CBDT has issued circular 27/2017 dt 3/11/2017 wherein three points related to section 40A(3) and 269ST are clarified . In my opinion , the aforesaid circular will create more confusion and problems for the taxpayers. The reasons for such a conclusion are as under :
- The circular in last para -point 5 concludes as under
5. In view of the. above, it is clarified that cash sale of the agricultural produce by its cultivator to the trader for an amount less than Rs 2 Lakh will not:-
a) result in any disallowance of expenditure under section 40A (3) of the Act in the case of trader.
b) attract prohibition under section 269ST of the Act in the case of the cultivator; and
c) require the cultivator to quote his PAN/ or furnish Form No.60.
let us examine , 5(a) .
CBDT clarifies that cash sale of the agricultural produce by its cultivator to the trader for an amount less than Rs 2 Lakh will not result in any dis-allowance of expenditure under section 40A (3) of the Act in the case of trader.
By saying so , the law under section 40A(3) of the Income Tax Act 1961 and Rule 6DD of the Income Tax Rule has been bypassed and the clarification is trying to disallow an amount which is allowed by the Parliament. The point is that Rule 6DD(e) for section 40A(3) itself says that not disallowance u/s40A(3) or 3A can be made in case of purchase of agriculture produce. The excerpt from the Rule 6DD(e) is as under :
(e) where the payment is made for the purchase of—
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, 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;
Most important is there is no limit on purchase related to agriculture produce mentioned in Rule 6DD . It is surprising that circular in Para 2 mentions this fact , but concluded or worded the conclusion in Para 5 quite differently . Therefore , clarification by CBDT in its circular that the cash purchase of agriculture produce by a trader exceeding Rs 2 Lakhs will not be allowed is contrary to Income Tax Rule .
Status of Circular Contrary to Act or Rule
The issue about the legal status of a circular which is contrary to law is settled by Supreme Court . In fact ,in Banque Nationale De Paris v. CIT (237 ITR 518), the Bombay High Court considered the question whether a circular can override or detract from the provisions of the Act. According to the Court, what section 119 has empowered the Board is to issue orders, instructions or directions for the `proper administration’ of the Act or for such other purposes specified in sub-section (2) of the section. Such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the parliament.
Bombay High Court relied on the decision of the Supreme Court in State Bank of Travancore v. CIT (158 ITR 102) wherein it was expressly held that circulars cannot detract from the Act. The subsequent judgment of the Apex Court in Kerala Financial Corporation v. CIT (210 ITR 129) has affirmed the view in State Bank of Travancore’s case that circulars cannot deviate from the Act.
Circular will create problems
It is also settled law now that while the circular is not a binding on taxpayer or the court, it is binding on tax authorities even if the circular may appear contrary to law. The authorities for such proposition are following decisions of Supreme Court
- Navnit Lal C. Javeri v. KK Sen, AAC of IT (56 ITR 198);
- Ellerman Lines Ltd. v. CIT (82 ITR 913) and KP Varghese v. ITO (131 ITR 597).
- Hindustan Aeronautics Ltd. v. CIT (243 ITR 808) SC
So here is how the problem will arise for common taxpayers . let us take a case of an assessee Mr X who is trader in wheat. The trader buys wheat directly from various farmers. Let us say the trader buys wheat worth Rs 3 crore from 20 farmers . The payment is done in cash . let us say , for easiness, each farmer is paid Rs 15 Lakhs.
So what the assessing officer will do ? Will he/she not be in bind ? One way he will know that the moment he finds that the purchase was of agriculture produce , should he apply Rule 6DD(e) or the Circular which is binding on him. So a dis-allowance will be made by him , which will start the grind of appeal . In such case department can not win at all as the circular has no legal basis.
section 269ST of the Act in the case of the cultivator
The Circular says that section 269ST would not apply on the cultivator if the sale transaction is below Rs 2,00,000 . Is it not obvious from section 269ST which is applicable only when the transaction value crosses Rs 2 Lakhs. So, in my humble opinion there was nothing to clarify.
In my considered opinion , the language used in the Para 5 of the Circular needs to be changed . It is requested that Central Board of Direct Taxes should re-examine the content of the circular and withdraw/change if it founds that clarification is not worded correctly .