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Issues: Whether the disallowance made under section 40A(3) of the Income-tax Act, 1961 was sustainable where the purchases were supported by deposit slips and the payments were made in the manner required by the liquor licensing arrangement, attracting the exceptions in Rule 6DD of the Income-tax Rules, 1962.
Analysis: The payment deposits were recorded as made directly into the sellers' accounts, and the genuineness of the purchases was not doubted. The Tribunal noted that the liquor business operated under a regulated system in which deposit of sale consideration was required before lifting goods from the bottling plants. The Revenue did not distinguish the earlier Tribunal decision relied on by the first appellate authority, nor did it show any change in facts or law. In these circumstances, the case fell within the protection of the relevant Rule 6DD exceptions and the disallowance under section 40A(3) could not be sustained.
Conclusion: The deletion of the disallowance was upheld and the issue was decided in favour of the assessee.
Ratio Decidendi: Where cash payment is made in the course of a regulated business under a bona fide commercial arrangement and the transaction falls within the exceptions under Rule 6DD, disallowance under section 40A(3) cannot be sustained.
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