Section 269SS: Cash Transaction Rules, Penalties, Exemptions & Case Laws

Summary: Section 269SS of the Income Tax Act prohibits accepting loans, deposits, or specified sums in cash exceeding ₹20,000, mandating that such transactions must be done via an account payee cheque, bank draft, or electronic clearing system (ECS). This law aims to curb large, unaccounted cash transactions, often used for tax evasion or illegal activities like money laundering. Violations of Section 269SS attract penalties under Section 271D, which imposes a penalty equal to the cash amount received. However, Section 273B offers relief if a reasonable cause for non-compliance can be demonstrated. Key court rulings, such as Asstt. Director of Inspection v. Kum. A.B. Shanthi, have upheld the imposition of penalties, emphasizing strict adherence to the law, even for genuine transactions. Exemptions exist for transactions between partners and firms, as they are considered internal adjustments and not subject to Section 269SS. Courts have also granted relief where cash transactions were deemed necessary for genuine business needs, provided the taxpayer can substantiate the urgency or business exigency, as in CIT v. Lakshmi Trust Co.. These rulings underscore the importance of following proper banking channels for large financial dealings.

Section 269SS: Cash Transaction Rules, Penalties, Exemptions, and Important Court Decisions

The  Income Tax Act includes provisions designed to cut down  circulation of unaccounted money and to promote transparency in monetary transactions. One such provision is Section 269SS  which prohibits the acceptance of loans, deposits, or particular sums in cash beyond a such threshold. The regulation pursuits to deter big cash transactions, which can be regularly used to  escape from taxes and avoid financial scrutiny.

This article, we are able to discover Section 269SS, its associated penalties under Section 271D, and exemptions provided under Section 273B, together with particular reasons of these sections, their judicial interpretations, and practical implications.

1. Understanding Section 269SS: A Detailed Explanation

Section 269SS prohibits any person from accepting loans, deposits, specified sums in cash exceeding ₹20,000 from some another individual. The regulation mandates that such transactions have to be made by an account payee cheque, an account payee bank draft, or an electronic clearing device (ECS). This provision changed into brought to reduce the practice of accepting massive sums of money in cash, that could otherwise escape taxation and facilitate unlawful activities together with money laundering.

Key Elements of Section 269SS:

• Applicability: The provision applies to all individual, corporations, partnerships, and other entities that be given loans, deposits, or specific sums from other person or entity.
• Monetary Limit: The law applies when sum of the loan or deposit is ₹20,000 or more
• Mode of Transaction: All such transactions should be performed through traceable approach, i.E., account payee cheques, bank drafts, or ECS.
• Specified Sum: Any sum received in connection with the transfer of immovable property, regardless of whether or not amount  is  loan or deposit

Real meaning of this section is to make certain that transactions related to large amounts are properly documented and that cash transactions are minimized to prevent   circulation of unaccounted cash.

2. Penalties under Section 271D

The Income Tax Act section 271D  specifies penalty for violations of Section 269SS. If any person accepts loan, deposit, or  sum in cash in breaking of Section 269SS, they may be charged to  penalty equal to the amount received in cash.

Key Elements of Section 271D:

• Penalty Amount: The penalty is same to the sum of the loan, deposit, or specified sum that was received in violation of Section 269SS.
• Power to Impose Penalty : The joint commissioner of income levied penalty
• Intention: The obligation of penalty is to discourage individuals and business from conducting  large cash transactions which will be used for tax evasion or other unlawful activities.

Supreme court’s Benchmark Judgments on this Section

Asstt. Director of Inspection v. Kum. A.B. Shanthi [2002] 255 ITR 258 (SC)

Facts of the Case:

• Kum. A.B. Shanthi, involved in certain Financial transactions wherein she received loans and deposits in cash, violating Income Tax provisions 269SS. Main issue was imposition of a penalty U/s 271D of the I.T. Act for violation of provision.
• Section 269SS prohibit acceptance of loan or deposit of Rs. 20,000/- or more in cash which require that such transaction must be carried out by account payee cheque or account draft.

 Submissions by the Assessee:

• The assessee said that the loans and deposits accepted in cash for the  urgent requirement of the business not evade to taxes or suppress income
• It was also contended that there was no mens rea, in accepting these cash deposits, and consequently, the penalty under Section 271D must not be levied.
• The assessee highlighted that the transactions have been actual, and merely a technical violation of the regulation happened, which did no longer justify the imposition of any such harsh penalty.

 Analysis by  the I.T. Officer:

• The Officer has found that assessee has accepted cash loans in violation of section 269SS
• The officer noted that the motive for cash accepted not justified, and law actually prohibited such transactions, no matter the genuineness of the business dealings.
• Based on the violation of Section 269SS, ITO imposed a penalty u/s. 271D of the Income Tax Act.

 Observations by the Commissioner of I.T :

• The Income Tax commissioner upheld  penalty imposed by the ITO, disallow the assessee’s arguments.
• The Commissioner emphasized that provisions of Section 269SS have been performed to fight tax evasion through cash transaction and failure to adhere to these provisions warranted a penalty.

   Tribunal’s View:

• The Tribunal while investigation the appeal, recognized the arguments presented by assessee but completed that the provisions of the law were unmistakable.
• The Tribunal held that even though t transactions were authentic, the violation of Section 269SS was  technical breach that attracted the penalty u/s. 271D.
• The Tribunal upheld the penalty, stating that  law must be followed firmly, and genuine transactions could not be  excuse for non-compliance.

Supreme Court Decision:

• The Supreme Court observed  intent and purpose behind  introduction of Section 269SS, which was to prevent the large number of black money and ensure that large cash transactions were reported throughout proper banking channels.
• The Court rejected  assessee’s plea that  penalty was too ruthless, ruling that the provisions of Section 269SS and 271D were mandatory and violation could not be unseen  merely because  transactions were genuine.
• The Supreme Court emphasized that compliance with the provisions of the I.T Act was necessary and failure to do so regardless of intent, attracted  prescribed penalty.

References to Other Cases:

• CIT v. Bombay Conductors & Electricals Ltd. [2008] 301 ITR 328 (Guj): This case dealt with the interpretation of Section 269SS and the imposition of penalties under Section 271D, reinforcing the strict application of these provisions.
• Baiju A.A. v. Dy. CIT [2018] 406 ITR 428 (Ker): In this case, the court reiterated that technical violations of Section 269SS warrant penalties, even in the absence of tax evasion motives.
• CIT v. Ajitnath Hi-Tech Builders Pvt. Ltd. [2018] 407 ITR 625 (BC): The Bombay High Court held that  acceptance of loans through journal entries violated Section 269SS but did not warrant a penalty due to a reasonable cause under Section 273B.

3. Relief from Penalties: Section 273B

While Section 271D enforced penalty for non-compliance with Section 269SS, Section 273B provides relief from these penalties in certain occasions. If taxpayer can show that they had a rational grounds for not fulfilling with Section 269SS, they will be not liable from the consequence.

Key Elements of Section 273B:

• Reasonable Cause: A person can avoid penalties U/S.271D if they could show that the failure to fulfill was due to a reasonable purpose. For example business exigencies, unexpected occasions, or real difficulties in adhering to banking norms may qualify as reasonable causes.
• Burden of Proof: The onus of confirm the existence of a reasonable cause lies with the taxpayer. They must provide enough evidence to reveal that their actions were reasonable.

4. Transactions Between Partners and Firms: Exemption from Section 269SS

A case Law has established that transactions among a partner and partnership Firm do not fall under the purview of Section 269SS. This is because a partnership Firm is not a separate Legal entity from its Partners, and any transaction between the two is considered an inner adjustment.

• Supreme court’s Land mark Judgment

CIT v. R.M. Chidambaram Pillai, etc. 1977 CTR (SC) 71:

Facts of the Case: .

• The assessee, R. M. Chidambaram Pillai was a partner in the firm which grew and manufactured tea. The activity was regarded as a composite business for purposes of the Income Tax Act.
• The firm received profits also from the business of cultivating and manufacturing tea. The partner’s issue was regarding the computation of his income vis-a-vis the profits generated by the firm.
• The issue was regarding the question that whether salary payment made to the partner from the firm could be categorized as ‘income from salaries’ or rather as a share of profits made from the firm for purpose of taxability .

Submissions by the Assessee: .

• The assessee argued that salary received from the firm treated as a “share of profit”  Income should not be tax under head of “ Salary ‘for the tax calculation.
• The assessee contended that as a partner, it was just a distribution of income and nothing within the income tax act termed as “salary.”
• The claim was that the partner was a co-owner of the firm rather than an employee and therefore the remuneration is nothing but an appropriation of profit.

Observations by the I.T. Officer.

• In the hands of the partner the remuneration paid for being a partner was considered under the income head “incomes from salaries” as given in section 15 of the Income Tax Act and was charged to tax.
• The ITO held that payment made to partner accounted as a salary in firm’s account, so it should be treated as income from Salary, irrespective of the partner’s position in the firm.
• The officer emphasized that the firm , for tax purposes, was distinct entity, and payment  made by it to a partner  in any form had been assessable as profits under the applicable heads.

Observations by the commissioner of I.T:

• The Commissioner of Income Tax upheld ITO’s decision , observing  that the salary paid to the partner is different from share of profit and had to be taxed separately
• The Commissioner trusted the fact that the firm was treated as a separate taxable entity for the motive of distributing income, and any salary paid to the partner could not be exempt from taxation.

Tribunal’s View:

• The Tribunal took view that  partner’s salary is not different form of income like  salary of employee but somewhat  profit appropriation from the partnership.
• The Tribunal leaned towards the disagreement that  salary received by partner shouldn’t be treated as “income from salary” but as  part of  profit-sharing mechanism.

Supreme Court Decision:

• The SC in its landmark decision ruled that  salary paid to  partner  from firm  is nothing however  share of profit and cannot be taxed under the head of “salary” U/S. 15 of the I.T Act
• The SC held that partnership firm even though assessed as  different entity for taxation purposes  is essentially   collection of partners. As such any remuneration received by partner is only a distribution of profit and should  not be treated as  separate salary income.
• The SC further make cleared that for tax purpose salary paid to partner is to be taken into consideration as part of their share of profits and taxed accordingly.

References to Other Cases

1. CIT v. Lokhpat Film Exchange (Cinema):

• • The Rajasthan High Court held that transactions between partner and a firm do not represent loans or deposits under  Sections 269SS and 269T.
  • The court observed that partnership firm does  not have a distinct legal identification from its partners. Therefore, the inter-se financial transaction among partner and  firm  are not governed by the cash transaction limits set by using Section 269SS.

2. CIT v. V. Sivakumar:

• • The Madras High Court ruled that cash withdrawals or contributions made by partner do no longer amount to loans or deposits. Thus, they’re no longer subject to the provisions of Section 269SS, and penalty U/S. 271D are not applied

5. Genuine Business Needs and Exemptions

Even if  transaction appears to disobey Section 269SS, if  taxpayer can confirm that transaction was authentic and necessary for business reasons  penalties may be avoided. In many cases courts have provided relief  where transactions were conducted in cash due to genuine business necessity.

CIT v. Lakshmi Trust Co. [2008] 303 ITR 99 (Mad)

 Facts of the Case:

• The Lakshmi Trust Co. was engaged in providing loans and investments.
• The dispute arose regarding the taxability of the interest waived through the assessee on certain loans given to its sister concerns.
• Primary questions was whether or not the waiver of interest by the assessee have to be dealt with as an allowable deduction or whether or not it represented business  deduction  that did not allow  for tax relief.

Submissions by the Assessee:

• The assessee contended that the waiver of interest was a valid business decision taken in the best interest of its business.
• It argued that the waiver of interest was made in order to help its sister concerns  which had been going  process financial problems, and that this should be handled as an ordinary business expenditure allowable under the Income Tax Act.
• The assessee additionally submitted that the waiver was neither income-earning activity nor a means to evade of taxes, but instead a business necessity.

Observations by the I.T. Officer:

• The Income Tax Officer disallowed the waiver of interest as  deduction, retaining that the choice to waive interest was not taken for business motives however to benefit the sister concerns.
• The ITO emphasized that there was no actual loss to the assessee, and the waiver of interest couldn’t be considered as an expenditure incurred for the cause of its business enterprise.
• The officer in addition discovered that the waiver did no longer align with the principle of business expediency and therefore it was eligible for tax deduction.

Observations by the Commissioner of I.T. :

• The Commissioner of Income Tax upheld the ITO’s decision, pointing out that the waiver of interest was not a regular business expenditure.
• The Commissioner noted that assessee had failed to provide sufficient explanation for waiving interest and that  waiver was other of  financial adjustment to related parties, rather than an action driven by business requirement.
• The appeal was discharged on the basis that waiver did not be eligible as deductible business expense.

Tribunal’s View:

• The Tribunal inverted findings of the ITO and I.T Commissioner ruling in support of the assessee.
• It held that  decision to waive interest was  business decision made in  interest of saving business dealings and serving its sister concerns survive economic adversity.
• The Tribunal emphasized that  business rationale behind  waiver was sound and that such judgment though advantaging  related parties  can still be permissible deductions if they are commercially Justified.

Madras High Court Decision:

• The Madras HC upheld  Tribunal’s decision, stating that  waiver of interest by assessee was a lawful business decision made for business expediency.
• The HC ruled that  I.T authorities cannot confront the wisdom of  business decision, particularly when the decision is supported by sound business rationale.

The HC Said  that  waiver of interest was certainly  allowable deduction u/s. 37(1) of the Income Tax Act  as it was made entirely and fully for  purposes of the business

References to Other Cases:

• CIT v. Birla Gwalior Pvt. Ltd. [1973] 89 ITR 266 (SC): The SC emphasized that business decisions made for commercial expediency cannot be inquired by tax authorities  as long as they are necessary by business needs.
• S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC):  The SC ruled that interest-free loans given to sister concerns could be considered commercially expedient, provided they serve up the commerce purpose.

 Penalty u/s 271D is not applicable on Capital Contributions by   Partners

• Various judicial precedents have clarified unambiguously that capital contributions by a partner to a partnership firm do not constitute loans or deposits for the purposes of this entry. Hence, even if these contributions are made in cash, they would not be considered under the provisions of Section 269SS.

ITO v. Universal Associates [2013] 143 ITD 262 (Mum):

Facts of the Case:

• Introduction of capital was made by the partners for cash payable to Universal Associates (a partnership firm).
• After that, the Assessing Officer raised a Section 269SS of the Income Tax Act as it is not allowed to accept loans/deposits in cash exceeding ₹20,000 and slap with penalty u/s 271D.
• The AO treated the capital contribution as cash deposits stating that these were required to be in conformity with a provision contained under Section 269SS.

Submissions by the Assessee:

• The assessee contended that as the capital contribution made by partners cannot be treated as Loans or Deposits under Section 269SS.
• According to the assessee, these contributions were nothing but capital investment given by partners in a firm and therefore could not be categorized as loan which is supposed to have been taken under Section 269SS.
• The firm’s case was that the capital contributions made in the course of business for supporting the firm did not attract penalties under Section 271D.

Observations by the I.T. Officer:

• The Income Tax Officer treated the capital contributions to be “deposits” as provided for under Section 269SS.
• The ITO argued that the cfirm had violated the said provision by accepting contributions in cash more than the permissible limit and levied penalties under Sec. 271D.

 Observations by Commissioner Of I.T :

• CIT confirmed the lower order passed by ITO , CIT was satisfied that capital contributions were in the nature of deposits liable for penalty u/s.271D
• The Commissioner found that the contributions had been accepted in cash and hence fell within the ambit of Section 269SS prohibiting such cash transactions above ₹20,000.

 Tribunal’s View:

• The Mumbai ITAT has set aside the orders passed by the lower authorities and has ruled in favor of the assessee.
• The Tribunal opined that the capital brought in by the partners in the firm is essentially different from loans/deposits within the meaning of section 269SS.
• The Tribunal held that the relation between the partner and the firm is that of ownership and the contribution of capital is an investment, not a loan or deposit. Thus the penalties levied under Sec 271D were set aside

Conclusion:

Transactions Between Partners and Firms:

The contribution of capital and other internal financial transactions between partners and firms are specifically excluded from the purview of Section 269SS. The taxpayers may safely make such contributions in cash without attracting penalties

Transaction Prove to Be Genuine:

If it can be proved that the transaction has been effected in genuine business exigency, then the penalties under Section 271D may be waived. Every care should be taken by the enterprises through proper documentation and justification for cash transactions.

Ensuring Compliance:

The taxpayer is obliged to be more careful when accepting loan or deposit in cash from third parties. The taxpayer will definitely avoid penalty if the prescribed banking modes are adhered to.