Restrictions on Cash Loans, Deposits & Advances under Income Tax

Provisions of Section 269SS

Mode of taking or accepting certain loans, deposits and specified sum.

269SS. No person shall take or accept from any other person (herein referred to as the depositor), 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 or through such other electronic mode as may be prescribed  if,—

(a) the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or

 (b) on the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified sum taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or

(b) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b)

is twenty thousand rupees or more:

Provided that the provisions of this section shall not apply to any loan or deposit or specified sum taken or accepted from, or any loan or deposit or specified sum taken or accepted by,—

(a) the Government;

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

(c) any corporation established by a Central, State or Provincial Act;

(d) any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013);

 (e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in 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.

Explanation.—For the purposes of this section,—

(i) “banking company” means a company to which the provisions of the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;

 (ii) “co-operative bank” shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949) ;

(iii) “loan or deposit” means loan or deposit of money;

(iv) “specified sum” means any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place.

ANALYSIS OF SEC.269SS OF THE ACT

Legislative Intent

Prohibition against taking or accepting certain loans and deposits in case

• Unaccounted cash found in the course of search is often explained as representing loans from or deposits made by various persons.
• Unaccounted income is also brought into the books of account in the form of such loans and deposits
• With a view to countering this device, which enables taxpayers to explain unaccounted cash or unaccounted deposits, section 269SS was introduced. The sole object  is to counter the evasion of tax
• Object of section 269SS was to curb this menace of making false entries in the account books and later giving an explanation for the same

Chamundi Granites (P) Ltd., 245 ITR 661 (Kar. HC)

ANALYSIS OF SEC 269SS

No person shall accept, from any other person, loan, deposit or any specified sum otherwise than by A/c payee cheque, bank draft or use of ECS through a bank account or through such other electronic mode as may be prescribed, if:

The amount of such loan, deposit or specified sum or the aggregate amount of such loan, deposit and specified sum exceed Rs. 20,000 or more.

Or

On the date of accepting such loan, deposit or specified advance, amount remaining unpaid or the aggregate amount remaining unpaid exceed Rs. 20,000 or more.

Or

Amount or aggregate of amount referred to in clause (a) together with amount or aggregate of amount in clause (b) exceeds Rs. 20,000 or more.

In other words, accepting loan in cash or through bearer cheque or crossed chequeis permitted up to Rs. 19,999.

Section	269SS
PROHIBITS	Acceptance of  Loan Deposits Advances Or any other specified sums
EXCEEDING	Rs. 20,000 or more
OTHERWISE THAN THROUGH	Account payee cheque, or Draft, or  Use of ECS through a bank account, or Through such other electronic modes as may be prescribed
MEANS	A person may take or accept loan deposit or specified sums in cash only upto Rs. 19,999/.

 In recent amendments, Finance (No. 2) Act, 2019 substituted the term ‘bank account with ‘bank account or through such other electronic modes as may be prescribed’.’Thesesuchother electronic modes’ ’are notified by Ministry of Finance as the following:

(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

EXEMPTION FROM SEC 269SS: 

This section applies to all the persons i.e. individual, HUF, Company, Partnership firm, AOP/BOI, Local authority, Co-operative society, Trust, AJP.

The provisions of this section are not applicable in cases

1. Where the following persons are either recipient or payer:

i. Government ;

ii. any banking company, post office savings bank or co-operative bank ;

iii. any corporation established by a Central, State or Provincial Act ;

iv. any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956)

v. such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette : {Notified by F. No.414/104/84-IT (INV)- Housing Development Finance Corporation Limited, Bombay, in respect of its Home Savings Plan Scheme, Loan Linked Deposit Scheme and Certificate of Deposit Scheme, including Cumulative Interest Scheme}

2. Where the payer of loan or deposit and the recipient are both having agricultural income and neither of them has any income chargeable to tax under the Act.

Example: Where X had accepted a loan from XYZ on 1stApril 2021by an account payee cheque for Rs.19,000. On 15^thApril 2021 X takes another loan from XYZ for Rs.2000 in cash (the earlier loan remaining unpaid on the date)

since the combined loan outstanding (19,000 + 2,000) = 21,000 is more than or equal to 20,000 the provisions of Sec 269SS will be attracted if the new loan on 15^thApril2021 is taken in cash. 

Example: Where X had accepted a loan from XYZ on 1^stof June 2020 by crossed cheque for Rs 19,000. He had repaid 3,000 in cash on 3^rdAug 2020. On 15^thApril 2021 X takes another loan from XYZ for Rs.2000 in cash (the earlier loan remaining unpaid on the date)

since the combined loan outstanding(19,000 – 3,000 + 2,000) = 18,000) is not more than or equal to 20,000 the provisions of Sec 269SS will not be attracted even if the new loan on 15^thApril is taken in cash .

Example: If X accepts a loan of Rs. 10,000 in cash from Y and a deposit of Rs. 15,000 in cash from Z. In this case there is no violation of the provisions of Sec 269SS as the amount is not more than or equal to 20,000 from one person

Example: if X takes a loan of Rs. 12,000 in cash from Y on 12th ^of Dec 2020 and accepts a further loan of Rs. 9,000 from Y by Account payee cheque, Since the new loan is by a mode of prescribed there is no violation of the provisions of Sec 269SS

PENALTY FOR FAILURE TO COMPLY WITH SECTION 269SS

Section 271D(1) If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted. (2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.

From the provision of section 271D following aspects can be observed.

a. Contravention of section 269SS is must

b. Person contravening shall pay Penalty

c. Amount of penalty is equal to loan taken or deposit accepted

d. No income-tax authority other than JOINT COMMISSIONER (‘JCIT’) CAN IMPOSE PENALTY

e. penalty proceedings under these section will be before Joint Commissioner.

Q. Mr. Rohit had borrowed a loan of Rs. 14,000 from Mr. X as on 01.09.2020 in form of account payee cheque and the same is still payable as on 20.12.2020 amounting to Rs 18,000 (Including interest). Also he has borrowed Rs. 7,000 as Deposit in cash as on 20.12.2020, whether there is any contravention to section 269SS?

Ans: As per Section 269SS (b), as on the date of taking or accepting loan or deposit or specified sum, if there is any loan or deposit or specified sum accepted earlier is remaining unpaid then the same should be considered for Rs 20,000 limit. In the instant case, as the amount exceeds 20,000 (18000 + 7,000 = 25,000) there is a contravention.

MEANING OF SPECIFIED SUM

The term ‘Specified sum’ was added by Finance Act, 2015 w.e.f 01.06.2015 by amending the provisions of section 269SS and 269T of the Act, which means any sum of money receivable, whether as advance or otherwise in relation to transfer of immovable property irrespective of whether or not the transfer has taken place. It is without any doubt that the applicability of Section 269SS of the Act is not limited to only cash transactions relating to immovable properties which have been held as capital asset but also to those immovable properties which are not capital asset, thus, definition of ‘transfer’ as specified in Section 2(47) cannot be said to be considered for the purposes of Section 269SS. Here, the expression ‘transfer’ will have to be understood as under the Transfer of Property Act, 1882. Also, the term ‘Immovable Property’ has not been defined anywhere. It does not matter whether immovable property is capital asset or stock in trade or whether it is rural agricultural land or urban land. It could be any land or any property.

Therefore, section 269SS of the Act would apply even to transfer of rural agricultural land in India except in the situation as defined in the second proviso to the section; where both parties involved are having agricultural income and neither of them has any income chargeable to tax under this Act.

However, as per the second proviso to Section 269SS, where both the depositor as well as the receiver are having agricultural income and are not in receipt of any other taxable income, Section 269SS will have no application.

Normally, as per the provisions of Section 269SS, a person cannot receive advances for sale of immovable property of Rs. 20,000 or more in cash. Any person who is found to have received advance cash of Rs. 20,000 or more in respect of consideration for sale of property would be liable to penalty under section 271D of the Act. However, the question that arises here is whether this position would continue to apply even where the sale consideration paid as cash advance has been subjected to TDS under Section194-IA of the Act.

The proviso to section provides “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.” It specifies that acceptance of deposit/ loan /specified sum shall not attract provisions of sec 269SS where both the parties are agriculturists and both have income below basic exemption limit

Q. Mr. Lal Singh purchased an agriculture land for Rs. 1,80,000 in cash from Mr. Nijjar Singh. Both of them are agriculturists and none of them have income exceeding the basic exemption limit. Whether Sec.269SS be applicable on them and whether penalty u/s 271D will be imposed on them?.

Whether the answer will remain same if the land is other than agriculture land.?

Whether the answer will remain same if land is purchased for Rs. 5,00,000?

Ans. It is to be noted that sec 269SS deals with receipt of specified sum and explanation to the section provides the meaning of specified sum “earns any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place.” It covers not only advance related to immoveable property, but also money received at time of transfer of property.

However, as both Mr. Lal Singh and Mr. Nijjar Singh are agriculturists and both have income below basic exemption limit, sec 269SS shall not be applicable on them. Mr. Nijjar Singh have received ‘specified sum’ other than account payee cheque/ draft or ECS. But this will not amount to violation of sec 269SS and hence, penalty u/s 271D shall not be imposed.

The answer would remain same even if the land is other than agriculture land because the exemption provided is not related to type of property. Rather, the exemption is for the agriculturists. Therefore, sec 269SS will not be applicable in this case.

If the consideration for the land is Rs. 5,00,000 the answer will still remain same. However, in this case sec 269ST will be applicable.  Sec 269ST provides that the provisions of this section shall not apply to transactions of the nature referred to in section 269SS.It Is to be noted that the transaction between two agriculturists who are having income below taxable limit is not covered by sec 269SS and hence sec 269ST shall be applicable on it.

As cash received by Mr. Nijjar singh exceeds Rs. 2,00,000  provisions of sec 269ST are violated. Penalty amounting to Rs. 5,00,000 shall be imposed u/s 271DA.

ISSUE- WHETHER SHARE APPLICATION MONEY TO BE CONSIDERED AS LOAN OR DEPOSIT OR NOT

Section 269SS has been inserted obviously with a view to prevent transactions in black money and to ensure that payments of Rs. 20,000 and above, are traceable to transactions through a bank. Share application money partakes the character of a deposit, since it is repayable in specie on refusal to allot shares and is repayable if recalled by the applicant, before allotment of shares and the conclusion of the contract. Bhalotia Engineering Works (P.) Ltd. vs. CIT [2005] 275 ITR 399 (Jhar.)

The High Court of Delhi in Director of Income-tax (Exemption) v. Alarippu [2000] 244 ITR 358 has observed that Deposit means that which is placed anywhere, as in any one’shands for safe-keeping, something entrusted to the care of another. The essence of deposit is that there must be a liability to return it to the party by whom or on whose behalf has been made on fulfillment of certain conditions. A loan, on the other hand, is granting temporary use of money, or temporary accommodation.

Thus, in CIT vs I.P. India (P.) Ltd.[2011] 16 taxmann.com 407 (Delhi), DHC held that if these tests are applied the receipt of share application monies from the three private limited companies for allotment of shares in the assessee-company cannot be treated as receipt of loan or deposit.

Other decisions wherein it has been held that Share application monies received in cash would not amount either to a loan or deposit are VLS Foods (P.) Ltd.Vs Addl. CIT [2010]128 TTJ 1 (Delhi- Trib.) (UO)

Once the share application money received by the assessee was treated as undisclosed income, penalty proceedings could not have been initiated under section 269SS read with section 271D of the Income-tax Act, 1961. CIT vs R. P. Singh and Co. Pvt. Ltd. [2012] 340 ITR 0217 (Del) .

SOME TRANSACTIONS OTHERWISE THAN THROUGH ACCOUNT PAYEE CHEQUE/BANKDRAFT.

Though sections 269SS and 269T use the words “otherwise than by an accountpayee cheque or account payee bank draft”the said provisions are meant to hit onlycash transactions (as evident from CBDT Circular No. 387 dated. 6-7-1984) i.e. ifthere are transactions which are “otherwise than by an account payee cheque oraccount payee bank draft” but they do not involve any movement of cash, the saidtransactions would not be hit by the aforesaid provisions as demonstratedhereunder.

A) Payment/ Adjustment by Journal Entry

In CIT vs. Noida Toll Bridge Co. Ltd. (2003) 262 ITR 260 (Delhi) it was heldthat when no payment is made in cash, but the same is effected by journalentry in books of account of assessee and there is no violation of section269SS so as to warrant penalty u/s  271D. Similar view has been taken in CITvs. Govind Kumar – (2002) 253 ITR 103 (Raj).

b) Where amount was transferred by deposits through transfer vouchers

In Asst. CIT vs. Jag Vijay Auto Finance (P.) Ltd. (2001) 78 ITD 378 (Jp.)it was held that the main object of section 269SS is to counter the device oftaking unaccounted cash or unaccounted deposits otherwise than by anaccount payee cheque or account payee draft. Where the amount wastransferred by the deposits through transfer vouchers, the amounts inquestion could be said to have been credited in the company’s bank accountthrough proper banking channels as per spirit of section 269SS and, thus, theassessee company could not be said to have violated the provisions of section269SS.

PENALTIES U/S 271D AND 271E ARE INDEPENDENT OF ASSESSMENT PROCEEDINGS.

Though the defaults under the aforesaid sections would normally be noticed in the course of assessment proceedings only, these penalty proceedings are independent of assessment proceedings. Even initiation of these proceedings are independent of assessment proceedings and hence section 275 has undergone drastic changes to take care of such proceedings.

Penalty proceedings under section 271D or 271E were independent proceedings and had nothing to do with assessment proceedings or its outcome. Therefore, CIT(A) was not justified in cancelling the orders imposing penalty on the ground that the assessment proceedings, during the course of which, penalty under section 271D and 271E were initiated had been held to be invalid.

Assessing Officer noticed that assessee had taken cash loans in violation of the provisions of Section 269SS and repaid cash loans in violation of the provisions of Section 269T and hence penalty proceedings under section 271D and 271E were initiated in the assessment orders for Assessment year 2009-10, 2010-11 & 2011­-12. Assessee in the appeals before CIT(A) contended that that the assessment orders in which the penalty proceedings under section 271D and 271E were initiated were quashed and hence the orders imposing penalty under section 271D and 271E should also be quashed. CIT(A) accepted the contention and quashed the orders imposing penalty. It was held that so far as imposition of penalty under section 271D or 271E was concerned, those were independent proceedings and having nothing to do with assessment proceedings or its outcome. Therefore, CIT(A) was not justified in cancelling the orders imposing penalty on the ground that the assessment proceedings, during the course of which, penalty under section 271D and 271E were initiated had been held to be invalid. Apart from the fact that the order holding the assessments to be invalid had not become final, CIT(A) ought not to have cancelled the orders imposing penalty on this ground. Since, CIT(A) had not adjudicated the matter on merits, the proper course would be to remit the question of imposition of penalty to the CIT(A) for fresh consideration, leaving all aspects open (Related Assessment Years : 2009-2010 to 2011-12) – [DCIT v. C. Gangadhara Murthy – Date of Judgement : 20.09.2021 (ITAT Bangalore)].

THE PREREQUISITE CONDITION FOR LEVY OF PENALTY U/S. 271D/271E IS THAT THETRANSACTIONIN CASH MUST RESULT IN A LOAN OR A DEPOSIT.

Thus if the receipt/repayment of cash doesnot result in loan/deposit or repayment of loan/deposit, no penalty would be leviable u/s 271D/271E as demonstrated in the illustrative cases given below.

1. Where cash is taken from wife without interest and with no promise to return for construction of house, the receipt of cash does not amount to loan/ deposit.	In Dr. B.G. Panda vs. Dy. CIT (2000) 111 Taxman 86 (Cal) (Mag) the wife gave cash to the husband for the construction of a house which was naturally a joint venture for the property of the family only. This transaction was not for commercial use. It was held that though the expenditure was apparently incurred by the husband being the karta/ head of the family, it could not be said that the wife could not have any interest of her own in this house being constructed. The transaction was neither loan nor any gift as no ‘interest’ element was involved and there was no promise to return the amount with or without interest. Consequently no penalty was leviable. Smt. Meera Devi Kumawat [2021] 132 taxmann.com 21 (Jaipur – Trib.) Short overview of the case: In instant case, where the family of the assessee was guided by its internal family requirement and at the same time, pooling in the family funds especially where the assessee did not have any known sources of income, the explanation of the assessee deserved to be appreciated and the approach of the revenue needs to be flexible for appreciating the reasonability of the explanation so submitted by the assessee. Further, the assessee had explained the payment of construction expenses which were required to be incurred in cash towards the purchase of construction material and payment to labourers. It may be noted that the order doesn’t discuss the applicability of Section 269ST as the case is related to Assessment Year 2009-10, whereas the provisions of section 269ST are applicable w.e.f. Assessment Year 2017-18. Conclusion : 1. Where assessee received substantial amount of cash from her husband which was used to purchase property for residence of family members, since amount was used for benefit of family not for business purpose and assessee provided reasonable explanation justifying cash transactions, no penalty could be levied under section 271D for voilation of section 269SS. 2. The transaction was not loan as no interest element was involved and there was no promise to return amount with or without interest.
2. Amount deposited by assessee’s wife in his account out of sale proceeds of land which is utilised for purchase of land in name of their son could not be treated as deposit or loan.	In Narotam Singh Mann vs. ITO (2003) SOT 450 (Asr) it was held that amount deposited by assessee’s wife in his account out of sale proceeds of land which is utilised for purchase of land in name of their son could not be treated as deposit or loan.
3. Where father of the assessee assisted him by giving money to purchase vehicle to settle him in life and assessee was under no obligation to return it.	In Mohan Karkare vs. Dy. CIT (1995) 52 ITD 236 (Ind.) (SMC)it was held that where father of the assessee assisted him by giving money to purchase vehicle to settle him in life and assessee was under no obligation to return it, it would be wrong to say that the receipt of amount in cash amounted to violation of section 269SS so as to attract penalty u/s. 271D.
4. Where father deposits cash for education of his son.	In ITO vs. Shree Mahaveer Industries (2004) 82 TTJ (Jd.) 549it was held that deposit of cash by father for the education of the son being trust amount did not contravene section 269SS nor repayment of the said money in cash contravened section 269T.
5. Payment by a partner to firm is a payment to self and, therefore not a deposit or loan which would attract penalty u/s. 271D.	In Shrepak Enterprises vs. Dy. CIT (1998) 64 ITD 300 (Ahd.) it was held that in view of the departmental Circular No. 387, dtd. 6-7-1984 which is a clarification of binding nature on the departmental authorities, section 271D was brought in to cover those situations where unaccounted cash found in the course of search was explained by the tax-payers as representing loans taken or deposits made by various persons. This particular section was brought in with a view to counter such tactics of the assessees. Payment by partner to firm is a payment to self and not a loan or deposit and as such it would not attract penalty u/s. 271D.
6. Repayment to partner of capital amount remaining with the assessee firm.	In ITO vs. Shree Mahaveer Industries (2004) 82 TTJ (Jd.) 549 it was held that repayment to partner of capital amount remaining with the assessee firm did not amount to repayment of loan or deposit.
7.  Application money received by assessee for purchase of its shares does not have character of ‘loan’ or ‘deposit’ within meaning of section 269SS.	In Jagvijay Auto Finance (P.) Ltd. vs. Asst. CIT (1995) 52 ITD 504 (Jp.) it was held that the amount taken in cash by the assessee-company from a party by way of application money for the purchase of shares of the assessee-company does not have character of ‘loan’ or ‘deposit’ within meaning of section 269SS.
8. Loans to minor children and wife.	In ITO vs. Sunil M. Kasliwal (2003) 80 TTJ (Pune) The assessee was amanufacturer of building material, etc. He was in need of funds for his business and borrowed money from his minor children and wife. As far asminors were concerned, the assessee himself acted as the guardian. No otherperson was involved. In the capacity of the guardian of the minor children, hehad given the loan and accepted it in the capacity of individual. The question was as to whether there was breach of section 269SS and penalty wasleviable u/s. 271D. It was held that even assuming that there was breach, itwas only a technical and venial breach. There is a common law maxim:”D“nonminimiscuratlex”.”It meanslaw does not take into considerationtrivialities. In respect of the loan taken from the wife, the amount of loan wasvery small. Normally, it could not be construed to be a transaction betweenthe borrower and the lender. Genuineness of the transaction was notdoubted.The penalty could not be maintained inrespect of the loans to minor children and wife.
9. Where purchase consideration of a property purchased by assessee along with his father was paid by his father as per co-ownership agreement and shown as loan from father to assessee.	In Mahesh Prasad Soni vs. Addl. CIT (2003) 128 Taxman 91 (Jab.) (Mag.) the assessee purchased a property along with his father for certain consideration. Since the assessee had no funds available, the father of the assessee paid the entire consideration, partly by way of bank draft and partly in cash. As per co-ownership agreement, the consideration was to be paid by father whereas the property was to be registered in the name of the assessee. Thus, in the assessee’s account, the entire amount was shown as loan from the father to the assessee. The Assessing Officer was of the opinion that such loan was accepted in contravention of the provisions of section 269SS and, accordingly, imposed penalty u/s. 271D. It was held that keeping in view the intention of the Legislature behind enacting section 269SS, it was to be held that the loan/deposit brought in by the assessee was not to explain his unaccounted cash and, therefore, the question of violating the provisions of section 269SS/269T did not arise. Further, penalty u/s. 271D is imposable where ‘a person takes or accepts deposits’. But in the instant case, as per co-ownership agreement, which was registered, purchase consideration was to be paid by the father of the assessee to the seller and no amount came to the assessee. It was also provided in the agreement that till the payment was made by the assessee to his father, the amount would be shown as outstanding in the name of the father. These facts clearly indicated that actually there was no actual acceptance of loan or deposit by the assessee. Only the entries were made in the accounts of the assessee. Hence, question of any violation of the provisions of section 269SS and attracting the penalty u/s. 271D did not arise.
10. Once loan amount is added/ treated as income by the A.O, the said amount cannot again be treated as a loan for the purpose of penalty.	In Diwan Enterprises vs. CIT (2000) 246 ITR 571 (Delhi) it was held that theAssessing Officer cannot be permitted to treat the amount of loan as incomefor the purpose of assessing tax thereon while framing the assessment and atthe same time to treat it as a loan for the purpose of section 269SS, readwith section 271, and subject the transaction to penalty. Such proceedingswould be self contradictory. Where for non-compliance with the provisions ofsection 269SS, the genuineness of the transaction as loan was doubted by theAssessing Officer and so the amount was surrendered by the assessee, andthe surrender was accepted by the Assessing Officer as income of theassessee, it ceased to be a loan and, therefore, the very foundation for theinitiating the proceedings for levying penalty u/s. 271D could be said to havebeen lost.

 WHETHER REOPENING OF ASSESSMENT UNDER SECTION 147 OF THE ACT COULD BE MADE FOR VIOLATION OF PROVISIONS OF SECTION 269SS OF THE ACT?

The assessing officer cannot come up after 4/6 years with a speculation that assessee might have dealt in cash transactions which needs to be verified.

Hon’b’e High Court of Gujarat with one such discrete issue in the case of Deep Recycling Industries vs. DCIT Special Civil Application No. 3611/2013 dt.02.08.2016 wherein the assessing officer has reopened the assessment for two reasons, one of which was acceptance of the loan without disclosing the mode of acceptance in the audit report and its repayment.

The reasons were recorded stating that the entries of acceptance of loan needs to be scrutinized in detail. The assessing officer has not recorded any finding that income chargeable to tax has escaped assessment which is the prime requirement to reopen the assessment and has rather referred to the imposition of possible penalty under section 271D.

As it is held by series of judgments of various courts that reopening of assessment cannot be made for mere fishing or rowing inquiries on mere suspicion, the matter was decided in favour of assessee.

The assessing officer has to have a belief that income chargeable to tax has escaped assessment,

for which there must be some tangible material having a live link with it. Although no specific time period has been provided in the Act for initiating penalty proceedings under section 271D/271E of the Act, it is possible to say that one may receive show cause notice for imposing penalty even after the expiration of 6 years of the relevant assessment year in which transaction in violation of Section 269SS/269T of the Act was carried out.

However, following the decision of Gujarat High Court as above, where the scrutiny of acceptance/repayment of loan/deposit/advance is to be made through the strenuous mode of reopening of assessments under section 147 of the Act, it cannot be done without having an independent reason to believe followed by supporting tangible material that the assessee has contravened the provisions of Section269SS/269T of the Income Tax Act.

PAYMENT OR RECEIPTS THROUGH JOURNAL ENTRIES

A plain reading of the Section 269SS of the Act indicates that it applies to a transaction where a deposit or a loan is accepted by an assessee, otherwise than by an account payee cheque or an

account payee draft.The ambit of the Section is clearly restricted to transactions involving acceptance of money and is not intended to affect cases where a debt or a liability arises on account of book entries.

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 clearly outside the ambit of the provision of Section 269SS of the Act, because passing such entries does not involve acceptance of any loan or deposit of money.

This view has been held by High Court of Delhi in CIT vs. Worldwide Township Projects Ltd. [2014] 367 ITR 433; CIT vs. Noida Toll Bridge Co. Ltd. [2003] 262 ITR 260 and CIT vs. Mahagun Technologies Pvt. Ltd.ITA No. 4410/Del/2013 dt 22.06.2015.

In another case of CIT vs. Lodha Properties Development SLP (Civil) Diary Nos. 42738/2018, the Hon’b’e Apex Court had dismissed the revenue’s’petition challenging the order of Bombay HC for AY 2009-10.

The hon’b’e high court had dismissed revenue’sappeal in the case of Lodha group of companies and confirmed the order of tribunal of deleting the penalty levied under section 271D/271E on the acceptance/repayment of loans/advances through journal entries.

Q.Mr. X paid Rs. 10,50,00,000 to Mr. Z, a civil contractor after retention of Rs. 12,00,000 to be released after expiry of warranty period. Whether, the above transaction attracts reporting in Form 3CD for Mr. X. If Yes, then under which clause of Form 3CD.

Would your answer be same in case the contractor i.e. Mr. Z deposits money with Mr.X and this money is refunded by Mr. X to him on expiry of warranty period?

ANS: Retentions from contractor’sbills as ‘Security Deposit’–whether deposit As per Para 39(c)of AS-7 Construction Contracts aforesaid amounts as retentions.Thus, it is not really correct to call these security deposits. They are retentions.So, withholding amounts out of contractor’sbills and releasing them after warranty period does not attract clause 31(a) and/or clause 31(d) of Form 3CD. As the money is not “received”.

However, if contractor deposits money with assessee and this money is refunded by assessee to him on expiry of warranty period – clause 31(a) and/or 31(b) will attracted as the amount is received.

Q.Mr. Mohan, Partner in M/s GSM & Associates contributed to the firm otherwise than by cheque. Whether Mr. Mohan can contribute to the firm otherwise than by cheque?

ANS: Repayment or receipt of amount to partners: If a partner introduces capital in cash in the firm or withdraws the same to the tune of Rs 20,000 or in excess of Rs 20,000, then Provisions of section 269SS or 269T shall not be attracted as the introduction of capital or withdrawal from firm cannot be called as loans or deposits. Amount paid by firm to partners or vice versa payment to self and does not take the character of loan or deposits in general law. Provisions of section 269SS are not applicable to such facts (CIT v. Lokhpat Film Exchange (Cinema) [2008] 304 ITR 172 (Raj.) Shrepak Enterprises vs. Dy. CIT 64 ITD 300 (Ahd – Trib) 82 TTJ 549.

Q.Mr. Ramesh & Co. received a loan vide cheque which is Crossed but not an Account Payee cheque. Will there be any penalty u/s 271D?

ANS:If the cheque or bank draft through which loan is received is crossed but words account payee is not written in the crossing but the transaction is otherwise genuine and the bank confirms that these amounts have been deposited in assessee account and are as per the banking norms and there was no flaw in the transaction, penalty under section 271 D is not imposable for such a trivial violation. CIT v. Makhija Construction Co. [2002) 123 Taxman 1003 (MP).

Although a distinction exists between crossed and counter payeehair-splitting on this is not warranted at least in section 269SS/269T context but is so warranted in section 40 A(3) contex.

 Q. Wether direct deposit of cash in closely held company’s bank account by the director is loan or deposit  under section 269SS?

Ans: When direct deposit of cash is made in closely held company’sbank account there would be no contravention of section 269SS. In Mangala Builders Pvt. Ltd. vs. Addl CIT [ITA Nos. 1900 & 1901/Bang/2004-order dated 17-4-2006], this issue was considered by ITAT. The Tribunal held that although the appellant-company and its Directors are two different legal entities, the appellant is a closely held company whose affairs are managed by the Directors. Since it was short of funds and to see that cheques issued by it are cleared, it had to keep sufficient balance in Bank. At that point of time, the Director out of his personal funds, deposited the sum in the bank account of the appellant company.

Though this can be considered as receiving the sum from Director, it cannot be considered as taking a loan or accepting the deposits in its true sense(for the purposes of section 269SS). The appellant, being closely held company and the affairs being managed by the Director, broadly speaking, they are one and the same. At this point of crisis, the appellant can bank upon only its Directors.

The Bangalore Bench of ITAT in Sri Renukeswara Rice Mills vs. ITO(93 ITD 263) had held in the context of section 40A(3) that where the payments are made otherwise than by account payee cheque directly in the bank account of the payee, it meets with the intention of the Legislature and no disallowance can be made under section 40A(3). Applying the same principle, it can be opined that when direct deposit of cash is made in (closely held) company’s bank account there would be no contravention of section 269SS.

HOTEL ACCEPTING CASH FROM GUESTS FOR SAFE CUSTODY IS LOAN OR BAILMENT

Hotel Imperial International, accepted cash from its Guests for safe custody. State the applicable clauses & disclosure in Form 3CD in the following circumstances:

Hotel Accepts sealed packet containing currency notes and coins and returns it. No entries made in cash book.

Cash accepted and entries made in cash book. The exact amount is returned but not in the same currency notes or coins in which they were deposited. 

VARIOUS ISSUES UNDER SECTION 269SS

ISSUE- WHETHER PENALTY IS LEVIABLE ON CASH LOAN TAKEN BY PARTNERS FROM FIRM OR NOT

In CIT vs. R.M. Chidambaram Pillai [1977] 106 ITR 292(SC),it has been held that partnership is only a collective of separate persons and not a legal person in itself. Thus, there cannot be a contract of service in strict law between a firm and one of its partners.

Thus, relying on the above principle, various courts have held that In case of a partnership firm, there is no separate identity of partner and firm and, therefore, where a partner took loan in cash from firm, there was no violation of section 269SS so as to invoke penal provisions of section 271D. CIT vs V. Sivakumar [2013] 32 taxmann.com 62 (Madras), CIT vsLokhpat Film Exchange (Cinema) [2008] 304 ITR 172 (Raj.), Shrepak Enterprises vs DCIT [1998] 64 ITD 300 (Ahd.- Trib.)

Capital contribution in cash of a partner in the partnership firm does not attract provisions of Section 269SS even if the amount is returned on non-approval of Government for constitution of partnership firm. BhikhabhaiDhanjibhai Patel vsAsstt. CIT [2010] 127 TTJ 479 (AHD.- ITAT) 11

ISSUE- APPLICABILITY OF SECTION 269SS IN CASE OF LOAN OR DEPOSIT RECEIVED/REPAID BY WAY OF JOURNAL ENTRIES

A plain reading of the Section 269SS of the Act indicates that it applies to a transactionwhere a deposit or a loan is accepted by an assessee, otherwise than by an account payeecheque or an account payee draft. The ambit of the Section is clearly restricted to transactions involving acceptance of money and is not intended to affect cases where a debt or a liability arises on account of book entries. The only object of this section is to prevent transactions in currency.

This is also clearly explicit from clause (iii) of the explanation to Section 269SS of the Act which defines loan or deposit to mean “loan or deposit of money”. 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 aparty from whom monies are receivable in the books of accounts, is clearly outside the ambit of the provision of Section 269SS of the Act, because passing such entries does notinvolve acceptance of any loan or deposit of money Commissioner of Income-tax, (Central) IV vsAdinath Builders (P.) Ltd [2019] 102 taxmann.com 57 (SC) HC held that receipt of any advance or loan by way of journal entries is in breach of section 269SS. But SC held that journal entries constitute a recognized mode of recording of transactions and in absence of any adverse finding by authorities that journal entries were made with a view to achieve purpose outside normal business operations or there was any involvement of money, there was a reasonable cause for not complying with section 269SS and penalty under section 271D was not to be imposed. The provisions of Section 269SS of the Act does not get attracted merely for transfer of amount to a loan account in the form of book entry. CIT Vs. Worldwide Township Projects Ltd., [2014] 367 ITR 433 (Delhi). Contrary view has been taken by High Court of Bombay in CIT vs Triumph International Finance (I) Ltd. [2012] 345 ITR 270 (Bombay) wherein held that repayment of loan/deposit by merely debiting account through journal entries contravenes provisions of Section 269T.

• CIT vs Noida Toll Bridge Co. Ltd. (2003) 262 ITR 260 (Del) Where the transaction is by an account payee cheque, no payment on account is made in cash by the assessee or on its behalf, no loan has been accepted by the assessee in cash, and the payment of Rs. 4.85 crore has been made through IL&FS, which holds more than 30% of the paid up capital of the assessee by journal entries by crediting the account of IL&FS, the Hon’ble Delhi High Court observed that provisions of section 269SS are not attracted. Neither the assessee nor IL&FS had made any payment in cash.
• DCIT vs Forging Ltd. [2012] 25 taxmann.com 156 (Delhi-ITAT) Facts: The consideration for land is paid to farmers through an agent and the agent’s account was credited by way of journal entries. The amount was paid in cash by agent to the farmers. Held, The term loan or deposits been defined to mean loan or deposit of money. The assessee has not accepted any deposit from by way of money in cash. It has credited the account of ‘D‘ by way of journal entries in respect of purchase consideration paid on its behalf by ‘D‘ through ‘J‘. Thus the section is not applicable.
• In CIT vs Triumph International Finance (I) Ltd. [2012] 22 taxmann.com 138 (Bom.) (followed in Lodha Builders (P.) Ltd. vs Asstt. CIT [2014] 163 TTJ 778 (Mum. – –rib.)), it was held that where loan/deposit has been repaid by merely debiting account through journal entries, it must be held that assessee has contravened provisions of section 269T.

On the other hand, the High Court/Tribunal has held as follows:

(a) CIT vs Worldwide Township Projects Ltd. [2014] 48 taxmann.com 118 (Delhi) Object of section 269SS is to prevent transaction in currency; it is not intended to affect cases where a debt or a liability arises on account of book entries.

(b)Asstt. CIT vs Vardaan Fashion [2015] 60 taxmann.com 407 (Delhi – trib.) Where there was no monetary transaction between assessee and creditor, rather by mere journal entry liability was created, it could not be said that loan or deposit accepted by assessee from creditor was in violation of section 269SS. (c) Asstt. CIT v. Gujarat Ambuja Proteins Ltd. [2004] 3 SOT 811 (Ahd. – trib).Further, as mentioned above the objective of the section is to discourage  cash receipts and not journal entries. Hence, it may be argued that receipts through journal entries are not covered by section 269ST. However, such receipts may result in protracted litigation.

ISSUE- AMOUNT RECEIVED FROM SISTER CONCERN TO MEET EXIGENCIES OF SITUATION AMOUNTS TO BORROWING OF LOAN OR RECEIPT OF DEPOSIT?

Temporary accommodation provided to one sister concern by another sister concern does not amount to transaction of loan or deposit and, therefore, it is outside per view of section 269SS. CIT vs Sree Krishna Promoters & Builders[2011] 16 taxmann.com 138 (Kar.)

Amount received from a sister concern to tide over financial crisis in several installments, each of which was below Rs. 20,000/-, cannot be treated as loan under section 269SS, where the assesse is running in losses and doing job work only for that sister concern. CIT vs Bangalore Leather & Leather Crafts Ltd. [2012] 19 taxmann.com 21 (Kar.)

DISCLOSURES IN TAX AUDIT REPORT IN FORM 3CD – –LAUSE 31 – SECTION 269SS

FORM 3 CD – clause 31 (a)  Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year :—

i. name, address and permanent account number (if available with the assessee) of the lender or depositor;

ii. amount of loan or deposit taken or accepted;

iii. whether the loan or deposit was squared up during the previous year;

iv. maximum amount outstanding in the account at any time during the previous year;

v. whether the loan or deposit was taken or accepted by cheque or bank draft or use of ECS through bank account;

i. In case loan or deposit was taken or accepted by cheque or bank draft, whether the same was taken or accepted by account payee cheque or account payee bank draft.

CLAUSE 31(a)

PARTICULARS OF EACH LOAN OR DEPOSIT IN AN AMOUNT EXCEEDING LIMIT SPECIFIED IN SECTION 269SS TAKEN/ACCEPTED DURING THE YEAR

• Security deposits against contracts etc. will be covered by the definition of deposit and therefore, such information will have to be given.
• The amount retained by the contractee against performance of contract will not be covered as loans/deposits for reporting as amount is not received.
• Not applicable to loan or deposit taken or accepted from or by Government, Bank Company, Cooperative Bank

Form 3CD Clause 31(b) Details of any specified sum taken or accepted in an amount exceeding limit specified in section 269SS

The auditor needs to take care of that not only advance but any sum received in relation to transfer of immovable property (including payment received at the time of sale) is covered under this clause.

(a)Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year:-

(i)name, address and permanent account number or Aadhaar Number (if available with the assessee) of the lender or depositor; [However, till 12-11-2020, the e-utility has not been updated and as such the reference to Aadhaar Number is not appearing there]

NAME, ADDRESS AND PAN OF THE LENDER/ DEPOSITER	AMOUNT OF LOAN/ DEPOSIT TAKEN/ ACCEPTED	WHETHER LOAN OR DEPOSIT TAKEN /ACCEPTED BY A CHEQUE OR BANK DRAFT OR USE OF ELECTRONIC CLEARING SYSTEM THROUGH A BANK ACCOUNT	IN CASE LOAN OR DEPOSIT WAS TAKEN OR ACCEPTED BY CHEQUE OR BANK DRAFT, WHETHER THE SAME WAS TAKEN OR ACCEPTED BY AN ACCOUNT PAYEE CHEQUE OR AN ACCOUNT PAYEE BANK DRAFT	WHETHER THE LOAN OR DEPOSIT WAS SQUARED UP DURING THE PREVIOUS YEAR	MAXIMUM AMOUNT OUTSTANDING IN THE ACCOUNT AT ANY TIME DURING THE PREVIOUS YEAR

(ii) amount of loan or deposit taken or accepted;

(iii) whether the loan or deposit was squared up during the previous year;

(iv) maximum amount outstanding in the account at any time during the previous year;

(v) whether the loan or deposit was taken or accepted by cheque or bank draft or use of electronic clearing system through a bank account.

(vi) in case the loan or deposit was taken or accepted byy cheque or bank draft, whether the same was taken or accepted by an account payee cheque or an account payee bank draft.

ICAI’s VIEWS ON CLAUSE 31(a)

The following views of ICAI are relevant in this regard :

• Sale proceeds collected by the selling agent (on behalf of his principal) is not a loan or deposit.
• The definition of deposit does not exclude a current account. Therefore, if the transactions in a current account exceed the amount of 20,000, it will be necessary to give the information against this sub-clause. This is so even if no interest is paid on current account.
• In case, the lender’s account is a mixed account, the transactions relating to loans and deposits (temporary advances) should be segregated from other accounts and the transactions relating to loans/deposits only should be stated under this clause.
• Advance received against sale of goods is not a loan or deposit.
• In case of loan taken in earlier years, opening credit balance is not specifically required to be disclosed. However, while giving figures of maximum amount outstanding at any time during the year or while giving information about repayment of loan/deposit, the opening balances in the loan accounts will have to be taken into consideration.
• Information has to be given in respect of interest-free loans also.
• Security deposits against contracts, etc. are ‘deposits’ and therefore, such information in respect of them should be given. However, if these ‘security deposits’ are in the form of amounts retained/withheld from bills, these are ‘retentions’ as per (AS) 7 and not ‘deposits’. To that extent, above view of ICAI needs reconsideration.
• Loans and deposits taken or accepted by transfer entries constitute acceptance of deposits or loans otherwise than by account payee cheques/drafts or ECS. Hence, such entries have to be reported under this clause.
• The entries that relate to transactions with a supplier and customer are not loans or deposits accepted.
• If the aggregate loans/deposits in a year (from a single party) exceed 20,000 but each individual item is less than 20,000 the information will still be required to be given in respect of all such entries starting from the entry when the balance reaches 20,000 or more and until the balance goes down below 20,000. The tax auditor should verify all loans/deposits taken or accepted where balance has reached 20,000 or more during the year for the purpose of reporting under this clause.
• In case of loans or deposits taken or accepted through electronic transfers (possible due to technological advances) through internet/mail transfer these are not through account payee cheque/DD or through ECS. All the same, they are capable of being tracked. These loans and deposits need not be reported.

In terms of Rule 6ABBA, loans or deposits may be received by the following ‘other prescribed electronic modes’ for section 269SS purposes:

(i) Debit card;

(ii) Credit card;

(iii) Net Banking;

(iv) UPI;

(v) BHIM;

(vi) RTGS;

(vii) NEFT;

(viii) IMPS;

(ix) Aadhaar Pay.

If loan or deposit is received by the modes specified in Rule 6ABBA, no need for reporting even though received otherwise than by account payee cheque/DD or ECS.

• In the absence of conclusive or satisfactory evidence that the loan/deposit was taken/accepted by account payee cheque/DD or use of electronic clearing system through bank, he should make a suitable comment in his report as suggested below :

“It is not possible for me/us to verify whether loans or deposits have been taken or accepted otherwise than by an account payee cheque or account payee bank draft, as the necessary evidence is not in the possession of the assessee”.

• Share application money advance supported by appropriate documentation is neither deposit nor loan.
• Subsequent allotment of shares or repayment of application money as a part of allotment process does not alter the character of application money and provision of section 269SS/T are not attracted in such a case. – CIT v. Rugmini Ram Ragav Spinners (P.) Ltd. [2008] 304 ITR 417 (Mad.) and CIT v. IP India (P.) Ltd. [2011] 16 taxmann.com 407/[2012[ 204 Taxman 368 (Delhi) and CIT v. Numero Uno Financial Services P. Ltd. [2012] 20 taxmann.com 508/206 Taxman 96 (Delhi) (Mag.). However, contrary view has been takenin Bhalotia Engineering Works (P.) Ltd. v. CIT [2005] 275 ITR 399 (Jhar.).

CERTIFICATE FROM ASSESSEE (MANAGEMENT REPRESENTATION)

Where loan or deposit is accepted by use of ECS, tax auditor will not be required to verify whether cheque/DD is “account payee” or not. Tax auditor should advice the auditee at the start of the financial year itself to accept/repay loans/deposits/ specified sum through ECS rather than by cheque or DD. Para 44.3 CLAUSE 31 OF FORM NO. 3CD 468 Where loan or deposit is accepted by cheque or Bank draft, it may not be practically possible for the tax auditor to verify each payment, reflected in the bank statement as received through cheque or DD, as to whether the payment/acceptance of deposits or loans has been made through account payee cheque, demand draft, pay order or not. Therefore, the 2014 Guidance Note requires the tax auditor to obtain suitable certificate from the assessee to the effect that the payments/ receipts referred to in sections 269SS and 269T were made by account payee cheque drawn on a bank or account payee bank draft as the case may be. Where the reporting has been done on the basis of the certificate of the assessee, the same shall be reported as an observation in clause (3) of Form No. 3CA and clause (5) of Form No. 3CB, as the case may be. [Para 51.5 of the 2014 Guidance Note]

PROVISIONS OF SECTION 269T

MODE OF REPAYMENT OF CERTAIN LOANS OR DEPOSITS.

269T. No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it or any specified advance received by it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit or paid the specified advance, or by use of electronic clearing system through a bank account ⁷¹[or through such other electronic mode as may be prescribed] if—

(a) the amount of the loan or deposit or specified advance together with the interest, if any, payable thereon, or

(b) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, or

(c) the aggregate amount of the specified advances received by such person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such specified advances, is twenty thousand rupees or more:

Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid :

Provided further that nothing contained in this section shall apply to repayment of any loan or deposit or specified advance taken or accepted from—

Government;

• banking company, post office savings bank or co-operative bank;
• corporation established by a Central, State or Provincial Act;
• Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
• such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.

 Explanation.—For the purposes of this section,—

“banking company” shall have the meaning assigned to it in clause (i) of the Explanation to section 269SS;

• Cooperative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);
• if any “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature;
• specified advance means any sum of money in the nature of advance, by whatever name called, in relation to transfer of an immovable property, whether or not the transfer takes place.
• The No person will not repay any loan or advance or specified sum, other wise than by account payee cheque or draft if the draft drawn in the name of the person who has made the loan or deposit if

a. amount of loan or deposit together with the interest is 20,000 or more. or

b. the aggregate of deposits with the above, either in his own name or jointly with any other person, together with the interest is 20,000 or more.

Penalty u/s 271E for failure to comply with the provisions of section 269T.

(1) If a person repays any loan or deposit or specified advance referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance so repaid.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.

Applicability:

This section applies to all the persons i.e. individual, HUF, Company (including branch of the banking company), Partnership firm, AOP/BOI, Local authority, Co-operative society, Trust, AJP.

Provision:

The repayment, by any person, of any loan or deposit or specified advance , made with it should not be done in any mode apart from account payee cheque or account payee bank draft drawn in the name of the person or by use of electronic clearing system through a bank account who has made the loan or deposit, if :-

1. The amount of loan or deposit or specified advance along with any interest, if any payable on such loans or deposit is Rs. 20,000 or more. or

2. As on the date of repayment, if there exists any other loan or deposits held by the person either in his own name or jointly with any other person, the aggregate amount of such loans or deposit together with interest, if any payable on such loans or deposits Rs. 20,000 or more.or

3. In case of specified advances received by such person either in his own name or jointly with any other person, the aggregate of such specified advances along with any interest payable on such specified advances is Rs. 20,000 or more.

The repayment made by a branch of a banking company or co-operative bank, of such loan / deposit, can also be made by crediting the amount to the savings bank account or to the current bank account held with the branch.

Section	269T
PROHIBITS	Repayment of Such Loans Deposits And specified sums
EXCEEDING	Rs. 20,000 or more
OTHERWISE THAN THROUGH	Account payee cheque, or Draft, or Use of ECS through a bank account, or Through such other electronic modes as may be prescribed
MEANS	A person may take or accept loan deposit or specified sums in cash only upto Rs. 19,999/.

 CASES WHERE THE ABOVE PROVISIONS DO NOT APPLY:

The provisions of this section do not apply to in case the loan / deposit has been taken / made by the following persons:

• Government;
• any banking company, post office savings bank or cooperative bank;

• any corporation established by a Central, State or Provincial Act;
• any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) ;
• such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.

Q.XYZ Ltd. had deposited of Rs. 18,500 from Mr. Arshdeep. During the previous year 2017-18, such deposit has become due for repayment (Interest payable Rs. 3100). XYZ Ltd repaid such amount by way of bearer cheque.

Ans.The provision of section 269T shall be made applicable if amount to be repaid (together with interest) exceeds Rs. 20,000. In this case, ABC Ltd. had repaid Rs. 21,600 otherwise than by account cheque or draft or ECS, there is a clear violation of provisions of section 269T.

Q.XYZ Ltd had accepted deposited of Rs. 12000 from Mr. Singh on 01-05-2015 for a period of two year (Rate of interest 12% p.a. payable annually). It further accepted deposit of Rs. 15,000 (Rate of interest 10% p.a payable annually). Date of second deposit was 01-06-2016.On 01-05-2017, XYZ Ltd repaid Rs.16,800 (together with interest) towards first deposit in cash. OP ltd also repaid Rs. 16,500 (together with interest) toward first deposit in cash. XYZ Ltd. also repaid Rs. 16,500 towards second deposit on 03-05-2017 in cash.

Does your answer differ in point no. (b)Above, if second deposit of Rs. 15,000 was in a joint name of Mr.& Mrs. Singh

Ans. The provision of the section 269T shall be made applicable if aggregate amount of deposits held by a person together with interest exceeds Rs.20,000 . Therefore, at the time of repayment of first deposit in cash, there is a violation of provision of section 269T since aggregate deposits together with interest exceeded Rs. 20,000.

However, there is no violation of section 269T by XYZ Ltd. at the time of repayment of second deposit in cash since neither the amount of deposit with interest nor the aggregate amount deposit held by Mr. Singh  on that date together with interest exceeds the threshold limit of Rs. 20,000.

The answer will not differ because the law mentioned under section 269Tis applicable even if deposits are held in joint name with other person.

Q.(i) Mr. A, an individual, has deposited Rs.15,000 on 1st ^May, 2019 for 48 months by bearer cheque and another Rs.15,000 on 30th ^June, 2019 in cash to purchase a new certificate of 48 months tenure.

(ii) Mr. A has applied for premature withdrawal against both the certificates and the company has paid him Rs.16,500, by a bearer cheque, against principal and interest on 23rd, March,2020, due against his first certificate (purchased in 2019) and Rs.15,500 in cash on 25th,March2020, against the second certificate.

Fearless General Finance & Investment Limited, a residuary non-banking company, accepts public deposits, issues deposit certificate and repays the same after some period of time alongwith interest, under different schemes run by it.

Following transactions were noted from their books of account:

Discuss the violation of income tax provision, if any, and consequential penalty for each transaction. Will it make any difference if the certificates were held jointly with Mrs. A, wife of Mr. A, while repaying back in cash or bearer cheque?

Ans. (i)There is no violation of section 269SS at the time of acceptance of the first deposit of Rs.15,000 on 1.5.2019, since it is not in excess of the threshold limit of Rs.20,000.

However, violation under section 269SS is attracted at the time of acceptance of the second deposit in cash on 30^thjune, 2019, since as on that date, there is already an outstanding deposit of Rs.15,000 and another cash deposit of Rs.15,000 would take the aggregate to Rs.30,000, which exceeds the threshold limit of Rs.20,000. Therefore, penalty under section 271D of a sum equal to the amount of deposit taken from Mr. A is attracted for failure to comply with the provisions of section 269SS.

(ii) This case, there is a violation of the provisions of section 269T at the time of first repayment by bearer cheque on 23rd ^March, 2020, since on that date, the aggregate amount of deposits held by Mr. A with the non-banking company (together with interest payable on such deposits) is more than Rs.20,000. Therefore, penalty under section 271E equal to the amount of deposit so repaid will be attracted for failure to comply with the provisions of section 269T. However, the second repayment of Rs.15,500 on 25th ^March, 2020 in cash cannot be considered as a violation of section 269T, since neither the amount of deposit with interest thereon nor the aggregate amount of deposits held by Mr. A on that date together with interest exceeds the threshold limit of Rs.20,000. The provisions of section 269T will be attracted even if the certificate is being held by Mr. A in joint name with his wife.

PENALTY FOR FAILURE TO COMPLY WITH SECTION 269T:

As per Section 271E of the Income tax act, 1961 if a person fails to comply with Section 269T then the Joint Commissioner shall charge a sum by way of penalty equal to the amount of the loan or deposit or specified sum so repaid.

Example. Pratham is an employee working in a company. He repaid loan in cash of Rs. 23,000/-(including interest of Rs.4,000),which he took from his friend for higher studies. What will be consequence of the said transaction for A.Y. 2022-23 ?

Ans. As per section 269T a person should not repay the amount of the loan or deposit or specified advance together with the interest, if any, payable thereon in cash for an amount of Rs.20,000/- or more.

On violation of 269T, If a person repays any loan or deposit or specified advance referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance so repaid (excluding interest) under Section 271E.It is to be noted that the words together with interest are not mentioned in sec 271E.So Penalty shall be levied on Pratham amounting Rs.19,000/-.

Form 3CD Clause 31(cIarticulars of each repayment of loan or deposit or any specified advance in an amount exceeding the limit specified in section 269T made during the previous year.

For the purposes of section 269T “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature.

• In the case of company assessee loan or deposit repayable on demand will not be considered for the purpose of this section as loan or deposit.
• In the case of non-company assessee loan or deposit is defined to mean loan or deposit of any nature. This distinction will have to be kept in mind while giving information under this sub-clause.

DISCLOSURES IN TAX AUDIT REPORT

CLAUSE 31 (CIARTICULARS OF EACH REPAYMENT OF LOAN OR DEPOSIT OR SPECIFIED ADVANCE IN AN AMOUNT EXCEEDING LIMIT SPECIFIED IN SECTION 269T REPAID DURING THE YEAR

Form 3CD Clause 31(d) Particulars of repayment of loan or deposit or any specified advance in an amount exceeding the limit specified in section 269T received otherwise than by a cheque or bank draft or use of electronic clearing system through a bank account during the previous year.

Form 3CD Clause 31(e) Particulars of repayment of loan/deposit or any specified advance in an amt. exceeding the limit specified in section 269T received by cheque / bank draft which is not an account payee cheque / account payee cheque / bank draft during the PY.

In case of a company loan or deposit repayable on demand will not be considered for the purpose of this section as loan or deposit. However, in the case of non-company assessee loan or deposit is defined to mean loan or deposit of any nature.

Particulars of each repayment of loan or deposit or any specified advance in an amount exceeding the limit specified in section 269T made during the previous year :- [this sub-clause was last amended w.e.f. 20-08-2018 vide Notification No.33/2018 dated 20-07-2018] Under this clause, the particulars of each repayment of loan or deposit or any specified advance in an amount exceeding the limit specified in section 269T made during the previous year are required to be furnished.

SOME INTERESTING ISSUES RELATING TO LOANS/ DEPOSITSANDREPAYMENTS

A. Whether Penalty u/s 271D be imposed where deposits are not genuine and considered as income u/s 68

Sec 68 is applicable where any sum is credited in the books maintained by the assessee and no explanation is offered or the explanation offered is not satisfactory. The amount so credited may be charged to income tax and tax is payable at the rate specified in sec 115BBE.

The issue is where the deposit/ loan has already been considered as income u/s 68, whether penalty u/s 271D for violation of sec 269SS can be imposed?

• In case of CIT v. Shyam Corporation [(2013) 35 taxmann.com 519 (Gujarat)] it was held that once booking of advance received by constructor had been assessed as undisclosed income under section 68, same could not be considered as deposit for levy of penalty under sections 271D and 271E
• In case of Director of Income-tax (Exemptions), Chennai Young Men Christian Association [(2014) 49 taxmann.com 72 (Madras)], it was held that once certain amount was subjected to tax under section 68, question of treating it as transaction in violation of section 269SS or section 269T did not arise as it stood mutually excluded.
• In case of ITO v. Smt. Gurmeet Kaur [(2012) 27 taxmann.com 173 (Jodh.)] it was held that once AO had made addition under section 68 treating deposits received in cash as non-genuine, then no penalty could be imposed under section 271D

Once the revenue has taken a stand that deposits are non-genuine then penalty under section 271D cannot be imposed. Penalty is a civil liability and some satisfaction is required for imposing such penalty.

B. WHETHER SEC 269SS APPLICABLE ON TRADING TRANSACTIONS SUCH AS ADVANCE FOR SUPPLY OF GOODS

NAME, ADDRESS AND PAN OF THE PAYEE	AMOUNT OF REPAYMENT	MAXIMUM AMOUNT OUTSTANDING IN THE ACCOUNT AT ANY TIME DURING THE PREVIOUS YEAR	WHETHER THE REPAYMENT WAS MADE BY CHEQUE OR BANK DRAFT OR USE OF ELECTRONIC CLEARING SYSTEM THROUGH A BANK ACCOUNT	IN CASE THE REPAYMENT WAS MADE BY CHEQUE OR BANK DRAFT, WHETHER THE SAME WAS REPAID OTHERWISE THAN BY AN ACCOUNT PAYEE CHEQUE OR AN ACCOUNT PAYEE BANK DRAFT

Advance received for supply of goods in future are not in nature of loans/ or deposits. They are generally provided to facilitate the production of goods by manufacturer or to provide some kind of security. Following judgments has been given on this issue

• Where the assessee had received an advance towards future supply of goods, such advance cannot fall under section 269SS, so as to require the transactions to be by account payee cheque. It was so held in CIT v. Kailash Chandra Deepak Kumar [(2009) 317 ITR 351 (All.)] holding that penalty under section 271D cannot be applied.
• Section 271D is confined to loan or deposit and not to other trading transactions. In CIT v. Indore Plastics Pvt. Ltd. [(2003) 262 ITR 163 (MP)], the assessee company received moneys from its promoter to the extent of about Rs. 2 lakhs. Since it was received in cash, penalty of an equal amount was levied. The Tribunal found that the receipt was neither a deposit nor a loan, but merely an adjustment of amount, which he owed to the company, so that the receipt did not fall within the meaning of loan or deposit under section 269SS of the Act
• The finding was challenged by seeking reference to High Court under section 256(2) of the Act, but the High Court agreed with the Tribunal that there was no question of law involved in the finding of the Tribunal.

C. TRANSACTION WITH SISTER CONCERNS

Sec 269SS and 269T was introduced to curb generation of black money. During search and surveys, asecognizenerally give reason that they have borrowed money/ received deposits from relatives and friends. Sec 269SS and 269T aims to not allow these as recognized escape by giving false explanations. However, in sister concerns where the transaction is recorded in books of both the parties and transaction is for genuine reason, the penalty u/s 271D and 271E may not be imposed. Judicial Pronouncements on this issue are as under:

• In CIT v. Maheswari Nirman Udyog [(2008) 302 ITR 201 (Raj.)], it was held that where payments were made in cash to sister concern, so as to enable them to meet their immediate cash needs, the explanation being reasonable was held to have been rightly accepted.
• Where the transactions are between two sister concerns both within the family and the fund transfers were for purposes of business with the transaction accounted for in the books, the requirement of reasonable cause was held to be satisfied in such circumstances in CIT v. Sunil Kumar Goel [(2009) 315 ITR 163 (Punj. &Har.)].
• Transactions as between sister companies do not attract penalty in CIT v. Lakshmi Trust Co. [(2008) 303 ITR 99 (Mad.)]

In case of Canara Housing Development Co. vs ACIT (13 Feb, 2009), action was initiated under section 271E against a housing development firm and a penalty of Rs. 14.72 crores was levied, the penalty being equal to the amount paid to sister institutions by cash to enable them to discharge their liability to contractors. It was argued that the transactions were inter-firm transactions tied up with common business interest with a common partner and the payments were for immediate use on the same date. Karnataka High Court had held that in such cases, there was reasonable cause, when the payments were otherwise genuine and were made to as recognized with PAN numbers as decided in an unreported case of the jurisdictional High Court in H. S. Ananthasubbaraya in I.T.A. No. 453 of 2003 dated 9^th march, 2004. The decision of the Tribunal in such a case of group company transactions in Muthoot M. George Bankers v. ACIT [(1993) 46 ITD 10 (Cochin)] was also relied upon.

D. TRANSACTIONS BETWEEN MUTUAL ASSOCIATION AND ITS MEMBERS AND TRANSACTIONS BETWEEN FIRM AND ITS PARTNERS

• It cannot apply to transactions between a mutual association and its members as was decided in Muslim Urban Co-operative Credit Society Ltd. v. JCIT [(2005) 278 ITR (AT) 246 (Pune)].
• It was held inapplicable to a transaction between a firm and its partners as was canvassed, but it was found to be necessary to decide the issue as the explanation was even otherwise acceptable in CIT v. Lokhpat Film Exchange (Cinema) [(2008) 304 ITR 172 (Raj.)].
• There cannot be two legally different parties as between a firm and partners as was decided in a different context in CIT v. R. M. Chidambaram Pillai [(1977) 106 ITR 292 (SC)]

E. BALANCE IN CURRENT ACCOUNT A DEPOSIT?

`Loan’ and `Deposit’ are not identical in meaning but it is true that both in the case of loan and in the case of deposit, there is a relationship of debtor and creditor between the parties giving money and the parties receiving money. In the case of deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposited the money.The benefit normally being earnings of interest from a party who customarily accepts deposits.

The deposit could also be for safe keeping or as a security for the performance of an obligation undertaken by the depositors. In the case of loan, however, it is the borrower at whose instance or for whose needs money is advanced. Borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interests on the amount lent.Ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover.

In case of Kans Raj & Sons v. ITO [(2005) 92 TTJ 931 (Asr.)]it was held that ‘Loan’ and `deposit’ are not identical in meaning and cannot be inter-changed. Some loans may be deposits and some deposits may be loans but all loans are not deposits and vice versa. Where the assessee, without stating the complete particulars of the deposit and without giving any particulars as to why he was accepting those deposits and as to why those depositors were making those deposits with the assessee and how those deposits were to be returned / repaid by the assessee to the depositors, had called those deposits in the nature of current accounts:

Held that unless the assessee had given/supplied the complete details to the AO at the time of assessment or at the time of penalty proceedings, while giving his explanation, it was difficult to hold that those depositors were having any current account with the assessee or the deposits with the assessee-firm made by the depositors were not covered within the meaning of loan or deposit as provided in section 269SS. Hence, the amount of deposits by the depositors with the assessee were deposits within the meaning of section 269SS and the assessee had violated the provisions of section 269SS.

F. BOOK ADJUSTMENT OF FUNDS VIOLATE S. 269T

Making book adjustment of funds by assessee firm with sister concern without making payment of cash, could not said to be violation or contravention of section 269SS and section 269T – Gururaj Mini Roller Flour Mills v. Addl. CIT [(2015) 370 ITR 50 (AP &Telangana)]

• Object of section 269SS is to prevent transaction in currency; it is not intended to affect cases where a debt or a liability arises on account of book entries –CIT v. Worldwide Township Projects Ltd. [(2014) 367 ITR 433 (Delhi)] Ambit of section 269SS is clearly restricted to transaction involving acceptance of money and not intended to affect cases where a debt or a liability arises on account of book entries. The assessee showed PACL as a sundry creditor in its books. PACL purchased lands on behalf of the assessee. PACL made payments to land owners through demand drafts. The AO concluded that transaction disclosed by the assessee amounted to a loan to the assessee and that no funds had passed through bank accounts of the assessee for acquisition of lands. Held that there was no infringement of section 269SS and penalty proceedings were to be quashed.
• Where there was no monetary transaction between assessee and creditor, rather by mere journal entry liability was created, it could not be said that loan or deposit was accepted by assessee from creditor was in violation of section 269SS – ACIT v. Vardaan Fashion [(2015) 38 ITR (Trib.) 247 (Delhi)] The AO noticed that the assessee had accepted loan or deposit otherwise than by account payee cheque or account payee draft and accordingly, levied penalty under section 271D. It Was observed that there was no monetary transaction between the assessee and the creditors. The monetary transaction had taken place between the creditors and some third party which were all by account payee cheques. In books of the assessee also, there was only a journal entry by debiting account of some other party and crediting to account of creditor. Held that since there was no monetary transaction between the assessee and the creditor, it could not be said that the assessee accepted loan or deposit from creditor in violation of section 269SS; hence penalty levied u/s 271D was to be cancelled.
• Where transactions by way of journal entries are aimed at extinguishment of mutual liabilities between assessee and sister concerns of group, penalty is not leviable under sections 271D / 271E – Lodha Builders (P.) Ltd. v. ACIT [(2014) 34 ITR (Trib.) 157 (Mum.)] Receiving loans and repayments through journal entries is hit by relevant provisions of section 269SS/269T. However, completing `empty formalities’ of payments and repayments by issuing / receiving cheque to swap / square up transactions, is not intention of provisions of section 269SS / 269T when transactions are otherwise bonafide or genuine. Where impugned journal entries in respective books were done with view to raise funds from sister concerns, to assign receivable among sister concerns, to adjust or transfer balances, to consolidate debts and to correct clerical errors, etc., and it was not case of revenue that any of impugned transactions was aimed at non-commercial reasons and outside normal business operations, though there was violation of provisions of Ss. 269SS/T, penalty was not leviable. 

WHETHER REOPENING OF ASSESSMENT UNDER SECTION 147 OF THE ACT COULD BE MADE FOR VIOLATION OF PROVISIONS OF SECTION 269SS OF THE ACT?

As discussed above, the penalty proceedings under section 271D/271E of the Act are completely independent of the assessment proceedings. However, the assessing officer

cannot come up after 4/6 years with a speculation that assessee might have dealt in cash transactions which needs to be verified. Hon’ble High Court of Gujarat with one such discrete issue in the case of Deep Recycling Industries vs. DCIT Special Civil Application No. 3611/2013 dt.02.08.2016 wherein the assessing officer has reopened the assessment for two reasons, one of which was acceptance of the loan without disclosing the mode of acceptance in the audit report and its repayment. The reasons were recorded stating that the entry of acceptance of loan needs to be scrutinized in detail. The assessing officer has not recorded any finding that income chargeable to tax has escaped assessment which is the prime requirement to reopen the assessment and has rather referred to the imposition of possible penalty under section 271D. As it is held by series of judgments of various courts that reopening of assessment cannot be made for mere fishing or rowing inquiries on mere suspicion, the matter was decided in favor of assessee. The assessing officer has to have a belief that income chargeable to tax has escaped assessment, for which there must be some tangible material having a live link with it. Although no specific time period has been provided in the Act for initiating penalty proceedings under section 271D/271E of the Act, it is possible to say that one may receive show cause notice for imposing penalty even after the expiration of 6 years of the relevant assessment year in which transaction in violation of Section 269SS/269T of the Act was carried out. However, following the decision of Gujarat High Court as above, where the scrutiny of acceptance/repayment of loan/deposit/advance is to be made through the strenuous mode of reopening of assessments under section 147 of the Act, it cannot be done without having an independent reason to believe followed by supporting tangible material that the assessee has contravened the provisions of Section 269SS/269T of the Act.

NO PENALTY UNDER SECTION 271D AND 271E ON CASH RECEIPTS AND CASH PAYMENTS OF LOAN OVER RS. 20,000 FROM FAMILY MEMBERS TO MEET BUSINESS EXIGENCIES

Assessee transporter was engaged in business of plying of truck and had not maintained any regular books of account. A survey under section 133A was conducted on 19.11.2007 in the business premises of the assessee. The assessment was completed on the basis of registers impounded. These registers allegedly contained entities of cash receipts and cash payments exceeding Rs.20,000/- from various persons which are admitted as cash loan deposits receipts and cash loan deposits repayments. The competent authority, i.e., Additional Commissioner of Income Tax invoked the provisions of sections 271D and 271E for alleged infringement of sections 269SS and 269T and imposed penalty of Rs.21,82,000/- and Rs.16,70,500/- respectively.

On appeal, The CIT(A) dismissed appeal of assessee and confirmed action of Additional Commissioner of Income Tax. On further appeal to Tribunal, it was found that the assessee in the course of survey itself, on being questioned, responded that the cash has been received by way of temporary loan from family members to meet the business exigency having regard to the nature of business he is involved in. The fact of business exigency has not been denied by the Revenue. The turnover receipts declared by the assessee at Rs.39,61,195/- was enhanced to Rs.1,33,67,162/- for the purposes of estimation of income based on such impounded records. It was also found that loans were taken from family members for business need and used for payment to drivers and other business associates to enable him to ply trucks.

Therefore, imposition of penalty separately towards such receipts by way loan is not justified. The impromptu response of the purportedly uneducated assessee at the time of survey, in our view, requires to be seen in its natural perspective and requires to be given credence. The assessee has declared that the money was received from family members to meet the business exigencies. Having regard to the nature of business of the assessee and ground realities, such explanation appears plausible. Some of the case law of the Hon’ble High Courts and Co-ordinate Benches of Tribunal viz; DCIT v. Rupen Dass (2011) 16 taxmann.com 35 (ITAT Kolkata); CIT v. Balaji Traders (2008) 303 ITR 312 : 167 Taxman 27 (Mad.); CIT v. Lakshmi Trust Co. (2008) 303 ITR 99 (Mad); DCIT v. Vignesh Flat Housing Promoters (2007) 105 ITD 359 (ITAT Chennai); Dillu Cine Enterprises (P) Ltd. v. Addl. CIT (2002) 80 ITD 484 (ITAT Hyderabad); Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC) Says in corus that the breach of sections 269SS and 269T for receipt/repayment of cash attributable to business exigencies is a mere technical or venial breach. Therefore, assessee having declared that money was received from family members to meet business exigencies and having regard to nature of business of assessee and ground realities, such explanation appeared plausible, order of Commissioner (Appeals) was to be set aside and penalty imposed under section 271D and 271E by competent authority was to be cancelled. [In favour of assessee] (Related Assessment year : 2008-09) – [Balwan Singh v. ACIT (2022) 137 taxmann.com 395 (ITAT Delhi)]

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