2022 (2) TMI 1492 - AT - Income Tax

Addition u/s 40A(3) - payments in question made by the assessee to Government undertakings - payment of legal tender - Whether 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)? - HELD THAT - Referring to tests laid down by the Hon ble Apex Court in the case of Som Prakash Rekhi 1980 (11) TMI 113 - SUPREME COURT 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. 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 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. Thus the payments made by the assessee to the aforementioned Government undertakings 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 - 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. - Decided in favour of assessee.

Issues Involved:
1. Applicability of Section 40A(3) of the Income-Tax Act, 1961.
2. Interpretation of Rule 6DD(b) of the Income-Tax Rules, 1962.
3. Classification of State Government Undertakings as "Government" under Rule 6DD(b).
4. Validity of cash payments made to State Government Undertakings.

Detailed Analysis:

1. Applicability of Section 40A(3) of the Income-Tax Act, 1961:
The primary issue was whether the cash payments made by the assessee for the purchase of wine from State Government Undertakings contravened the provisions of Section 40A(3) of the Income-Tax Act, 1961. Section 40A(3) stipulates that any expenditure incurred by an assessee, where the payment or aggregate of payments made to a person in a day exceeds twenty thousand rupees, should be disallowed unless it is made by an account payee cheque or bank draft.

2. Interpretation of Rule 6DD(b) of the Income-Tax Rules, 1962:
The assessee argued that the payments fell within the exception provided under Rule 6DD(b) of the Income-Tax Rules, 1962. Rule 6DD(b) exempts payments made to the Government in legal tender from the disallowance under Section 40A(3), provided such payments are required to be made in legal tender under the rules framed by the Government.

3. Classification of State Government Undertakings as "Government" under Rule 6DD(b):
The CIT(A) and the Tribunal had to determine whether the payments made to M/s Rajasthan State Ganganagar Sugar Mills Ltd. and M/s Rajasthan State Beverages Corporation Ltd. could be considered as payments to the Government. The Tribunal referred to judicial precedents and the definition of "State" under Article 12 of the Constitution of India. It was concluded that these undertakings, being wholly owned and controlled by the State Government, could be classified as an arm of the Government.

4. Validity of Cash Payments Made to State Government Undertakings:
The Tribunal examined whether the payments made in Indian currency (legal tender) to the State Government Undertakings were in compliance with Rule 6DD(b). It was noted that the payments were reflected in the TCS returns of the Government Undertakings and the Form 26AS of the assessee, indicating the genuineness of the transactions. The Tribunal concluded that the payments made in legal tender to the State Government Undertakings fell within the exception provided under Rule 6DD(b), thereby not attracting disallowance under Section 40A(3).

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the payments made by the assessee to the State Government Undertakings in legal tender were covered by the exception under Rule 6DD(b) of the Income-Tax Rules, 1962. Consequently, the disallowance of ?2,07,24,418/- under Section 40A(3) was rightly vacated. The appeal filed by the Revenue was dismissed, affirming that the cash payments to the State Government entities did not contravene the provisions of Section 40A(3) due to the applicability of Rule 6DD(b).

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