This article is written by Akshaya V, pursuing LLB from CMR University, School of Legal Studies. This article discusses the concept of Section 269SS of the Income Tax Act, 1961, its implications on deposits and loans with judicial insights and its applicability in various cases.

It has been published by Rachit Garg.

Table of Contents


We all are aware of the black money menace ongoing in our country as we see that almost every day some or the other money laundering scam is unearthed by the Income Tax Authorities. One of the main reasons for this is the large amount of unaccounted cash that is circulating in the country. Along with this, tax evasion also seems to be a serious problem causing economic disparities. Tax evasion happens when there is unaccounted money because of false cash transactions. During income tax raids, when the income tax authorities discover unaccounted money, people usually escape the consequences without disclosing the source of such money and claim the money as loans and deposits received from family. Section 269SS of the Income Tax Act 1961 is an important provision that brings such transactions within the scope of the Act and helps keep such unaccounted money in check. This article details the provision of Section 269SS of the Income Tax Act, 1961 which extends to all kinds of receipts irrespective of their nature above a specified limit, along with the section analysis and supporting judicial decisions.  

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Section 296SS of the Income Tax Act, 1961

This Section states that – 

No person shall take or accept from any other person, any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if –

  1. the amount of such loan or deposit or specified sum or the aggregate of the loan or deposit or specified sum, or
  2. on the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified sum accepted earlier by such person from the depositor is remaining unpaid, or
  3. the aggregate amount of loan or deposit or sum mentioned in clause (a) together with the amount or the aggregate amount mentioned in clause (b), is twenty thousand rupees or more. 

To explain in simple terms, no person can accept any deposit or loan of rupees twenty thousand or more in any manner other than by way of account payee draft or account payee cheque. Such a limit will also apply if any loan or deposit was taken or accepted earlier by a person, remains unpaid and such unpaid amount is more than the aforesaid limit along with the loan and deposit to be accepted or taken. This can be explained by an illustration. 

Illustration 1 -=

Illustration 2 – If Mr. X wants to obtain a loan of Rs. 60,000/- from Mr. Y, he cannot accept the said amount in cash. The lending must be through account payee draft or account payee cheque only as the loan amount exceeds Rs. 20,000/-

Illustration 3 – If Mr. Shiv wants to obtain a loan of Rs. 7,000/-, a deposit of Rs. 8,000/- and advance money of Rs. 7,000/- from Mr. Ram, the said amount cannot be given in any other mode other than account payee cheque or account payee draft as the sum exceeds Rs. 20,000/-

Illustration 4 – Mr. A borrowed a loan of Rs. 13,000/- from Mr. B and Rs.15,000/- as a deposit in cash on In the instant case, there is a contravention of section 269ss as the amount exceeds Rs. 20,000/- 

Specified modes of transaction 

Rule 6ABBA of the income tax rules specify the mode of accepting deposits or loans which are as follows – 

  1. Net banking;
  2. Credit card;
  3. Debit card;
  4. Electronic Clearing System (ECS) through any bank account;
  5. Account payee cheque or bank draft;
  6. National Electronic Fund Transfer (NEFT);
  7. Bharat Interface for Money (BHIM);
  8. Immediate Payment System (IMPS);
  9. Unified Payments Interface (UPI);
  10. Real-Time Gross Settlement (RTGS)

Exceptions to Section 269ss of Income Tax Act, 1961

The said provisions of the Section do not apply to any deposit or loan or specified sum taken or accepted from or taken or accepted by –

  1. the Government;
  2. any banking company, post office savings bank or co-operative bank;
  3. any corporation established by a Central, State or Provincial Act;
  4. any Government company as defined in clause (45) of Section 2 of the Companies Act, 2013.
  5. Such other institutions, associations or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify on this behalf in the Official Gazette. 

Provided further that the provisions of this Section shall not apply to any loan or deposit or specified sum, where the person from whom the loan or deposit or specified sum is taken or accepted and the person by whom the loan or deposit or specified sum is taken or accepted, are both having agricultural income and neither of them has any income chargeable to tax under this Act. To explain in simple words, this Section will not be applicable in the case of both the parties, ie., the depositor and acceptor whose income is agricultural income and neither of their income is taxable under the Income Tax Act, 1961. For instance, If Mr. A has taken a loan of Rs. 17,000/- from B and has a credit balance for the same, he cannot take loans above Rs. 2099 in any manner other than account payee cheque or account payee draft.

Interpretation of Section 269SS of Income Tax Act, 1961

1. Loan or deposit 

The term “loan” has not been defined under the Act. However, it was given meaning through various judicial decisions. In the case of CIT v. Mahindra and Mahindra Ltd [(2006) 200 CTR Bom 28, 2006 284 ITR 679 Bom], the term loan was defined as a sum of cash which has to be repaid along with interest mutually decided by the parties. The debtor has the liability to pay back the principal amount along with the agreed rate of interest within the stipulated time as agreed between them. 

In the case of Chandrakant H. Shah v. ITO [2009] 28 SOT 315/[2010] 3 ITR (Trib.) 398/124 ITD 177 (Mum. – Trib.), the following points are to be noted from the above judicial decisions to call a transaction as a loan. 

  1. Two parties: A loan transaction involves two parties, ie., the lender and borrower.
  2. Obligation to return the money: A loan is lent by one person to another, wherein the person taking the loan promises to repay the loan.
  3. Unpaid purchase price: Where there was a purchase of goods and the money has not been paid but deferred is not considered a loan as it does not convert an unpaid purchase price into a loan. 
  4. A loan may be interest-free: A loan may not always be interest-bearing but also interest-free. 

Whether a renewal of a loan is a loan Renewal of a loan is taken as a fresh loan and such renewal will be taken as a payment from the debtor on one hand and fresh borrowing on the other hand. This was held in the case of Lachmi Lal v. Babu Narain Das, AIR 1950 All 152

In Sunflower Builders (P.) Ltd. v. Dy. CIT [1997] 61 ITD 227, the difference between ‘loans’ and ‘deposits’ was observed. Section 269SS of the Income Tax Act, 1961 uses the phrase ‘take or accept.’ It means the borrower goes to the lender for obtaining the loan and the depositor deposits money with the person who accepts it. So this Section can be applied only where money passes from one person to another by way of deposit or loan. Therefore, this provision cannot be applied if the debt has been shown by an entry in the books of accounts but has not been passed from one person to another by way of a loan. Similarly, when the parties agree that the amount standing to the credit of the partner who is retiring may be a loan for the continuing partners. In such a case no cash is passed from one person to another but only journal entries are made in the books of accounts. 

Whether trade advances are loans – In Chemmanur Metals and Alloys (P.) Ltd. v. Addl. CIT [ITA No. 934/Bang/2016, the Court held that trade advances are loans. When there are advances for the supply of trade goods or sale of property or application money for allotment of securities, it will not be termed as a loan. Where any advance is given in the nature of a loan during the regular course of trade or as a trade practice, it cannot be called an advance in the nature of a loan. When the advance is more than the value of an order and is far in excess of the period for which advances are usually given, it may be called a loan. 

1.2 Specified sum 

new legal draft

Any sum which is receivable, whether as an advance or otherwise, about the transfer of immovable property, even if the transfer takes place or not. 

1.3 Transfer 

Section 269SS is also applicable to any amount in cash received with regard to the transfer of an immovable property irrespective of whether such immovable property transferred is shown as a capital asset or as stock-in-trade. Section 269SS does not limit itself to only cash transactions in relation to immovable property held as a capital asset. 

1.4 Immovable property

Section 269SS of the Income Tax does not define the term “immovable property”. However, this does not exclude rural agricultural land and the Section applies to even the transfer of rural agricultural land except when both parties have agricultural income and neither of their income is taxed under this Act. 

1.5 Account payee cheque v crossed cheque

The question of account payee cheque or crossed cheque comes to light when the loan or deposit is paid by cheque and not when it is done through an electronic clearing system (ECS). If the transaction is genuine and if the bank confirms that these amounts have been deposited in the assessee’s account and fulfil the banking norms, the penalty will not be imposed for such trivial violation when the words ‘account payee is not written but if the cheque through which the loan is received is ‘crossed’. Therefore, although there is a distinction between crossed cheque and an account payee cheque, distinction on this is not warranted in Section 269SS context. This was deliberated in the case of  CIT v. Makhija Construction Co. [2002] 123 Taxman 1003 (MP) the Court

1.6 Transactions between sister concerns 

Funds may be transferred from one sister concern to the other which can constitute a ‘loan or deposit’ as and when required. When the manager is the same for both the concerns, it is largely the same individual who will be transferring and repaying the money. In such situations, the transactions inter se between sister companies, the assessee cannot naturally be partaking the transaction as a loan or deposit though he may be paying the interest for the same.

In the case of Shree Durga Distillery v. Addl. CIT (Inv.) [ITA No. 349/Bang/2004], the tribunal considered whether the transactions between sister concerns constitute a loan or deposit or not, for this Section. The Court held that it cannot be termed as a loan or deposit because a loan is given at the request of the borrower and a deposit is given only for a fixed term. It would be difficult to construe it as loan or deposit because the person lending and borrowing is the same individual and it is difficult to define it as loan or deposit as understood in general parlance. 

1.7 Applicability of Section 269SS to capital contributions of partners

In Munjal Sales Corpn. v. CIT [2008] 168 Taxman 43 (SC), the Apex Court held that capital contribution by partners in the partnership firm is not a loan or borrowing in the hand of a firm. According to the assessee, Section 40(b)(iv) applies to the partner’s capital whereas Section 36(1)(iii) applies to loan/borrowing. Conceptually, the position may be correct but we are concerned with the scheme of Chapter IV-D’. From the Court’s remarks, it appears that the Court’s ruling is only in the context of Chapter IV-D and this definition of borrowings will not apply in other contexts in the Act. Hence, it is clear that section 269SS of the Act does not hit capital contributions in money by the partners. However, to be on the safer side, it is better to comply with Section 269SS by partnership firms and LLPs. 

1.8 Applicability of clause 31(a) of the Income Tax Act, 1961 

Clause 31(a) states the particulars of every loan or deposit taken or accepted exceeding the limit of rupees twenty thousand as specified under Section 269SS of the Act must be obtained. The following are the particulars which are to be disclosed in Form 3CD:

  1. Name of the lender or depositor;
  2. Address of the lender or depositor;
  3. PAN number of the lender or depositor;
  4. Amount of loan or deposit taken or accepted;
  5. Squared up loan or deposit, if any;
  6. The mode in the loan or deposit is taken or accepted whether by cheque or electronic clearing system;
  7. Whether loan or deposit is taken or accepted by an account payee cheque or account payee draft;
  8. Name of the person from whom individually or in aggregate loan or deposit taken or accepted more than twenty thousand rupees during the year;
  9. Maximum deposit or loan during the year;
  10. Mention if the cheque or electronic system is made for a loan or deposit taken or accepted; and
  11. In case of cheque or bank draft, mention if it is account payee cheque or account payee draft.

However, clause 31(a) does not apply to the following assessees:

  1. Any banking company;
  2. Any corporation established by a Central, State or Provincial Act;
  3. Any Government company as defined in Section 617 of the Companies Act, 2013

Applicability of Section 269SS of Income Tax Act, 1961

This Section applies to all the persons as defined under Section 31 of the Income Tax Act, 1961. It includes an individual, a company, a Hindu Undivided Family, a firm, an association of persons, the body of individuals and an artificial judicial person. 

Case 1 

Whether retention bills of the contractor as ‘security deposit’ amount to deposit under the ambit of Section 269SS? Let us say Mr. Y paid Rs. 15,00,000 to Mr. Z, after retention of Rs. 18,00,000 to be taken out after the expiry of the warranty period. Whether the above transaction has to be reported in Form 3CD for Mr. Y?

Para 39(c) of AS-7 reads that construction contracts are called ‘retention’. Thus it is not right to bring this under the meaning of deposits. Hence withholding such amounts and releasing them after the expiry of the warranty period does not attract clause 31(a) as the money is not ‘received’ by anyone per se. clause 31(a) will be attracted only if the contractor deposits money with the assessee and if it is refunded to the assessee after the warranty period expires. In this case, the money will be considered as “received”. 

Case 2

Whether a person can contribute to a firm otherwise than by cheque?

When there is a receipt of the amount to partners in the form of contribution or withdrawal of Rs. 20,000 or more, the provisions of Section 269SS would not be attracted as such contribution or withdrawal cannot be called as loans or deposits. Amount paid by partners to the firm or vice versa is like a payment to self and does not amount to a loan or deposit in common law parlance. This was also held in the case of CIT v. Lokhpat Film Exchange (Cinema) [2007] 212 CTR Raj 371.

Case 3 

Whether share application money falls under the scope of Section 269SS? 

Share application money accompanied by appropriate documentation is neither a loan nor a deposit. Subsequent repayment or allotment of shares as a part of the allotment process does not change the character of application money and provisions of Section 269SS are not applicable in such a case. Held in the following cases: 

  1. Commissioner of Income-tax v. Speedways Rubber (P.) Ltd. (326 ITR 31 )
  2. Commissioner of Income-tax, Tamil Nadu-I, Madras v. Idhayam Publications Ltd.(285 ITR 221. 

However, the contrary was held in the case of Bhalotia Engineering Works (P) Ltd. 275 ITR 399. The Court held that according to the guidance note issued by ICAI on Audit of Capital and Reserves, a share application not accompanied by an application form or certificate from share transfer agents or resolution of appropriate authority would be treated as an unsecured loan.

Case 4

Whether a loan vide cheque which is a crossed cheque but not an account payee cheque attracts a penalty under section 271D? 

There is no imposition of penalty as long as the transaction is genuine and as per the banking norms. Although there is a distinction between ‘crossed’ and ‘account payee cheque’ there is no necessity for hair-splitting under Section 269SS.

Case 5

Whether direct deposit of cash by the director in a closely held Bank account is loan or deposit under Section 269SS? 

Although the company and its director are two different entities, the company’s affairs are solely managed by the directors. The company can bank upon only its directors. Hence the provisions of Section 269SS are not contravened when a direct deposit of cash is made in the bank account of the company. For instance, if Mr. A is the director of a company entrusted with the duty of managing the finance of the same. If Mr. A deposits Rs. 80,000 in a closely held bank account of the company, it shall not be termed as a loan or deposit. 

Penalty for violation of Section 269SS of Income Tax Act, 1961

Section 271D of the Income Tax Act, 1961 states that if a person takes or accepts any loan or deposit or specified sum in violation of the provisions under Section 269SS, the penalty levied by the joint commissioner would be hundred per cent of the loan or deposit or specified sum.

Who can initiate penalty provisions: There is no such categorical condition specifically stated in the Act for the initiation of a penalty under section 271D. However, only the Joint Commissioner of Income Tax  has the authority to impose a penalty under section 271D.

Some courts believe those penalty proceedings penalty bought by the assessing officer under Section 271D are also lawful, citing the reason that the Act makes no provision for the initiation of penalty proceedings under section 271D. As a result, if an AO issues a show cause notice pursuant to section 271D r.w.s. 274, it will be regarded the start of penalty proceedings.

Some courts, on the other hand, believe that because the JCIT has the right to impose penalties, it also has the power to commence penalty procedures. The satisfaction recorded by the AO to initiate is useless if the AO is unable to enforce a penalty. Only the JCIT’s satisfaction would be taken into account for imposing a penalty.

In response to the controversy, the Central Board of Direct Taxes (CBDT)  issued the following circular, stating that penalty proceedings under Section 271D should only be considered as having begun once the JCIT issues a Show Cause Notice under Section 274 r.w.s 271D of the Act. 

Time limit for imposing penalty under section 271D: (i) within the end of financial year in which proceedings, during the course of which action for imposing penalty were initiated, gets completed;

(ii) within the end of six months from the end of the month in which penalty proceedings were initiated, whichever is later;

The CBDT issued a circular in which it was directed that the provisions of paragraph (c) of section 275(1) be applied to penalty proceedings under sections 271D and 271E, and that related appeals be withdrawn.

Cases where no penalty shall be levied for contravention of Section 269SS of Income Tax Act, 1961

  1. Transactions involving acceptance or repayment of any amount mentioned under Section 269SS only through entries made in the books of accounts. 
  2. Cash payment or repayment transactions due to any business exigency. 
  3. Any loan taken from and within the family including father-in-law. 
  4. Any advance received from promoters through current accounts. 
  5. A genuine transaction made at the time of emergency does not attract a penalty. 
  6. Any loan taken in cash from the unorganised finance sector to repay lenders. 
  7. Any current account transactions between sister concerns.
  8. Repayment or receipt of partner’s capital. If any money is exchanged in the form of a loan, deposit, etc. (through capital/current account) between partners and the partnership firm amounting to INR 20,000 or more, then it shall not be covered within the ambit of Section 269SS. 

Judicial insights relating to section 269SS of Income Tax Act, 1961

CIT v. Noida Toll Bridge Co. Ltd (2003) 184 CTR Del 266, 2003 262 ITR 260 Delhi

In the instant case, the issue was whether the liability recorded in the books of accounts by way of journal entries, i.e. crediting the account of a party to whom monies are payable or debiting the account of a party from whom monies are receivable in the books of accounts is within the ambit of 269SS of the Act or not. Held that, the applicability of section 269SS of the Income Tax Act, 1961 to non-monetary book-entry transactions of loans was discussed. The object of section 269SS is restricted to transactions that involve acceptance of money and does not impact those cases where liability has arisen merely on the basis of book entries, as there is no receipt of money in cash or by cheque or in any other form. Since there is no movement of money, section 269SS shall not be applicable for non-monetary book-entry transactions.

DCIT v. Chetan M Kakaria 4961 (Mum.) of 2011

In the above case, the issue was whether the transactions between the firm and the assessee were treated by the AO as repayment of a loan in cash. It was held that when partners of a firm give money to the business in case of exigencies and received it through a capital account, it will not attract a penalty for violation of section 269SS.

M/s Muthoot Financiers group firms v. CIT (Delhi High Court) 2015

In this case, the issue was whether the transaction has been made from capital or current account has no relevance since the partners have the right towards using both accounts for making contributions held that for the purpose of Section 269SS, partnership firms and partners are different assesses but the intention of acceptance of money is important to be considered. In terms of factual interpretation, partners are the owners of the firm and partners are the ones who make contributions through their capital account. This shows that money is transferred from one individual to himself, as they are the same person. Hence, the provisions of Section 269SS will not be contravened. 

Nabil Javed v. ITO 3797 & 3798/DEL/2018

This case held that any transaction of loan between husband and wife does not attract the provisions of Section 269SS as there is no interest of parties involved and neither is there a creditor or depositor relationship between them. Similarly, in the case of Tuhinara Begum Hoogly Vs. JCIT Range 2, Hooghly ITA No. 2256/Kol/2014, it was observed that the wife gave money to her husband for the house construction in the joint family property land. Rs. 17,000/- was given to the husband and Rs. 26,000/- was given to the supplier of the materials directly. Though the amount spent was by the husband for constructing the house, it cannot be said that the wife does not have any interest in the house. The transaction was neither a gift nor a loan as there was no promise made to return the amount with or without interest. Therefore, the provisions of section 269SS do not apply to any transactions between husband and wife. 

Sri Nikhil Banik Mazumder v. JCIT ITA No. 453 & 454/Kol/2016

In the instant case, The assessee had taken a loan of Rs. 4,00,000/-  from Shri Mithun Banik, who was the assessee’s son and had repaid Rs.1,50,000/-. He had also repaid a couple of loans to his other son named Sri Indranil Banik and his wife Sandhya Banik amounting to Rs. 2,25,098/- and Rs.54,928/- respectively. The tribunal observed that transactions were between the husband, his wife and sons of the same family. The tribunal also noted that the assessee was a salaried employee and not a businessman. Therefore, such transactions do not fall under the provisions of Section 269SS of the Act. 

FAQs regarding Section 269SS of Income Tax Act, 1961

How much deposit or loan can be accepted in cash

A loan or deposit up to Rs. 20,000/- can be accepted in cash from one person as per Section 269SS of the Income Tax Act, 1961. It has to be noted that the amount should not exceed Rs. 20,000 at any time together with the loan or deposit taken or accepted earlier. 

Can an assessee accept a loan or deposit of money exceeding the limits laid down in section 269SS of the Income Tax Act, 1961 by book transfer entry or by bearer cheque or self cheque or any other mode other than account payee cheques

No, the only mode prescribed in section 269SS of the Income Tax Act, 1961 is Account Payee Cheque or Account Payee Bank Draft.

What is the intent behind the insertion of this section

The intent of the section is clearly to put restrictions on cash transactions and reduce the quantum of black money which affects the revenue of the government. Black money is generally transacted in cash and a large amount of unaccounted wealth is stored and used in the form of cash. Therefore in a bid to control unaccounted money, a section has been proposed which will limit cash transactions and in essence the black money

Will the provisions of this section apply If the assessee receives a deposit of Rs. 20,000/- as an agent

Provisions of Section 269SS shall not be applicable if a person receives an amount of Rs. 20,000/- as deposit as an agent or servant and not on his own. 

Whether a penalty under Section 271D can be levied in a case where the amount of deposit is treated as income by the Assessing Officer

No, it cannot be treated as a loan when it is simultaneously treated as income by the assessing officer. Hence, no penalty can be levied in such cases.

Does it cover cash received by borrowers only

On a plain reading of the section it appears that all kind of receipts are covered by the section, therefore it appears cash received by the borrowers also gets covered. However when we look at the exclusion part of the section, it states that the provision of the section is not applicable to transaction of nature referred in section 269SS. While section 269SS is applicable in situations where a person receives cash as loan or deposit. 


The application of section 269SS in various cases is thus iterated through provisions of the section and judicial decisions. The limit of Rs. 20,000 under the Section is fixed and any loan or deposit cannot be taken or accepted in excess of the above limit in cash. Although Section 269SS was formed with the object of curbing the black money threat hazard and preventing tax evasion in the country, the limit of rupees twenty thousand mentioned as limit under the Section is very small considering the rate of inflation resulting in a decrease in the value of money and increase in prince of goods. Therefore, it would be wise to increase the limit of rupees twenty thousand similar to how the limit was increased under Section 44AB to benefit all the small assessees.


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