KSEB is "State": ITAT Rules Cash Payments to Govt. utilities Fall u/s 40A(3) Exception, Deletes Disallowance [Read Order]

The Income Tax Appellate Tribunal ( ITAT ), Cochin Bench has deleted a disallowance made against a business for paying its electricity bill in cash.

The tribunal ruled that the Kerala State Electricity Board (KSEB) qualifies as ‘State’ and thus, payments made to it are exempt from the restrictions that normally apply to large cash expenditures under the Income Tax Act.

Mina Wood Industries, a partnership firm engaged in manufacturing and trading food items. For the assessment year 2015-16, the firm filed its return declaring an income of approximately Rs. 1.93 lakh. The Income Tax Officer, however, completed the assessment at a much higher income of Rs. 15 lakh.

This was due to a disallowance of Rs. 13,06,452 under Section 40A(3) of the Act, which prohibits deductions for any expenditure exceeding a specified amount if it is made in cash. The payment in question was made in cash to KSEB for electricity charges. The firm’s appeal to the Commissioner of Income Tax (Appeals) was unsuccessful, leading to the appeal before the ITAT.

During the hearing, no one appeared on behalf of the assessee firm to argue the case. The tribunal, however, proceeded to examine the legal grounds based on the appeal memo and the arguments of the senior departmental representative. The core issue was whether the cash payment to a state utility like KSEB fell under the exceptions to the stringent rules of Section 40A(3).

The bench, comprising Judicial Member Keshav Dubey and Accountant Member Inturi Rama Rao, delved into the provisions of Rule 6DD of the Income Tax Rules, which lists exceptions to the cash payment disallowance. They focused on clause (b) of the rule, which explicitly states that no disallowance shall be made for any payment made to the government. The key question was whether KSEB, a state government undertaking, could be considered ‘government’ for this purpose.

The tribunal answered in the affirmative, relying on established legal principles. It noted that KSEB is considered to be a ‘State’ within the meaning of Article 12 of the Constitution of India. This classification brought the cash payment squarely within the exception provided under Rule 6DD(b).

To support this conclusion, the bench referred to past decisions, including the decision by the Delhi High Court in the case of CIT v. SRC Aviation P. Ltd. (2013). Gujarat High Court’s CIT V. Aravind Mills Ltd. (2014). Consequently, the tribunal held that the addition made by the tax authorities was unsustainable and ordered its deletion.

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