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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Satbeer Singh Godara & Shri Amarjit Singh
O R D E R Per Bench
This assessee’s appeal for A.Y. 2015-16 arises against the Addl/JCIT(A)-2, Kolkata [CIT(A)]’s DIN & Order No. ITBA/ APLS/S/250/2023-24/105957373 (1) dated 10.01.2024 in proceedings u/s. 250 of the Income Tax Act, 1961 (the Act).
Heard both the parties. Case file perused.
The assessee pleads the following substantive grounds in the instant appeal: - “1. The appellate order passed by the National Faceless Appeal Centre (NFAC) dismissing the appeal is against the facts and circumstances of the appellant's case and hence opposed to the provisions of the Income Tax Act. 2 The Appellant humbly submits that the payments under reference, are made to Kerala State Electricity Board (KSEB) in cash in excess of Rs. 10000 could not be treated as in violation of Section 40A(3) of the Income Tax Act, as the KSEB is a Government Department under Kerala Government headed by a Minister. The appellant humbly submit that the payments made to KSEB is covered by the exception in Rule 6DD(b) of the IT Rules and as such no disallowance under section 40A(3)of the Act is called for. It is settled view
that the provisions of section 40A(3) may not be invoked and addition foisted, if the payee is identifiable and the expenses are genuine. Reliance is placed on the decisions contained in (a) Honourable Supreme Court in the case of Jaswant Sing Charan Singh (1967) AIR 1454 in Civil Appeal No. 2011 of 1966 (b) by the Honourable ITAT A Bench, Kolkata in Narayan Rice Mill Vs. Commissioner of Income-tax 3. It is confirmed by the Assessing Officer as well as First Appellate Authority, that the certificate (NO DB 52/2016-17/mtr/244 dated 31/10/2016) stated to be obtained by the Assessing Officer from the KSEB Office, Mattannur, during the Appellate proceedings that payment from the appellant is received by Kerala State Electricity Board and the nature of payment is electricity consumption charges and the payment is made in cash. The learned Appellate Authority has grossly erred in holding that the certificate produced by the appellant from KSEB, is the one issued "without application of mind."
The appellant submit that the section 40A(3) is to introduced with the object of restricting cash payments to unknown persons. In the instant case the Payee is identifiable (identified by the Assessing Officer as well as First Appellant Authority) and the genuineness of the is not disputed being in the nature of payment of electricity charges, which is properly recorded in the book and hence the disallowance is uncalled for and unwarranted. The basic intention of the section 40A(3) is to curb the tendency to account cash payments to unknown persons and not to disallow the genuine payments made to known persons especially in the case a state government controlled department. This has been totally ignored while passing the Assessment order as well as Appellate order.
5. The learned NFAC in a similar issue in the case of an assessee from the same area, allowed the claim by holding as below in appeal number CIT (A), Kozhikode/10036/2020-21 Assessment Year:2018-19 vide order DIN & Order No ITBA/NFAC/S/250/2022- 23/1044864956(1) dated 23/08/2022 (copy attached) (italics supplied by appellant): 4. Observations and Decision 4.1 The contention of the appellant is that the payments made to Kerala State Electricity Board (KSEB) in cash in excess of Rs. 10,000 could not be treated as violation of Section 40A(3) of the Income Tax Act, as the KSEB is a Government Department under Kerala Government headed by a Minister. The appellant further submitted that the payments made to KSEB is covered by the exception in Rule 6DD(b) of the IT Rules and as such no disallowance under section 40A(3)of the Act can be made. The Payee is identifiable and the transaction is genuine being in the nature of payment of electricity charges which also identifiable, which is properly recorded in the book. 4.2 I have carefully considered facts and circumstances of the case. The contention of the appellant regarding the payment made to KSEB being covered by the exception under Rule 6DD(b) is correct, and therefore, the disallowance made on this account is deleted. The appeal is allowed. The order under reference on the similar facts is to uphold the principle of consistency, which was the intention for Faceless Procedure.
For the above and other reasons to be adduced at the time of hearing, it is prayed that justice be done to the appellant by setting aside the order appealed against.”
Suffice to say that there could be hardly any dispute between the parties that both the learned lower authorities have invoked section 40A(3) disallowance representing assessee’s cash payment made to the Kerala State Electricity Board, which admittedly is a state government authority. That being the case, this tribunal’s coordinate bench order in 2/Kol/2015 in Narayan Rice Mill v. CIT dated 07.06.2017 concluded that such a disallowance is not sustainable once the corresponding recipient happened to be the state itself or its other statutory bodies as under: -
“7. Heard the ld, AR and perused the material available on record. We find that there is no dispute in respect of said West Bengal State Electricity Distribution Company Limited (WBSEDCI.) is controlled and owned by the Govt. of West Bengal. We also find that there is no dispute with regard to genuineness of such payments made to West Bengal State Electricity Distribution Company Limited (WBSEDCL). We find that the CIT assumed his jurisdiction only on the ground that the said cash payments were made on different dates and the same do not fall under any of the exceptions of Rule 6DD of the IT Rules. The CIT also found that inspite of opportunities availed by the assessee, the assessee did not point out any specific section/rule clause on which such payment is outside the proviso of Section 40A(3). Admittedly, the assessee paid such cash payments towards power charges to West Bengal State Electricity Distribution Company Limited (WBSEDCL) and debited the same to its P & L account on different dates from April' 09 to Feb' 10. In such circumstances, the question arises before us for our consideration whether West Bengal State Electricity Distribution Company Limited (WBSEDCL) is a State amenable to the article 12 of the Constitution. The decision as relied on by the Id.AR of the assessee of the Co-ordinate Bench, ITAT Pune in the case of supra, the ITAT Pune has relied on the decision of the Hon'ble Supreme Court in the case of supra for the purpose of interpretation of expression of other authorities. The Co-ordinate Bench discussed the tests that if a state holds entire capital, control over the corporation can be a state agency or instrumentality of a state. If such corporation enjoys monopoly status and the functions of which are public importance can be termed as State instrumentality. Relevant portion of which is reproduced herein below:- 12. If these tests are applied on the MSRTC, we observe that the Corporation satisfies majority of the conditions. The entire share capital of MSRTC is owned by State and Central Government. The State has full control over the working, policies and the framework of the Corporation. The Corporation is providing public transport facility to the subjects of the State, even in for remote areas, where to 1272PN/2014 and others of Raisoni Group sometimes it is not Narayan Rice Mill economically viable to provide transport service. Thus, it is providing vital function of public importance.
The Hon'ble Bombay High Court in the case of Maharashtra State Road Transport Corporation Vs. Diwakar Madhukarrao Malkapure and Others in Writ Petition No.2762/2012 decided on 12-11- 2013 while dealing with an issue relating to payment of compensation to one of the employee of MSRTC has observed as under:
The Petitioner employer is a body Corporate and is State within the meaning of Article 12 of the Constitution of India and therefore it has to act as a Model Employer.
Thus, in view of the facts of the case and in the light of observations of the Hon'ble Bombay High Court, we are of the considered opinion that the CIT(A) has erred in holding that MSRTC is not a "State" and cash payments made to MSRTC are hit by the provisions of section 40A(3) of the Act.
In so far as genuineness of the payments to MSRTC by the assessees, they are not disputed by the department. Once it has been held that MSRTC is a "State" within the meaning of Article 12 of the Constitution of India, the payments cannot be disallowed u/s.40A(3). The provisions of Rule 6DD would protect the assessee from such disallowance. The assessees have explained that cash payments have been made to MSRTC on successful bid of scrap auction. The payments are made in cash immediately to guard against the pilferage of scrap. Thus, cash payments are also made out of business expediency. Therefore, in our considered view, no to 1272PN/2014 and others of Raisoni Group disallowance can be made u/s.40A(3) in the facts of the present case.
Our view is fortified by the decision rendered in the case of Sri Laxmi Satyanarayan Oil Mill Vs. CIT (Supra). The Hon'ble High Court has held that no disallowance can be made u/s.40A(3) where genuineness of payment is not doubted. The relevant extract of the observation of the Hon'ble Court are as under: 18. Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque on crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are no taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions."
In the case of Gurudev Garg Vs. CIT the Hon'ble Punjab & Haryana High Court has held that where genuineness of transaction made in cash in excess of Rs.20,000/- was not disbelieved by the authorities, the same cannot be disallowed u/s.40A(3) of the Act.
In view of the facts of the case and the case laws discussed above, we are of the considered view that the provisions of section 40A(3) are not attracted on the cash payments made by the to 1272PN/2014 and others of Raisoni Group assessees to MSRTC. The provisions of Rule 6DD (b) provide exception to Section 40A(3) where cash payments are made to Government. The aforesaid exception will operate in the case of the assessee. Thus, the CIT(A) has erred in holding that disallowance u/s.40A(3) is to be made in respect of cash payments made by assessees to MSRTC. The impugned orders are set aside and the AO is directed to delete the disallowing made u/s.40A(3) in the impugned assessment years. Accordingly, ground Nos. 1 to 5 raised in the appeals are allowed. Respectfully following the above, we hold that cash payments made to West Bengal State Electricity Distribution Company Limited (WBSEDCL) is covered by the exception Rule 6DD(b) of the IT Rules and as such no Narayan Rice Mill disallowance u/s. 40A(3) of the Act can be made. Therefore, the grounds raised
by the assessee are allowed.”
4. We adopt the above mentioned detailed discussion mutatis mutandis and delete the disallowance in the very terms.
This assessee’s appeal is allowed.