Cash payments to state-owned electricity company allowed under Section 40A(3) exception Rule 6DD(b)

ITAT Raipur allowed the assessee's appeal regarding disallowance under Section 40A(3) for cash payments made to Chhattisgarh Electric Power Distribution Company Limited for electricity charges. The tribunal held that the company, being a 100% state-owned public sector undertaking with complete government control, qualifies as part of the state government. Since payments were made in Indian currency (legal tender) to a government entity, they fall within the exception under Rule 6DD(b) of Income Tax Rules, 1962, exempting them from Section 40A(3) disallowance provisions.

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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.

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