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Income Tax Appellate Tribunal, RAIPUR BENCH “SMC”, RAIPUR
Before: SHRI RAVISH SOOD
आदेश / ORDER
PER RAVISH SOOD, JM:
The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, dated 17.03.2023, which in turn arises from the order passed by the A.O under Sec.143(3) r.w.s. 143(3A) & 143(3B) of the Income-tax Act, 1961 (in short ‘the Act’) dated 27.02.2021 for the assessment year 2018-19. The assessee has assailed the impugned order on the following grounds of appeal:
“1. That under the facts and the law, the learned CIT (Appeals) erred in maintaining disallowance made by AO u/s.40A(3) being cash payments of Rs.3,84,000/- on different dates towards Godown Rent payment was below Rs.10,000/-. Prayed that, it is expenses for business, provisions of section 40A(3) are not applicable, disallowance is-unjustified and be deleted.
2. That under the facts and the law, the learned CIT (Appeals) erred in maintaining disallowance of u/s.40A(3) made by AO for cash payments of Rs.3,63,642/- towards Electricity Charges, for running cold storage plant at Raipur, paid to Chhattisgarh Electric Power Distribution Company Limited. Prayed that Head Office is at Ambikapur and cold storage plant is at Raipur, at Raipur there is no bank account of appellant, therefore, payment of electricity expenses was made in cash, the disallowance is unjustified and be deleted.”
Succinctly stated, the assessee HUF had e-filed its return of income for A.Y.2018-19 on 30.09.2018, declaring an income of Rs.6,16,570/-. The return of income filed by the assessee was processed as such u/s. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment u/s. 143(2) of the Act.
3 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur
3. Assessment was, thereafter, framed by the A.O. vide his order passed u/s. 143(3) r.w.s. 143(3A) & 143(3B) of the Act determining the income of the assessee at Rs.20,00,230/- after, inter alia, making the following additions/disallowances: -
Sr. Particulars Amount No. 1. Disallowance u/s. 40A(3) of the Act of Rs.3,84,000/- the assessee’s claim for deduction of rent paid for four godowns at Raipur and Ambikapur Disallowance u/s. 40A(3) of the Act of 2. Rs.3,63,642/- assessee’s claim for deduction of electricity charges.
4. Aggrieved the assessee carried the matter in appeal before the CIT(Appeals) but without success in so far the aforesaid two disallowances u/s. 40A(3) of the Act were concerned. For the sake of clarity, the observations of the CIT(Appeals) are culled out as under:
“7. DECISION:- I have considered the submission of the appellant and the assessment order of the AO passed u/s 143(3) r.w.s. 143(3A) & 143(3B) of the I.T. Act 1961. AO has made following additions in the assessment order:
1. 1. Electricity charges paid to Chhattisgarh state electricity board Rs.3,63,642/- 2. Salary to staffs Rs. 6,36,020/- .
3. Godown Rent Rs. 3,84,000/-.
Total addition Rs.13,83,662/-. On scrutiny AO has found that these expenses have been paid by way of cash exceeding Rs.10,000/- which violates the provisions of 40A(3). Before
4 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur me, the appellant has contended that the said expenses have been incurred on commercial expediency and requested to delete the said additions. In this regard appellant has adduced Xerox copies of affidavits made by the employees, Xerox copies of rental agreement etc. I have perused the affidavits (Xerox copies) filed by the respective employees and found that their monthly salary was stated to be below Rs.10,000/-. The affidavits of appellant's employees Mr. Ajay Singh, Dharmendra Herinkhedhe Mr. Dhiraj Kumar Tiwari, Gavrav Jaiswal, Haricharan Vishwakarma, Neeraj Pathak, Raja Singh, Shankar Sahu, Tapas Daury, Vikas Gupta etc. The total salary paid as per these affidavits is worked out at Rs.7,18,220/-. However, the monthly salary has not been exceeded more than Rs.10,000/-. In view of the affidavits and the submissions made by the appellant I am of the opinion that AO is not justified to make the addition on account of staff salary expenses. In the facts and circumstances AO is directed to delete the addition made of Rs.6,36,020/-. Coming to other two disallowed expenses i.e. electricity charges and godown rent. The appellant has not adduced any evidence to show that the said payment to payments have been made below Rs.10,000/-. Therefore I find that AO is justified to invoke section 43A in respect of godown charges and electricity charges paid by way of cash exceeding of Rs.10,000/-. In the facts and circumstances the additions of Rs.3,63,642/- and Rs.3,84,000/- on account of electricity charges and godown rent. are sustained. The grounds of appeal taken by the appellant are partly allowed. In the result, Appeal is partly allowed.”
5. The assessee, being aggrieved with the order of the CIT(Appeals), has carried the matter in appeal.
I have heard the ld. Authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by Ld. AR to drive home his contentions.
Apropos the disallowance of the godown rent of Rs.3,84,000/- u/s. 40A(3) of the Act, I have thoughtfully considered the issue in hand in the backdrop of the contentions of the ld. authorized representatives of both parties. The Ld. A.R
5 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur submitted that the payment towards godown rent was made with respect to the following godowns that the assessee had taken on rent from the following parties:
Sr. Name of Location of Rent per Total rent Tenure Remarks No. landlord godown month for the payment cash (in Rs.) year ( in condition Rs.) 1. Shri Krishna Near Vyas 5,800/- 69,600/- Payment Each items Mohan Talab, Vill. within 5 less than Choubey Rawanbhata, days after 10,000 cash ( Notarised Bhanpuri, end of the Agreement) Raipur ( 2000 month Sq. ft.) 2. Shri Krishna Near Vyas 7,700/- 92,400/- Payment Each items Mohan Talab, Vill. within 5 less than Choubey Rawanbhata, days after 10,000 cash ( Notarised Bhanpuri, end of the Agreement) Raipur ( 2000 month Sq. ft.)
3. Shri Monohar Near Vyas 6,500/- 78,000/- Payment Each items Lal Jindal ( Talab, Vill. within 5 less than Notarized Rawanbhata, days after 10,000 cash Agreement) Bhanpuri, end of the Raipur ( 2000 month Sq. ft.)
4. Shri Haricharan Near Primary 12,000/- 1,44,000/- Monthly Rs.1,08,000/- Vishwakarma ( school, by RTGS & Affidavit) Gangapur, Rs.36,000/- Ambikapur ( by cash- 3000 sq.ft.) each below 1000/-
Shri G.S. Agrawal, Ld. Authorized Representative (for short ‘AR’) of the assessee had come up with two fold contentions to support his claim that no 6 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur disallowance u/s. 40A(3) of the Act qua both the aforesaid claim for deduction of expenses, i.e., (i) goown rent; and (ii) electricity expenses was called for in the hands of the assessee. Elaborating on his aforesaid contention, the Ld. AR submitted that as the genuineness of the aforementioned expenditure has not been doubted by the department, the same, thus, could not have been disallowed by the A.O u/s. 40A(3) of the Act. In support of his aforesaid contention, the Ld. AR had relied on the following judicial pronouncements:
(i) ACIT Vs. M/s. R.P Real Estate Pvt. Ltd., Income Tax Appeal No.13 of 2016 dated 01.03.2016; (ii) Attar Singh Gurmukh Singh Vs. ITO, (1991) 59 Taxman 11 (SC); and (iii) Gurdas Garg Vs. Commissioner of Income Tax, Bathinda (2015) 63 taxmann.com 289 ( P & H)
Apart from that, it was submitted by the Ld. AR that as the respective payments towards godown rent, i.e., with respect to four godowns, were below the specified limit of Rs.10,000/- each; therefore, on the said count also, no disallowance of the same was called for u/s. 40A(3) of the Act. Apropos the payment towards electricity charges of Rs.3,63,642/- that was made by the A.O u/s. 40A(3) of the Act, the Ld. AR submitted that Chhattisgarh Electric Power Distribution Company Limited, i.e., a public sector undertaking, was owned by the Government of Chhattisgarh; therefore, the said amount could not have been subjected to the rigors of Sec. 40A(3) of the Act. Alternatively, it was submitted by the Ld. AR that as the genuineness of the aforesaid expenditure incurred by the assessee has not been doubted by the 7 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur department, therefore, the same on the said count also could not have been disallowed u/s. 40A(3) of the Act.
Per contra, the Ld. Departmental Representative (for short ‘DR’) relied on the orders of the lower authorities.
Apropos the claim of the Ld. AR that no disallowance of the assessee’s claim was called for with respect to the aforesaid expenses, viz., (i) godown rent; and (ii) electricity charges, for the reason that the A.O has not doubted the genuineness of the expenses incurred by the assessee, I am unable to persuade myself to subscribe to the same. As the specific instance where the applicability of Section 40A(3) of the Act would stand suspended, has specifically been carved out by the legislature in all its wisdom in Rule 6DD of the Income Tax Appellate Tribunal Rules, 1962, therefore, the claim of the Ld. AR that in case the genuineness of the expenditure has not been doubted, then no disallowance u/s. 40A(3) of the Act was called for in the hands of the assessee does not merit acceptance.
In so far, the judgment of the Hon’ble High Court of Chhattisgarh in the case of ACIT Vs. M/s. R.P Real Estate Pvt. Ltd (supra) as has been pressed into service by the Ld. AR is concerned; the same supports my aforesaid view. On a careful perusal of the aforesaid judgment of the Hon’ble High Court, it transpires that the Hon’ble High Court had observed that as payment made by the assessee before them was to the villagers who had no bank account and, therefore, had insisted on cash payments, was covered by the Rule 6DD(g), therefore, disallowance u/s. 8 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur 40A(3) of the Act was not called for in its case. The claim of the Ld. AR that the Hon’ble High Court had observed that in case the genuineness of the expenditure is not doubted, then no disallowance u/s. 40A(3) of the Act could be made, is not discernible from the order of the Hon’ble High Court.
Apropos the judgment of the Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh Vs. ITO (supra) would not assist the case of the assessee before me. Addressing the concern of the assessee before them, i.e., draconian provision of Section 40A(3) would restrict the business activities, and thus, for the said reason, the said statutory provision was in itself ultra-vires, the Hon’ble Apex Court had observed that the provisions of Section 40A(3) were to be read along with the exceptions carved out in Rule 6DD. Accordingly, the Hon’ble Apex Court had observed that a conjoint reading of the provisions of Section 40A(3) and Rule 6DD revealed that the restraint intended to curb the chances and opportunities to use or create black money should not be regarded as curtailing the freedom of trade or business. In my considered view, the judgment of the Hon’ble Apex Court in the aforesaid case further fortifies my conviction that the only exception to the application of Section 40A(3) can be traced in Rule 6DD.
Apropos the judgment of the Hon’ble High Court of Punjab & Haryana in the case of Gurdas Garg Vs. Commissioner of Income Tax, Bathinda (supra), I find that the Hon’ble High Court had though observed that as the genuineness of the transaction made in cash was not disbelieved by the department, therefore, the same
9 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur could not have been disallowed u/s. 40A(3) of the Act, but thereafter, at Para 15 of its judgment, it had categorically observed that while arriving at the aforesaid conclusion, it had wrongly referred to the pre-amended Rule 6DD. Accordingly, the Hon’ble High Court had observed that Rule 6DD had, thereafter, been amended vide Notification dated 10.10.2018 by the Ministry of Finance (Department of Revenue), CBDT. Backed by the aforesaid facts, the Hon’ble High Court observed that as it had pronounced the judgment in the open court, it was not open for it to examine the effect of the amendment to Rule 6DD. As the Hon’ble High Court in the aforesaid case, had admittedly observed that while disposing off the appeal for A.Y.2009-10, it had by mistake referred to the earlier pre-amended provision, i.e., that appliable up to 10.10.2008, therefore, the said judicial pronouncement would by no means assist the case of the assessee before me. In fact, the aforesaid judgment of the Hon’ble High Court in the case of Gurdas Garg Vs. Commissioner of Income Tax (supra) supports my aforesaid conviction that Section 40A(3) of the Act would only not be applicable in a case/situation as has been explicitly carved out in Rule 6DD and not otherwise.
Thus, in terms of my aforesaid observations, I am unable to persuade myself to concur with the contention of the Ld. AR that as the genuineness of both the aforesaid expenses, viz. (i) payment of godown rent and (ii) payment of electricity expenses, had not been doubted by the lower authorities, therefore, the same could not have been disallowed u/s. 40A(3) of the Act.
10 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur
Apropos the claim of the assessee that the respective payments made towards rent of four godowns were lower than Rs.10,000/- each, therefore, no disallowance of the same could have been made in absence of violation of the mandate of Section 40A(3) of the Act, I am of the view that as observed by the CIT(Appeals), and rightly so, as there has been a shift in the claim of the assessee as regards the bifurcation of the godown rent of Rs.3,84,000/-, therefore, the said claim as had been projected by the assessee before me cannot be summarily accepted, but at the same time, I am of the view that in all fairness, the aforesaid claim of the assessee could not have been summarily discarded as had been so done by the CIT(Appeals) and would require necessary verification on the part of the A.O. Accordingly, I restore the matter to the file of the A.O with a direction to him to re-adjudicate the same, and in case if the respective payments or aggregate of payments made by the assessee to the respective persons in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, does not exceed Rs.10,000/-, then no disallowance u/s. 40A(3) of the Act would be called for in the hands of the assessee. Thus, the Ground of appeal No.1 raised by the assessee is allowed for statistical purposes in terms of my aforesaid observations.
17. I shall now deal with the grievance of the assessee that both the lower authorities had grossly erred in making/sustaining the disallowance u/s.40A(3) of the Act of electricity charges of Rs.3,63,642/- paid by the assessee to Chhattisgarh Electric Power Distribution Company Limited, i.e., Public Sector Undertaking owned by the government of Chhattisgarh.
11 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur
Controversy involved in the issue in hand lies in a narrow compass, i.e., as to whether or not the CIT(A) is right in law and the facts of the case in concluding that the cash payments made by the assessee towards electricity charges to the aforementioned undertaking of the Government, viz. Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking owned by the Government of Chhattisgarh, which, as per him, was to be considered as an arm of the State Government that had received the payment in legal tender, i.e., in Indian currency, would by virtue of the exception carved out in Rule 6DD(b) of the Income Tax Rules, 1962 be saved from the disallowance contemplated in Sec. 40A(3) of the Act?
Before proceeding any further, I deem it fit to cull out the provisions of sub- section (3) of section 40A of the Act, which reads as under: “(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.”
However, the legislature, in all its wisdom, had carved out certain exceptions in Rule 6DD of the Income Tax Rules, 1962, wherein payments towards certain expenses, though made not as per the mandate of the provisions of section 40A(3) of the Act, would still be saved from the disallowance therein contemplated. As per Rule 6DD(b), where a payment is made by an assessee to the Government and, under the rules framed by it, such payment is required to be made in legal tender, then no 12 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur disallowance of such payment would be called for u/s 40A(3) of the Act. For the sake of clarity, Rule 6DD(b) is culled out as under: “6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or aggregate of the payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder, namely :- (a).…………………………………………………………………………… …………………………….. (b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender;”
In my considered view, for the purpose of adjudicating the issue in hand, i.e., as to whether or not the payment in question made by the assessee would be covered by the exception carved out in Rule 6DD(b) (supra), I have to first adjudicate on the issue as to whether the aforementioned entity to whom payments have been made by the assessee for electricity charges, viz. Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking owned by the Government of Chhattisgarh, would fall within the meaning of “Government,” as provided in the aforesaid rule. I find that the issue as to whether or not a company, public sector undertaking owned by the Government of Chhattisgarh could be said to be an instrumentality or agency of the Government had, after exhaustive deliberations, been looked into and adjudicated upon by a co-ordinate Bench of the Tribunal, viz. ITAT, Pune Bench “B,” Pune in the case of Smt. Sapna Sanjay Raisoni v. ITO, Ward-2(1), Pune. In the aforesaid order, it was observed by the Tribunal that if a 13 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur body was found to be an instrumentality or the agency of the Government, then it would be an authority included in the term “State” under Article 12 of the Constitution of India. After referring to Article 12 of the Constitution of India, it was observed by the Tribunal that the definition of “the State” therein provided, though inclusive and not exclusive, included, viz. (a). the Government and Parliament of India; (b). the Government and the Legislature of each of the States; (c). all local and other authorities within the territory of India; and (d). all local and other authorities under the control of the Government of India. Observing that the term “other authorities” used in Article 12 was neither defined in the Constitution of India nor in any other statute, the Tribunal had drawn support from the interpretation of the said term by the Hon’ble Supreme Court in the case of Som Prakash Rekhi Vs Union of India, AIR 181 SC 212, wherein the Hon’ble Apex Court had culled out certain tests for determining as to when a corporation should be said to be an instrumentality or agency of the Government, which read as under : “1. If the entire share capital of the corporation is held by the Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of the Government.
2. Existence of deep and pervasive State control may afford an indication that the corporation is a State agency or instrumentality.
Whether the Corporation enjoys monopoly status which is State conferred or State protected.
If the functions of the corporation are of public importance and closely related to governmental functions. It would be a relevant factor in classifying the corporation as an instrumentality or agency of the Government.
14 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur
If a department of a Government is transferred to a corporation, it would be a strong factor supporting this inference of the corporation being an instrumentality or agency of the Government.” Also, we find that the aforesaid order of the Tribunal had thereafter been followed by the ITAT, Bench “A,” Kolkata, in the case of Narayan Rice Mills v. CIT, Burdwan, ITA No. 732/Kol./2015, dated 07.06.2017.
In the backdrop of my aforesaid deliberations and applying the aforesaid tests laid down by the Hon’ble Apex Court in the case of Som Prakash Rekhi (supra), I am of the considered view that as the aforesaid undertaking, viz., Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking is State Government Companies wherein the State Government holds 100% shareholding; there is an existence of deep and pervasive control of the State Government on the said undertaking, and the full control of their working, policy, and framework is vested with the State Government; therefore, they can safely be brought within the meaning of “State.” As regards the requirements contemplated in Rule 6DD(b) that the payment is required to be made in legal tender, we find that the term “legal tender” has not been defined in the Income-Tax Act. However, the dictionary meaning of “legal tender,” as mentioned in “Aiyer’s Law Terms and Phrases,” is “the coinage of a country in which debts may be paid and which the creditor is bound to accept.” The dictionary meaning of the coin is; “metal used for the time being as money and stamped and issued by the authorities of the state in order to be used.” Therefore, it can be said that “legal tender” means the currency of a state to be used as money. Backed up by my aforesaid observations, I am of the considered view that as in the 15 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur case of the assessee before me, the payments in question to the aforementioned State Government undertaking have been made by the assessee in Indian currency; therefore, it can safely be concluded that the same has been made in legal tender. In the backdrop of my aforesaid deliberations, I am of the considered view that the payments made by the assessee to the aforementioned Government undertaking, viz. Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking., that could safely be held as a part of the Government, would fall within the realm of the exception carved out in Clause (b) of Rule 6DD of the Income Tax Rules, 1962, qua, the applicability of the provisions of Sec. 40A(3) of the Act. I, thus, in terms of my aforesaid observations of the view that the electricity charges of Rs. 3,63,642/- paid by the assessee to the aforementioned Government undertaking, viz. Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking., is covered by the exception contemplated in Rule 6DD(b) of the Income Tax Rules, 1962; therefore, the same could not have been disallowed u/s 40A(3) of the Act. Accordingly, the order of the CIT(Appeals) on the said issue is set aside, and the disallowance of Rs. 3,63,642/- (supra) made by the A.O u/s 40A(3) is vacated. Thus, the Ground of appeal No.2 raised by the assessee is allowed in terms of the aforesaid observations.
16 Shubh Karan Mahnot Vs. ITO, Ward-Ambikapur
In the result, the appeal of the assessee is partly allowed/allowed for statistical purposes in terms of the aforesaid observations.