No Sec. 40A(3) disallowance if bank account of payee was non-operational due to attachment order passed by ESI dept.

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No Sec. 40A(3) disallowance if bank account of payee was non-operational due to attachment order passed by ESI dept.

This was the obsrrvatIon by Madras High Court in the case of Principal Commissioner of Income Tax v. Sumukha Synthetics – [2020] 119 taxmann.com 234 (Madras).
The logic can be applied in various other situations.
Short overview of the case is as under :
Assessee was a partnership firm filed its return of income for the relevant assessment year declaring a total income of Rs. 23,29,830.
The assessment was completed under section 143(3) of the Act. The Commissioner of Income-tax (CIT) exercised his power under section 263 on the ground that certain payments made by the assessee to M/s. SLM towards conversion charges paid by cash was omitted to be disallowed under section 40A(3).
On CIT’s direction, Assessing Officer (AO) made addition under section 40A(3) being 20% of total cash payment of Rs. 3,06,62,382.
 The assessee contended that it was compelled to make cash payment for the conversion work undertaken by M/s. SLM.
The bank account of M/s. SLM was attached by ESI and party requested assessee to pay cash for meeting the wages, salary and other expenses for their Unit to run smoothly.
The Madras High Court held that in the instant case, the banking facility was available but the bank account could not be operated 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 had agreed to conversion on job work basis.
 The assessee was required to act as a prudent businessman so that the job work was completed to his satisfaction with optimum quality.
This had led the assessee to effect payments in cash.
Since the payee was identifiable and not a fictitious person, the assessee was entitled to exemption under rule 6DD in respect of payment made in cash and thus, no disallowance under section 40A(3) was to be called for.

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