Law:

Section:

Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD(j) of the Income-tax Rules, 1162 - Business disallowance - Cash payments exceeding Rs. 2,500 - Assessee made certain payments in excess of Rs. 2,500 due to non-availability of bank accounts at places where bank accounts were not available - However, identity of persons to whom payments were made was established and their CST numbers and sales tax registration numbers were also available - Whether those payments were entitled to exemption under section 40A(3) in view of rule 6DD(j) read with clause 4(ii) of Circular No. 220 dated 31-5-1977 of the CBDT - Held, yes Facts For the relevant assessment year, the ITO disallowed a certain expenditure incurred by the assessee on the ground that the payments were made in cash in contravention of section 40A(3). However, the ITO in the course of the order, stated that the payment and the identity of the parties who sold the goods were established, and the payments were made by hundis mostly, and the CST number and the sales tax numbers of the vendors were furnished. It was also further stated by the ITO that the assessee might have paid because he had no bank account in places where the payment was made. On appeal, the Tribunal confirmed the order of the ITO. On reference: Held The absence of a bank account was a crucial circumstance and should have been considered as an exceptional circumstance to avail exemption under rule 6DD. Accordingly, in the instant case, the assessee was entitled to exemption for the said payments in view of rule 6DD(j) read with clause 4(ii) of Circular No. 220 dated 31-5-1977. [See Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., page 404.] M. Suryanarayana Murthy and A.V.K. Koundinya for the Applicant. S.R. Ashok for the Respondent. JUDGMENT Rao, J. -Under section 256(1) of the Income-tax Act, 1961 ('the Act') the Tribunal referred the following questions of law : "1. Whether the Appellate Tribunal is justified in holding that section 40A(3) of the Income-tax Act, 1961 has got application in the case of payments made for the purchase of stock in trade? 2. Whether the amount paid to sellers amounting to Rs. 27,379 for purchase of…

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