Section 40A(3) disallowance not sustained where excise rules required bank deposit for country spirit purchases.

Cash payments for country spirit purchases were considered in light of section 40A(3) and the West Bengal excise regulatory framework. Because the payment was made by direct deposit into the seller's bank account, the recipient was identifiable, and the payment method was mandated by statutory excise rules, the expenditure was treated as genuine and consistent with the object of the anti-evasion provision. The transaction was held to fall within the protective scope of rule 6DD exceptions, including payments made to the Government in legal tender and payments routed through an agent required to pay on behalf of the payer. The disallowance was therefore deleted.

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Issues: Whether cash payments made for purchase of country spirit were hit by section 40A(3) of the Income-tax Act, 1961 and were liable to be disallowed in computing business income.

Analysis: The payment was made to the seller by direct deposit in its bank account in accordance with the West Bengal excise regulatory framework governing supply of country spirit. The transaction was genuine, the recipient was identifiable, and the payment mechanism was mandated by the statutory excise rules. Section 40A(3) is intended to curb unaccounted cash expenditure and tax evasion, and it is to be applied in a manner consistent with its object. In the circumstances, the payment fell within the protective ambit of the exceptions recognised in rule 6DD, including payments made to the Government in legal tender and payments routed through an agent required to make the payment on behalf of the payer.

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

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