2016 (7) TMI 23 - AT - Income Tax

Cash Payments to Government Entities Exempt under Income Tax Rules: Tribunal Ruling

The Tribunal allowed the appeals, holding that cash payments made to MSRTC and other Government organizations are exempt under Rule 6DD(b) of the Income ... Disallowance under section 40A(3) - exception under Rule 6DD(b) - State within Article 12 - instrumentality or agency of the Government test - genuineness of payment and business expediencyDisallowance under section 40A(3) - exception under Rule 6DD(b) - State within Article 12 - instrumentality or agency of the Government test - genuineness of payment and business expediency - Whether cash payments made to Maharashtra State Road Transport Corporation (MSRTC) and other government organisations for purchase of scrap attract disallowance under section 40A(3), or fall within the exception under Rule 6DD(b). - HELD THAT: - The Tribunal in the assessee's earlier proceedings examined whether MSRTC is a part of the State within Article 12 and applied the tests for an instrumentality or agency of the Government (shareholding, degree of state control, public character of functions, statutory incorporation). MSRTC satisfied those indicia: entire share capital held by State/Centre, statutory incorporation under the Road Transport Corporation Act, and pervasive state control over policy and management; it performs public functions. Once MSRTC is held to be a 'State' under Article 12, cash payments to it are covered by the exception in Rule 6DD(b) and cannot be disallowed under section 40A(3). The Tribunal further observed that the genuineness of payments was not disputed and that payments were made in cash on auction success and for business expediency (to prevent pilferage), factors which militated against invoking the disallowance. Reliance on High Court decisions that section 40A(3) must be read with Rule 6DD and that bona fide payments whose genuineness is not doubted should not be disallowed reinforces this conclusion. Applying these principles, the Tribunal deleted the disallowance and the present Bench, having no contrary material, followed that decision and set aside the addition made under section 40A(3). [Paras 9, 10, 11]The disallowance under section 40A(3) in respect of cash payments to MSRTC and other Government organisations for purchase of scrap is deleted; Rule 6DD(b) exception applies.Disallowance under section 40A(3) - Whether the grounds relating to disallowance of interest under section 36(1)(iii) pressed by the assessee require adjudication. - HELD THAT: - The assessee did not press grounds relating to disallowance of interest under section 36(1)(iii) before the Tribunal and the Revenue had no objection to non-pressing. Accordingly, those grounds were not adjudicated on their merits and were dismissed as not pressed. [Paras 10]Grounds relating to disallowance of interest under section 36(1)(iii) are dismissed as not pressed.Final Conclusion: The appeals are partly allowed: the addition/disallowance under section 40A(3) in respect of cash payments to MSRTC and other government organisations for purchase of scrap is deleted for AY 2009-10; the alternate grounds on disallowance of interest were not pressed and stand dismissed. 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 OrganizationsThe 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.