M/S. UNITED SALT WORKS,BHARUCH vs. ITO, WARD 1(3), BHARUCH

आयकर अपील�य अ�धकरण, सुरत �यायपीठ, सुरत IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT ‘SMC BENCH’ BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER आ.अ.सं./ITA No.208/SRT/2020 (AY 2014-15) (Hearing in Physical Court) M/s United Salt Works Income Tax Officer, 9, Pruthvi Nagar, 1st Floor, Ward-1(3), 2nd Floor, Above Vs Station Road, Bharuch- Bank of Baroda Building, 392001 Station Road, Bharuch- PAN : AAAFU 4725 A 392001 अपीलाथ�/Appellant ��यथ� /Respondent

�नधा�रती क� ओर से /Assessee by Sh Krutarth Desai, Advocate राज�व क� ओर से /Revenue by Sh Vinod Kumar, Sr-DR सुनवाई की तारीख/Date of hearing 15.09.2022 उ�घोषणा क� तार�ख/Date of 28.09.2022 pronouncement Order under section 254(1) of Income Tax Act 1. This appeal by assessee is directed against the order of Ld. Commissioner of Income-tax (Appeals)-3, Vadodara [for short to as “Ld. CIT(A)” dated 14.07.2020 for the assessment year 2014-15, which in turn arise out of separate assessment order passed under section 143(3) of Income-Tax Act (Act) dated 30.11.2016. The assessee has raised the following grounds of appeal: “1) The order passed by the learned Assessing Officer and learned Commissioner of Income Tax (Appeals)-4, Vadodara are

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works ex facie illegal, without appreciation of factual matrix of the case, without appreciation of legal position and not within the four corners of law and violative to the principle of Natural Justice and therefore, deserves to be quashed and set aside in the interest of justice. 2) The learned assessing officer as well as learned Commissioner of Income Tax (Appeals-3, Baroda has failed to appreciate the legal position and factual matrix of the case. They have erred in arriving at a conclusion that, DGVCL being a state Government electricity distribution company is not covered under the definition of “Government” under Rule 6DD of the Income Tax Rules and therefore, the addition made and subsequently confirmed deserves o be deleted in the interest of justice. 3) The appellant has, during the course of appellate proceedings, have submitted two judicial precedents out of which none have been appreciated by the learned Commissioner of Income Tax (Appeals)-3 Baroda whereas the another judgment appreciated and referred in the appellate order, has not been confronted to the appellant and under the circumstances, the order is perverse and non speaking in nature. The appellant submits that, the judgment which has not been referred in appeal order is directly covering the instant case of the appellant. The judgment is of Hon'ble Income Tax Appellate Tribunal, Jodhpur Bench in the case of Sumit Enterprise Vs ITO Ward 2 bearing ITA No.12/JODH/2018 which was allowed vide order pronounced dated 30.02.2018. 4) The appellant submits that payment made to DGVCL for the purpose of electricity supply only which has not been disputed with regard to the validity and genuineness of the expenses. The appellant further submits that, DGVCL has been registered as “State Government Company” with Ministry of Corporate Affairs and falls within the definition of Government Company under the provision of 2

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works section 2(45) of the Companies Act and therefore, the findings of the learned Commissioner of Income Tax (Appeals)-3, Vadodara is perverse and deserves to be quashed and set aside. 5) The Appellant submits that, the learned Commissioner of Income Tax (Appeals)-3, Vadodara has not categorically rebutted the submission of the appellant which was made before him by the appellant and has summarily rejected the contention of the appellant which is against and violative to the provision of the Principle of Natural Justice and therefore, the order is non est and deserves to be quashed and set aside in the interest of justice. 6) The appellant submits that the learned Commissioner of Income Tax (Appeals)-3, Vadodara has been hit by the principle of Natural Justice inasmuch as not providing cognate reasons for not agreeing with the judgment of M/s Sumit Enterprise and not providing an opportunity of being heard to the appellant with regard to the judgment on which he was inclined to rely which is referred in the appellate order. Therefore, under the circumstances, the impugned addition of Rs.5,36,100/- deserves to be deleted in the interest of justice. 7) The appellant craves for leave to add or amend or alter or modify any of the grounds of appeal in the interest of justice.”

for the assessee submits that he is not to pressing Ground

No.1. Considering the submission of Ld. AR for the assessee,

hence, Ground No.1 is dismissed as “not pressed”.

manufacturing of common salt, filed its return of income for 3

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assessment year 2014-15 on 06.10.2014 declaring income of Rs.8,17,640/-.The case was selected for scrutiny. During the assessment, the Assessing Officer noted that assessee has made payment in cash against the electricity charges of Rs.5,36,100/- to Dakshin Gujarat Vij Company Ltd. (for short to “DGVCL”). The Assessing Officer asked the assessee vide order-sheet entry dated 09.11.2016, as to why the aforesaid expenses of Rs.5,36,100/- should not be disallowed under section 40A(3) of the Act. The assessee filed its reply dated 09.11.2016. The contents of assessee’s reply is extracted in para-5 of the assessment order. In the reply, the assessee submitted that DGVCL is wholly and exclusively owned and controlled by Government of Gujarat. So DGVCL is a Government Company, the payment made to a Government Company against the power consumption bill raised by them for consumption of power to run the salt work. Banking facilities were not available at that point of time of the working place of assessee and the assessee’s case is covered under the exception of Rule 6DD of the Income Tax Rules, 1962. Further 4

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due to non-availability of sufficient funds, for payment to DGVCL could not be made on or before the due date of payment. In such circumstances, the power connection would have been disconnected by DGVCL, once connection is discussion, normally takes 15 days to restore power connection may result in production of loss more than 50% might have been put to a great hardship and loss. The payment is genuine, made to DGVCL and there is no unaccounted payment. The object of provision of section 40A(3) was to check evasion of tax so that payment is made from disclosed sources. The assessee furnished the copy of money receipt of DGVCL and prayed to allow such expenses as business expenses. The submission of assessee was not accepted by Assessing Officer. The Assessing Officer held that electric consumption charges of Rs.2,68,050/- was made on 13.03.2014 and Rs.2,68,050/- was also made on 27.03.2014 in cash in violation of provision of section 40A(3). Thus, it was required to be added to the total income of assessee. The Assessing Officer further recorded that except the month of 5

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March, 2014, rest of the year payments paid were made through account payee cheque or draft. Thus, the assessee violated the provision of section 40A(3) and the expense of Rs.5,36,100/- is disallowed. 4. Aggrieved by the additions / disallowances assessee filed its appeal before Ld. CIT(A). Before Ld. CIT(A) the assessee reiterated similar submission as made before the Assessing Officer. The Ld. CIT(A) after considering the submission of assessee upheld the action of the Assessing Officer. The Ld. CIT(A) further held that assessee tried to establish the word “Government” includes the companies owned by Central or State Governments and tried to take help the provision of Section 2(45) of the Companies Act, 1956, which define “the Government Company”. The case law relied by assessee was also not accepted by Ld. CIT(A) by holding that Rule 6DD of the IT Rules, cannot be stretched to the extent of bringing every Government Entity / Company into the fold of exempt category. Further aggrieved, the assessee has filed present appeal before the Tribunal. 6

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works

Rule 6DD(b) of the I.T. Rules and could not be disallowed under section 40A(3). 6. On the other hand, Ld. Sr-DR for the Revenue submits that assessee has made payment by cheque throughout relevant financial year, except for the month of March, 2014 and assessee has not shown any bona fide reason which may fall within the exceptional category of 6DD of the IT Rules. The Ld. Sr-DR for the Revenue supported the order of lower authorities. 7. I have considered the rival submissions of both the parties and gone through the orders of lower authorities. There is no dispute that assessee made payment of electric charges to DGVCL for Rs.2,68,050/- on 13.04.2014 and Rs.2,68,050/- on 27.03.2014 and both the payments were made in cash. I find that assessee has not disputed that expenses were paid against the liability. I find that on further there is no further dispute that DGVCL is a Company owned and controlled by Government of Gujarat. Further I find that genuineness of expenses is not doubted by Assessing Officer. I find that 8

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almost similar grounds of appeal, the Division Bench of

Amritsar Tribunal in the case of DCIT Vs Vinod Arora (supra)

passed the following order:- “5. xxxxxxxxxxxxxxxxxxxx. We have heard the Ld. Authorized Representatives for 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 them to drive home their respective contentions. Admittedly, the assessee who is engaged in the business of purchase/sale of wine on a retail basis had made cash payments in excess of amount of Rs. 20,000/- for purchase of wine to, viz. M/s Rajasthan State Beverages Corporation Ltd.; and Rajasthan State Ganganagar Sugar Mills Ltd. As observed by us hereinabove, the AO holding a conviction that the aforementioned payments made by the assessee were in contravention of the provisions of sec. 40A(3) of the Act, had thus, disallowed the same. On appeal, the CIT(A), was of the view that as the payments in question were made by the assessee to Government undertakings, which were to be considered as an arm of the State Government, and had accepted the payment in legal tender, i.e., in Indian currency, therefore, the same fell within the realm of the exception contemplated in rule 6DD(b) of the Income-tax Rules, 1962 and were thus saved from the disallowance u/s 40A(3) of the Act. Accordingly, the CIT(A) backed up his aforesaid deliberations vacated the disallowance of Rs. 2,07,24,418/- that was made by the AO by triggering the provisions of sec. 40A(3) of the Act. For the sake of clarity, the relevant observations of the CIT(A) qua the issue in hand are culled out as under : "8. The submissions of the appellant have been considered and the circumstances of the case have been noted. There is no dispute to the fact that the cash payment has been made by the appellant for purchase of liquor. However, it is also not in dispute that such payments have been made to Undertakings of the Government of Rajasthan. The said Undertakings have to be considered as an arm of the Government in view of the judicial precedent cited by the appellant and extracted herein above. Since the said Undertakings of the State Government of Rajasthan accepted cash payment for sale of

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works liquor, there is a valid presumption that receipt of payment in legal tender i.e. Indian currency was not proscribed by any rules framed by the said Undertakings. It cannot be presumed that the Government undertakings shall indulge in activities which are prohibited by any rules made thereunder. Besides, the genuineness of the payment is not in doubt. The payment so made have been reflected in the TCS returns of the Govt. Undertakings and is also reflected in Form 26AS of the appellant. In the circumstances, it is held that the appellant is entitled to be exempted from the operation of the provisions of section 40A(3) by virtue of falling in the category of rule 6DD(b). Accordingly, the disallowance and the consequent addition of Rs. 2,07,24,418/- [Rs. 1,37,31,676/- + Rs. 69,92,742/-] is directed to be deleted. The ground of appeal pertaining to this issue is thus treated as allowed." 6. Controversy involved in the present appeal lies in a narrow compass, i.e., as to whether or not the CIT(A) is right in law and the facts of case, in concluding, that the cash payments made by the assessee towards purchase of wine to the aforementioned undertakings of the Government, viz. (i) M/s Rajasthan State Ganganagar Sugar Mills Ltd; and (ii) M/s Rajasthan State Beverages Corporation Ltd., which as per him were 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, we 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 disallowance of such payment would be called for u/s 40A(3) of the Act. For the sake

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works 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 our 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), we have to first adjudicate on the issue as to whether the aforementioned entities to whom payments have been made by the assessee for purchase of wine, viz. (i) M/s Rajasthan State Beverages Corporation Ltd ; and (ii) M/s Rajasthan State Ganganagar Sugar Mills Ltd., would fall within the meaning of "Government", as provided in the aforesaid rule. We find that the issue as to whether or not a corporation 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 [2016] 70 taxmann.com 7/159 ITD 1, Pune. In the aforesaid order, it was observed by the Tribunal that if a 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 v. Union of 11

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works India AIR 1981 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. 3. Whether the Corporation enjoys monopoly status which is State conferred or State protected. 4. 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. 5. 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 Mill v. CIT [IT Appeal No. 732 (Kol.) of 2015, dated 7-6-2017]. 7. In the backdrop of our aforesaid deliberations, and applying the aforesaid tests laid down by the Hon'ble Apex Court in the case of Som Prakash Rekhi (supra), we are of the considered view, that as both of the aforesaid undertakings, viz. (i) M/s Rajasthan State Ganganagar Sugar Mills Ltd; and (ii) M/s Rajasthan State Beverages Corporation Ltd., are State Government Companies wherein 100% share holding is held by the State Government; there is an existence of deep and pervasive control of the State Government on the said undertakings, 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 12

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works 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 which is to be used as money. Backed up our aforesaid observations, we are of the considered view, that as in the case of the assessee before us the payments in question to the aforementioned State Government undertakings have been made by the assessee in Indian currency, therefore, it can safely, or in fact inescapably be concluded that the same have been made in legal tender. In the backdrop of our aforesaid deliberations, we are of the considered view that the payments made by the assessee to the aforementioned Government undertakings, viz. (i) M/s Rajasthan State Ganganagar Sugar Mills Ltd; and (ii) M/s Rajasthan State Beverages Corporation Ltd., which 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 Rues, 1962, qua, the applicability of the provisions of sec. 40A(3) of the Act. We, thus, in terms of our aforesaid observations finding no infirmity in the view taken by the CIT(A), who had rightly concluded that as the payments in question made by the assessee to the State Government entities in legal tender were 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, uphold his order. 8. Accordingly, filing no substance in the appeal filed by the Revenue before us, we dismiss the same. 9. Resultantly, the appeal filed by the Revenue is dismissed in terms of our aforesaid observations.” 8. Considering the aforesaid factual and legal discussion and respectfully following the order of Division Bench of Amritsar Tribunal in the case of DCIT Vs Vinod Arora (supra), I direct the Assessing Officer to delete the addition under section

ITA No.208/SRT/2020 (A.Y 14-15) M/s United Salt Works 40A(3). In the result, the grounds of appeal raised by assessee

is allowed.

Order pronounced in the open court on 28/09/2022.

Sd/- (PAWAN SINGH) [�याियक सद�य JUDICIAL MEMBER] सूरत /Surat, Dated: 28 /09/2022 Dkp. Out Sourcing Sr.P.S Copy to: 1. Appellant- 2. Respondent- 3. CIT(A)- 4. CIT 5. DR 6. Guard File True copy/ By order // True Copy // Sr.P.S./Assistant Registrar, ITAT, Surat

Date Initial Draft order was dictated by author JM) 28/09/2022 28/09/2022 Draft placed before author 28/09/2022 Approved Draft comes to the Sr.PS/PS Kept for pronouncement on,, 28/09/2022 29/09/2022 File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order. Draft dictation sheets are attached