Section 40A(3) disallowance fails where cash payments follow a statutory excise scheme and remain fully traceable.

Cash deposits made by retail vendors into the wholesale licensee's bank account for country spirit purchases, where mandated by the West Bengal Excise Rules and the governing notification, were treated as genuine, traceable payments made under a statutory scheme. The identifiable payee, prescribed banking channel, and direct deposit trail brought the transactions within the rule 6DD exceptions, including payment under legal compulsion and through an agent acting under statutory control. On that basis, section 40A(3) disallowance was held not sustainable and the additions were deleted.

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Issues: Whether cash deposits made by the assessee in the bank account of the wholesale licensee for purchase of country spirit were liable to disallowance under section 40A(3) of the Income-tax Act, 1961, or were covered by the exceptions in rule 6DD of the Income-tax Rules, 1962.

Analysis: The assessee's payments were made pursuant to the West Bengal Excise Rules, 2005 and the notification governing supply of country spirit, which required retail vendors to deposit duty, cost price and bottling charges to the credit of the wholesale licensee through the prescribed banking mode. The transactions were found to be genuine, the identity of the payee was established, and the cash was deposited directly into the payee's bank account. The purpose of section 40A(3) is to curb evasion and untraceable cash dealings, not to penalize bona fide transactions where the payee is identifiable and the payment trail is clear. On the facts, the payment was treated as falling within the exceptions for payment to Government under legal compulsion and payment through an agent acting under a statutory scheme.

Conclusion: The disallowance under section 40A(3) was not sustainable and the assessee's claim succeeded.

Final Conclusion: The cash payments made under the statutory excise were held to be exempt from the rigour of section 40A(3), and the additions made in all the years under appeal were deleted.

Ratio Decidendi: Where a payment is genuinely made through a statutorily mandated channel to an identifiable recipient acting under government-controlled excise regulations, and the payment trail is fully traceable, section 40A(3) does not apply if the transaction falls within the relevant rule 6DD exceptions.

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