Tax Audit & Payment to the electricity board for electricity in cash exceeding Rs. 10,000 attracts disallowance u/s 40A(3) read with Rule 6DD

Section 40A(3) provides that any expenditure will not be allowed as deduction if the payment is done in cash for an amount exceeding Rs. 10,000/- in a day.  Rule 6DD of the Income Tax Rules-162 provides an exception to section 40A (3) and covers the situation where no disallowance shall be done in certain cases. It provides in Clause b that if the payment is made to the Government, it would not be subject to disallowance.. In short, payment to Government is allowed in cash U/s 40A(3) read with Rule 6DD.

One may note that the tax auditor are also required to report the disallowance figure u/s 40A(3) in the tax audit report.

Who is “Government” for the purpose of Rule 66D?

One may note that the word “Government” has not been defined under the Income Tax Act. Thus, it would be relevant to import the definition from statute. Let us refer to the GST Act for its definition.

Under the GST Act, Corporations formed under the Central or a State Act or various companies registered under the Companies Act -1956 or 2013 or autonomous institutions set up by the State Acts will not be covered under the definition of ‘Government’.

This has been well clarified by the CBEC in a FAQ released on GST applicability to the Government services. The same view was prevailing when the Service Tax regime was in force.

The outcome would remain the same if we import it from the definition of Government as per the General Clauses Act.

Whether the payment to the electricity board will be covered by the word “Government”? One knows that electricity board may be a company incorporated by the State Government would not be covered under the definition of Govt. Hence, payment to such boards would be outside the scope of exception of Rule 6DD.
In short, one could reasonably conclude that payment to government entities would not be covered by Rule 6DD r.w.r 40A(3). There are certain private distributors as well in few states, certainly they are not covered by any remote possibility under Rule 6DD.

No matter the expenses are genuine or verifiable from documentary evidences without any intention to hide or evade the tax payment, such expenses may be subject to disallowance and tax auditor will also be required to report it.

However, there are two judgments in favour of the Assessee as under:

1. In the case of Smt. Sapna Sanjay Raisoni Vs. ITO, Pune ITAT has 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.The same logic as of payment to MSRTC can be extended to the Other state board as well.
2. The Kolkata ITAT has also 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.The judgment was delivered in 2017.

Author Conclusion:

No matters the above judgment by the ITAT, tax auditor must ensure that the error in tax audit report make them liable for penalty as well U/s 271J. It is better to disallow the same and pay the tax accordingly.