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Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash Payments, Exceeding Rs. 2,500 - Assessee-firm made payments, each exceeding Rs. 2,500, to a firm otherwise than by a crossed cheque or crossed bank draft - ITO made additions on ground that these payments fell within mischief of section 40A(3) - Whether ITO was not justified and question of applicability of rule 6DD(j) had to be considered in the light of CBDT Circular No. 220, dated 31-5-1977 - Held, yes FACTS During the assessment year 1970-71, the assessee-firm made certain payments, each exceeding Rs. 2,500, to a firm otherwise than by a crossed cheque or a crossed bank draft, towards the price of cotton waste purchased. The ITO held that these payments fell within the mischief of section 40A(3), and made additions accordingly. Both the AAC and the Tribunal dismissed the assessee's appeals. On reference: HELD The CBDT issued a Circular No. 220, dated 31-5-1977 which illustrated certain cases to which rule 6DD(j) could be stated to be applicable. The underlying idea in citing the cases was that if the seller's identity could be established, it would be possible for the ITO to cross-check whether the transaction in fact had taken place as stated and was of a genuine nature. Even though this circular came to be issued in May 1977, the assessee was justified in pressing it into aid as the circular merely indicated the circumstances in which rule 6DD(j) would be attracted. Accordingly, the matter was remanded to the Tribunal with the direction that it was open to the Tribunal to dispose of the appeal-in the light of the observations made after determining the question on the basis of fresh evidence, if any, in the light of the CBDT's Circular dated 31-5-1977. CASE REVIEW CIT v. Trinity Traders [1987] 163 ITR 381 (Guj.) and CIT v. Indian Molasses Co. Ltd. [1970] 78 ITR 474 (SC) followed and relied upon. CASES REFERRED TO CIT v. Trinity Traders [IT Reference Nos. 102 and 103 of 1975] and CIT v. Indian Molasses Co. (P.) Ltd. [1970] 78 ITR 474 (SC). J.P. Shah for the Applicant. S.N. Shelat for the Respondent. JUDGMENT Ahmadi, J. -The assessee,…

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