Disallowance u/s 40A(3) for cash payment to BSNL deleted as BSNL is a “State” and payments were made for business expediency-ITAT

Disallowance u/s 40A(3) for cash payment to BSNL deleted as BSNL is a State and payments were made for business expediency and were not doubted – ITAT

ABCAUS Case Law Citation:
ABCAUS 2231 (2018) (03) ITAT

Section 40A(3) of the Income Tax Act, 1961 (the Act) puts an embargo on cash payments in excess of prescribed limit of Rs. 10,000/- (the limit was reduced from Rs. 20000/- by Finance Act, 2017). However, Rule 6DD of the Income Tax Rules 1962 (the Rules) provides for cases and circumstances in which cash payments in excess of prescribed limit can be made otherwise than by an account payee cheque/draft.

Once of the exceptions listed under clause (b) to the Rule 6DD covers the payments made to the Government where such payment is required to be made in legal tender.

In the instant case, a controversy arose as to is whether the payments made to Bharat Sanchal Nigam Limited (BSNL) being the “Government” were covered under the Rule 6DD(b)?

The appellant assessee was engaged in the business of purchase and sale of SIM cards and recharge vouchers. The Assessing Officer (AO) completed his assessment by making addition under section 40A(3) of the Act on account of cash payments made to BSNL.

Being aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A). It was submitted that the payments were made in cash as required by BSNL and that BSNL is a Government company and the genuineness of payments was not not doubted. The payments were made in cash in view of the business expediency. The CIT(A) however upheld the addition made by the Assessing Officer.

Before the Tribunal, it was contended that as per the demand note of BSNL, the assessee was required to make payment in cash and the genuineness of the payment to BSNL was not doubted by the Department. It was further contended that BSNL is a “State” within the meaning of article 12 of the Constitution of India since all the assets of the Deptt. of Telecommunication aiongwith liabilities were transferred to BSNL. All the employees except group A and B employees were absorbed in the BSNL. The remaining employees are on deputation without deputation allowance.

The Tribunal observed that undisputedly, as per the demand note was issued by BSNL the assessee was required to make payments in cash and genuinity of the payments to BSNL was never doubted by the Department.

The Tribunal disagrred with the observation of the CIT(A) that BSNL is not a State within the meaning of Article 12 of the Constitution of India as being contrary to the various judicial pronouncements. The ITAT opined that the definition of State as per Article 12 includes local or other authorities within the territory of India or under the control of the Government of India. Therefore, the BSNL is a body which is an instrumentality of the agency of the Government.  Relying on the order of the coordinate Bench, the Tribunal held that BSNL is a State under Article 12 of the Constitution of India.

It was observed that the assessee was required by BSNL to make payments in cash and the payments made to BSNL were not doubted by the Revenue and that BSNL is a State within Article 12 of the Constitution of India and payments were made in cash for the business expediency of the assessee and as per requirement specified by BSNL.

The ITAT opined that under the above circumstances, even if the assessee did not fall in any of the clause of Rule 6DD, invoking the provisions of section 40A(3) can be dispensed with.

The Tribunal set aside the order of the CIT(A) and deleted the addition made under section 40A(3) of the Act.