This article is written by Vandana Shrivastava, an undergraduate student at the Institute of Law, Nirma University. The article analyses Section 269T of the Income Tax Act, 1961 and examines the spectrum of the provision with case laws.
It has been published by Rachit Garg.
Table of Contents
Introduction
The notion of income tax has been prevalent in the pre-colonial era. It is understood as a tax that a citizen pays to the state subject to the citizen’s income and the companies’ profit. The state utilizes this tax revenue for many purposes which inter alia includes public services, development of infrastructure, expenditure on military and defence and subsidies. The Income Tax Act, of 1961 is a sophisticated and comprehensive statute that addresses the various rules and regulations that administer taxation in the nation. The Indian Government is responsible for levying, administering, collecting, and collecting income tax.
Section 269T of the Income Tax Act imposes a prohibition on companies, including banking companies and their branches, cooperative societies, firms, and cooperative banks and individuals to repay the loan or deposit or specified sum under certain specific conditions. This article extensively deals with the conditions specified under this Section.
Section 269SS & 269T of the Income Tax Act
People often strive to avoid paying taxes in whatever capacity they can. Tax evasion, on the other hand, is a significant criminal offence if it is done through fraudulent means or by concealing facts from income from tax authorities. If discovered, the individual might incur a significant penalty as well as imprisonment. People evolved tactics to rationalize the transactions to prevent these consequences. In the case of unaccounted cash, one such common justification was offered. If the tax authorities found unaccounted cash during raids, the person may avoid the penalty by saying that the money came from a loan or deposit from friends and relatives, as the Income Tax Act of 1961 (‘the Act’) had no restriction on the amount of such a loan/deposit. Therefore, Section 269SS and Section 269T were introduced to bring such transactions within the Act’s ambit and to restrict the transfer of black money.
Section 269SS of the Income Tax Act
Section 269SS of the Act stipulates that an individual can’t accept any loan or any other kind of specified sum with respect to advance or otherwise, in compliance to the transfer of any immovable property, from another individual otherwise than by an account payee cheque or account payee cheque or any means of electronic clearing system via bank account or any other specified manner, on the precondition that-
- The amount of loan or deposit or specified sum is Rs. 20,000 or more
Illustration: X intends to take a loan of Rs 50,000 from Y, he cannot accept it in cash because it will contravene Section 269SS as the amount is more than Rs 20,000.
- The sum total amount of the loan, deposit and the specified sum is Rs. 20,000 or more
Illustration: X wants to take a loan of Rs. 6,000, a deposit of Rs. 9,000 and an advance of Rs. 7,000 from Y, he cannot accept it in cash because the total sum is 22,000.
- In a scenario where an individual had already received a loan, deposit or specified sum from the depositor (person giving the loan, deposit or specified sum) but the loan or deposit or specified sum hasn’t been paid back in such scenario if the unpaid loan or deposit or-specified sum is Rs. 20,000 or more;
Illustration: X had accepted a loan from Y on 1st June 2020 by crossed cheque for Rs 19,000. On 15th April 2021 X wants to take another loan from Y for Rs 2000 (the previous loan remains unpaid on the date). Then, since the total loan outstanding is Rs 21,000 (20,000 + 2,000) is more than Rs 20,000, the provisions of Section 269SS will be implemented. Thereby, X cannot accept the new loan on 15th April 2021 by cash mode.
In brief, an individual cannot receive a cash loan or a deposit of Rs 20,000 or more in a single day from another individual. Furthermore, according to the Income Tax Rules, 1962 the specified manner of accepting loans or deposits or any kind of specified sums, inter alia includes Account payee cheque/bank draft, Electronic Clearing System (ECS) through a bank account, net banking, credit card, debit card, Real-Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Bharat Interface for Money(BHIM), Immediate Payment Service (IMPS) and Unified Payments Interface (UPI).
Exceptions to Section 269SS of the Income Tax Act
There are certain exceptions to the implementation of the Section 269SS of the Act which is as follows-
Exception 1
Any loan or deposit or specified sum ‘taken or accepted from’ or ‘taken or received’ through the following institutions–
- The government.
- Any banking company, post office savings bank or co-operative bank.
- Any corporation established by a Central, state or provincial Act.
- Any government company as defined in Section 2(45) of the Companies Act, 2013 (18 of 2013).
- Any institution, association or body or class of institutions, associations or bodies notified in the Official Gazette.
Exception 2
An individual whose primary source of income is agriculture accepts a loan or deposit from another person whose primary source is agriculture. The individuals may have other sources of income (in addition to agricultural income) that are subject to taxation under the Income Tax Act; but, after accounting for exemptions and deductions, there should be no income tax liability. Other exceptional cases include receiving funds from a relative in an emergency. The purpose should not be to avoid paying taxes, partners making cash contributions to the partner company and the scenario where there is only a book entry and no cash or other form of payment.
Consequences of violating Section 269SS of the Income Tax Act
If an individual violates the provision of Section 269SS of the Income Tax Act, then the amount of the penalty that the assessing officer can impose is 100% of the loan or deposit amount. An individual who accepts loans and cash deposits in excess of the stipulated amount is liable to the penalty. As a result, the money receiver must guarantee that the provisions of Section 269SS are followed while making payments. However, if the individual can show that there was a valid basis for the transactions and that no malice was intended, he or she may not be penalized.
Section 269T of the Income Tax Act
Section 269T of the Income Tax Act stipulates a prohibition on individuals to repay the loan or deposit or specified sum otherwise than by an account payee cheque or account payee bank draft or by use of an electronic clearing system through a bank account, if-
i) The amount of loan or deposit, including interest amount, is Rs. 20,000 or more, or
ii) The aggregate amount of loans or deposits, including the interest amount, held by such an individual in his own name, or jointly with any other individual, is Rs. 20,000 or more.
In a brief, an individual cannot repay the loan or deposit in cash if the amount is Rs. 20,000 or more.
Exceptions to Section 269T of the Income Tax Act
Section 269T of the Income Tax Act also lays down the exception that an individual paying Rs. 20,000 or more towards repayment of loan or deposit does not have to comply with 269T if he pays to the following parties –
- The government,
- Any banking company, post office savings bank or co-operative bank,
- Any corporation established by a Central, state or provincial Act,
- Any government company as defined in Section 617 of the Companies Act, 1956,
- Other notified institutions
Consequences of violating Section 269T of the Income Tax Act
In the event of a violation of Section 269T of the Income Tax Act, 1961 by an individual, Section 271E of the Income Tax Act stipulates that a penalty equivalent to the amount of loan or deposit repaid may be levied by the Joint Commissioner. The amount of the penalty that the assessing officer can impose is 100 percent of the loan or deposit amount.
Difference between Section 269SS and 269T of the Income Tax Act
If the portion of the loan or deposit is INR 20,000/- or more, the provisions of Section 269SS of the Act provide that no individual shall accept any loan from any individual other than by account payee cheque, account payee demand drafts, or online transfer through a bank account. However, there are a few exceptions listed under the Section. Likewise, if the sum of the loan or deposit is INR 20,000/- or more, the provisions of section 269T of the Income-tax Act stipulated that any loan or deposit shall not be repaid by the individuals mentioned in the Section other than by an account payee cheque, account payee demand drafts, or online transfer through a bank account.
The difference between Section 269SS and Section 269T is that both the provision deals with cash payment and repayment of loans and deposits. While Section 269T stipulates that the mode of repayment of certain loans or deposits amounting to INR 20,000 or more cannot be in cash, Section 296SS prohibits the use of cash as a mode of accepting certain loans and deposits amounting to INR 20,000 or more.
Meaning and scope of reasonable justification
If a failure to adhere to the standards of Sections 269SS or 269T of the Income Tax Act is due to some reasonable cause, no penalty will be imposed, according to Section 273B of the Income Tax Act. The question now is what constitutes a reasonable justification for disregarding the provisions of Sections 269SS and 269T. To understand the reasonable justification we will comprehend the rationale of the judicial decision on the issue.
Cases concerning ‘reasonable justification’
In the case of Commissioner of Income Tax v. M/S. Muthoot Financiers (2015), Justice V. Kameswar Rao of the Hon’ble Delhi High Court determine the issue, whether in a transaction between the firm and the partner the provision of Section 269SS would be attracted and if we hold that Section 269SS was drawn and therefore violated, whether the respondent-assessee would be entitled to benefit of Section 273B of the Act. The Court observed that if a partner introduces capital in cash in the firm or withdraws the same to the tune of Rs. 20000 or in excess of Rs. 20000, then Provisions of Section 269SS or 269T shall not be attracted as the introduction of capital or withdrawal from a firm cannot be called loans or deposits.
In the case of Narsingh Ram Ashok Kumar v. Union of India (1996), the bench of Justice D. Wadhwa and Justice M Eqbal of the Hon’ble Patna High Court determined the constitutionality of 269SS of the Income Tax Act. The Court observed that the Assessing Officer is responsible for the statement of income of the assessee before him under the Act’s provision. According to Section 269SS of the Act, any loan or deposit transaction in the books of the assessee must be accompanied by an account payee cheque or an account payee bank draft. A provision like this was included in the Act to combat the widespread circulation of black money.
The Court further observed that it is critical to understand, how the assessee can protest that when he seeks money in the manner of a loan or a deposit for the conducting of his business, Section 269SS of the Act requires him to accept the money only in the manner of an account payee cheque or an account payee bank drafts. Why should he be concerned that the person who lends the loan or makes the deposit should be penalized equally if he does not make the payment or deposit using an account payee cheque or bank draught?
The assessee is responsible for maintaining his house in order. And besides, it is he who claims remedies under the Act, claiming that the sum represented in his books of account as a loan or deposit is not taxable. Unless the assessee can demonstrate reasonable evidence of the loan or deposit’s authenticity, the Assessing Officer might consider the loan or deposit in the assessee’s books as his income from undeclared resources. The Court concluded that the provision is rational since it accomplishes the objective of reducing the black money movement. The provision is not discriminatory or unreasonable. Therefore, any challenge to its constitutionality must be dismissed.
Frequently Asked Questions (FAQs)
- Is it reasonable for any individual to repay a loan of more than Rs.20,000 in cash?
No, this would be in violation of Section 269T, which states that a person cannot return a debt of more than Rs.20,000 in cash.
- Whether Section 269SS can be implemented if an individual takes a loan from my colleague for the purpose of personal use?
Yes, Section 269SS is implemented for every individual taking a loan above Rs 20,000 even if it is for personal purposes.
- Whether an individual has to mention Section 269SS and 269T transactions and if yes, where?
Yes, every individual has to mention in clause 31 of Form 3CD, wherein the tax auditor has to report the transactions that have fallen under the provisions of Sections 269SS and 269T. Both the parties (payer and receiver) have to report the transactions.
- Can an individual accept a cash loan or deposit amount of Rs.20,000 or more from the government or banking institution?
Yes, an individual can accept a cash loan or deposit amount of Rs. 20,000 or more from the government or banking institution because it falls under exceptions of Section 269SS.
Conclusion
Although the requirements of Sections 269SS and 269T of the Act were introduced to avoid the rise of black money and tax evasion. Even so, the sum of Rs. 20000 is minimal in the present situation, given the rate of inflation, which has resulted in a decline in the worth of money and an increase in the costs of various items, hence increasing the working capital requirements of every enterprise. Therefore, the limits under Section 269SS and 269T should be raised in the same way that the audit limit under Section 44AB was raised to support small assessees.
References
- Provisions of Section 269SS and 269T under Income Tax Act 1961
- Sections 269SS & 269T under Income Tax Act
- Section 271E Penalty for contravening provisions of section 269T
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