2010 (11) TMI 797 - HC - Income Tax

Royalty - Additions under s. 40A 3) of the IT Act - assessee was a contractor and collecting the royalty and payment had been made to the contractor who had collected the royalty on behalf of the State - AO disallowed 20 per cent of the amount as the payment exceeded Rs. 20,000 Held that - Amount was paid to the contractor which was collected on behalf of the State Government as such no disallowance could have been made in view of r. 6DD(b). The Government has granted contract to collect the royalty to the contractor. The payment was made to the contractor not in individual capacity, but on behalf of the Government of Rajasthan, hence, no disallowance under r. 6DD(b) could have been made, CIT(A) and Tribunal have not committed any illegality in passing the orders, no substantial question arises in the instant appeal. Consequently, the income-tax appeal is hereby dismissed

Summary

Issues:
1. Interpretation of Section 40A(3) of the Income Tax Act regarding disallowance of payments exceeding Rs. 20,000 made in cash.
2. Application of Rule 6DD(b) in the context of royalty payments collected on behalf of the State Government.
3. Justification of the Tribunal's decision to delete the additions made by the Assessing Officer (AO) under Section 40A(3) of the IT Act.

Analysis:
1. The primary issue in this case revolved around the interpretation of Section 40A(3) of the Income Tax Act, which deals with the disallowance of payments exceeding Rs. 20,000 made in cash. The AO disallowed 20% of the amount as the payment exceeded the specified limit, leading to a dispute regarding the justification of this disallowance.

2. Another crucial aspect was the application of Rule 6DD(b) concerning royalty payments collected on behalf of the State Government. The assessee, a contractor, had paid a significant amount as royalty to the State Government, with the contractor collecting the royalty on behalf of the Government. The contention was that this arrangement fell under the purview of Rule 6DD(b), thereby exempting the payments from disallowance under Section 40A(3) of the IT Act.

3. The Tribunal upheld the order of the CIT(A) in deleting the additions made by the AO, emphasizing that the payments were made to the contractor on behalf of the State Government. The Court agreed with this interpretation, stating that the contractor was acting as an agent of the Government in collecting the royalty, and hence, no disallowance could be justified under Rule 6DD(b).

4. The counsel for the Revenue argued that a substantial amount of royalty was paid in cash, highlighting the necessity of payment by cheque. However, the Court reasoned that since the payments were made to the contractor representing the State Government, the disallowance was not applicable as per the provisions of Rule 6DD(b).

5. Ultimately, the Court found no illegality in the decisions of the CIT(A) and the Tribunal, concluding that no substantial question arose in the appeal. As a result, the income-tax appeal was dismissed, affirming the Tribunal's decision to delete the additions made by the AO under Section 40A(3) of the IT Act.