Section 40A(3) exception applied where genuine payments to a State-appointed licensee were treated as payments to Government.

Payments made by a retail vendor of country spirit into the bank account of a State-appointed wholesale licensee were treated as genuine and traceable, with the recipient identified without dispute. The article explains that the wholesale licensee acted as an agent under the excise regulatory scheme, so the payments were, in substance, payments reaching the Government. On that basis, the anti-evasion purpose of section 40A(3) was not defeated, and the case was said to fall within the recognised exceptions in Rule 6DD(b) and Rule 6DD(k). The stated result is that disallowance under section 40A(3) was not sustainable and the addition was deleted.

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Issues: Whether the disallowance under section 40A(3) of the Income-tax Act, 1961 was justified where the assessee, a retail vendor of country spirit, made payments into the bank account of the wholesale licensee appointed by the State Government under the excise regulatory scheme.

Analysis: The transactions were genuine and the recipient was identified without dispute. The payment mechanism was regulated by the State excise framework, under which the wholesale licensee collected the price and allied charges on behalf of the State. In the facts, the wholesale licensee functioned as an agent of the State Government, and the payments made to its account were, for practical purposes, payments reaching the Government. The object of section 40A(3), as reflected in CBDT Circular No. 6P dated 06.07.1968, is to prevent tax evasion and concealment of the payee's identity through cash payments. That object was not frustrated here, and the case fell within the statutory exceptions recognised in Rule 6DD(b) and Rule 6DD(k) of the Income-tax Rules, 1962.

Conclusion: The disallowance under section 40A(3) was not sustainable and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded and the addition made on account of section 40A(3) was deleted.

Ratio Decidendi: Where payment is made to a State-appointed wholesale licensee acting as an agent under a regulatory scheme, and the transaction is genuine with the payee's identity and fund trail established, section 40A(3) does not apply if the payment falls within the recognised exceptions under Rule 6DD.

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