Facts of the Case

The assessee, Pramukh Metal Quarry, filed an appeal against the order dated 31.01.2024 passed by the Addl./JCIT(A), Visakhapatnam for Assessment Year 2008-09, arising out of reassessment proceedings under Sections 147/148. During reassessment, various disallowances were made, including disallowance of interest paid on TDS, VAT and royalty amounting to ₹4,799, disallowance of cash payment of ₹42,879 made to Madhya Gujarat Vij Company Limited (MGVCL) under Section 40A(3), and disallowance of ₹1,76,102 under Section 40(a)(ia) in respect of interest paid by a partner on loans taken in his personal capacity but used for the firm’s business and subsequently reimbursed by the firm. The CIT(A) upheld the disallowances. Aggrieved, the assessee filed an appeal before the Tribunal.

Issues Involved

Whether interest paid on statutory dues such as TDS, VAT and royalty is allowable as business expenditure, whether cash payment of electricity charges to a government utility attracts disallowance under Section 40A(3) or is covered by Rule 6DD, and whether reimbursement of interest paid by a partner on behalf of the firm attracts disallowance under Section 40(a)(ia).

Petitioner’s Arguments

The assessee contended that interest paid on TDS, VAT and royalty is compensatory in nature and not penal, and therefore allowable. It was submitted that cash payment of electricity expenses to MGVCL, a government body, was covered under Rule 6DD as the payment was made in a local area where the assessee was not maintaining bank accounts and was compelled to pay in cash. Regarding disallowance under Section 40(a)(ia), it was argued that the interest was paid by the partner directly to finance companies on loans taken in his personal capacity for business purposes of the firm, and the firm merely reimbursed the partner; hence, provisions of Section 40(a)(ia) were not applicable.

Respondent’s Arguments

The Revenue supported the order of the CIT(A) and contended that statutory interest is not allowable, cash payments violated Section 40A(3), and reimbursement of interest to partner attracted disallowance under Section 40(a)(ia).

Court Order / Findings

The ITAT Ahmedabad held that interest paid on TDS, VAT and royalty is statutory in nature and not allowable as deduction, and therefore upheld the disallowance of ₹4,799.

On the issue of disallowance under Section 40A(3), the Tribunal observed that the cash payment of ₹42,879 was made to MGVCL, a government utility, towards electricity expenses. The Tribunal held that such payment is covered by Rule 6DD and therefore does not attract disallowance under Section 40A(3). Accordingly, the disallowance was deleted.

With regard to disallowance under Section 40(a)(ia), the Tribunal found that the interest was paid by the partner directly to finance companies on loans taken in his personal capacity but utilised for the firm’s business, and the firm only reimbursed the partner. The Tribunal held that reimbursement of such interest to the partner does not attract provisions of Section 40(a)(ia). Accordingly, the disallowance of ₹1,76,102 was deleted.

Important Clarification

The Tribunal clarified that cash payments made to government bodies towards statutory or utility charges fall within the exception provided under Rule 6DD and are outside the ambit of Section 40A(3). It further clarified that reimbursement of expenses incurred by a partner on behalf of the firm does not amount to payment to a third party attracting TDS provisions under Section 40(a)(ia).

Final Outcome

The appeal filed by the assessee was partly allowed. Disallowance of ₹4,799 towards statutory interest was upheld, while disallowance of ₹42,879 under Section 40A(3) and disallowance of ₹1,76,102 under Section 40(a)(ia) were deleted.

 Link to download order https://www.mytaxexpert.co.in/uploads/1769063798_PRAMUKHMETALQUARRYVADODARAVS.THEINCOMETAXOFFICERWARD125.pdf

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