Rule 6DD protection for genuine cash payments through a statutory excise licensee under a regulated liquor scheme

Cash deposited directly into the bank account of a statutory wholesale licensee under a government-controlled excise scheme was treated as a genuine, traceable payment made in the course of a regulated trade. The analysis held that section 40A(3) is aimed at curbing unaccounted cash dealings and tax evasion, but that payments made under a statutory mandate, including through an authorised intermediary, may fall within the liberal construction of Rule 6DD. On that basis, the disallowance was not sustainable because the payment was regarded as covered by the relevant exception and therefore not liable to addition.

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Issues: Whether the disallowance made under section 40A(3) of the Income-tax Act, 1961 was justified in respect of cash payments deposited directly into the bank account of the wholesale licensee for purchase of country liquor, having regard to the West Bengal Excise regime and the exceptions in Rule 6DD of the Income-tax Rules, 1962.

Analysis: The payment was made in the course of a regulated trade in country spirit, where the State Excise notification and rules required the retail vendor to pay the duty, cost price and bottling charges through the wholesale licensee and not directly into the local treasury. The transaction was found to be genuine, the identity of the recipient was established, and the cash was deposited directly into the bank account of the licence holder. The reasoning adopted that section 40A(3) is intended to curb unaccounted cash dealings and tax evasion, and that genuine, regulated payments made under a statutory scheme fall within the liberal construction of Rule 6DD. The payment was treated as falling within the exception for payments made to the Government under legal tender and the allied exception for payment through an agent acting under the statutory mandate.

Conclusion: The disallowance under section 40A(3) was not sustainable, and the deletion of the addition was in law.

Ratio Decidendi: Where cash is deposited directly into the bank account of a statutory wholesale licensee under a government-controlled excise scheme, and the transaction is genuine and traceable, the payment falls within the protective ambit of Rule 6DD and cannot be disallowed under section 40A(3).

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