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2016 (6) TMI 417 - AT - Income TaxApplicability u/s 40A(3) - payments made in cash by the assessees to MSRTC for purchase of scrap in auction - Held that - 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 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 (2014 (8) TMI 486 - ANDHRA PRADESH HIGH COURT ) no disallowance can be made u/s.40A(3) where genuineness of payment is not doubted. 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. - Decided in favour of assessee.
Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act for cash payments made to Maharashtra State Road Transport Corporation (MSRTC) and other Government organizations. 2. Disallowance of interest under Section 36(1)(iii) for interest-free advances made to related parties from interest-bearing borrowed funds (not pressed). Issue-wise Detailed Analysis: 1. Disallowance under Section 40A(3) for Cash Payments: Facts and Background: The assessees, engaged in the business of purchasing and selling scrap from various Government organizations, made cash payments exceeding Rs. 20,000 to MSRTC for the purchase of scrap. The Assessing Officer (AO) disallowed these payments under Section 40A(3) of the Income Tax Act, which prohibits cash payments exceeding Rs. 20,000. The CIT(A) upheld this disallowance. Tribunal's Observations and Findings: The Tribunal had previously remitted the matter back to the CIT(A) to reconsider whether MSRTC qualifies as a "State" under Article 12 of the Constitution of India, which would exempt such payments under Rule 6DD of the Income Tax Rules. The CIT(A), however, maintained the disallowance, prompting the current appeals. Arguments by Assessee: The assessees argued that MSRTC is a "State" under Article 12 of the Constitution, and thus, payments to it should be exempt from Section 40A(3) under Rule 6DD. They emphasized that MSRTC is a State-owned corporation with full control by the government, supported by the Supreme Court's interpretation in Commissioner of Sales Tax Vs. Jaswant Singh Charan Singh. Arguments by Department: The Department contended that CIT(A) correctly concluded that MSRTC is not a "State" and that the payments fall under Section 40A(3). They defended the CIT(A)'s reliance on various judicial decisions to support this view. Tribunal's Analysis: The Tribunal examined the definition of "State" under Article 12 and the tests laid down by the Supreme Court in Som Prakash Rekhi Vs. Union of India, which include: 1. Entire share capital held by the Government. 2. Deep and pervasive State control. 3. Monopoly status conferred by the State. 4. Functions of public importance closely related to governmental functions. 5. Transfer of a Government department to a corporation. Applying these tests, the Tribunal found that MSRTC meets the criteria of a "State" as it is fully controlled and funded by the Government, performs public functions, and has no private participation. They also cited the Bombay High Court's observation in Maharashtra State Road Transport Corporation Vs. Diwakar Madhukarrao Malkapure that MSRTC is a "State" under Article 12. Conclusion: The Tribunal concluded that MSRTC is a "State" and thus, payments to it are exempt from Section 40A(3) under Rule 6DD. They noted that the genuineness of the payments was not disputed by the Department, and the payments were made out of business expediency. The Tribunal directed the AO to delete the disallowance under Section 40A(3). 2. Disallowance of Interest under Section 36(1)(iii) (Not Pressed): The assessees did not press the grounds related to the disallowance of interest under Section 36(1)(iii) for interest-free advances to related parties. Consequently, these grounds were dismissed as 'not pressed.' Final Judgment: The appeals were partly allowed, with the Tribunal setting aside the CIT(A)'s orders regarding Section 40A(3) disallowance and directing the AO to delete the disallowance. The decision on the non-pressed grounds was dismissed. Order Pronouncement: The order was pronounced on February 29, 2016.
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