Cash Payment: Disallowance u/s 40A(3) not applicable on payment made to MSEDCL

2. The only issue is to be decided is as to whether the CIT(A), NFAC, Delhi justified in confirming the disallowance made by the AO u/s. 40A(3) on account of cash payment towards electricity bill paid to Maharashtra State Electricity Distribution Company Limited (MSEDCL).

3. I note that the assessee is a firm engaged in the business of hotel and lodging. The assessee conducts its business under the name and style as “M/s. Hotel Rajdhani”. The assessee filed its return of income declaring a total income of Rs.48,500/- and the CPC, Bangalore determined the same at Rs.3,91,250/- inter alia making addition on account of cash payment exceeding Rs.10,000/- u/s. 40A(3) of the Act. The CIT(A) confirmed the same.

4. The ld. AR, Shri Mahavir Atal submits that the MSEDCL is a Government authority and is covered by the exception under Rule 6DD(b) of the Income Tax Rules. In support of its contention, he drew my attention to the profile of MSEDCL at pages 1 and 2 of the paper book. He submits that the MSEDCL though incorporated under the Companies Act in 2005, is a wholly owned corporate entity under the Maharashtra Government. He argued that the cash payment towards electricity bill paid to MSEDCL is to be treated as a payment made to Government covered by Rule 6DD(b) of the Income Tax Rules. He drew my attention to the order of this Tribunal in the case of Smt. Sapna Sanjay Raisoni Vs. ITO reported in 70 taxmann.com 7 (Pune-Trib.) and argued that this Tribunal considering the Article 12 of the Constitution and also the decision of Hon’ble Supreme Court in the case of Som Prakash Rekhi Vs. Union of India reported in AIR 1981 SC 212 held the provisions u/s. 40A(3) is not attracted on the cash payment made to Government authorities and the Rule 6DD(b) is applicable to the present case. He drew my attention to the case laws provided in the paper book in the case of Sumit Industries in ITA No. 12/JODH/2018 of ITAT Jodhpur Bench and in the case of Vinod Arora reported in 137 taxmann.com 450 of ITAT Amritsar Bench and argued that the finding therein rendered by the various Benches of the ITAT is applicable to the facts on hand. The ld. DR supported the order of CIT(A).

5. Heard both the parties and perused the material available on record.

A similar issue based on same identical facts, this Tribunal decided the issue in favour of the assessee in the case of Aakash Petroleum in ITA No. 134/NAG/2021 for A.Y. 2018-19 vide order dated 15-12-2022 by holding that the provisions u/s. 40A(3) of the Act are not attracted to the cash payment made to MSEDCL. The relevant portion of the said order of Tribunal is reproduced here-in-below for ready reference :

“6. Heard both the parties and perused the material available on record. We note that the bill dated 17-02-2018 issued by the SNDL to the assessee at page 24 of the paper book, wherein, it is reflected that it is a MSEDCL’s franchisee. Further, the receipt dated 26-02-2018 issued by SNDL is at page 25 of the paper book, on perusal of the same it is reflected that SNDL, Nagpur is a distribution franchisee of MSEDCL. On an examination of both the bill and receipt placed on record by the assessee clearly shows that SNDL is a franchisee for distribution of electricity on behalf of the MSEDCL which is a fully owned Company of the State of Maharashtra. The definition of franchisee is provided at Point No. 27 of the Electricity Act at page 15 of the paper book, explains that persons authorized by a distribution licensee to distribute electricity on its behalf in a particular are is called franchisee. Therefore, it is clear that the SNDL in the capacity of franchise distributing electricity on behalf of the MSEDCL, in the same way the bill was issued by the SNDL in the capacity of franchisee for collection of electricity charges on behalf of the MSEDCL, receipt was issued on payment of charges, in our opinion is covered under exception provided under Rule 6DD(b) of the Rules.

7. The profile of MSEDCL is at pages 21 and 22 of the paper book, on perusal of the same, it is noted that it is a wholly owned corporate entity under the Maharashtra Government incorporated in 2005 restructuring the erstwhile Maharashtra State Electricity Board to distribute electricity from the end point of transmission to the end consumers. Further, it is observed that the MSEDCL is a public company in the category of State Government Company with the main objectives of developing, operating and maintenance of distribution system for supplying electricity to the consumers in its area of supply. Further, we note that it is a deemed distribution licensee u/s. 14 of the Electricity Act, 2003 in order to achieve carrying out the supply of power to the end users as well as maintaining the wire business for supply of such power.

8. The MSEDCL entered into an agreement with Spanco, in turn the Spanco forms Spanco Nagpur Discon Limited (SNDL) to look after power distribution in Nagpur city. MSEDCL signed an agreement between Spanco and SNDL. The said agreement entered by the MSEDCL is to supply reliable power to Nagpur city and Spanco Limited is answerable for its obligations for MSEDCL. Therefore, it is clear from the profile of MSEDCL and its agreement with SNDL as a franchise supplying power to the end consumers in the Nagpur city. Further, as already discussed above, the receipt raised by the SNDL at page 25 of the paper book clearly discloses that SNDL as franchise for MSEDCL for distribution of electricity. Thus, it can be safely concluded that the payment to SNDL on account of electricity charges is deemed to be payment receiving on behalf of MSEDCL.

9. Coming to the order of this Tribunal in the case of Smt. Sapna Sanjay Raisoni (supra), the facts therein are that the assessee was engaged in the business of purchase and sale of scrap from various Government organizations. The AO disallowed cash payments exceeding Rs.20,000/- for the purchase of scrap from MSRTC. The CIT(A) upheld the findings of AO. The Tribunal held that MSRTC is a “State” within the meaning of Article 12 of the Constitution of India and the provisions of section 40A(3) are not attracted on the cash payments made by the assessee therein to MSRTC. The ld. AR argued that the MSEDCL is to be treated as “State” within the ambit of Article 12 of the Constitution of India and the order of Tribunal is applicable to the facts on hand. The ld. DR argued that the SNDL was assessed in the Central Division of Mumbai, cannot be considered as “State”. The ld. AR drew our attention to the decision of Hon’ble Supreme Court in the case of Rajasthan State Electricity Board reported in 1967 AIR 1857, on careful reading of the said decision, we note that the Hon’ble Supreme Court was pleased to explain the “other authorities” in Article 12, will, include all constitutional or statutory authorities on whom powers are conferred by law. Further, it is not at all material that some of the powers conferred may be for the purpose of carrying on commercial activities. The State, is itself envisaged as having the right to carry on trade or business as mentioned in Article 19(1)(g) of the Constitution of India. The Hon’ble Supreme Court further observed that the circumstance that the Board under the Electricity Supply Act is required to carry on some activities of the nature of trade or commerce does not, therefore, give any indication that the Board must be excluded from the scope of the word “State” as used in Article 12.

10. Now, let us refer to the decision of Hon’ble High Court of Rajasthan at Jaipur Bench in the case of CIT Vs. Kalyan Prasad Gupta (supra) as relied on by the ld. AR, on careful reading of the same, we find that the Government of Rajasthan has granted contract to collect the royalty to the contractor. The assessee had paid Rs.64,00,384/- as royalty to the State Government and as per policy of the State Government, royalty is collected by the contractor on behalf of the Government. The 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 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).

11. 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.”

6. In the light of the above, I find the facts and circumstances of the present case are similar to the facts and circumstances in the case of Aakash Petroleum (supra). Therefore, I hold that the 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. Thus, the order of CIT(A) is set aside and the addition confirmed thereon is deleted and the grounds raised by the assessee are allowed.

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