Section 40A(3) disallowance may be avoided where rule 6DD and the Board circular cover genuine cash-linked purchase payments.

Payments by bearer cheque for genuine purchases were treated as falling within the exceptions to section 40A(3) because the payee's identity was established and the seller refused crossed cheques or crossed demand drafts. Evidence of market shortage and cash-against-delivery practice supported the application of rule 6DD. The assessing authority was also bound by Circular No. 220 dated 31 May 1977, which exempted such payments from the rigour of section 40A(3). On that basis, the disallowance was deleted.

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Issues: Whether the disallowance under section 40A(3) of the Income-tax Act, 1961 was liable to be deleted in view of the exceptions under rule 6DD of the Income-tax Rules, 1962 and the applicable Board circular.

Analysis: The payments were made by bearer cheques for genuine purchases, the identity of the payee was established, and the seller had refused to accept crossed cheques or crossed demand drafts. The assessee supported these circumstances with evidence showing market shortage and cash-against-delivery practice. The statutory exceptions under rule 6DD were therefore attracted, and the assessing authority was also bound by Circular No. 220 dated 31 May 1977, which exempted such payments from the rigour of section 40A(3).

Conclusion: The disallowance was rightly deleted and the claim was saved by the exception under rule 6DD and the Board circular.

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