Commentary on Section 269ST of Income Tax Act, 1961

Section 269ST was introduced through Finance Act 2017. The main purpose to bring this section was to curb the unaccounted money circulating in the country. To achieve the mission of the Government to move towards a less cash economy, to reduce the generation and circulation of black money, this section came into legislation.

The Section 269ST titled “Mode of undertaking transactions” read as follows:

No person shall receive an amount of two lakh rupees or more—

(a) in aggregate from a person in a day; or

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed.

Before moving further to the Proviso of this section, we need to understand few things here. A question arises to mind after reading the first line of the section who are person covered under this section?

To get the answer, we will first understand the definition of “Person” given under Section 2(31) of the Act.

As per clause 31 of Section 2 of the Act, “Person” includes

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation. —For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains.

As the definition of “Person” in Section 2(31) is an inclusive one which states that “Person” includes the person mentioned in sub-clause (i) to (vii) above. So, after reading the definition of “Person” it is cleared that Section 269ST applies to all persons as defined in Section 2(31).

Another question arises in mind Whether restriction mentioned in Section 269ST will be applicable only when the Person is liable to tax under the Act or apply to all person irrespective of the fact, that person is not liable to tax. We will understand this situation with few examples:

The reason behind mentioning the above example is very clear that Section 269ST does not differentiate among the person who is liable to pay tax or the person who is not liable to pay tax. It simply says that “No Person” shall receive an amount of two lakh rupees or more. It applies equally to an assessee as well as a non-assessee.

But one point to consider here is if a person not liable to pay tax or who is not an assessee under the Income Tax Act received the amount in cash more than the specified in Section 269ST, the moment he receives cash more than the limit specified in Section 269ST he will become an assessee under the Act. Let’s understand this situation with an example:

Example: Mr. A, having NIL income in a previous year. Now as per Income Tax Act he will not be called an assessee because his total income is less than the maximum amount not chargeable to tax and he is not liable to pay any tax. But in case he receives an amount of two lakh rupees or more, then the provision of Section 269ST will get attracted and he will be liable to pay, by way of penalty, a sum equal to the amount of such receipt under section 271DA.

Now, when he liable to pay a penalty, he will be covered under the definition of an assessee under the Income Tax Act since Income Tax Act defines “Assessee” under Section 2(7) as “assessee” means a person by whom any tax or any other sum of money is payable under this Act…… In the given example Mr. A who was not an assessee earlier is now covered under the definition of an assessee by virtue of section 2(7) as he is liable to pay a penalty.

Now if proceed further there are three clauses under Section 269ST which are as follows:

(a) in aggregate from a person in a day; or

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person,

Let’s understand the above clauses with the help of examples.

Non-Applicability of this section: This provision of this section does not apply to:

(i) any receipt by—

(a) Government;

(b) any banking company, post office savings bank, or co-operative bank;

(ii) transactions of the nature referred to in section 269SS “Mode of taking or accepting certain loans, deposits, and specified sum”

(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify.

Permissible Mode of Receipt are:

i) Account Payee Cheque,

ii) Account payee Bank Draft,

iii) Electronic Clearing system through a bank account, or

iv) Such other electronic modes may be prescribed. Other electronic modes prescribed under Rule 6ABBA are:

a) Credit Card (b) Debit Card (c) Net Banking (d) IMPS (Immediate Payment Service) (e) UPI (Unified Payment Interface) (f) RTGS (Real Time Gross Settlement) (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhar Pay.

Penalty on failure to comply with Section 269ST:

If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt:

Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.