Cash payment disallowance under income-tax law depends on strict application of the narrow cash-payment exception.

Cash payments for bottling charges were considered against the disallowance rule in section 40A(3), which denies deduction for expenditure paid otherwise than by account payee cheque or bank draft above the prescribed limit. Rule 6DD(j) was described as a narrow exception available only where cheque or draft payment was impracticable or caused genuine difficulty in exceptional or unavoidable circumstances, and where genuineness and identity of the payee were proved. Rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967 was treated as governing liquor sales by a licencee, not purchases from bottling agents or the Government, so the claimed cash-compulsion did not apply and the disallowance was attracted.

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Issues: Whether cash payments made towards bottling charges were disallowable under section 40A(3) of the Income-tax Act, 1961, or were saved by rule 6DD(j) of the Income-tax Rules, 1962 on the footing that rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967 required cash-only transactions.

Analysis: Section 40A(3) disallows deduction where expenditure above the prescribed limit is paid otherwise than by account payee cheque or bank draft. Rule 6DD(j) creates a limited exception where payment by cheque or draft was not practicable, or would have caused genuine difficulty, due to exceptional or unavoidable circumstances, and the assessee also proves genuineness of payment and identity of the payee. Rule 14 of the Karnataka Excise Licences (General Conditions) Rules, 1967 governs sale of liquor for cash by a licencee and does not govern purchases made by the assessee from bottling agents or the Government. As the alleged cash-compulsion under rule 14 did not apply to the purchase transaction, the case did not fall within rule 6DD(j).

Conclusion: The cash payments were not protected by rule 6DD(j) and the disallowance under section 40A(3) was attracted; the Revenue succeeded.

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