Understanding Income Tax: Disallowance of Cash Payments to Electricity Boards for Electricity charges under Section 40A(3)
In the realm of Income Tax, one topic that sparks significant debate is whether cash payments exceeding Rs. 10,000 to electricity boards attract disallowance under section 40A(3) in conjunction with Rule 6DD. This article delves into the specifics of Rule 6DD, clarifies the treatment of payments to government entities, and explores relevant case laws to shed light on this complex issue.
Let’s clarify what is stated under Rule 6DD: “There would be no disallowance if the payment is made to the Government.” Nowhere does it state that payment to government entities would also be covered here.
Unfortunately, the word “Government” has not been defined under the Income Tax Act. It would be wise to adopt the definition stated under other taxation acts in India. The next important taxation act would be the GST Act. Let’s understand the government’s stance in the GST Act. Corporations formed under the Central or a State Act, various companies registered under the Companies Act, 1956/2013, or autonomous institutions set up by the State Acts will not be covered under the definition of ‘Government’. The Central Board of Excise and Customs (CBEC) has stated this via a FAQ released by them relating to government services. The same stance was taken under the Service Tax Act. The result would be the same if we analyze the definition of “Government” as per the General Clauses Act. Thus, it can be concluded that the electricity board, which would be a company incorporated by the State Government, would not be covered under the definition of Government. Hence, payment to such boards would be outside the scope of the exception of Rule 6DD.
“Seriously? Oh no! I didn’t show the disallowance for the same while computing the tax for a client. Would there be an issue?”
Not really. Before concluding, let’s analyze some case laws that would be directly applicable here.
i The Kolkata ITAT in 2017 held that the payments made to WB State Electricity Distribution Company CANNOT BE DISALLOWED by invoking the provisions of section 40A(3) of the Income Tax Act.
ii he Pune ITAT, in the case of Smt. Sapna Sanjay Raisoni Vs. ITO, relied on the decision of the Hon’ble Supreme Court in the case of Jaswant Sing Charan Singh and held that the MSRTC (Maharashtra State Road Transport Corporation) is a Government, and cash payments made therein are covered by 6DD(b) of the IT Rules r.w.s 40A(3) of the Act.
Conclusion: The topic of disallowance for cash payments to electricity boards under Income Tax remains inconclusive, highlighting the contrasting interpretations found within the statute and case laws. While the statute suggests that electricity boards are not considered part of the government, case laws view them differently. Nonetheless, from a practical standpoint, disallowing such expenses while computing income and tax may not be necessary. By considering the substance over form concept, where the government controls the operations of these boards, one could argue against disallowance. However, it is crucial for Rule 6DD to either include a provision for government entities or provide a clear definition of what constitutes the government. Hopefully, the government will address this matter and provide a clarification in due course.
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