2016 (7) TMI 23 - AT - Income Tax

Disallowance u/s. 40A(3) - cash payments made to MSRTC and other Government organizations towards purchase of scrap - Held that - Since the CIT(A) has upheld the disallowance made by the AO u/s.40A(3) by following his orders for earlier years in assessee s own case and since the Tribunal has already deleted such disallowance, therefore, in absence of any contrary material brought to our notice against the order of the Tribunal in assessee s own case, we hold that the provisions of section 40A(3) in respect of cash payments made to MSRTC and other Government Organisations towards purchase of scrap materials are not attracted. Accordingly, the disallowance u/s.40A(3) made by the AO and upheld by the CIT(A) are deleted. - 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) of the Income Tax Act.

Detailed Analysis:

Issue 1: Disallowance under Section 40A(3) for Cash Payments to MSRTC and Other Government Organizations

The primary issue in these appeals pertains to the disallowance under Section 40A(3) of the Income Tax Act, 1961, for cash payments made to MSRTC and other Government organizations towards the purchase of scrap materials. The assessee argued that these payments should be exempt under Rule 6DD(b) of the Income Tax Rules, which provides exceptions to Section 40A(3) for payments made to the Government.

The Tribunal noted that in the first round of litigation, the same issue was remitted back to the CIT(A) for fresh consideration. The Tribunal had previously observed that MSRTC, being entirely controlled and funded by the State and Central Government, qualifies as a "State" under Article 12 of the Constitution of India. Consequently, payments made to MSRTC should be exempt from disallowance under Section 40A(3).

The Tribunal reiterated that MSRTC is an instrumentality of the Government, as it meets the criteria laid out by the Hon’ble Supreme Court in the case of Som Prakash Rekhi vs. Union of India. These criteria include complete government ownership, pervasive government control, and the performance of public functions.

The Tribunal also referenced the Hon’ble Bombay High Court's decision in the case of Maharashtra State Road Transport Corporation vs. Diwakar Madhukarrao Malkapure, which recognized MSRTC as a "State" under Article 12. Given these precedents, the Tribunal concluded that the disallowance under Section 40A(3) for cash payments to MSRTC was not warranted.

Furthermore, the Tribunal emphasized that the genuineness of the payments was not disputed by the department. Therefore, applying Rule 6DD(b), which provides an exception for payments made to the Government, the Tribunal directed the deletion of the disallowance under Section 40A(3).

Issue 2: Disallowance of Interest under Section 36(1)(iii)

The second issue involved the disallowance of interest under Section 36(1)(iii) of the Income Tax Act. The assessee did not press this issue during the proceedings, and the Departmental Representative had no objection to this. Consequently, the Tribunal dismissed this ground of appeal.

Conclusion:

The Tribunal allowed the appeals concerning the disallowance under Section 40A(3), holding that cash payments made to MSRTC and other Government organizations are exempt under Rule 6DD(b). The disallowance of interest under Section 36(1)(iii) was dismissed as it was not pressed by the assessee. Thus, the appeals were partly allowed. The order was pronounced in the open court on 29-04-2016.

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