ADDITION OF RS.23,42,054/- MADE BY THE ASSESSING OFFICER UNDER SECTION 40(A)(IA) OF THE INCOME-TAX ACT. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE COMPANY DURIN G THE YEAR UNDER CONSIDERATION WAS ENGAGED IN THE PRODUCTION AND MARKETING OF POTATO SEEDS. AS PE R PRODUCTION PROCESS THE MULTIPLICATION OF POTATOES IS CARRIED OUT IN TISSUE CULTURE LABORATOR Y. THESE MULTIPLIED PLANTS ARE TRANSPLANTED IN GREEN HOUSES TO PRODUCE 0 GENERATION SEED [MINI-T UBERS]. MINI-TUBERS ARE MULTIPLIED FIRST GENERATION SEED IN OPEN FIELDS AND IN BUY-BACK AGRE EMENT WITH FARMERS. FIRST-GENERATION SEED IS MULTIPLIED INTO FOURTH GENERATION SEEDS. AFTER PRO DUCTION OF SEEDS INTO RESPECTIVE GENERATIONS, SEEDS ARE SOLD TO FARMERS AND TRADERS. OVER-SIZED SEEDS AND POOR QUALITY SEEDS ARE SOLD AS POTATOES IN THE MARKET AND TO THE PROCESSING INDUST RY. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE EXPENDITURE OF RS.23,86,522/- HAD BEEN CLAIMED AS BUY-BACK PRODUCTION COST. THE NATURE OF EXPENSES WAS EXAMINED AND IT WAS FOUND THAT THE EXP ENSES WERE IN THE NATURE OF CONTRACT PAYMENTS ON WHICH TDS SHOULD HAVE BEEN DEDUCTED UND ER SECTION 194-C OF THE ACT. SINCE NO TDS WAS DEDUCTED THE EXPENSES CLAIMED AS BUY-BACK P RODUCTION WERE NOT LIABLE TO BE ALLOWED AS DEDUCTION UNDER SECTION 40(A)(IA) OF THE ACT. THE ASSESSING OFFICER, THEREFORE, REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THE BUY-BACK PRODUCTI ON EXPENSES SHOULD NOT BE DISALLOWED. IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE SOLD SE EDS TO FARMERS BY RAISING INVOICES AND, THEREAFTER PURCHASED THE MULTIPLIED POTATOES AGAINS T INVOICE. THE AGREEMENT WAS ENTERED INTO TO PREVENT THE FARMERS FROM SELLING THE MULTIPLIED SEE DS TO OTHER PARTIES. THE COMPANY WAS NOT MAKING ANY PAYMENT IN NATURE OF JOB WORK. IT WAS A LSO SUBMITTED THAT THE ITEMS PRODUCED BY THE FARMERS FOR THE COMPANY WERE NOT SPECIFIED AND ALSO FREELY TRADABLE IN NATURE MEANING THEREBY 3 I. T. APPEAL NO. 4292 (DEL) OF 2009. THAT THE ITEMS COULD BE SOLD BY THE FARMERS IN THE OPEN MARKET. THE PROVISIONS OF SECTION 194-C OF THE ACT ARE APPLICABLE WHEN CONTRACT IS EITHER A WORK CONTRACT OR A CONTRACT FOR SUPPLY OF LABOUR. THE AGREEMENT WAS FOR CONTRACT OF SALE OF GOODS INSTEAD OF WORK CONTRACT. HOWEVER, FROM THE COPY OF PAYMENT ACCOUNT OF FARMERS THE ASS ESSING OFFICER NOTED THAT THE ASSESSEE HAD PAID ADVANCES TO FARMERS. IF THE ASSESSEE HAD SOLD SEEDS TO FARMERS AND HE WAS FREE TO SELL IT IN THE OPEN MARKET, THEN QUESTION OF ADVANCE WOULD NOT HAVE ARISEN. THE ASSESSEE HAD DEDUCTED COST OF SEED AT THE TIME OF RECEIPT OF POTATOES FRO M THE FARMERS, WHICH SHOWED THAT THERE WAS WORK CONTRACT BETWEEN THE FARMER AND THE ASSESSEE W HEREIN THE FARMER GOT PAYMENT FOR THE WORK THAT HE HAD DONE FOR THE ASSESSEE. REFERRING TO CL AUSE (1) OF THE AGREEMENT THE ASSESSING OFFICER NOTED THAT THE FARMERS HAVE GIVEN AN UNDERTAKING TO SUPPLY ALL THE POTATOES GROWN FROM THE SEEDS SUPPLIED BY THE ASSESSEE. EVEN THE FARMING PROCESS WAS CLOSELY MONITORED BY THE ASSESSEE AS MENTIONED IN CLAUSE (3) OF THE AGREEMENT. THE ASSE SSING OFFICER, THEREFORE, CAME TO THE CONCLUSION THAT THE ASSESSEE HAD GIVEN WORK CONTRAC T TO THE FARMERS FOR GROWING POTATOES OF DESIRED SPECIFICATIONS FROM SEEDS SUPPLIED BY IT. THE PAYMENTS WERE MADE SUBJECT TO DEDUCTION OF TAX AT SOURCE. SINCE THE TAX WAS NOT DEDUCTED A T SOURCE, THE AMOUNT WAS NOT ALLOWABLE AS DEDUCTION UNDER SECTION 40(A)(IA) OF THE ACT. 5. BEFORE THE LD. CIT (APPEALS) THE LD. AR OF THE A SSESSEE SUBMITTED THAT PROVISIONS OF SECTION 194-C WERE NOT APPLICABLE. THE ASSESSING O FFICER HAS DRAWN CONCLUSIONS MERELY ON THE FACTS THAT THE ASSESSEE USED TO GIVE ADVANCES TO FA RMERS ALONG WITH POTATOES SEEDS AND USED TO RECOVER THE ADVANCES AND COST OF SEEDS AT THE TIME OF RECEIPT OF POTATOES FROM THEM. IT WAS ALSO ARGUED THAT GIVING ADVANCES TO FARMERS AT THE TIME OF SOWING OF CROP AND RECOVERY OF THE SAME AT THE TIME OF HARVEST OF THE CROP WAS A VERY COMMON P RACTICE IN ASSESSEES LINE OF BUSINESS. IT WAS ALSO ARGUED THAT THE PURPOSE OF EXECUTING AGREEMENT S WAS TWO-FOLD : (I) TO SAFE-GUARD THE CREDIT GIVEN TO THE FARMERS; AND (II) THE SEEDS OF POTAT OES WHICH HAD BEEN INVENTED BY IT DO NOT GO TO OTHER COMPETING BUSINESS CONCERNS IN THE MARKET. T HE LD. CIT (APPEALS) AFTER CONSIDERING THE WRITTEN SUBMISSIONS AND PROVISIONS OF SECTION 194-C OF THE ACT WAS IN AGREEMENT WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE. HE WAS OF THE OPINION THAT THE ASSESSING OFFICER HAD NOT MADE OUT A CASE THAT FARMERS WERE ACTUALLY WORKING FOR AND ON BEHALF OF THE ASSESSEE COMPANY AND THE ASSESSEE COMPANY WAS ONLY RESPONSIBLE FOR T HE LOSSES AND GAINS OF SUCH AGRICULTURAL OPERATIONS. ON THE CONTRARY, IT WAS CLEARLY BROUGH T OUT BY THE ASSESSEE COMPANY THAT GIVING 4 I. T. APPEAL NO. 4292 (DEL) OF 2009. ADVANCES AT THE TIME OF SOWING OF CROP AND FINANCIA L ASSISTANCE WAS MERELY WITH A VIEW TO ENSURE PROCUREMENT OF AGRICULTURAL PRODUCE AT THE TIME OF HARVEST. THE PROFITS AND LOSSES WERE ENTIRELY BORNE BY THE FARMERS. HE WAS OF THE VIEW THAT PROV ISIONS OF SECTION 194-C OF THE ACT WERE NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. HE ACCORDINGLY DELETED THE ADDITION. 6. BEFORE US, THE LD. SR. DR SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE AGREEMENT BETWEEN THE ASSESSEE AND FARMERS WAS IN THE NATURE OF WORK CONTRACT AND, THEREFORE, TDS WAS DEDUCTIBLE. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT (APPEALS). 7. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. FROM THE FACTS STATED ABOVE, IT IS CLEAR THAT THE PRODUC TION OF SEEDS FOR THE PURPOSE OF MARKETING THE SAME TO THE FARMERS HAS BEEN GOT THROUGH CULTIVATIO N BY THE FARMERS. THE ASSESSEE HAD SUPPLIED THE SEEDS AND ALSO HAD ADVANCED SOME MONEY TO EACH FARMER. THE CULTIVATION OF POTATOES APART FROM SEED REQUIRES HEAVY INVESTMENT AS COMPARED TO THE OTHER CROP. THE FARMERS HAVE TO RAISE THE CROP ON NARROW BEDS. HE HAS TO PUT FERTILIZERS LIKE DAP, UREA AND REQUIRES 3-4 TIMES WATERING. IT ALSO REQUIRES WEEDING OUT AND OTHER A GRICULTURAL OPERATIONS LIKE RAISING OF BEDS PERIODICALLY AND REMOVAL OF POTATOES FROM THE FIELD . FOR ALL THESE PURPOSES, HEAVY EXPENDITURE IS REQUIRED. THE ASSESSEE IN ORDER TO FACILITATE THE PROPER PRODUCTION HAD ADVANCED THE AMOUNT TO THE FARMERS BY WAY OF SEEDS AND CASH IN ADVANCE. T HE COST OF SEED AND THE AMOUNT SO ADVANCED HAVE BEEN ADJUSTED AGAINST THE SALE PROCEEDS. THE CONTENTION OF THE ASSESSING OFFICER THAT THE FARMER HAS TO PRODUCE THE POTATOES SEEDS OF DESIRED SIZE, IN OUR CONSIDERED OPINION, IS NOT CORRECT. THE GROWING OF POTATOES IS A NATURAL PROCESS. THE SIZE OF POTATOES DEPENDS UPON THE NATURE OF LAND, THE QUANTITY OF MANURES AND FERTILIZERS ADDED , THE QUANTITY OF WATER AND THE NATURE OF THE BEDS RAISED WHETHER THEY WERE COMPACT OR POROUS ENO UGH TO ALLOW THE SIZE OF POTATOES GROW FREELY. THE OPERATIONS CARRIED OUT BY THE FARMERS ARE PURELY AGRICULTURAL OPERATIONS. THEY CANNOT BE BY ANY STRETCH OF IMAGINATION BE SAID THAT THEY WERE IN THE NATURE OF WORK CONTRACT. THE ASSESSEE HAD ENTERED INTO AGREEMENT WITH THE FARMER S TO PREVENT THEM FROM SELLING THE SEEDS SO GROWN IN THE OPEN MARKET. THEREFORE, IN OUR CONSID ERED OPINION, PROVISIONS OF SECTION 194-C OF THE ACT ARE NOT APPLICABLE IN THE CASE OF THE ASSES SEE. ACCORDINGLY, THE LD. CIT (APPEALS) WAS JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSE SSING OFFICER UNDER SECTION 40(A)(IA) OF THE ACT. 5 I. T. APPEAL NO. 4292 (DEL) OF 2009. 8. THE NEXT ISSUE FOR CONSIDERATION RELATES TO DELE TING THE ADDITION OF RS.4,28,805/- UNDER SECTION 40(A)(IA) OF THE ACT ON ACCOUNT OF EXPENDIT URE CLAIMED BY THE ASSESSEE ON LABOUR CHARGES. THE FACTS OF THE CASE ARE THAT THE ASSESSEE CLAIMED PAYMENT OF LABOUR CHARGES OF RS.10,14,265/-. IN THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTI CED BY THE ASSESSING OFFICER THAT CERTAIN PAYMENTS WERE MADE BY THE ASSESSEE TO LABOUR CONTRA CTORS AGAINST THE SUPPLY OF LABOUR FOR HARVESTING, GRADING AND PACKING ETC. THE ASSESSEE COMPANY COULD NOT FURNISH CONFIRMATIONS OF LABOUR CHARGES. THE ASSESSING OFFICER ALSO NOTED T HAT THE PAYMENTS TO VARIOUS PERSONS WERE MADE IN SUCH A WAY THAT NONE OF THE PAYMENT EXCEEDED RS. 20,000/-. HE, THEREFORE, CONCLUDED THAT PAYMENTS MADE TO THE LABOUR CONTRACTORS WERE KEPT D ELIBERATELY BELOW RS.20,000/- IN ORDER TO CIRCUMVENT THE PROVISIONS OF SECTION 194-C OF THE A CT. IN THE ABSENCE OF ANY SUCH CONFIRMATIONS THE ASSESSING OFFICER CONCLUDED THAT THE ENTIRE PAY MENT WAS SUBJECT TO TDS UNDER SECTION 194-C AND SINCE NO TDS WAS MADE, HE DISALLOWED THE AMOUNT OF RS.4,28,805/- UNDER SECTION 40(A)(IA) OF THE ACT. 9. BEFORE THE LD. CIT (APPEALS) THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAD INVOKED PROVISIONS OF SECTION 194-C OF THE ACT WRONGLY FOR MAKING THE DISALLOWANCES. IT WAS SUBMITTED THAT NO PAYMENT WA S MADE TO ANY LABOUR CONTRACTOR AND THE PAYMENTS WERE ACTUALLY MADE TO INDIVIDUAL LABOURS. THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN SAYING THAT THE PAYMENTS WERE MADE TO LABOUR CONTRACTORS. IT WAS ALSO ARGUED THAT THERE WAS NO DELIBERATE ATTEMPT ON THE PART OF THE ASSESSEE TO KEEP THE INDIVIDUAL PAYMENT BELOW RS.20,000/- IN ORDER TO CIRCUMVENT THE PROVISIONS O F SECTION 194-C OF THE ACT AS ALLEGED BY THE ASSESSING OFFICER. SINCE THE PAYMENTS WERE MADE TO INDIVIDUAL LABOUR DEPENDING UPON THE NUMBER OF DAYS / HOUR FOR WHICH THEY WERE ENGAGED, THE AMOUNT WAS ALLOWABLE AS DEDUCTION. THE LD. CIT (APPEALS) CONSIDERED THE SUBMISSIONS MA DE BY THE ASSESSEE. HE WAS OF THE OPINION THAT THE ASSESSING OFFICER HAD NOT DOUBTED THE PAYM ENT OF LABOUR CHARGES. HE HAD MADE THE SUBJECT DISALLOWANCE IN TERMS OF SECTION 194-C, AS NO TDS WAS MADE BY THE ASSESSEE COMPANY. THE ACTION OF THE ASSESSING OFFICER WAS FOUND NOT S USTAINABLE FOR THE REASONS THAT : (I) HE HAS NOT BROUGHT ON RECORD ANY MATERIAL TO SUGGEST THAT THE ASSESSEE COMPANY HAD DELIBERATELY KEPT THE INDIVIDUAL PAYMENTS BELOW RS.20,000/-; AND (II) HE WAS ALSO NOT JUSTIFIED AS TO HOW PAYMENTS OF RS.20,000/- AND ABOVE WOULD HAVE MANDATED DEDUCT ION OF TAX AT SOURCE UNDER SECTION 194-C OF THE ACT. HE ACCORDINGLY DELETED THE ADDITION OF RS.4,28,805/-. 6 I. T. APPEAL NO. 4292 (DEL) OF 2009. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. FROM THE FACTS STATED ABOVE, IT IS CLEAR THAT THE ASSESS ING OFFICER HAS DISALLOWED THE PAYMENT ON THE PRESUMPTION THAT THE PAYMENT WAS MADE TO THE CONTRA CTORS AND THE ASSESSEE HAD KEPT THE PAYMENTS BELOW RS.20,000/- DELIBERATELY IN ORDER TO CIRCUMVENT THE PROVISIONS OF SECTION 194-C OF THE ACT. PROVISIONS OF SECTION 194-C ARE APPLIC ABLE IN RESPECT OF A PERSON RESPONSIBLE FOR PAYING ANY SUM TO ANY RESIDENT REFERRED TO AS RESID ENT BEING A CONTRACTOR FOR CARRYING OUT ANY WORK INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT AN Y WORK IN PURSUANCE OF THE CONTRACT BETWEEN THE CONTRACTOR AND THE PERSON SPECIFIED IN SECTION 194C(1) OF THE ACT. THE EXPRESSION USED IS ANY SUM. THEREFORE, IF THE PAYMENT HAS BEEN MADE TO A CONTRACTOR, THE PAYER HAS TO DEDUCT TAX AT SOURCE ON EVEN AMOUNTS LESS THAN RS 20,000/-. T HERE IS NOTHING ON RECORD TO SUGGEST THAT THE PAYMENTS ON ACCOUNT OF LABOUR CHARGES WERE MADE TO CONTRACTORS. ON THE CONTRARY THE ASSESSEE HAD MADE PAYMENT TO LABOURS DIRECTLY. THEREFORE, P ROVISIONS OF SECTION 194-C OF THE ACT ARE NOT APPLICABLE. THE ASSESSING OFFICER HAD MADE DISALLO WANCE ON AD-HOC BASIS OUT OF TOTAL LABOUR CHARGES OF RS.10,14,365/-. SINCE NO MATERIAL HAS B EEN BROUGHT ON RECORD, IN OUR CONSIDERED OPINION THE ASSESSING OFFICER WAS JUSTIFIED FOR INV OKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. ACCORDINGLY, THE LD. CIT (APPEALS) WAS JUSTIF IED IN DELETING THE ADDITION. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 14 TH MAY, 2010. SD/- SD/- [ C. L. SETHI ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 14 TH MAY, 2010. *MEHTA * 7 I. T. APPEAL NO. 4292 (DEL) OF 2009. COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT. 8 I. T. APPEAL NO. 4292 (DEL) OF 2009. 9 I. T. APPEAL NO. 4292 (DEL) OF 2009.