IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN FRIDAY, THE 6TH NOVEMBER 2009 / 15TH KARTHIKA 1931 ITA.No. 77 of 2009() -------------------- ITA.740/COCH/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT --------------------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): RESPONDENT ------------------------- M/S.INTERSEAS, SEA FOOD EXPORTERS, CHANDIROOR, ALLEPPEY. ADV. SRI.JOSEPH VELLAPALLY, SENIOR ADVOCATE FOR R SRI.CHANDRAMOHAN.R. FOR R SRI.PREMJIT NAGENDRAN FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06/11/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. .................................................................... I.T. Appeal No.77 of 2009 .................................................................... Dated this the 6th day of November, 2009. JUDGMENT Ramachandran Nair, J. The respondent-assessee is mainly engaged in processing and export of marine products. Goods purchased and exported by respondent include processed shell fish like prawns and lobsters supplied to respondent by processors who purchase the whole fish and process the same by removing the head, tail, shell etc. During the previous year relevant for the assessment year 2001-2002, assessee made massive purchases from various suppliers of processed fish by paying cash instead of making payment through Account Payee Cheques or Demand Drafts as required under Section 40A(3) of the Income Tax Act (hereinafter called "the Act"). When proposal was made in assessment to make disallowance of purchases in excess of Rs.20,000/- through payment of cash, the assessee claimed the benefit of exemption provided under Rule 6DD(f)(iii) of the Income Tax Rules 2 (hereinafter called "the Rules") prescribed under sub-section(3) of Section 40A of the Act which provides for exemption for payments made to producers of fish or fish products for the purchases other than through Account Payee Cheques or Demand Drafts. The Assessing Officer, however, took the view that the processor of fish who supplied the same after removal of head, tail and shell to whom payments were made, is not the producer falling under the Rule abovereferred and so much so, the entire cash payments were made subject to disallowance under Section 40A(3) of the Act. 2. When assessee filed first appeal before the Commissioner of Income Tax (Appeals), he felt that fish produce referred to in the above Rule covers prawn meat, lobster meat, etc. purchased by the assessee and so much so, the assessee is entitled to claim the benefit of exemption under the Rule. However, the appellate authority directed the Assessing Officer to conduct enquiry with the suppliers based on the details furnished by the assessee, based on which a remand report 3 was called for from the Assessing Officer. On examining the details contained in the remand report and after hearing the assessee, the appellate authority held that payments made for so much of the supplies which do not stand confirmed by the suppliers should be disallowed. While the original disallowance was Rs.2,20,42,473/-, appellate authority reduced and refixed the disallowance at Rs.41,84,915/-. The assessee as well as the department filed second appeals before the Tribunal. The Tribunal agreed with the first appellate authority on it's finding that the goods purchased is fish produce entitling the assessee for the benefit of exemption under the Rule abovereferred and consequently dismissed the department appeal. Simultaneously on considering the assessee's appeal, the Tribunal found that having regard to the nature of business, it would be impossible for the assessee to prove before the department the identity of the persons who have supplied the fish meat against which payments were made. Accordingly the Tribunal allowed the assessee's appeal by 4 cancelling the part disallowance made by the first appellate authority based on details collected from remand report submitted by the Assessing Officer after enquiry. It is against this common order of the Tribunal the department has filed this appeal. We have heard Sri.P.K.R.Menon, Senior Standing Counsel appearing for the appellant and Sri.Joseph Vellappally, Senior counsel appearing along with Adv. Sri.Premjit Nagendran for the respondent-assessee. 3. Even though several questions are raised by the department, in our view only two issues arise from the order of the Tribunal for our decision which are redrafted by us as follows: 1) Whether the goods purchased by the assessee for export namely, processed sea food which is the meat obtained from prawns, lobsters, skud fish etc. after removing the head, tail, shell and other inedible portions, fall within the definition of fish products entitling the assessee to get the benefit of exemption from the operation of Section 40A(3) of the Income Tax Act provided under Rule 6DD(f)(iii) of the Income Tax Rules? 2) Whether on the facts and in the circumstances of the case, was the Tribunal justified in cancelling the part disallowance confirmed by the C.I.T.(Appeals) on the ground 5 that the assessee has discharged their burden of purchase of fish products from the suppliers in terms of Rule 6DD(f)(iii) of the Income Tax Rules? 4. Before proceeding to consider the issue, we have to refer to the undisputed facts in the case which are the following. The assessee is a marine exporter who directly export marine products and is also engaged in supplying marine products to Export Houses for export as a supporting manufacturer. The total export turnover on which income tax exemption is granted to the assessee during the assessment year is above Rs.14 crores. Besides processing the fish by itself, the assessee is engaged in purchase of processed fish which is nothing but fresh fish meat obtained after removal of inedible portions like head, tail, shell etc. In fact, the fish meat so purchased are of prawns, lobsters, skud fish etc. The suppliers of the processed fish to the assessee are not actually fishermen but are those who purchase fish from fishermen, process the same and sell the same to the assessee. According to the assessee, suppliers are in the unorganised sector who did not issue bills 6 for sales nor accept payment for the value of the fish supplied in Cheques or Demand Drafts. Therefore, payments are made in cash as and when processed fish, which is a perishable commodity, is supplied to the freezing plant of the assessee. No doubt, the assessee's claim finds acceptability with the Government because Rule 6DD among other items provide in clause (f)(iii) for purchase of fish and fish products by making payments other than through Account Payee Cheques and Demand Drafts as required under Section 40A(3) of the Act. Since the decision on the first question raised above depends on the interpretation of Rule 6DD(f)(iii), we extract hereunder the relevant portion of the said Rule as it stood during the relevant time: "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:- (f) where the payment is made for the purchase of-- (i) agricultural or forest produce; or 7 (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." 5. Senior Counsel appearing for the department contended that the item purchased by the assessee is not a fish product and is only fish and since the payment is not made to the cultivator, grower or producer of the article, purchase by the assessee from the processors of fish would not be covered by the exemption clause. On the other hand Senior counsel appearing for the assessee contended that fish meat is nothing but a produce or product of fish and so much so, payment made to the processor qualify for exemption under Rule abovereferred. Rule 6DD is certainly an exception clause which entitles an assessee for claiming deduction of expenditure incurred in excess of Rs.20,000/- in cash, if the payments are for the purchases and to the persons 8 mentioned in the Rules. No doubt, in order to qualify for exemption, all the conditions of the Rule have to be satisfied because it is made very clear in Rule 6DD that in order to get the exemption, the expenditure in respect of which claim is made should have been incurred in the cases and circumstances specified under the Rules. On examining the Rule in detail, we notice that in order to qualify for the benefit of exemption, two conditions have to be satisfied. In the first place, the exemption is available only for the purchase of items referred to therein. Secondly, the payment should be made only to the persons referred to therein who are cultivator, grower or producer of such articles, produce or products mentioned therein. Necessarily there has to be one to one correspondence between the items involved and the person who supplies the same to whom payment is made. In other words, unless the supplier of the item referred to therein is the person falling within the description of cultivator, grower or producer of such article, produce or products, the purchase is not covered by the 9 exemption clause. We have to, therefore, consider two questions herein; one is whether the item purchased in this case is fish or fish product and the payment is to it's producer. Obviously no one has a case that fish purchased by the assessee are grown in a farm and sold by the producer of it. On the other hand, fish involved is caught from the ocean by the fishermen, purchased by the processors who process the same by removing the inedible portions and supply to the assessee in meat form. On the face of it and admittedly, the supply by the processor to the assessee is not in the form in which the fish is purchased by him. In other words, what is sold, though not a manufactured product of fish, is processed fish which is meat obtained after removal of inedible portions like head, tail, shell etc. for the purpose of export. 6. Senior Standing Counsel appearing for the appellant relied on decision of the Supreme Court in COMMISSIONER OF INCOME- TAX V. RELISH FOODS reported in (1999) 237 ITR 59 and another 10 decision of this court in AMEENA ENTERPRISES V. COMMISSIONER OF INCOME-TAX reported in (2005) 275 ITR 8 and contended that removal of head, tail, peeling, deveining, cleaning etc. of prawns and other variety of fish do not involve any manufacturing activity and so much so, the fish meat purchased cannot be treated as a fish product. Senior counsel appearing for the assessee on the other hand relied on Notification S.O. 730(E) dated 21.8.1995 issued by the Central Government under Section 17 of the Export (Quality Control and Inspection) Act, 1963 and contended that any fishery product which has undergone an operation affecting its anatomical wholeness, such as gutting, heading, slicing, filleting, chopping etc., is a prepared product. In our view, the decision of the Supreme Court referred to by the Senior Counsel for the Revenue cannot be applied here because the context in which the Supreme Court decided the issue is with reference to Section 5(3) of the CST Act and the question involved was whether the commodity purchased namely, 11 the fish, changes it's identity and character in the process of cleaning, peeling, deveining etc. to disentitle the assessee for exemption for export after the said processing. The Supreme Court held that processing do not involve any manufacture or production of an article having a different identity and so much so, exemption under Section 5 (3) is available on purchase of fish and export of the same after processing. In other words, the provision involved was given liberal construction so far as exemption on export is concerned. In this case we have to examine whether the products referred to in Rule 6DD(f) (iii) are only manufactured products of fish and not processed fish. It is worthwhile to note that produce of animal husbandry covered by sub-clause (ii) of clause (f) takes in even hides and skins. Hides and skins are obtained in the process of taking meat from the slaughtered animal. Payments made to even industries engaged in manufacture of fish products are covered by the exemption clause contained in clause (iii). We feel the exemption clause generally covers a class of goods in 12 all forms without confining itself to any particular form leaving other forms of it from the very same class. When fish and even manufactured products of fish are covered by the exception clause and the payments to it's producers in excess of the limit of Rs.20,000/- are covered by the exception clause, we see no reason why the processed fish which is an intermediary, should be taken out of the scope of the Section. In our view, the Rule makers never intended processed fish to be taken out of the scope of sub-clause (iii) of clause (f) of Rule 6DD because the Government under the Rule considers fish only in two forms, either fish as such or in it's product form. In other words, sub- Rule (iii) of Rule 6DD(f) covers all forms of fish, though the broad classification is only between fish and fish products. So much so, in our view, since the processed fish purchased is not fish in the same form it is obtained, it falls within the meaning of fish product under the above Rule. Since we have accepted the contention of the assessee that the processed fish purchased is fish product within the meaning of that 13 term in the Rule, we have to necessarily hold that the supplier namely, the processor of the fish, is certainly producer to whom payments are made. Therefore, we are of the view that the Tribunal rightly held that Rule 6DDf(iii) of the Income Tax Rules squarely apply to the processed fish purchased by the assesee and so much so, they are entitled to exemption available under Section 40A(3). We, therefore, answer the first question stated above in favour of the assessee and against Revenue. 7. The next question raised pertains to the part disallowance sustained by the C.I.T.(Appeals) and reversed by the Tribunal on the ground that the assessee cannot be expected to prove purchase against payment of cash. No doubt, on going through the details contained in the remand report extracted in the C.I.T.(Appeals)'s order, it is clear that very many suppliers whose names and addresses were furnished by the assessee, fully or partly disowned the transactions. It is seen that the purchases made in an year from the very same person runs into 14 several lakhs of rupees. In some cases even though the suppliers have confirmed that they have supplied goods to the assessee, they have stated that they do not maintain the accounts to confirm the turnover of supply to the assessee during the previous year. Similarly in one case atleast we have seen that the supply is made by the wife of the person who is even an assessee under the Income Tax Act, whereas the purchase accounted by the assessee is from husband. Obviously the husband of the supplier arranged supply of the goods to the assessee and probably in order to avoid accounting of the transaction by his wife who is stated to be an income tax assessee, he got the documents in regard to supply written by the assessee in his name. We find force in the contention of the assessee that having regard to the nature of trade, the assessee would not be able to get the suppliers confirm the supplies to the assessee because they are not within the control of the assessee. After making supplies and after collecting cash payments the suppliers are absolutely free to disown the transaction and assessee obviously 15 cannot be blamed for the same. It is seen from the contents of the remand report extracted by the C.I.T.(Appeals) in it's order that in many cases suppliers owned up the transactions, even though not to the extent covered by the documents produced by the assessee. The assessee normally should purchase goods based on supplier's bills, but if suppliers do not raise bills, assessee can only keep purchase vouchers. The only fool proof evidence to establish purchase from a person is the payment made through Account Payee Cheque or Demand Draft which is the requirement of Section 40A(3). However, Government has chosen to liberalise the operation of Section 40A(3) to augment trade. After granting this facility, we are of the view that the department cannot insist the assessees to get the suppliers confirm to the department about the supplies made to the assessee and the payments received by them. In our view, the assessee should be taken to have discharged their burden by furnishing the copies of purchase bills or vouchers issued containing the names and addresses of the 16 suppliers with date, value, quantity etc. Besides this, the department cannot demand the assessee to get the supplier confirm to the department about the supplies, which the suppliers are free to deny. In a case where the suppliers deny that the supplies have not been made to the assessee, the remedy open to the department is to proceed for conducting a survey and enquiry against the activities of the supplier, establish with materials the details of business carried on by him including the supplies made to the assessee and proceed to make assessment on suppliers. No doubt, if assessee's claim of purchase from a particular person is found to be bogus, then it is certainly open to the department to disallow the expenditure in respect of such purchase. However, in this case it is the finding of the Tribunal that the assessee in fact purchased the quantity accounted by them and the same is seen exported and the assessee has accounted the export proceeds. So much so, in our view, the Tribunal rightly held that the department cannot call upon the assessee to prove what is beyond their capacity i.e. 17 to get the suppliers confirm the supplies made to the assessee in terms of the claim of the assessee. In our view, there is no logic in the department disbelieving the assessee with regard to the purchases, but at the same time believe the denial of the supply and receipt of consideration by the suppliers. Besides the denial of full or part supply by the suppliers, we do not find any case of bogus purchases accounted by the assessee as found by any of the lower authorities. We, therefore, uphold the order of the Tribunal on this issue as well by answering the second question also in favour of the assessee and against the Revenue. Consequently appeal is dismissed. C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms