The validity of Sec. 40A(3) was upheld by the Supreme Court even as applicable to purchases by treating it as expenditure in Attar Singh Gurmukh Singh v ITO (1991) 191 ITR 667 (SC), because under the pre-existing rule 6DDJ the disallowance was not possible, if the payee could convince the assessing officer of the exceptional circumstances warranting receipt as pointed out by the Supreme Court in following words:
``Sec. 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the assessing officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources.
The terms of Sec. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Sec. 40A(3) was not practicable or would have caused genuine difficulty to the payee.
Also note that the intention of the provision was to curb the use of black money, reduce tax evasion and inculcate the banking habits.(Mudiam Oil Company v ITO 19730 92 ITR 519 (AP)."
With respect to above facts, you have to prove the genuinity of the transaction & hardships faced for giving cheque to the respective payments before the assessing officer. Other wise Sec 40A(3) attacted b'coz the payment is made to another person not Centralor State goverment. ![smiley smiley](/ckeditor1/plugins/smiley/images/regular_smile.png)
Refer also
https://www.simpletaxindia.net/2010/04/electricity-bill-paid-in-cash-40a3.html
https://indiankanoon.org/doc/77867891/