Cash payments to a government undertaking may escape section 40A(3) disallowance where genuineness and Rule 6DD relief are established.

Cash payments to a wholly owned government undertaking were held not to attract disallowance under section 40A(3) on the facts, because the expenditure was genuine and the Rule 6DD exception could not be treated as rigidly exhaustive in that context. The Tribunal accepted that, where the payee is a genuine electricity distribution undertaking owned by the Government, the statutory mischief of section 40A(3) may not apply if the surrounding facts justify relief under Rule 6DD. The disallowance was therefore deleted.

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Issues: Whether cash payments made to a wholly owned government undertaking attracted disallowance under section 40A(3) and whether the payments were saved by Rule 6DD.

Analysis: The payments were made in cash to the electricity distribution undertaking, which was treated as a wholly owned government entity. The Tribunal accepted the genuineness of the expenditure and held that the exception under Rule 6DD could not be read narrowly as exhaustive in the given facts. On that basis, the statutory disallowance was found unsustainable.

Conclusion: The disallowance under section 40A(3) was deleted and the assessee succeeded on the sole issue.

Ratio Decidendi: Cash payments to a genuine payee that is a wholly owned government undertaking may fall outside the mischief of section 40A(3) where the facts justify application of Rule 6DD and the exception is not to be treated as rigidly exhaustive.

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