2023 (1) TMI 821 - AT - Income Tax

Disallowance u/s. 40A(3) - cash payment towards electricity bill paid to Maharashtra State Electricity Distribution Company Limited (MSEDCL) - HELD THAT - A similar issue based on same identical facts, this Tribunal decided the issue in favour of the assessee in the case of Aakash Petroleum 2022 (12) TMI 1351 - ITAT NAGPUR by holding that the provisions u/s. 40A(3) of the Act are not attracted to the cash payment made to MSEDCL. Thus hold that, MSEDCL is a State under Article 12 of the Constitution and the cash payments made to its franchise/agent is covered under Rule 6DD(b) of the Rules. Therefore, the disallowance made by the CPC and as confirmed by the CIT(A) is not justified. Order of CIT(A) is set aside and the addition confirmed thereon is deleted and the grounds raised by the assessee are allowed.

Summary

Issues involved:
Whether disallowance made by AO u/s. 40A(3) on cash payment towards electricity bill to MSEDCL is justified.

Analysis:
The appeal concerns the disallowance made by the AO under section 40A(3) of the Income Tax Act on cash payment exceeding Rs.10,000 towards electricity bill paid to Maharashtra State Electricity Distribution Company Limited (MSEDCL) by a hotel and lodging firm. The firm argued that MSEDCL, being a wholly owned corporate entity under the Maharashtra Government, falls under the exception provided in Rule 6DD(b) of the Income Tax Rules. The firm cited precedents and legal provisions to support its contention. The Tribunal noted a similar issue decided in favor of the assessee in a previous case involving Aakash Petroleum, where it was held that cash payments made to MSEDCL were not subject to section 40A(3). The Tribunal analyzed the nature of MSEDCL, its relationship with distribution franchisees, and its status as a deemed distribution licensee under the Electricity Act, 2003. The Tribunal concluded that payments made to MSEDCL's franchisee were covered under Rule 6DD(b) and, therefore, the disallowance was not justified.

The Tribunal referred to the case of Smt. Sapna Sanjay Raisoni, where it was held that payments made to a State entity were not subject to section 40A(3). The Tribunal also considered the decision of the Hon'ble Supreme Court in the case of Rajasthan State Electricity Board, emphasizing that entities carrying out commercial activities on behalf of the State could still be considered part of the State under Article 12 of the Constitution. Additionally, the Tribunal cited a ruling by the Hon'ble High Court of Rajasthan regarding payments made to a contractor collecting royalty on behalf of the State Government, where no disallowance was warranted under Rule 6DD(b). Drawing parallels to these cases, the Tribunal determined that payments to MSEDCL's franchisee were akin to payments made to the State and were covered by Rule 6DD(b), thereby justifying the deletion of the addition confirmed by the CIT(A).

In conclusion, the Tribunal found that MSEDCL qualified as a State entity under Article 12 of the Constitution, and payments made to its franchise/agent were covered under Rule 6DD(b) of the Income Tax Rules. Consequently, the disallowance made by the CPC and confirmed by the CIT(A) was deemed unjustified, leading to the allowance of the assessee's appeal.