Ajai Kumar Singh Khaldelial v. PCIT – [2020] 122 taxmann.com 103 (Allahabad)

Assessee deposited cash of Rs. 3,40,000 on various dates in the bank account of the supplier.

A notice under Section 148 was issued stating that cash payment made to supplier violated the provisions of Section 40A(3) and the same is liable to be disallowed.

 Assessee contended that amount deposited in the bank account of supplier would be covered under Rule 6DD(c)(v) as the same had been done by use of “electronic clearing system” through the Bank.

 Assessing Officer (AO), not being satisfied with assessee’s reply, disallowed said payment under Section 40A(3).

On writ, Allahabad High Court held that the term “use of electronic clearing system through a bank account” would necessarily include the transaction of funds by electronic mode through the clearing system.

Any transfer of funds through the use of electronic clearing system through a bank account would mean a transfer of funds through electronic mode of transfer i.e. RTGS, IMPS, NEFT etc., where the funds are transferred through the bank account of one individual into the bank account of the beneficiary through electronic means.

When the funds are transferred through electronic clearing system then at least two banks or two branches of the same bank have to be involved then only the money is transferred through electronic clearing system between them.

Transaction by depositing cash directly in the bank account of the beneficiary was not routed through any clearing house nor is the money sent through electronic mode and therefore such a transaction could not be covered by rule 6DD(c)(v).

Therefore, the benefit of the provision could not be given to assessee.

 Assessee also could not lead any evidence to show that he had deposited the amount on the instructions of the supplier or due to any business exigency.

In absence of such evidence, AO rightly denied the benefit of exemption to assessee.

Thus, it was held that seposit of cash exceeding limit prescribed u/s 40A(3) in supplier’s bank account attract disallowances