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The question which falls for consideration is whether the disallowance under section 40A(3) of the Act as made by the Assessing Officer is sustainable and the extent of applicability of Rule 6DD of the Income-tax Rules.

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Section 40A(3) of the Income Tax Act, 1961- Business Disallowance - If the assessee has a reasonable explanation, then the proviso under section 3A would stand attracted and the assessee would be entitled to relief.

Facts : Whether Tribunal is correct in holding that assessee is entitled for allowable expenditure u/s.40A(3) even though the transaction undertaken by the assessee was in contravention of section 40A(3)? and Whether Tribunal was right in holding the decision of the Hon'ble Supreme Court in the case of Attar Singh Gurumukh Singh as applicable in the assessee's case without appreciating that the decision was with reference to Rule 6DD(j) which was omitted w.e.f. 1-4-1996?"

Held, that words "extent of banking facilities available" has to be interpreted in the facts of a given case and all such cases will not be covered under clause (j) of Rule 6DD which has been subsequently deleted. In the instant case, banking facility was available but the bank account could not be operated by the very bank themselves because of an order of attachment passed by the ESI Department. M/s. SLM virtually came to the assessee with the begging bowl and requested to effect payment in cash. The assessee has entered into an agreement for conversion on job work basis. The assessee is required to act as a prudent businessman, so that the job work is completed to his satisfaction with optimum quality. This has led the assessee to effect payments in cash. The argument of the revenue is on the ground that in order to avoid the attachment of the bank account the assessee has effected payment in cash. It is to be noted that what is relevant to be seen insofar as Section 40A(3) is the conduct of the assessee and not the payee. The question would be did the assessee have a reasonable cause to effect payment in cash. If the assessee has a reasonable explanation, then the proviso under section 3A would stand attracted and the assessee would be entitled to relief. It may be true that merely because the payee is identifiable, it will automatically exonerate the assessee. The fact that the payee was identifiable and not a fictitious person would go to show the bonafides of the transaction and this is what is required to be considered from the angle of a commercially expedient and prudent business house. Thus, Tribunal rightly interfered with the order passed by AO as confirmed by the CIT(A) and granted the relief to the assessee. In the result, the tax case appeal is dismissed - PR. CIT V/s SUMUKHA SYNTHETICS - [2020] 29 ITCD Online 001 (MAD)