2022 (12) TMI 1351 - AT - Income Tax

Income Tax Appeal Victory: Cash payments to SNDL exempt from section 40A(3) - Tribunal rules in favor of assessee (3)

Aakash Petroleum Versus The Income Tax Officer, Ward – 2 (1), Nagpur

The Tribunal allowed the appeal of the assessee, ruling that the provisions of section 40A(3) were not applicable to cash payments exceeding Rs.10,000 ... Addition u/s. 40A(3) - cash payment more than Rs.10,000/- - HELD THAT:- AO disallowed 20% of the said payment on the ground that the royalty was paid by way of cash. The Hon’ble High Court of Rajasthan [2010 (11) TMI 797 - RAJASTHAN HIGH COURT] opined that the amount was paid to the contractor which was collected on behalf of the State Government as such no disallowance could have been made in view of Rule 6DD(b) of the Rules vide para 6 of the said judgment. Further, the Hon’ble High Court of Rajasthan was pleased to hold that the payment received by the contractor not in individual capacity but on behalf of the Government of Rajasthan and held no disallowance Rule 6DD(b) could have been made in view of Rules 6DD(b). In the present case, MSEDCL which, is a wholly owned corporate entity of Maharashtra State, in turn, which is deemed licensee u/s. 14 of the Electricity Act, 2003, in turn, entered into an agreement with SNDL which is a subsidiary of Spanco with whom the MSEDCL entered into original agreement. The home page of SNDL shows that has been formed to look after power distribution to Nagpur city on behalf of the MSEDCL and the Spanco is answerable for its obligation towards MSEDCL, which clearly establishes that the SNDL performing its obligations in pursuance of contract entered with MSEDCL which is a State under Article 12 of the Constitution, as an agent of Maharashtra State for distribution of electricity in Nagpur city. Therefore, the payment made to the agent/franchisee of the State of Maharashtra is covered under Rule 6DD(b) of the I.T. Rules. Thus, the provisions u/s. 40A(3) are not attracted to the payments made to SNDL received on behalf of the MSEDCL. Therefore, the order of CIT(A) is not justified and the grounds raised by the assessee are allowed. Issues:Whether the addition of cash payment exceeding Rs.10,000/- under section 40A(3) is justified.Analysis:The appeal pertains to an order passed by the National Faceless Appeal Centre for the assessment year 2018-19. The main issue is the confirmation of an addition of Rs.1,92,190 on account of cash payment exceeding Rs.10,000 under section 40A(3) of the Income Tax Act. The assessee argued that the payment made to Spanco Nagpur Discon Ltd. (SNDL), acting as an agent of the Government of Maharashtra, falls under the exception provided in Rule 6DD(b). The assessee provided an agreement between Maharashtra State Electricity Distribution Co. Ltd. (MSEDCL) and SNDL to support this claim. Reference was made to a decision of the Hon'ble High Court of Rajasthan, which held that payments made to a contractor on behalf of the State Government are covered under Rule 6DD(b) and not subject to disallowance under section 40A(3).The Department argued that MSEDCL and SNDL are companies, not government authorities, and therefore, the provisions of section 40A(3) apply. However, the Tribunal found that SNDL acts as a franchisee of MSEDCL for electricity distribution, authorized by the Maharashtra State Electricity Distribution Co. Ltd., a wholly owned corporate entity of the State of Maharashtra. The Tribunal examined the definitions and agreements related to SNDL and MSEDCL, concluding that the payment to SNDL for electricity charges is deemed to be received on behalf of MSEDCL, falling under the exception provided in Rule 6DD(b).Referring to a previous Tribunal decision involving payments to a government organization, the Tribunal drew parallels between the case at hand and the earlier ruling, emphasizing that MSEDCL should be treated as a 'State' entity within the meaning of Article 12 of the Constitution of India. The Tribunal also referenced a decision of the Hon'ble High Court of Rajasthan, which held that payments made to a contractor on behalf of the State Government are covered by Rule 6DD(b). Based on the analysis of the agreements and profiles of MSEDCL and SNDL, the Tribunal concluded that the payment made to SNDL, acting as an agent of the State of Maharashtra, is covered under Rule 6DD(b) and not subject to disallowance under section 40A(3).In light of the above analysis, the Tribunal allowed the appeal of the assessee, finding that the provisions of section 40A(3) were not applicable to the payments made to SNDL on behalf of MSEDCL. The order of the CIT(A) confirming the addition was deemed unjustified, and the grounds raised by the assessee were upheld.This detailed analysis of the judgment highlights the arguments presented by both parties, the legal interpretations made by the Tribunal, and the application of relevant rules and precedents in reaching the final decision to allow the appeal of the assessee.