Disallowance under section for cash payments for recharge vouchers; court upholds genuineness and lifts rigors for payments to telecom vendor.

Disallowance for cash payments was examined where an assessees purchased recharge vouchers and paid a telecommunications vendor in cash; the court found the transactions genuine and lifted the rigors of the cashpayment restriction because the vendor required cash and deposited receipts in bank, and cheque payments would have delayed supply and harmed business. The court applied a liberal view of exceptions to cashpayment rules based on prior judicial guidance but limited that relief to payments made to the telecommunications vendor and not to two other suppliers, resulting in relief to the assessee for those payments.

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Issues: Whether Section 40A(3) of the Income-tax Act, 1961 applies to cash payments exceeding Rs.20,000 made to the principal supplier where payments were made in cash pursuant to the supplier's directive and the payments were genuine and reflected in the parties' accounts.

Analysis: Section 40A(3) disallows deduction for payments above the prescribed limit made otherwise than by account payee cheque or bank draft, subject to prescribed exceptions. Rule 6DD lists specific circumstances where disallowance shall not be made, but the proviso to Section 40A(3) and settled precedents recognise that considerations of business expediency, genuineness of transaction and identity of the payee can exempt a bona fide payment from disallowance. On the facts decided, cash payments were made only because the supplier instructed distributors to pay in cash to avoid delay in receipt of goods, the payments were genuine and recorded in the supplier's account, and the supplier undertook to deposit the amounts in bank. The Tribunal's sole reliance on absence of a literal fit within Rule 6DD(j) overlooked the proviso and authoritative decisions recognising business exigencies and the primacy of genuineness and payee identity.

Conclusion: Section 40A(3) does not apply to the cash payments in question; the disallowance under Section 40A(3) is not warranted in respect of those payments.

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