Statutory cash payments under excise control rules fall within Rule 6DD exceptions and escape disallowance under section 40A(3).

Cash payments by a retail liquor vendor to the wholesale licensee under the West Bengal excise supply rules were treated as falling outside section 40A(3) because the payment mechanism was mandated by statute. The wholesale licensee was regarded as an instrumentality or agent of the State under the excise control framework, so the payments were treated as payments to the Government under rule 6DD(b) and, alternatively, as payments to an agent required to make cash payment on the assessee's behalf under rule 6DD(k). The disallowance was therefore deleted and upheld on challenge.

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Issues: Whether cash payments made by the retail liquor vendor to the wholesale licensee, in accordance with the West Bengal excise regulatory framework, attracted disallowance under section 40A(3) of the Income-tax Act, 1961 or fell within the exceptions in rule 6DD.

Analysis: The payments were made pursuant to a statutory scheme under the West Bengal Excise (Supply of Country Spirit on Payment of Duty) Rules, 2005, which required the retail vendor to pay the duty, cost price and allied charges through the wholesale licensee and, in effect, by direct deposit into the licensee's bank account. The Tribunal followed its earlier decision on identical facts and held that the wholesale licensee functioned as an instrumentality or agent of the State under the excise control mechanism. On that basis, the payments were treated as payments to the Government for purposes of rule 6DD(b), and alternatively as payments to an agent required to make cash payment on behalf of the assessee for purposes of rule 6DD(k). Consequently, the statutory prohibition under section 40A(3) was held not to apply to such payments.

Conclusion: The deletion of the disallowance was upheld and the Revenue's challenge failed.

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