IT APPEAL NOS. 1267 TO 1278 (PN.) OF 2014
[ASSESSMENT YEARS 2006-07 TO 2008-09]

R.K. PANDA, ACCOUNTANT MEMBER 
AND VIKAS AWASTHY, JUDICIAL MEMBER

Sunil Pathak for the Appellant. 
Aseem Sharma for the Respondent.

ORDER

Vikas Awasthy, Judicial Member - These bunch of 11 appeals are filed by the assessees. Since common issues arising from same set of facts are involved in these appeals, these appeals are taken up together for adjudication.

2. In the present set of appeals, the assessees have raised nine grounds. However, a perusal of grounds of appeal would show that these elaborate grounds involve two issues only. Ground No.1 to 5 relate to disallowance u/s.40A(3) in respect of cash payments made to Maharashtra State Road Transport Corporation (in short "MSRTC") and other Govt. Organisations. In Ground Nos. 6 to 8 the assessees have assailed the findings of CIT(A) in disallowing interest u/s.36(1)(iii), on interest free advances made to related parties from interest bearing borrowed funds. The ground No.9 is general in nature.

The Ld. Authorised Representative submitted at the outset that he would not be pressing grounds relating to disallowance of interest u/s.36(1)(iii) of the Act. In view of the statement made at Bar by the Ld. Authorised Representative of the assessees, ground Nos. 6 to 8 in the appeals are dismissed as 'not pressed'.

3. The facts in brief as emanating from records in these appeals are : The assessees are engaged in the business of purchase and sale of scrap from various Government organizations. During the course of scrutiny assessment proceedings the AO made addition/disallowance in the income returned by the assessees inter-alia on the ground that the assessees have made cash payments exceeding Rs.20,000/- for the purchase of scrap from MSRTC. These cash payments are in violation of the provisions of section 40A(3) of the Act.

4. Aggrieved by the assessment orders in the impugned assessment years, the assessees filed appeals in the respective cases before the Commissioner of Income Tax (Appeals). The CIT(A) upheld the findings of the AO on the issue.

Against the findings of CIT(A), the assessees filed second appeal before the Tribunal. The Tribunal vide order dated 20-05- 2013 held that MSRTC is a "State" within the meaning of Article 12 of the Constitution of India, and remitted the matter back to CIT(A) for deciding the issue afresh in the light of observations made. The CIT(A) in second round of litigation again decided the issue against the assessees by placing reliance on various decisions. Hence, the present appeals.

5. Shri Sunil Pathak appearing on behalf of the assessees submitted that the CIT(A) has erred in holding that the assessees have violated the provisions of section 40A(3) and the payments made by the assessees do not fall in the exceptions provided under Rule 6DD of the Income Tax Rules. In the present case, the assessees have made cash payments on account of purchase of scrap from MSRTC, Maharashtra State Electricity Board (in short MSEB) and other Government organizations. Mainly the purchase of scrap is from MSRTC. All these State Corporations fall within the meaning of "State" under Article 12 of the Constitution of India. MSRTC was established by the State Government, as per the provisions of section 3 of the Road Transport Act, 1950. It is a State owned Transport Corporation. The entire share capital of MSRTC is funded by the State Government and Central Government. There is no public participation. The State Government has full control over the policy decisions and the management of MSRTC. As per the definition of "State" given in the Constitution, it is clear that any authority which is under the control of the Government can also be considered as part of the State. The words and phrases are to be interpreted in the manner which are widely accepted. Since MSRTC is a State owned Transport Corporation, for intents and purposes it is considered an inseparable limb of the State Government and is a 'State' as per Article 12 of the Constitution of India. In support of his submissions the Ld. Authorised Representative placed reliance on the decision of the Hon'ble Supreme Court of India in the case ofCommissioner of Sales Tax v. Jaswant Singh Charan Singh reported as 1967 AIR 1454 SC. The Ld. Authorised Representative submitted that the Tribunal in the first round of litigation has held that MSRTC is a "State" within the meaning of Article 12 and therefore the provisions of section 40A(3) will not apply on the cash payments made by the assessee to MSRTC.

6. The Ld. Authorised Representative further submitted that the Department, has not raised any doubt over the genuineness of the payments. The only objection raised by the Department is that there is violation of the provisions of section 40A(3) of the Act. The genuineness of the payments are not doubted by the Department, therefore, no disallowance could be made. In support of his submissions the Ld. AR placed reliance on the following decisions :

7. On the other hand Shri Aseem Sharma representing the Department vehemently supported the findings of the CIT(A). The Ld. Departmental Representative submitted that the CIT(A) in a detailed and well reasoned order after considering various judgements on the issue, has rightly come to the conclusion that MSRTC is not a "State" and thus the payments made in cash to MSRTC by the assessees will fall within the purview of section 40A(3) of the Act. The Ld. Departmental Representative vehemently defended the order of CIT(A) and prayed for dismissing the appeals of the assessees.

8. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. The only issue before us for adjudication in these appeals is; Whether the payments made in cash by the assessees to MSRTC for purchase of scrap in auction would attract the provisions of section 40A(3) of the Act ?

9. In the first round of litigation, same question was raised before the Tribunal in ITA No.845 & 1471/PN/2010, ITA No.836/PN/2010 & ITA No.1241/PN/2011, ITA No.834/PN/2010 & ITA No.1242/PN/2011, ITA No.1472/PN/2010. The Tribunal vide consolidated order dated 20-05-2013 had remitted the issue back to the file of CIT(A) for deciding it afresh in the light of the observations made. The relevant extract of the observations made by the Tribunal are as under :

'10. We are unable to accept the argument canvassed by the Ld. DR. The Article 12 of the Constitution reads as under:

"the state includes the Government and Parliament of India and Government and the Legislature of the states and all local or other authorities within the territory of India or under the control of the Government of India."

11. The definition of the State under Article 12 has come for the consideration on number of occasions before the Hon'ble Supreme Court. The State consists of three departments, the Legislature, the Executive and the Judiciary. We need not go into all the limbs of the State as only the limited issue before us is whether the term Government used in clause (b) to Rule 6DD includes even the autonomous bodies which partakes the character of instrumentalities of the Government. The core test to be applied whether a particular Corporation which is autonomous body is a part of Government, to be seen in the context of degree of control over management and policy decisions. We find that in the case of MSRTC as per the certificate of the share capital filed before us, the entire share capital is contributed by the State Government and the Central Government and there is no private participation. We further find that MSRTC is incorporated under special legislation i.e., Road Transport Corporation Act, 1950. We have examined the provisions of the said enactment. As per section 5 of the said Act, the State Government is only having power to appoint the Chairman and other Members in the Managing body. There is a full control of the State Government on the policy decisions as well as management. In our opinion, if we apply the test of the control and management as well as the equity participation, MSRTC is a State within Article 12 of the Constitution. Applying the above test, the Hon'ble Supreme Court has held, as discussed hereinabove, that the autonomous bodies like State Road Transport Corporation or Warehousing Corporation where there is a full control by the Government, either Central or State, these are the instrumentalities of the Government only.

12. The term Government is very much wide under the constitutional set up. Government may be Central or State, or it may be Local Government which is envisaged by our Constitution, like Zilla Parishad, Municipal Corporations, Municipal Councils, Panchayat Samithis, etc. The Public Works Department is part of the Government. In our opinion, this aspect has not been considered by the authorities below and they have closed door to the assessees to make out the case for examination under Rule 6DD. We are, therefore, of the opinion that in the light of our above discussion, the plea of the assessees need reconsideration by the Ld. CIT(Appeals). We, therefore, set aside the issue in respect of the disallowance made u/s.40A(3) to the file of the Ld. CIT(A) to decide the same de novo in the light of our above observations and discussion. Accordingly, the relevant Grounds taken by the assessees in all these appeals are allowed for statistical purposes. Needless to say the CIT(A) is directed to give opportunity of being heard to the assessees as per the principles of natural justice.'

10. A bare perusal of Article 12 shows that the definition of "the State" given in Article is inclusive and not exhaustive. "The State" includes :

11. The expression "other authorities" used in Article 12 is neither defined in the Constitution of India nor in any other statute. Therefore, the Hon'ble Supreme Court of India and the Hon'ble High Court have interpreted this expression in various judgements. The Hon'ble Supreme Court of India while interpreting the expression "other authorities" in the case of Som Prakash Rekhi v. Union of India reported as AIR 1981 SC 212 have culled out certain tests to determine as to when a Corporation should be said to be an instrumentality or Agency of the Government. The tests laid down by the Hon'ble Apex Court are summarized as under :

After applying the cumulative effect of all the relevant factors mentioned above, if the body is found to be an instrumentality of the agency of the Government, it would be an authority included in term "State" under Article 12 of the Constitution of India. However, the tests indicated by the Hon'ble Apex Court in the case of Som Prakash Rekhi are merely indicative and not absolute and thus, have to be applied discretely. If any body or organisation falls within the criteria as laid down by the Hon'ble Apex Court it can be considered that it falls within the term "State".

12. If these tests are applied on the MSRTC, we observe that the Corporation satisfies majority of the conditions. The entire share capital of MSRTC is owned by State and Central Government. The State has full control over the working, policies and the framework of the Corporation. The Corporation is providing public transport facility to the subjects of the State, even in for remote areas, where sometimes it is not economically viable to provide transport service. Thus, it is providing vital function of public importance.

13. The Hon'ble Bombay High Court in the case of Maharashtra State Road Transport Corpn. v. Diwakar Madhukarrao Malkapure and Others in Writ Petition No.2762/2012 decided on 12-11-2013 while dealing with an issue relating to payment of compensation to one of the employee of MSRTC has observed as under :

"The Petitioner employer is a body Corporate and is State within the meaning of Article 12 of the Constitution of India and therefore it has to act as a Model Employer."

14. Thus, in view of the facts of the case and in the light of observations of the Hon'ble Bombay High Court, we are of the considered opinion that the CIT(A) has erred in holding that MSRTC is not a "State" and cash payments made to MSRTC are hit by the provisions of section 40A(3) of the Act.

15. In so far as genuineness of the payments to MSRTC by the assessees, they are not disputed by the department. Once it has been held that MSRTC is a "State" within the meaning of Article 12 of the Constitution of India, the payments cannot be disallowed u/s.40A(3). The provisions of Rule 6DD would protect the assessee from such disallowance. The assessees have explained that cash payments have been made to MSRTC on successful bid of scrap auction. The payments are made in cash immediately to guard against the pilferage of scrap. Thus, cash payments are also made out of business expediency. Therefore, in our considered view, no disallowance can be made u/s.40A(3) in the facts of the present case.

16. Our view is fortified by the decision rendered in the case of Sri Laxmi Satyanarayan Oil Mill (supra). The Hon'ble High Court has held that no disallowance can be made u/s.40A(3) where genuineness of payment is not doubted. The relevant extract of the observation of the Hon'ble Court are as under :

"18. . . . . . . . . . . . . . . . . . Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque 0n crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are no taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions."

17. In the case of Gurdev Garg (supra) the Hon'ble Punjab & Haryana High Court has held that where genuineness of transaction made in cash in excess of Rs.20,000/- was not disbelieved by the authorities, the same cannot be disallowed u/s.40A(3) of the Act.

18. In view of the facts of the case and the case laws discussed above, we are of the considered view that the provisions of section 40A(3) are not attracted on the cash payments made by the assessees to MSRTC. The provisions of Rule 6DD (b) provide exception to Section 40A(3) where cash payments are made to Government. The aforesaid exception will operate in the case of the assessee. Thus, the CIT(A) has erred in holding that disallowance u/s.40A(3) is to be made in respect of cash payments made by assessees to MSRTC. The impugned orders are set aside and the AO is directed to delete the disallowing made u/s.40A(3) in the impugned assessment years. Accordingly, ground Nos. 1 to 5 raised in the appeals are allowed.

19. In the result, the appeals of the assessees are partly allowed.