Cash payments to a State instrumentality can fall within the rule 6DD exception and avoid disallowance under section 40A(3).

Section 40A(3) is not absolute and must be read with rule 6DD, which exempts payments made to the Government. Cash payment to the Kerala State Electricity Board was treated as payment to a State instrumentality within Article 12, so the statutory exception applied. On that basis, the cash payment was not liable to disallowance under section 40A(3), and the addition was deleted in favour of the assessee.

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Issues: Whether cash payment made to the Kerala State Electricity Board for electricity charges attracted disallowance under section 40A(3) of the Income-tax Act, 1961, or fell within the exception under rule 6DD of the Income-tax Rules, 1962.

Analysis: Section 40A(3) is not absolute and has to be read with rule 6DD, which carves out exceptions where payment is made to the Government. The payment in question was made to a State Government undertaking, which was treated as a State instrumentality within the meaning of Article 12 of the Constitution of India. On that basis, the cash payment was held to fall within the statutory exception.

Conclusion: The disallowance under section 40A(3) was not sustainable and the addition was deleted in favour of the assessee.

Final Conclusion: The appeal was allowed by granting relief to the assessee on the disallowance made for cash payment to the State electricity undertaking.

Ratio Decidendi: Cash payments made to a State Government undertaking that qualifies as a State instrumentality fall within the exception under rule 6DD and are not liable to disallowance under section 40A(3).

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