2024 (7) TMI 947 - AT - Income Tax

Disallowance u/s 40A(3) - cash payments on different dates towards Godown Rent payment to undertaking of the Government Whether cash payments made by the assessee towards electricity charges to undertaking of the Government, viz. Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking owned by the Government of Chhattisgarh, 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) of the Act? - HELD THAT - As relying on tests laid down in the case of Som Prakash Rekhi 1980 (11) TMI 113 - SUPREME COURT the aforesaid undertaking, viz., Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking is State Government Companies wherein the State Government holds 100% shareholding; there is an existence of deep and pervasive control of the State Government on the said undertaking, 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 - 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 to be used as money. Thus, the payments in question to the aforementioned State Government undertaking have been made by the assessee in Indian currency; therefore, it can safely be concluded that the same has been made in legal tender. Payments made by the assessee to the aforementioned Government undertaking, viz. Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking., that 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 Rules, 1962, qua, the applicability of the provisions of Sec. 40A(3) of the Act. Electricity charges paid by the assessee to the aforementioned Government undertaking, viz. Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking., is 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. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of godown rent under Section 40A(3) of the Income-tax Act, 1961.
2. Disallowance of electricity charges under Section 40A(3) of the Income-tax Act, 1961.

Detailed Analysis:

1. Disallowance of Godown Rent under Section 40A(3):
The assessee challenged the disallowance of Rs. 3,84,000/- made by the AO under Section 40A(3) for godown rent paid in cash. The assessee contended that the payments were below the specified limit of Rs. 10,000/- each and thus should not be disallowed. The CIT(A) upheld the disallowance, stating that the assessee failed to provide sufficient evidence to show that payments were below Rs. 10,000/-. The Tribunal noted that the bifurcation of godown rent provided by the assessee required verification. Consequently, the Tribunal restored the matter to the AO for re-adjudication to verify if the payments exceeded the specified limit. If the payments were below Rs. 10,000/-, no disallowance under Section 40A(3) would be warranted. Thus, the ground of appeal regarding godown rent was allowed for statistical purposes.

2. Disallowance of Electricity Charges under Section 40A(3):
The assessee also contested the disallowance of Rs. 3,63,642/- for electricity charges paid to Chhattisgarh Electric Power Distribution Company Limited, a public sector undertaking. The assessee argued that the payment should be exempt under Rule 6DD(b) as it was made to a government entity in legal tender. The Tribunal examined whether the public sector undertaking could be considered an arm of the State Government and thus fall within the exception of Rule 6DD(b). Referring to previous judgments and constitutional definitions, the Tribunal concluded that the public sector undertaking met the criteria of being an instrumentality of the State. Therefore, the payment in legal tender to the public sector undertaking was covered by the exception in Rule 6DD(b), and the disallowance under Section 40A(3) was not justified. The Tribunal set aside the CIT(A)'s order and vacated the disallowance of Rs. 3,63,642/-. Thus, the ground of appeal regarding electricity charges was allowed.

Conclusion:
The appeal was partly allowed, with the issue of godown rent remanded for verification and the disallowance of electricity charges vacated. The Tribunal's decision emphasized the importance of verifying the nature and amount of payments to determine the applicability of Section 40A(3) and the exceptions under Rule 6DD.