JUDGMENT

K. JAGANNATHA SHETTY, J.:—The assessees in these appeals have made payments in cash exceeding a sum of Rs. 2500/ - for some of the purchases of stock-in-trade. The payments are not allowed as deductions in the computation of income under the head "profits and gains of business". The payments are held to be in contravention of the terms of Section 40A(3) of the Income-tax Act, 1961 read with the Rule 6DD of the Income-tax Rules, 1962. The assessees have appealed to this Court challenging the disallowance.

2. Two questions arise for consideration in these appeals; (i) The validity of Section 40A(3) of the Act; and (ii) The applicability of Section 40A(3) to payments made for acquiring stock-in-trade.

3. Section 40A(3) so far as material provides:

"40A. Expenses or payments not deductible in certain circumstances- (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the: head "Profit and gains of business or profession."

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(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction:

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Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bankdraft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors."

4. Originally, Sec. 40A(3) required payments in respect of expenditure, which exceed Rs. 2,500/- to be made by a crossed cheque or a crossed bank draft. On failure to do so, the payments made were disallowed in the computation of income. In order to remove hardship to smaller assessees, the Amending Act, 1987 has raised this ceiling to Rupees 10,000/- . Section 40A(3) begins with a non obstante clause. It is an overriding provision which operates in spite of anything to the contrary contained in any other provision of the Act relating to the computation of income under the head "profits and gains of business or profession". The legislature has thus made it clear that the provisions of Section 40A will apply in supersession of other contrary provisions of the Act relating to the computation of income. Sub-section (3) empowers the assessing officer to disallow, as a deduction any expenditure in respect of which payment is made of any sum exceeding Rs. 10,000 / -otherwise than by a crossed cheque or crossed bank draft.

5. Rule 6DD of the Income-tax Rules 1962 refers to cases and circumstances in which payment of a sum exceeding Rupees 10,000/- may be made otherwise than by a crossed cheque or by a crossed bank draft. The Rule so far as it is relevant reads:

6 DD. Cases and circumstances in which payment in a sum exceeding ten thousand rupees may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft - No disallowance under sub-section (3) of Section 40A shall be made where any payment in a sum exceeding ten thousand rupees is made otherwise than by crossed cheque drawn on a bank or by a crossed bank draft in the cases and circuinstances specified hereunder, namely:-

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(j) in any other case, where the assessee satisfies the Assessing Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft -

(1) due to exceptional or unavoidable circumstances; or

(2) because payment in the manner aforesaid was not practicable, or would have caused genuine d