Deduction upheld: disallowance under s.40A(3) unjustified where payments before year-end and rule 6DD(j) exceptions apply

HC allowed the assessee's claim and held that disallowance under s.40A(3) was not justified. The court found payments were made in the first year of business before year-end, the payee's identity and transaction genuineness were established, and a certificate explained the commercial necessity for cash payments. The Board's circular is illustrative only; surrounding circumstances and business expediency fall within rule 6DD(j) exceptions. A delay in payment alone did not remove the case from exceptional or unavoidable circumstances, so the deduction cannot be denied.

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Issues Involved:
1. Justification of disallowance u/s 40A(3) of the Income-tax Act, 1961.
2. Interpretation of rule 6DD of the Income-tax Rules, 1962, and applicability of CBDT Circular No. 220 dated May 31, 1977.

Summary:

Issue 1: Justification of disallowance u/s 40A(3) of the Income-tax Act, 1961

The assessee, a wholesale dealer in jaggery, made cash payments exceeding Rs. 2,500 to Mangilal Nathmal, totaling Rs. 37,048. The Income-tax Officer (ITO) disallowed these payments u/s 40A(3) as they were not made by crossed cheque or bank draft. The assessee's explanation that he was new to the business and the parties refused to accept cheques was not accepted by the ITO. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, noting that the payments were made long after the date of purchase, indicating that cash payments were not necessary. The Tribunal partially agreed with the AAC, allowing a reconsideration for Rs. 14,906 but upheld the disallowance for the remaining Rs. 22,098.

Issue 2: Interpretation of rule 6DD of the Income-tax Rules, 1962, and applicability of CBDT Circular No. 220 dated May 31, 1977

Rule 6DD provides exceptions to the disallowance u/s 40A(3) for payments exceeding Rs. 2,500 made otherwise than by crossed cheque or bank draft under exceptional or unavoidable circumstances. The CBDT Circular No. 220 lists illustrative circumstances where rule 6DD(j) would apply, such as when the purchaser is new to the seller or when the seller refuses to accept payment by cheque. The Tribunal noted that the Board's circular is not exhaustive but illustrative, and the ITO should take a pragmatic view considering business expediency and the facts of each case.

The High Court observed that the genuineness of the transactions and the identity of the payee were not disputed by the Revenue. The payments were made in the first year of the assessee's business, and a certificate from the seller indicated the necessity for cash payments. The Court emphasized that the ITO should adopt a practical approach and not deprive the assessee of legitimate deductions due to technicalities. The delay in payment alone does not negate the exceptional circumstances.

Conclusion:

The High Court answered the question in the negative, in favor of the assessee, stating that the delay in making payment does not exclude the case from the ambit of exceptional or unavoidable circumstances u/r 6DD(j). The deduction of the expenditure, otherwise allowable, cannot be denied based on the delay alone. There will be no order as to costs.

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