Section 40A(3) disallowance not sustained where genuine cash payments in a running account fell within the rule 6DD(j) exception.

Cash payments made in a running account to a sister concern were treated as outside the rigid application of section 40A(3) where the parties were identifiable, the transactions were found genuine, and the material on record supported the need for cash payment. The CBDT circular was read as preventing a harsh disallowance in circumstances covered by rule 6DD(j), and the explanation for cash payment was accepted on the facts. The deletion of the addition under section 40A(3) was upheld and the Revenue's appeals were rejected.

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Issues: Whether disallowance under section 40A(3) of the Income-tax Act, 1961 was justified when the cash payments were made in a running account to a sister concern, the parties were identified, the transactions were found genuine, and the requirement of cash payment was supported by the material on record.

Analysis: The payments were accepted as genuine and identifiable, and the assessee's case fell within the parameters indicated by the CBDT circular and the exception contemplated by rule 6DD(j). The circular was treated as intended to prevent a rigid and harsh application of section 40A(3) where the circumstances justified cash payment, and the explanation that cash payment was required was accepted on the facts.

Conclusion: The deletion of the addition under section 40A(3) was upheld and the Revenue's appeals were rejected.

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