Smt. Chanchal Dogra vs The Income Tax Officer

Deepak Gupta, Judge

Though this Income Tax Appeal was admitted on a large number of questions of law formulated by the appellant, at the time of hearing we find that only the following questions of law arise for decision in this case:

Whether the provisions of Section 40A(3) of the Income Tax Act, 1961 would be applicable to the purchase of stock-intrade?

Whether in terms of Rule 6DD of the Income Tax Act, payment made by the assessee to M/s Hoshiarpur District Co-operative Milk Producers Union Ltd. shall be treated as payment made to the "cultivator, grower or producer" of the milk?

To appreciate the rival contentions, it would be apposite to refer to Section 40A(3) of the Income Tax Act and Rule 6DD of the Income Tax Rules, as they stood at the relevant time.

Section 40A. Expenses or payments not deductible in certain circumstances.-(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head ''Profits and gains of business or profession''....

(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction:...

Provided further that no disallowance under this sub-section 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 such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors.

Rule 6DD. Cases and circumstances in which payment in a sum exceeding twenty thousand rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft.-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:

...

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

(i) agricultural or forest produce; or

(ii) the produce of animal husbandry (including 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.

The first question raised by Mr. M.M. Khanna, learned Senior Advocate, is that since milk was the stock-in-trade, the expenditure incurred for purchase of stock-in-trade is not covered u/s 40A(3). In support of this contention, he has relied upon the judgment of the Gauhati High Court in Commissioner of Income Tax Vs. Hardware Exchange, wherein the Division Bench held that money spent on purchasing the stock-in-trade could not be termed to be expenditure u/s 40A(3).

With due respect, we are not at all in agreement with the law laid down by the Gauhati High Court. In this behalf, we may mention that a number of other High Courts, namely the Orissa High Court in Sajowanlal Jaiswal Vs. Commissioner of Income Tax, , Allahabad High Court in U.P. Hardware Store Vs. Commissioner of Income Tax, & Ratan Udyog Vs. Income Tax Officer and Another, , Kerala High Court in P.R. Textiles Vs. Commissioner of Income Tax, , Punjab & Haryana High Court in Commissioner of Income Tax Vs. New Light Tin Manufacturing Company, , Rajasthan High Court in Fakri Automobiles Vs. Commissioner of Income Tax, and Patna High Court in Commissioner of Income Tax Vs. Ram Chand Gobind Prasad, took the view that u/s 40A(3) money spent on purchase of stock-in-trade also amounted to expenditure. We are in agreement with all the High Courts other than Gauhati High Court and are of the considered opinion that even when moneys are paid/spent for purchase of stock-in-trade then also the provisions of Section 40A(3) will apply since this amounts to expenditure. Accordingly, the first question is answered against the assessee and in favour of the revenue.

Now, coming to the second question, the sole issue is whether the Hoshiarpur District Co-operative Milk Producers Union Ltd. can be treated to be a producer of milk or not. There is no doubt that, in terms of Rule 6DD the assessee can take benefit only if the payment is made to the grower or producer of such articles. Milk is not grown but is produced and the benefit can be taken by the assessee if the money is paid to the producer of the milk.

It has been contended on behalf of the revenue that since M/s Hoshiarpur District Co-operative Milk Producers Union Ltd. is a society, it can never be termed to be a producer of the goods. We cannot accept this wide submission at its face value. There may be a Union or Co-operative Society of milk producers, who may join together to supply milk. If such individuals join together and form a co-operative society then the society may be considered to be a producer. This will depend on the constitution of the society.

We have perused the Model Bye-laws of the Hoshiarpur Distt. Co-op. Milk Producer''s Union Ltd. and as per these bye-laws, the membership of the society is as follows:

The membership of the Union shall consist of:

(i) Any registered Milk Producers'' Society in the area of operation of the Union.

(ii) State Government.

It is, thus, apparent that no individual producer of milk can be a member of the Union. It is only the registered milk producers'' society and the State Government, which can be the members of the Union. The constitution of the Union does not permit individual producers to be its members. Therefore, the Union, by no stretch of imagination, can be considered to be a producer of the milk.

In view of the above discussion, the second question is also answered against the assessee and in favour of the revenue.

Consequently, appeal filed by the assessee is dismissed.