Rule 6DD states that No disallowance shall be made under sub-section (3) of section 40A. No payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or in the cases and circumstances specified.

Rule 6DD sub-clause (e) & (f) states that where the payment is made for the purchase of agricultural or forest produce; or the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; etc.

Therefore, in the aforesaid facts, the Assessee is even engaged in the ginning of cotton but it purchases row cotton in cash from the agriculturists, without any manufactured or processed. Therefore, the assessee falls under the exception of rule 6DD for payment to the agriculturist in cash. Further, the Agriculturist confirmed this transaction and accepted that they had received payment in cash for the sale of cotton. Hence, the assessee has discharged its burden before the Assessing Office for the purchase of cotton as well as payments against same in cash. Therefore, action for making disallowance for u/s. 40A(3) r.w.rule 6DD is not justified.

In CIT v. A.C. Industries [2014] 225 Taxman 55 (Gujarat)(Mag)(HC) held that, Cash payment exceeding the prescribed limit (Agriculture produce), on cogent evidence concluded that purchases were made from agriculturists as also through common agents, case was correctly held to be falling under the exception provided under clauses (e) and (k) of rule 6DD of Income-tax Rules.