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2016 (6) TMI 417 - ITAT PUNE

2016 (6) TMI 417 - ITAT PUNE - TMI - Applicability u/s 40A(3) - payments made in cash by the assessees to MSRTC for purchase of scrap in auction - Held that:- 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.

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 .....

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e can be made u/s.40A(3) in the facts of the present case.

Our view is fortified by the decision rendered in the case of Sri Laxmi Satyanarayan Oil Mill Vs. CIT (2014 (8) TMI 486 - ANDHRA PRADESH HIGH COURT ) no disallowance can be made u/s.40A(3) where genuineness of payment is not doubted. 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) ha .....

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eals 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 assesses 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 .....

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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 ₹ 20,000/- for the purc .....

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n 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 pa .....

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s 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 .....

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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 .....

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enting 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 dismis .....

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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 Governm .....

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s 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 .....

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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 w .....

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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 .....

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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 Vs. 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 o .....

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otected. 4. If the functions of the corporation are of public importance and closely related to governmental functions. It would be a relevant factor in classifying the corporation as an instrumentality or agency of the Government. 5. If a department of a Government is transferred to a corporation, it would be a strong factor supporting this inference of the corporation being an instrumentality or agency of the Government. After applying the cumulative effect of all the relevant factors mentione .....

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. 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 .....

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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 th .....

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ent case. 16. Our view is fortified by the decision rendered in the case of Sri Laxmi Satyanarayan Oil Mill Vs. CIT (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 c .....

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e 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 op .....

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