MINA WOOD INDUSTRIES,MATTANNUR vs. ITO, W-3, KANNUR

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

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.

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: -

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:

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 ITA Nos. 1270 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

This assessee’s appeal is allowed.