Cash payment exception under Rule 6DD saved bank deposits made to a government-controlled liquor supplier from disallowance.

Cash deposits made directly into the bank account of a Government-controlled wholesale licensee for purchase of country spirit were examined under section 40A(3) read with Rule 6DD(b) and Rule 6DD(k). Because the supplier operated under a statutory excise regime with payment and warehouse arrangements controlled by excise authorities, the deposits were treated as payments to a Government-regulated authority, or alternatively to an agent required to receive cash on behalf of the principal. On that footing, the cash payment exception applied, so disallowance under section 40A(3) was not attracted and the addition was deleted.

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Issues: Whether disallowance under section 40A(3) of the Income-tax Act, 1961 was sustainable where the assessee made cash deposits directly into the bank account of the supplier for purchase of country spirit.

Analysis: The payment mechanism was examined in the light of Rule 6DD(b) and Rule 6DD(k) of the Income-tax Rules, 1962. The supplier was treated as a wholesale licensee operating under the West Bengal Excise Rules, 2005 and the Bengal Excise Act, 1909, with the warehouse and payment structure controlled by the excise authorities. On that basis, the cash deposits were regarded as payments made to a Government-regulated authority and, alternatively, to an agent required to receive payment in cash on behalf of the principal. The issue was held to be covered by earlier Tribunal decisions on identical facts.

Conclusion: The disallowance under section 40A(3) was not attracted. The deletion of the addition was upheld and the Revenue's challenge failed.

Ratio Decidendi: Where cash is deposited directly into the bank account of a Government-controlled wholesale licensee under a statutory excise payment regime, the payment falls within the exception to section 40A(3) under Rule 6DD of the Income-tax Rules, 1962.

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