Interpretation and Impact of Section 269SS, 269ST, 269SU, 269T etc of the Income Tax Act, 1961- Legitimacy of repayments through Journal Entries. Whether liable to penalty?
Executive Summary:
1) Legislative Framework: The encompassing framework of Chapter XX-B, including Sections 269SS, 269ST, 269SU, 269T, and 269TT, illustrates a comprehensive approach towards minimizing tax evasion opportunities and promoting financial integrity. These sections collectively aim to ensure transparency in financial transactions and bolster the effectiveness of government welfare programs through improved revenue collection.
2) Section 269T, introduced as part of Chapter XX-B by the Income-tax (Second Amendment) Act, 1981, targets the reduction of black money circulation and tax evasion through stringent regulations on the repayment of loans, deposits, or specified advances. This legislative measure underscores the government’s commitment to enhancing financial transparency and accountability, crucial for combating the adverse effects of unaccounted money on the economy and government revenue collection. This restriction applies to both individual and aggregate transactions, under particular conditions, aiming to discourage large cash transactions and encourage traceable payment methods.
3) Interpretation and Judicial Clarification: The literal interpretation of Section 269T has stirred debates, especially regarding the legitimacy of repayments through Journal Entries. Courts have advocated for a strict interpretation, focusing on the provision’s mandatory nature and the consequences of non-compliance. However, genuine transactions involving repayment adjustments through Book Entries in the ordinary course of business are not penalized under this provision, in line with legislative intent and various CBDT circulars.
4) The method of payment by Journal/Book Entries does not find a place in the above provisions and are liable to penalty in the first instance however, Judiciaries have shortlisted certain situations based on the principles of Reasonable Cause under section 273B which provide for relief from penalty when payments have been made Journal/Book Entries.
5) The Tribunal emphasizes the importance of assessing the bona fides and the context of transactions, acknowledging that while these sections impose strict prohibitions to curb unaccounted money, they must be interpreted in light of their intent. The principle, as highlighted in the CIT vs. Naga Hills Tea Co. Ltd., advocates for a construction favorable to the taxpayer in cases of ambiguity.
6) Conclusion: The enforcement of Section 269T and related provisions, while presenting interpretative challenges, clearly aligns with the broader strategy against black money and tax evasion. The legislative intent is to promote financial integrity and transparency, with strict compliance underscoring the government’s resolve to combat tax evasion. The judiciary’s role in balancing tax law strictures with business realities ensures that genuine transactions are not unduly penalized, reinforcing the law’s intent without compromising on practical business operations.
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Main Article
1) The interpretation of Section 269T of the Income Tax Act, 1961, which mandates the repayment of loans or deposits solely through account payee cheques or drafts, has been a subject of scrutiny, particularly regarding transactions executed via Journal Entries. A literal interpretation suggests a strict adherence to the method of repayment through cheques or drafts, potentially leading to impractical outcomes and impacting genuine transactions. However, courts have underscored the section’s negative language, its penal consequences for non-compliance, and its mandatory nature. Amendments that extend these requirements to include loans further underline the necessity of a stringent interpretation.
2) Despite arguments suggesting that bona fide transactions or repayments via fund outflows should be exempt, the provision does not distinguish between genuine and non-genuine transactions nor specifies alternate methods of repayment. Consequently, any repayment through Journal Entries is viewed as a contravention of Section 269T, incurring penalties.
3) The broader context of these provisions, as situated within Chapter XXB of the Act—encompassing Sections 269SS, 269ST, 269SU, 269T, and 269TT—highlights the government’s efforts to combat the proliferation of black money. The Central Board of Direct Taxes (CBDT) has elucidated that the creation of these sections aims to tackle the significant threat black money poses to the national economy. By addressing the issue of entities being established to obscure the relationship between the sources of funds and their ultimate utilization, primarily for tax evasion, these provisions aim to mitigate the impact of black money on the government’s revenue and its ability to fund welfare programs.
4) However, it’s important to note that the genuine transaction of repayment of a loan or deposit by way of adjustment through book entries in the ordinary course of business is not targeted by the provisions of Section 269T. This clarification aligns with the legislative history and various circulars issued by the CBDT, indicating that Sections 269SS and 269T were not designed to penalize genuine transactions. The legislative intent is evidently to prevent unintended hardships to assessees while maintaining a robust framework to curb tax evasion and black money circulation.
5) The main highlights of Chapter XX-B, inserted by the Income-tax (Second Amendment) Act, 1981, effective from July 11, 1981, which addresses the requirement for the mode of acceptance, payment, or repayment in certain cases to counteract tax evasion, are summarized below:
(a) Section 269SS – Acceptance of Loans, Deposits, and Specified Sums:
Prohibits accepting loans, deposits, or specified sums above ₹20,000 except through an account payee cheque, account payee bank draft, electronic clearing system (ECS) through a bank account, or prescribed electronic modes. Applies to individual transactions as well as the aggregate of transactions that are unpaid or were previously accepted. Exceptions are provided for specified persons under certain conditions.
(b) Section 269ST – Restrictions on Cash Transactions:
(i) Bans receiving ₹2 lakh or more in cash:
(ii) From a single person in a day.
(iii) For a single transaction relating to one event or occasion from a person.
(iv) Transactions must be done through account payee cheques, account payee drafts, ECS through a bank account, or prescribed electronic modes. Exceptions are made for specified persons or cases.
(c) Section 269SU – Requirement for Electronic Payment Facilities:
Mandates businesses with sales, turnover, or gross receipts exceeding ₹50 crore in the previous year to provide facilities for accepting payments through prescribed electronic modes, in addition to any existing electronic payment methods.
(d) Section 269T – Mode of Repayment of Certain Loans or Deposits:
Restricts repayment of loans, deposits, or specified advances of ₹20,000 or more by any entity except through an account payee cheque, account payee bank draft, ECS through a bank account, or prescribed electronic modes.
Applies to individual amounts as well as aggregate amounts of loans, deposits, or advances, including interest, if any, payable on them. Includes exceptions for specified persons under certain conditions.
Overall, these sections are designed to minimize tax evasion by discouraging large cash transactions and promoting traceable payment methods, thereby ensuring transparency in financial transactions related to loans, deposits, and specified sums.
The question that arises in the face of the above provisions is :
“Whether transactions effected through Journal Entries in the books of the assessee would amount to repayment of any loan or deposit otherwise than by account payee cheque or account payee bank draft or use of electronic clearing system within the meaning of the above Section to attract levy of penalty under Section 271E of the Income Tax Act, 1961 ?”
(a) Section 269T of the Act mandates that repayments of loans or deposits to certain entities must only be made through account payee cheques or drafts. A literal interpretation of this section suggests that all transactions, whether genuine or not, must comply with this requirement, leading to potential absurdities by hindering legitimate transactions. However, the section’s strict and negative wording, reinforced by the punitive provisions of Section 276E, underscores the mandatory nature of this requirement. Section 276E, introduced alongside Section 269T on 11th July 1981, stipulates penalties for non-compliance, including imprisonment and fines equivalent to the deposit amount. This legislative framework clearly signals the mandatory adherence to the specified modes of repayment to prevent evasion of tax and ensure financial transparency.
(b) From 1st June 2002, this requirement was extended to include not just deposits exceeding a prescribed limit but also loan repayments, further emphasizing the legislative intent to curb malpractices. Despite arguments suggesting that bona fide transactions involving loan or deposit repayments through Book Entries or without direct fund outflow should be exempt from Section 269T’s constraints, courts have consistently rejected these interpretations. They highlight that Section 269T does not differentiate between bona fide and non-bona fide transactions, nor does it acknowledge any repayment methods other than those expressly mentioned. Consequently, any loan or deposit repayment conducted through Journal Entries or other unapproved methods is deemed a violation of Section 269T, making the assessee liable for penalties.
(c) The judiciary has frequently addressed disputes regarding the compliance with Section 269T through book entries, firmly establishing that the law’s explicit requirements take precedence over traditional accounting practices or the perceived nature of the transaction. This legal stance ensures that the objectives of Section 269T—to safeguard against tax evasion and promote financial discipline—are upheld, regardless of the transaction’s legitimacy or the parties’ intentions.
The issue can be better understood with the help of analysis of the following Case Laws
ITAT MUMBAI Dated.- December 17, 2021
1) Cent.CIR-7(3)Mumbai Versus Sanathnagar Enterprises Ltd.,
2) Ajitnath Hi-Tech Builders Pvt. Ltd.,
3) Lodha Glowing Construction Pvt. Ltd.,
4) Lodha Properties Developments Pvt. Ltd. And DCIT Cent. Cir-7 (3) Mumbai
5) Cent. Cir-7 (3) , Mumbai Versus Aasthavinayak Real Estate Pvt. Ltd. and Lodha Developers Ltd.,
6) And Others
(d) The core issue in these appeals centers around the deletion of penalties under Sections 271D and 271E of the Income Tax Act by the CIT(A), which was contested by the Revenue. The penalties were originally levied due to the assessee’s financial transactions with sister concerns through Journal Entries, flagged by the DCIT as violations of Sections 269SS and 269T for not utilizing account payee cheques or drafts. The crux of the dispute revolves around whether these transactions, amounting to mutual extinguishment of liabilities and assignment of debts/receivables within group entities, constitute loans or deposits in violation of the specified sections.
(e) The Additional CIT distinguished the assessee’s case from the Triumph International Finance (I) Ltd. case, noting the latter involved transactions with a single party where mutual liabilities were squared off, making the physical transfer of money redundant. However, the assessee failed to prove a similar context, raising concerns about the potential for facilitating unaccounted cash flow or tax evasion, leading to the conclusion of a violation of Sections 269SS and 269T and the subsequent imposition of penalties.
(f) The assessee contested these penalties, arguing that the transactions were part of normal business operations, scrutinized and accepted by the AO during the original assessment without any issues. Supported by CBDT Circular No.387, various tribunal decisions, and High Court judgments, the assessee argued these transactions didn’t fall under the definitions of loans or deposits as per Sections 269SS and 269T, and therefore, should not attract penalties. Specifically, the Delhi High Court’s decision in CIT vs. Noida Toll Bridge Co. Ltd. was cited to argue the legality of the transactions at the time they were made. The assessee also argued for a liberal interpretation of “reasonable cause” under Section 273B to avoid penalties, emphasizing the genuine, non-tax evasive nature of the Journal Entries among group entities.
(g) The assessee placed reliance on the decision of this Tribunal in the case of sister concern of the assessee group wherein this Tribunal had deleted levy of penalty u/s.271D and 271E of the Act by stating that assessee had reasonable cause in terms of Section 273B of the Act on the similar set of transactions. In fact, in para 34 of the said order, Mumbai Tribunal had held as under:-
“The causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by account-payee cheque/bank draft, was on account of the following, namely; alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/MIS purpose; consolidation of family member debts; correction of errors; and loans taken in case. In our opinion, all these reasons are, prima facie, commercial in nature and they cannot be described as non-business by any means. Further, we ask ourselves as to why should the assessee under consideration take up issuing number of account payee cheques/bank drafts which can be accounted by the Journal Entries. This being the Spirit of Hon’ble High Court of Bombay, we adopt the same to the present issue. Further, in para 35 of this order the Hon’ble ITAT says in the language of the -Hon’ble High Court, that the said ‘Journal Entries’ constitute one of the recognized modes of recording the loan/deposit. The commercial nature and occurrence of these transactions by way of Journal Entries is in the normal course of business operation of the group concerns. In this regard, there is no adverse finding by the AO in the regular assessment. AO has not made out in the -assessment that any of the impugned transactions is aimed at noncommercial reasons and outside the normal business’ operations.”
(h) The assessee also stated that the facts prevailing in the instant case are identical with the facts of the assessee company as each of the transactions passed through Journal Entries would fall in one of the seven categories cited below. For the sake of convenience, the details of 7 categories are mentioned as under:-
1) Alternate mode of raising funds
2) Assignment of receivables
3) Squaring up transactions
4) Operational efficiencies / MIS purpose
5) Consolidation of family member debts
6) Correction of errors; and
7) Loans taken in cash
(i) The assessee by placing reliance on various decisions relied upon submitted that in order to catch the transaction for levy of penalty the AO either in the assessment order or in the penalty order should have specified the following:-
(a) The genuineness of the transactions should be doubted
(b) Unaccounted income of either the depositor or receiver should be involved in the transaction.
(c) There has to be a finding that the transactions were meant to evade tax.
(d) There has to be a finding that the transaction is not bonafide.
(j) The Department followed the judgment of the Hon’ble Bombay High Court in the case of CIT v. Triumph International Finance (India) Ltd dated 12.06.2012 [2012] 345 ITR 270 (Bom) and held that there has been contraventions of the provisions of 269SS and 269T of the Act. He quoted from the judgment to highlight that the section does not make any distinction between bona fide and non- bona fide transactions. There can be no deletion of penalty if simply there is a receipt of loan or repayment of loan through Journal Entries. Each and every case is required to be considered as to whether there was some reasonable cause in accepting such loans or repaying loans through Journal Entries.
(k) The Revenue’s appeal to the Tribunal against the CIT(A)’s decision highlighted their stance that avoiding procedural hassles does not exempt the assessee from compliance with Sections 269SS and 269T. However, the tribunal found significant merit in the assessee’s arguments, noting the genuine nature of the transactions, the lack of evidence suggesting involvement of unaccounted income, and the proper recording of these transactions in regular books of account.
(l) Reliance was placed by the ld. Special Counsel for the Revenue on the Special Bench decision of Mumbai Tribunal in the case of Deepak Sales and Properties Pvt. Ltd., vs Addl. CIT reported in 95 Taxmann.com 166 wherein it was held as under:-
“18. There is no dispute between the parties that bona fide nature of transaction alone would not be sufficient to escape the clutches of sec.271D of the Act. As per the decision rendered by Hon’ble Supreme Court in the case of Kum. A. B. Shanti (supra), it is required to be established that there was some bona fide reasons for the assessee for not taking or accepting loan or deposit by account payee cheque or account payee bank draft, so that the provisions of section 273B of the Act will come to the help of the assessee. Only in such cases, the AO is precluded from levying penalty u/s 271D of the Act. The Ld. A R took support of Explanatory note given while introducing the provisions of sec. 269SS of the Act. However, the Hon’ble Supreme Court has rendered its decision in the case of Kum. A. B. Shanthi (supra) after considering the same and has expressed the view extracted above. In the case of Triumph International Finance (I) Ltd. [2012] 345 ITR 270, also, the Hon’ble Bombay High Court has deleted the penalty only on the ground of existence of reasonable cause” wherein it was observed as under:-
(a) When loan/ deposit has been repaid by debiting accounts through Journal Entries, it was held that the assessee has contravened the provisions of section 271T of the Act. However, the Hon’ble High Court gave relief holding that there was reasonable cause for the default.
(b) The Hon’ble Court observed:
-Para 17- ….The obligation to repay the deposit by account payee cheque/bank draft for entities specified in section 269T would have to be construed as mandatory in view of the negative language used in the section.
– Para 18-….. Thus with effect from 1st June 2002, it is mandatory under section 269T of the Act for the persons specified therein to repay any loan/deposit together with interest, if any, exceeding the limits prescribed therein, by account payee cheque/ bank draft and the failure to do so is made liable to penalty u/s 271E of the Act.
– Para 19 – In the present case, it is not in dispute that the assessee has repaid loan/deposit by debiting the account through Journal Entries. The question is whether such repayment of loan /deposit is in contravention of the modes of repayment set out in section 269T? The argument advanced by the counsel of the assessee, that the bona fide transactions of repayment of loan/deposit by way of adjustment through book entries carried out in the ordinary course of business would not come within the mischief of section 269T, cannot be accepted , because, the section does not make any distinction between the bona fide and non – bona fide transactions and requires the entities specified therein not to make repayment of any loan/deposit together with interest, if any, otherwise than by an account payee cheque/account payee bank draft if the amount of loan/deposit with interest if any exceeds the limit prescribed therein. Similarly, the argument, that only in cases where any loan or deposit is repaid by an outflow of funds, section 269T provides for repayment by an account payee cheque/draft, cannot be accepted because section 269T neither refers to repayment of loan/deposit by outflow of fund nor refers to any other permissible modes of repayment of loan/deposit, but merely puts an embargo on repayment of loan/deposit except by the modes specified therein. Therefore, in the present case, where loan/deposit has been repaid by debiting the account through Journal Entries, it must be held that the assessee has contravened the provisions of section 269T of the Act.
– Para 24- It would have been an empty formality to repay the loan/deposit by account pay cheque/draft and receive back almost the same amount towards the sale price of shares.
(m) The AR argued that bonafide belief while passing the Journal Entries was always available with the assessee company and the ld. Special Counsel for the Revenue cannot infer that said bonafide belief of the assessee is wrong. For Journal Entries passed before 12/06/2012, those entries were passed with a bonafide belief that there was no violation in terms of series of Tribunal decisions that were available in favour of the assessee. In respect of Journal Entries passed after 12/06/2012, those entries were passed by the assessee only if assessee had a reasonable cause and not otherwise. Hence, in any case, the assessee cannot be invited with the levy of penalty u/s.271D and 271E of the Act.
(n) In this regard, it would be relevant to reproduce the relevant portion of the judgement of Hon’ble Jurisdictional High Court in the case of CIT vs Triumph International Finance (I) P Ltd reported in 345 ITR 270 (Bom) wherein in para 24 and 25 it was observed as under:-
“24. In the present case, the cause shown by the assessee for repayment of the loan/deposit otherwise than by account-payee cheque/bank draft was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom loan/deposit was received by the assessee. It would have been an empty formality to repay the loan/deposit amount by account-payee cheque/draft and receive back almost the same amount towards the sale price of the shares. Neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. There is nothing on record to suggest that the amounts advanced by Investment Trust of India to the assessee represented the unaccounted money of the Investment Trust of India or the assessee. The fact that the assessee company belongs to the Ketan Parekh Group which is involved in the securities scam cannot be a ground for sustaining penalty imposed under Section 271E of the Act if reasonable cause is shown by the assessee for failing to comply with the provisions of Section 269T. It is not in dispute that settling the claims by making Journal Entries in the respective books is also one of the recognized modes of repaying loan/deposit. Therefore, in the facts of the present case, in our opinion, though the assessee has violated the provisions of Section 269T, the assessee has shown reasonable cause and, therefore, the decision of the Tribunal to delete the penalty imposed under Section 271E of the Act deserves acceptance.”
25. In the result, we hold that the Tribunal was not justified in holding that repayment of loan/deposit through Journal Entries did not violate the provisions of Section 269T of the Act. However, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan/deposit was not a bonafide transaction and was made with a view to evade tax, we hold that the cause shown by the assessee was a reasonable cause and, therefore, in view of Section 273B of the Act, no penalty under Section 271E could be imposed for contravening the provisions of Section 269T of the Act.”
(o) We are also inclined to accept the argument advanced by the AR that in respect of compliance to provisions of Section 269SS and 269T of the Act, considering the intention behind introduction of those provisions as explained in detailed by CBDT Circular No.387 dated 06/07/1984, rational interpretation should be given to those provisions and not literal interpretation. We find that the Hon’ble Supreme Court in the case of CIT vs. Naga Hills Tea Co. Ltd., reported in 89 ITR 236 had observed that “if the interpretation of fiscal enactment is open to doubt, the construction most beneficial to the subject should be adopted”. This approach if applied and adopted to the facts of the instant case, the obvious conclusion would be the Journal Entries which had been passed by the assessee company in its books for mutual extinguishment of liabilities between various entities and assignment of debts / receivables from one entity to another entity would not be hit by the provisions of Section 269SS and 269T of the Act as there is sufficient reasonable cause for the same within the meaning of section 273B of the Act.
(p) We find that the ledger accounts produced by the assessee before the AO in the quantum assessment proceedings and before the ld. Addl. CIT during the penalty proceedings had not raised any doubt in respect of genuineness of the transactions and the transactions being entered into in the normal course of business of the assessee. Hence, it could be safely concluded that those entries were passed out of business exigencies with bonafide belief that they are not in contravention of provisions of Section 269SS and 269T of the Act. It is a well-known fact that concealment should always be established and could never be presumed. Assessee was under a bonafide belief that passing of Journal Entries do not violate provisions of law. This is established by the fact that
1) the plea was taken before the ld. AO in the first instance itself ;
2) this has not been disbelieved by the ld. AO ; and
3) the assessee group has a common set of accountants, chartered accountants and advisors.
4) In the group cases, the Tribunal and Hon’ble High Court has accepted the explanation of bonafide belief of the assessee. With common set of people, it has to be held that the assessee was also under the same belief. In assessee’s own case for the immediately preceding assessment year, the Tribunal has accepted that the assessee was under the bonafide belief. In any case, the ld. AO having not disbelieved the explanation nor made any inquiry, the revenue cannot allege contrary at this stage.
(q) We hold that the revenue is not justified in expecting the assessee to stop passing the Journal Entries with effect from 12/06/2012. This is for the reason that the Hon’ble Bombay High Court in the case of Triumph International has not declared all the Journal Entries to be illegal. In fact, Journal Entries are part and parcel of accrual system of accounting. The Hon’ble Bombay High Court judgement only requires that the assessee needs to establish the reasonable cause for passing the Journal Entries. The liberal interpretation of the provisions of Section 273B is in accordance with the judgement of the Bombay High Court in the case of Triumph International wherein at para 23 of the decision, the High Court observed that “Unlike the expression “sufficient cause‟ used in Section 249(3), 253(5) and 260A(2A) of the Act, the legislature has used the expression “reasonable cause‟ in Section 273B of the Act. A cause which is reasonable may not be a sufficient cause. Thus, the expression “reasonable cause‟ would have wider connotation than the expression “sufficient cause‟. Therefore, the expression “reasonable cause‟ in Section 273B for non-imposition of penalty under section 271E would have to be construed liberally depending upon the facts of each case.
(r) We find that the issue in dispute is squarely covered in favour of the assessee by the various decisions of this tribunal as tabulated supra. The issue in dispute is also covered by the various decisions of Hon’ble Jurisdictional High Court as under:-
1) CIT vs Triumph International Finance (I) Ltd reported in 345 ITR 270 (Bom)
2) CIT vs Triumph International Finance (I) Ltd in ITA No. 5745/2010
3) CIT vs Ajitnath Hi-Tech Builders Private Limited and Others (belonging to the assessee group concerns) reported in 92 taxmann.com 228 (Bom)
4) CIT vs Lodha Builders Pvt Ltd in ITA No. 199 of 2015 dated 6.2.2018
(s) Hence in view of our detailed observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that the assessee had proper reasonable cause within the meaning of section 273B of the Act and hence the transactions passed through Journal Entries though would be hit by the provisions of sections 269SS and 269T of the Act, since reasonable cause is established in the instant case, the assessee company would get immunity from levy of penalty thereon.
Case decided in favour of the Assessee and against the Revenue.
Conclusion: Navigating the complexities of Income Tax Sections 269SS, 269ST, 269SU, and 269T, especially concerning Journal/Book Entries, requires a nuanced understanding. While the legislative intent is clear—to promote transparency and curb tax evasion—judicial precedents ensure genuine transactions are not unduly penalized. Businesses should stay informed and interpret these sections in light of their operations and compliance.
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