Purposive reading of cash payment disallowance protects genuine regulated payments made under a statutory supply mechanism.

Cash deposited directly into the wholesale supplier's bank account under the West Bengal excise framework was treated as a genuine payment mechanism, with the payee's identity established and the transaction made in compliance with the prescribed regulatory rules. Applying a purposive reading of the cash payment disallowance provision, the Tribunal noted that the rule is aimed at curbing bogus, unaccounted expenditure and tax evasion, not genuine regulated transactions. It also accepted that the payment fell within the protective scope of the relevant exception for payments made under legal tender and prescribed statutory arrangements. The disallowance was therefore deleted.

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Issues: Whether disallowance under section 40A(3) of the Income-tax Act, 1961 could be sustained where cash was deposited directly in the bank account of the wholesale supplier of country spirit in accordance with the West Bengal excise regulatory framework.

Analysis: The payment was found to be genuine, the identity of the payee was established, and the cash was deposited directly in the bank account of the supplier as mandated by the State excise notification and rules governing country spirit trade. The Tribunal applied a purposive construction of section 40A(3), holding that the provision is intended to curb bogus or unaccounted cash expenditure and tax evasion, not to penalise genuine transactions carried out under a statutory payment mechanism. It further held that the transaction fell within the protective ambit of the Rule 6DD exceptions, particularly where payment is made to the Government in legal tender under the prescribed rules and where the wholesale licensee functioned as an agent in the regulated supply chain.

Conclusion: The disallowance under section 40A(3) could not be sustained and was directed to be deleted.

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