Rule 6DD(b) protected cash liquor purchase payments to a government-appointed agent, defeating disallowance under section 40A(3).

Cash payments for liquor purchases made to a State Government-appointed agent were treated as payments to the Government for the purposes of the excise supply arrangement, so the exception in Rule 6DD(b) applied. On that footing, the disallowance under section 40A(3) for cash purchases of liquor was not sustainable, and the addition was deleted in favour of the assessee.

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Issues: Whether the disallowance made under section 40A(3) for cash purchases of liquor was sustainable, or whether the payments made to the State Government's appointed agent were protected by the exception under Rule 6DD(b).

Analysis: The cash payments were made for purchases from a government-appointed agent engaged in the statutory supply of country liquor. The payments were treated as payments to the Government itself for the purpose of the applicable excise arrangement, and the exception under Rule 6DD(b) was held to apply. In view of the covered nature of the transactions, the disallowance under section 40A(3) could not be sustained.

Conclusion: The addition made under section 40A(3) was deleted, and the issue was decided in favour of the assessee.

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