VICT PLY INDUSTRIES,KANNUR vs. ITO, WARD 4, KNNUR

Brief facts of the case are that assessee is a partnership firm. The return of income for the AY 2015-16 was filed on 19/07/2016 declaring nil income after setting off the brought forward depreciation loss of Rs. 1,25,649/-. Against the said return of Victply Industries income, the assessment was completed by the ITO, Ward-4, Kannur (for short, 'AO') vide order dated 17/11/2017 passed u/s. 143(3) of the Income Tax Act, 1961 (for short, 'the Act') at a total income of Rs. 14,32,070/-. While doing so, the AO disallowed the electricity charges paid to Kerala Electricity Board in cash of Rs. 14,32,070/- u/s. 40A(3) of the Act.

Being aggrieved by the above addition, an appeal was filed before the CIT(A). It was contended before the Ld. CIT(A) that the electricity charges paid to Government organization and, therefore, is covered by the exception enumerated under Rule 6DD of the IT Rules, 1962 (for short, “the Rules”), however, Ld. CIT(A) confirmed the action of the AO placing reliance on certain judicial precedents.

Being aggrieved, the assessee is in appeal before the Tribunal in the present appeal.

It is contended that the payment was made to Kerala Electricity Board which is wholly funded by Government of Kerala and payment made to it, is covered by the exceptions enumerated under rule 6DD of the Rules.

On the other hand, ld. Sr. DR submitted that the orders of the lower authorities are speaking one and the payment made by the assessee does not cover by the exceptions enumerated under Rule 6DD of the Rules.

The issue that arises for my determination is whether the electricity charges paid to Kerala Electricity Board in cash attracts the provisions of section 40A(3) of the Act or not. The provisions of rule 6DD of the Rules enumerates that any payment made to the Government is exempt from the rigorous of the provisions of section 40A(3) of the Act. The Kerala Electricity Board is no doubt is a “State” within the meaning of Article 12 of the Constitution of India. Although, strictly speaking, it does not fall within the definition of ‘State Government’, however, for the purpose of section 40A(3) and it can be treated as a government and no disallowance attracted. Reliance in this regard can be placed on the decision of Hon’ble Delhi High Court in the case of CIT vs. SRC Aviations (P) Ltd. 280 taxman.com 62 (mag.) (Del.) and also the decision of Hon’ble Karnataka High Court in the case of CIT vs. Venkatesh V. Kabade (2014) 45 taxman.com 403 (Mag.) (Kar.).

Respectfully following the decisions of Hon’ble Delhi & Karnataka High Courts (supra), I am of the considered opinion that the payment made to Kerala Electricity Board in cash does not attract the provisions of section 40A(3). Accordingly, I direct the AO to delete the addition made u/s. 40A(3) of the Act. Thus, the appeal filed by the assessee is allowed.