Facts of the Case

The assessee, Rajesh Kumar, filed his return declaring total income of ₹2,23,140. During assessment proceedings, the Assessing Officer (AO) observed that purchases amounting to ₹2,77,13,513 were made through bearer cheques, rather than account payee cheques or banking channels.

Payments were made to three entities:

  • Dolphine Sales Corporation
  • Salasar Enterprises
  • Balaji Trading Co.

The assessee argued that such payments were necessitated due to business exigencies and relied upon erstwhile Rule 6DD(j) and CBDT Circular No. 220 dated 31.05.1977.

However, the AO disallowed the expenditure under Section 40A(3) of the Income-tax Act, 1961, which was upheld by CIT(A) and the ITAT.

Issues Involved

  1. Whether payments made through bearer cheques violate Section 40A(3) of the Income-tax Act, 1961.
  2. Whether the assessee can claim exemption under Rule 6DD(j) read with CBDT Circular No. 220 (1977).
  3. Whether substituted Rule 6DD (post-2008 amendment) overrides reliance on earlier circulars.

Petitioner’s Arguments

  • The assessee contended that:
    • Payments were made under exceptional and unavoidable circumstances.
    • Suppliers insisted on bearer cheque payments.
    • Confirmations from suppliers established genuineness of transactions.
    • Relief should be granted under CBDT Circular No. 220 (1977) and erstwhile Rule 6DD(j).
  • It was argued that the assessee was a new entrant in business, justifying deviation from normal banking modes.

Respondent’s Arguments

  • The Revenue argued that:
    • Payments were clearly in violation of Section 40A(3).
    • The confirmations were undated and identical, raising doubts about genuineness.
    • The assessee failed to prove exceptional circumstances.
    • The reliance on old Rule 6DD(j) and the 1977 circular was misplaced due to substitution of Rule 6DD in 2008.

Court’s Findings / Order

  • Payments through bearer cheques violated Section 40A(3) as they were not made via prescribed banking modes.
  • The assessee failed to establish:
    • Genuineness of transactions convincingly
    • Existence of exceptional circumstances
  • Even if confirmations were accepted, payments could have been made through bank drafts or other banking channels.
  • The confirmations were suspect due to identical language and lack of dates.
  • The reliance on CBDT Circular (1977) was misplaced because:
    • Rule 6DD was substituted in 2008, effective from AY 2009–10.
    • The earlier clause (j) no longer applied in the same manner.

Final Order:

  • No substantial question of law arose.
  • Appeal dismissed.

Important Clarification

    • Post-2008 amendment, Rule 6DD significantly narrowed exceptions.
    • Old circulars cannot override amended statutory provisions.
    • Even genuine transactions must comply with prescribed payment modes unless clearly falling within updated exceptions.

 Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/60803102023ITA5622023_162312.pdf

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