381. Payment made during the period when cheque clearing operations by banks suspended - Whether covered under sub-section (3)
Circular No. 250 was issued by the Central Board of Direct Taxes on 11 January 1979. Its subject is 381. Payment made during the period when cheque clearing operations by banks suspended - Whether covered under sub-section (3).
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Treats a hold-up in bank cheque clearing as an exceptional or unavoidable circumstance for the purposes of section 40A(3). That sub-section disallows business or professional expenditure paid above the prescribed monetary limit otherwise than by a crossed cheque or crossed bank draft, and clause (j) of rule 6DD lifts the disallowance where the Income-tax Officer is satisfied that payment could not be so made because of exceptional or unavoidable circumstances and the assessee proves the genuineness of the payment and the identity of the payee. The Board says a suspension of cheque clearing operations, or any similar circumstance likely to give the payee a reasonable apprehension that a crossed cheque or draft will not be cleared expeditiously, falls within clause (j), so payments in cash made while that state of affairs lasts escape the disallowance on proof of genuineness and identity.
Representations were received from members of the public and chambers of commerce about the hardship section 40A(3) caused when cheques could not be cleared.
381. Payment made during the period when cheque clearing operations by banks suspended - Whether covered under sub-section (3)
CLARIFICATION 1
1. Representations have been received from the members of public, chambers of commerce, etc., pointing out the hardship resulting from the operation of the provisions of section 40A(3) in view of the difficulties in clearance of cheques issued on banks.
2. Sub-section (3) of section 40A provides for the disallowance of expenditure incurred in business or profession for which payment is made in an amount exceeding Rs. 2,5001 otherwise than by a crossed cheque drawn on a bank or a crossed bank draft.
3. Under clause (j ) of rule 6DD the provision in section 40A(3) will not be applied by the Income-tax Officer where he is satisfied that the payment could not be made by crossed bank cheque or draft due to "exceptional or unavoidable circumstances" and the assessee furnishes evidence as to the genuineness of the payment and the identity of the payee. The hold-up in cheque clearing operations in the banks or any other similar circumstances which is likely to cause reasonable apprehension in the mind of the payee that the crossed cheque/bank draft will not be cleared expeditiously would constitute "exceptional or unavoidable circumstances" within the meaning of clause ( j) of rule 6DD. Accordingly, any payment for business expenditure made during the period when the cheque clearing operations are suspended or other similar circumstance as aforesaid exists, will not be covered by the provisions of section 40A(3) provided the assessee furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee.
Circular : No. 250 [F. No. 206/1/79-IT(A-II)], dated 11-1-1979.
CLARIFICATION 2
Under clause (j) of rule 6DD, the provisions in section 40A(3) will not be applied by the Income-tax Officer where he is satisfied that the payment could not be made by crossed bank cheque or draft due to exceptional or unavoidable circumstances and the assessee furnishes evidence as to the genuineness of the payment and the identity of the payee. The suspension of cheque clearing and banking operations consequential to the strike of bank employees will constitute "exceptional or unavoidable circumstances." Accordingly, payments for business expenditure made during this period, and until clearance of cheques is resumed, will be excepted from the operation of section 40A(3), subject to the other requirements that the payment is genuine and the identity of the payee is also established to the satisfaction of the Income-tax Officer. You may inform all your members, accordingly.
Letter : F. No. 142 (14)/70-TPL, dated 28-9-1970.
In an assessment where cash payments made during a bank strike or clearing hold-up are disallowed under section 40A(3), and in the appeal that follows.
Rules it names. Rule 6DD of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.