Cash payments to a State instrumentality were protected by Rule 6DD(b) and not disallowed under cash-payment restrictions.

Cash payments made for purchase of scrap to a government-controlled corporation treated as a State instrumentality were analysed under section 40A(3) and Rule 6DD(b). Applying the tests of State ownership, deep and pervasive control, public function, and Article 12 status, the Tribunal noted that the payments were genuine and made in the ordinary course of business for auctioned scrap. On that basis, the cash-payment restriction was held inapplicable and the Rule 6DD(b) exception protected the assessee, resulting in deletion of the disallowance.

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Issues: Whether cash payments made to Maharashtra State Road Transport Corporation for purchase of scrap were hit by section 40A(3) of the Income-tax Act, 1961, or were protected by the exception in Rule 6DD(b) as payments to the Government or a State instrumentality.

Analysis: The cash payments were made to a corporation found to be controlled by the State and treated as a "State" within Article 12 of the Constitution of India. The Tribunal applied the tests of governmental ownership, deep and pervasive control, public importance of functions, and the nature of the corporation as an instrumentality of the State. It further noted that the genuineness of the payments was not disputed and that the payments were made in the course of business for auctioned scrap. On that basis, the statutory prohibition in section 40A(3) was held not to apply, and the exception under Rule 6DD(b) was held to protect the assessee.

Conclusion: The cash payments to the State transport corporation were not disallowable under section 40A(3), and the issue was decided in favour of the assessee.

Final Conclusion: The Tribunal sustained relief on the cash-payment issue and upheld deletion of the disallowance, resulting in a partial allowance of the appeals.

Ratio Decidendi: Cash payments made to a government-controlled body that qualifies as a State instrumentality are not hit by section 40A(3) when the transaction is genuine and falls within the Rule 6DD exception.

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