Section 40A(3) disallowance fails for traceable excise-regime cash deposits; unexplained bank balance addition is sustained.

Cash deposits made into the wholesale licensee's bank account for purchase of country spirit were not hit by section 40A(3) because the payment was traceable, made under the prescribed excise regulatory scheme, the recipient was identified, and the transaction was genuine; the payment also fell within rule 6DD exceptions, so the disallowance was deleted. The addition for undisclosed bank balance was sustained because the assessee failed to explain satisfactorily the balance reflected in the bank account and not disclosed in the balance sheet, and no infirmity was found in the lower authorities' addition.

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Issues: (i) Whether disallowance under section 40A(3) of the Income-tax Act, 1961 was sustainable in respect of cash deposits made into the bank account of the wholesale licensee for purchase of country spirit; (ii) Whether the addition made on account of undisclosed bank balance was sustainable.

Issue (i): Whether disallowance under section 40A(3) of the Income-tax Act, 1961 was sustainable in respect of cash deposits made into the bank account of the wholesale licensee for purchase of country spirit.

Analysis: The payment was made directly into the bank account of the wholesale licensee under a regulatory scheme framed by the West Bengal Excise authorities. The transaction was found to be genuine and the identity of the recipient was established. The statutory scheme required payment in the manner prescribed by the excise notification, and the wholesale licensee functioned as an intermediary under the State-controlled distribution mechanism. The object of section 40A(3) is to curb tax evasion and use of unaccounted money, and that object was not frustrated where the payment was traceable and made in the prescribed regulatory framework. The payment also fell within the recognised exceptions under rule 6DD.

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

Issue (ii): Whether the addition made on account of undisclosed bank balance was sustainable.

Analysis: The assessee did not furnish a satisfactory explanation for the bank balance reflected in the Corporation Bank account and not shown in the balance sheet. On the material before it, no infirmity was found in the addition made by the lower authorities.

Conclusion: The addition on account of undisclosed bank balance was sustained against the assessee.

Final Conclusion: The appeal relating to the cash purchase disallowance succeeded, while the addition relating to the bank balance was upheld, resulting in only partial relief to the assessee.

Ratio Decidendi: Where a cash payment is made through a traceable bank deposit under a statutory excise payment regime, and the transaction is genuine with the recipient identified, section 40A(3) is not attracted if the payment falls within the rule 6DD exceptions and does not defeat the anti-evasion object of the provision.

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