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Introduction
Unaccounted
cash found in the course of searches carried out by the Income Tax
Department is often explained by tax-payers as representing loans
taken 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 and tax-payers are also able to get confirmatory letters
from such persons in support of their explanation. With a view to
countering this device, which enables tax-payers to explain away unaccounted
cash or unaccounted deposits, the provisions of sections 269SS and
269T have been inserted in the Act debarring persons from taking/
accepting or repaying any loan or deposit in cash in excess of Rs.
19,999.99. (CBDT Circular No. 387 dtd. 6-7-1984). To enforce
the aforesaid provisions penalties have been provided in sections
271D and 271E of the sum equal to the amount of loan/deposit taken/
accepted or repaid in cash in excess of the aforesaid monetary limit.
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Penalty
for taking/accepting or repaying any loan or deposit in cash in contravention
of the provisions of section 269ss and 269t
Section
269SS provides that no person shall take or accept from any other
person any loan or deposit otherwise than by an account payee cheque/bank
draft if (a) the amount of such loan/deposit or (b) on the date of
taking or accepting such loan/deposit, any loan or deposit taken/accepted
earlier is remaining unpaid, the amount or the aggregate of amount
remaining unpaid or (c) the amount or aggregate amount referred to
in (a) above together with the amount or aggregate amount referred
to in (b) above – is
Rs. 20,000/- or more; i.e., section 269SS prohibits the taking or
accepting any loan or deposit in cash exceeding Rs. 19,999.99. Section
271D provides for penalty of a sum equal to the amount of loan or
deposit taken/ accepted in cash in contravention of the provisions
of section 269SS.
Section
269T provides that 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 otherwise than by an account
payee cheque/bank draft if (a) the amount of the loan or deposit together
with the interest if any payable thereon or (b) the aggregate amount
of the loans or deposits held by such person either in his own name
or jointly with another person on the date of such repayment together
with the interest, if any payable on such loans or deposits – is Rs.
20,000/- or more; i.e., section 269T prohibits the repayment of any
loans or deposits in cash exceeding Rs. 19,999.99. Section 271E provides
for penalty of a sum equal to the amount of loan or deposit repaid
in cash in contravention of the provisions of section 269T.
The
penalties imposable under sections 271D and 271E shall be imposed
by the Joint Commissioner.
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Quantum
of penalty
Section
271D as well as section 271E provide that the penalty shall be the
sum equal to the amount of loan or deposit taken/accepted or repaid
in cash in contravention of the provi-sions of sections 269SS and
269T which lays down the limit of Rs. 20,000/-. Thus the quantum of
penalty would be the amount paid in cash in excess of the said limit
of Rs. 20,000/-.
In CIT
vs. Ajanta Dyeing & Printing Mills (2003) 264 ITR 505 (Raj) it
was held that if any loan is there exceeding Rs. 20,000/- and for
that purpose any penalty is to be imposed in accordance with provisions
of section 271-D for violation of section 269SS, permissible amount
of Rs.20,000/- has to be adjusted meaning thereby the penalty is leviable
in respect of the amount that exceeds the limit of Rs. 20,000/-
In Ravi
Iron & Scrap Co. vs. DICT (2001) 70 TTJ 263 it was
held that the scheme of legislation is quite clear that no penalty
is attracted with reference to amount of loan/ deposit below Rs. 20,000/-
and that penalty would only be exigible with reference to further
loan/ deposit in excess of Rs. 20,000/-; i.e., where the assessee
had taken deposits of Rs. 20,000,
Rs. 2,000 and Rs. 1,500 other than by account payee cheque/draft,
penalty was imposable with reference to deposits of
Rs. 3,500/- only and not with reference to aggregate deposit of Rs.
23,500. Similar view has been taken in ITO vs. Satya Prakash Gupta (2004) 85 TTJ (Jd.) 18.
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Penalties
u/ss 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.
[Manoharlal vs. Dy. CIT (1995) 83 Taxman 255 (Jp.) (Mag.), Bhushan
Chemicals vs. Dy. CIT, 54 ITD 5 (Pune)]. The usual concepts
like the assessee, the previous year, the assessment year, or the
law applicable to the assessment year cannot be imported into the
provisions of section 269SS or section 269T. (Muthoot M. George
Bankers vs. Asst. CIT (1993) 46 ITD 10 (Cochin). The question
as to whether the assessee had paid his self assessment tax for any
particular assessment year or not, shall have no relevance to the
question of admissibility of the appeal against imposition of penalty
u/s. 271D on the assessee simply because of the fact that this penalty
cannot be related to any particular assessment year or return of income
in respect of any such year. Therefore, dismissal of appeal against
penalty order under section 271D in limine on ground of non-payment
of self assessment tax would not be justified. [T.D.
Rathod vs. Dy. CIT (1995) 53 ITD 375 (Bang.)]
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Provisions
of sections 269ss and 271d are not retrospective in nature
In Som
Nath Khem Chand vs. O.P. Bhiana, ITO (2001) 250 ITR 785 (P&H)
it was held that the amendment/deletion brought about in section
276DD w.e.f. 1-4-1989 (which provides for prosecution of person for
failure to comply with the provisions of section 269SS) and substituting
the same with section 271D wherein only penalty has been provided,
cannot operate retrospectively unless the substitution was made specifically
retrospective or could be so inferred by implied intendment. In
Jaipur Carpet Mfg. (India) (P.) Ltd. vs. DCIT (2000) 113 Taxman 227
(Jp.) (Mag) & Muthoot M. George Bros. vs. ACIT (1994) 74 Taxman
290 (Coch) (Mag) it was held that provisions of sections 271D
and 271E could not be invoked in relation to violation taking place
prior to 1-4-1989.
In Straptex
(India) (P.) Ltd. vs. Dy. CIT (2003) 84 ITD 320 (Mum) it
was held that since section 269T as it stood at relevant time, prohibited
repayment of deposits and word ‘loan’ was inserted later by Finance
Bill, 2002, levy of penalty u/s. 271E for assessment year 1991-92
for alleged violation of section 269T for repayment of loan was not
sustainable.
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Constitutional
validity
In Asst.
Director of Inspection vs. Kum. A.B. Shanthi (2002) 255 ITR 258 (SC)
it was held that section 269SS or 271D, or earlier section 271DD,
cannot be held to be unconstitutional on ground that they are draconian
or expropriatory in nature. In Chamundi Granites (P) Ltd. vs. DCIT
(1999) 239 ITR 694 (Kar) it was held that the provisions of secs.
269SS and 271D are the reasonable restrictions in accordance with
the powers which are with the Parliament and, as such, cannot be considered
violative of Articles 14 and 19. The same view has been taken in Narsingh
Ram Ashok Ram vs. Union of India (1998) 234 ITR 414 (Pat). The
constitutional validity of section 269SS and 269T has also been upheld
by the Hon’ble Rajasthan High Court in Mehta
Vegetable P. Ltd. vs. Union of India – 235 ITR 425 (Raj)
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Loans
or deposits
The
general law makes a clear distinction between loan and deposit.
For example, under the Limitation Act, different limits have been
set out for instituting suits for recovery of loans and deposits.
The Chambers 20th Century Dictionary, (New Edition 1983) defines
a ‘deposit’ as ‘that which is deposited or put down; a sum of money
paid to secure an article, serving etc.; while it defines ‘loan’
as ‘anything lent, especially money at interest; the act of lending;
the condition of being lent; and arrangement for lending’. Thus,
there is a marked distinction between a loan and a deposit [Dy.
CIT vs. Dhanji R. Zalte (2001) 78 ITD 397 (Pune)]. The aforesaid
distinction had more significance prior to 1-6-2003 because prior
to that date penalty u/s. 271E was leviable only in respect of deposits
repaid in contravention of the provisions of section 269T i.e. cash
loans repaid in excess of
Rs. 20,000/- were not hit by the provisions of section 269T/ 271E.
(A.M. Shamsudeen vs. UOI (2000) 244 ITR 266 (Mad.)) However,
after the amendment w.e.f. 1-6-2003, even loans are now hit by section
271E.
The
prerequisite condition for levy of penalty u/s. 271D/271E is that
the transaction in cash must result in a loan or a deposit. Thus
if the receipt/repayment of cash does not 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.
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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.
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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.
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Loans
to minor children and wife
In
ITO vs. Sunil M. Kasliwal (2003) 80 TTJ (Pune) (TM) 1
the assessee was a manufacturer of building material, etc.
He was in need of funds for his business and borrowed money
from his minor children and wife. As far as minors were concerned,
the assessee himself acted as the guardian. No other person
was involved. In the capacity of the guardian of the minor children,
he had 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 was leviable u/s. 271D. It was held that even assuming
that there was breach, it was only a technical and venial breach.
There is a common law maxim : "De non minimis curat lex". It
means law does not take into consideration trivialities. In
respect of the loan taken from the wife, the amount of loan
was very small. Normally, it could not be construed to be a
transaction between the borrower and the lender. Genuineness
of the transaction was not doubted. Apropos the relation of
husband and wife it is said in the Bible that "what god hath
joined together man cannot cast as under". As such, there existed
a mitigating circumstance. The penalty could not be maintained
in respect of the loans to minor children and wife.
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Where
purchase consideration of a property purchased by assessee alongwith
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.
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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.
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Where
father deposits cash for education of his son
In
ITO vs. Shree Mahaveer Industries (2004) 82 TTJ (Jd.) 549
it 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.
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Withdrawal
from joint account of father and son
In
Shiv Nandan Kaushik vs. Dy. CIT (2002) 74 TTJ 761 (Chd)
an amount of Rs. 2 lakhs was withdrawn from the joint bank
account of assessee and his son and same was deposited with
a company. It was agreed between father and son that deposits
of Rs. 1 lakhs each would be made in the separate names of father
and son and income arising therefrom would be respective income
of father and son. It was held that mere fact that the company
had issued one receipt in the name of the assessee was not a
conclusive evidence that the deposit was made by the father
alone, when in fact income arising from their respective deposits
was being enjoyed by both and assessed accordingly. It was held
that the department had not been able to establish the fact
that transaction was indeed a loan to assessee from his son.
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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.
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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.
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Where sister concerns and their partners are
closely related to each other.
In
Motilal & Co. vs. ITO (1999) 102 Taxman 108 (Ahd.) (Mag.)
the assessee contended that it had three sister concerns
and the partners of these firms were closely related to each
other and as and when money was required, it was taken and paid
back to the other party and entries made in running accounts.
It was therefore held that the amount received by the assessee
were neither loans nor deposits. Similar view has also been
taken in Muthoot M. George Bankers vs. ACIT (1993) 46 ITD
10 (Coch.) and ACIT vs. G.P. Taparia (2004) 84 TTJ (Jd.)
34.
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Temporary
advances being neither loans nor deposits are outside the purview
of section 269SS
In
Karnataka Ginning & Pressing Factory vs. Jt. CIT (2001)
77 ITD 478 (Mum.) it was held that where the amounts
taken by the assessee from its sister concern were temporary
advances and there was no evidence that there was any stipulation
as to the period or any stipulation for interest, it was therefore
a matter of grave doubt as to whether the amounts received from
its sister concern could be characterised as loans or deposits.
They could be more appropriately referred to as temporary advances
which are outside the purview of section 269SS.
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Where
promoter director of assessee-company provided funds in cash
to assessee from time to time to meet immediate requirements
of assessee’s project activity, the provision of funds, did
not amount to a transaction of loan/deposits as it was a unilateral
transaction
In Chandra Cement
vs. Dy. CIT (2000) 68 TTJ (Jp.) 35 when the promoter
director found company being unable to make the resources available
for the project work, he decided to involve and utilise his
own money for construction work. There were neither compelling
reasons nor a compelling force by the so called artificial person,
i.e. company, to bring in the money. It was merely a suo
motu decision of the promoter to expose himself to such
a huge risk of utilising his personal money for company’s purpose,
with the hope that he would take it back when the loans were
disbursed to the company. It was a case where agent utilised
his own money in order to fulfil his obligations towards the
principal upon which he became entitled to get back the money.
This was thus a unilateral transaction on the part of the promoter
to involve and utilise his own money by withdrawing it from
his own sources. As unilateral Act cannot result in a contract
for which existence of two parties is a sine qua non. Loan or
deposit, both are contracts only, originating from bilateral
Act. The company was bound to pay for the construction expenditure.
The promoter paid it because he was interested in the capacity
as promoter and also because his personal guarantees were involved
in the finances to the company. Thus, he paid the amount and
became entitled for the reimbursement by the company. It was
thus, neither a loan which was a bilateral transaction at the
instance of borrower having predetermined repayment period,
nor a deposit which was at the instance of depositor and was
repayable on fulfilment of certain conditions. The provisions
of section 269SS were therefore not attracted.
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Where cash withdrawal
is made by promoter director of a closely held sick company
for purchase of FDR which is offered as security in accordance
with the direction of AAIFR
In Mrs. Rupali R. Desai vs. Addl. CIT (2004) 88 ITD 76
(Mum) the assessee was a shareholder of a private
limited company which was a sick unit covered by BIFR. The AAIFR
had directed the Chairman and Managing Director of the company
who was the father of the assessee to deposit Rs. 41.50 lakhs
as security. Accordingly cash was withdrawn from the company
and given to the assessee to enable her to get FDRs which were
offered as security. Ultimately the revival proposal failed
and the money was returned to the company by the assessee through
cheque. It was held that taking into consideration the entire
conspectus of the case, there existed a reasonable cause for
accepting the cash loans and the penalty was accordingly deleted.
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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.
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Advance
for purchase of truck does not amount to loan or deposit See
CIT vs. Kharaitilal & Co. (2004) 270 ITR 445 (P&H)
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In
case of Kachcha Arhatiya
The
Board is of the opinion that where a ‘Kachcha Arhatiya’ sells
goods belonging to an agriculturist, the sale proceeds thereof
which remain with him cannot be regarded as a deposit made by
the agriculturists with the ‘Kachcha Arhatiya’. Further, whether
the ‘Kachcha Arhatiya’ remits only a part of the sale proceeds
to the agriculturists, the unremitted part of the sale proceeds
would also not assume the character of a deposit. Therefore,
the repayment of such sale proceeds does not fall within the
purview of section 269T of the Act. (CBDT Circular No. 556
dtd. 23-2-1990). The said Circular has been relied upon
in Harpal Singh Jaswant Singh vs. ITO (1995) 82 Taxman 81
(Asr.) (SMC) (Mag).
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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 the
Assessing Officer cannot be permitted to treat the amount of
loan as income for the purpose of assessing tax thereon while
framing the assessment and at the same time to treat it as a
loan for the purpose of section 269SS, read with section 271,
and subject the transaction to penalty. Such proceedings would
be self contradictory. Where for non-compliance with the provisions
of sec. 269SS, the genuineness of the transaction as loan was
doubted by the Assessing Officer and so the amount was surrendered
by the assessee, and the surrender was accepted by the Assessing
Officer as income of the assessee, it ceased to be a loan and,
therefore, the very foundation for the initiating the proceedings
for levying penalty u/s. 271D could be said to have been lost.
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It
must be established that money is borrowed in cash – mere presumption
raised under section 132(4A) that assessee had borrowed money
in cash is not sufficient
In Straptex (India)
(P.) Ltd. vs. Dy. CIT (2003) 84 ITD 320 (Mum) it was held
that even where presumption was raised under section 132(4A)
that assessee had borrowed money in cash, levy of penalty u/s.
271D could not be sustained in the absence of corroborative
evidence to establish that the assessee borrowed money in cash.
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Some
transactions otherwise than through account payee cheque/bank draft
which are not hit
Though
sections 269SS and 269T use the words "otherwise than by an account
payee cheque or account payee bank draft" the said provisions are
meant to hit only cash transactions (as evident from CBDT Circular
No. 387 dtd. 6-7-1984) i.e. if there are transactions which are
"otherwise than by an account payee cheque or account payee bank draft"
but they do not involve any movement of cash, the said transactions
would not be hit by the aforesaid provisions as demonstrated hereunder.
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Payment/
Adjustment by Journal Entry
In
CIT vs. Noida Toll Bridge Co. Ltd. (2003) 262 ITR 260 (Delhi)
it was held that when no payment is made in cash, but the same
is effected by journal entry in books of account of assessee and
there is no violation of section 269SS so as to warrant penalty
u/s. 271D. Similar view has been taken in CIT vs. Govind Kumar
– (2002) 253 ITR 103 (Raj).
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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 of taking unaccounted cash or unaccounted
deposits otherwise than by an account payee cheque or account
payee draft. Where the amount was transferred by the deposits
through transfer vouchers, the amounts in question could be said
to have been credited in the company’s bank account through proper
banking channels as per spirit of section 269SS and, thus, the
assessee company could not be said to have violated the provisions
of section 269SS.
- Exceptions
The
provisions of sections 269SS and 269T are not applicable to any loan/
deposit or repayment of any loan/ deposit taken or accepted from
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Government
-
Any
banking company, post office saving bank or co-operative bank
The
explanation to section 269SS provides that
-
"banking
company" means a company to which the Banking Regulation Act,
1949 (10 of 1949), applies and includes any bank or banking
institution referred to in section 51 of that Act;
-
"co-operative
bank" shall have the meaning assigned to it in Part V of the
Banking Regulation Act, 1949 (10 of 1949).
- Any corporation
established by a Central, State or Provincial Act
- Any Government
company as defined in section 617 of the Companies Act, 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.
Housing
Development Finance Corporation Ltd. is notified under clause
(e) of proviso to the section, being institution to which the
aforesaid provisions are not applicable. (Notification: No.
SO 3607, dtd. 18-7-1986 as modified by SO 3828/4250, dtd. 28-10-1986).
In
addition to the above, the provisions of section 269SS shall not
apply to any loan or deposit where the person from whom the loan
or deposits is taken or accepted and the person by whom the loan
or deposit is taken or accepted are both having agricultural income
and neither of them has any income chargeable to tax under this
Act.
- Levy of
penalty – Whether mandatory ?
Though
the provisions of section 271D and 271E use the word "shall", the
Legislature has given discretion to the assessing authority u/s. 273B
to levy the penalty as provided u/s. 271D/ 271E or not. U/s. 273B,
if the Court finds that there was a reasonable and sufficient cause
for not imposing the penalty on the assessee in the given facts and
circumstances of the case, the penalty shall not be levied. Therefore
levy of penalty is not mandatory but only directory in nature. (Muthoot
M. George Banker vs. ACIT (1993) 46 ITD 10 (Coch).)
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Illustrative
cases showing existence of reasonable cause
-
Genuine
transactions to satisfy immediate requirement of money
In
CIT vs. Bhagwati Prasad Bajoria (HUF) (2003) 263 ITR 487 (Gauhati)
it was held that where there is an immediate need of money,
the person cannot get such money from the nationalised bank. To
satisfy the immediate requirement of money the person normally
approaches the money-lender or his friend or relative who could
lend money to him to satisfy his immediate requirement. In those
circumstances it cannot be said that the assessee has entered
into a cash transaction to avoid the payment of tax or to defraud
the Revenue. Thus no penalty should be levied.
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Where
loans are taken to clear cheques (i) so as to avail discount (ii)
due to urgent need of time bound supplies
-
In
CIT vs. Parma Nand (2003) 266 ITR 255 (Delhi) the Tribunal
held that there was reasonable cause as the loans were taken
to clear the cheques issued by the assessee as there was no
sufficient bank balance with the assessee. The amounts were
prepaid through account-payee cheques. It was held that there
was a reasonable cause because the assessee was going to be
directly benefited if the cheques issued were cleared in time,
as there was a discount at the rate of 2 per cent for cash
payment against the bills. The High Court held that the conclusion
of the Tribunal that there was a reasonable cause in not strictly
complying with the provisions of section 269SS was based on
relevant factors and that the findings recorded by the Tribunal
were essentially factual giving rise to no question of law
much less a substantial question of law.
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In
CIT vs. Manoj Lalwani (2003) 260 ITR 590 (Raj) the
Tribunal came to the conclusion that as the assessee was an
exporter and in the urgent need of the time bound supplies,
the assessee took a loan of Rs. 2.50 lakhs from his brother-in-law
the genuineness of which had not been doubted by the Assessing
Officer and the assessee immediately deposited a sum of Rs.
2.45 lakhs out of Rs.2.50 lakhs in the bank on the same day
for making the payment to his suppliers, which showed that
there was no intention of the assessee to violate the provisions
of law. It was also observed that since the assessee was not
having sufficient time and funds, the cash loan was taken
to avoid further delay in the process of clearing the cheque.
In view of these peculiar circumstances, the Tribunal held
that the cash loan was taken by the assessee in the exceptional
circumstances and it was a case of reasonable cause which
was proved by the assessee. Consequently, the Tribunal deleted
the penalty. The High Court held that the Tribunal had acted
in accordance with law in waiving the penalty imposed on the
assessee by the Revenue authorities.
- The loans
and deposits as well as the repayments of loans in cash as a result
of discounting of cheques/ dishonouring of cheques issued by the
assessee
In
Shreenath Builders vs. Dy. CIT (2000) 66 TTJ (Ahd.) 113 it
was found that the assessee-firm, carrying on business as building
contractor, had accepted loans/ deposits from two shroffs and
had also repaid the same in cash. The genuineness of the transactions
in relation to which penalties had been imposed had not been doubted.
The loans and deposits as well as the repayments of loans was
a result of discounting of cheques/ dishonouring of cheques issued
by the assessee. Both the Shroffs from whom the cheques were discounted
by the assessee or to whom the payments in cash were made on account
of dishonouring of cheques issued by the assessee were regular
income-tax assessees. The discounting of the cheques was made
by the assessee to meet urgent business needs of making the payments
to the labourers for enabling the assessee to carry on its business
of working as a building contractor as the payments from the State
Government which were due to the assessee were not forthcoming.
It was held that the contention of the assessee that violation
of the provisions of sections 269SS and 269T was an innocent mistake
on its part on account of ignorance of the relevant provisions
of law and it constituted a reasonable cause within the meaning
of section 273B, could not be just brushed aside. Ordinarily a
plea as to the ignorance of law cannot support the breach of a
statutory provision. But the fact of such an innocent mistake
due to ignorance of the relevant provisions of law, combined with
the fact that the transactions in question were genuine and bona
fide transactions and were undertaken during the regular course
of its business, would constitute a reasonable cause.
-
Temporary
cash advances from sister concern in cash for business exigencies
In
Karnataka Ginning & Pressing Factory vs. Jt. CIT (2001)
77 ITD 478 (Mum.) the assessee-firm having a running account
and business relationship with a sister concern, took temporary
advances in cash for business exigencies, more particularly for
payment of excise duty and repaid them from out of sale proceeds
or through adjustments, it was held that since genuineness of
borrowing was not in doubt and assessee was prevented by reasonable
cause from taking monies through account payee cheque or draft,
there was reasonable cause for assessee to act in contravention
of provisions of section 269SS by taking monies from its sister
concern in cash and as such no penalty under section 271D could
be imposed on assessee.
-
Loans
taken from sister concern in violation of section 269SS to project
better financial position of sister concern for taking loan from
bank
In
Jay Builders vs. Asst. CIT (2000) 111 Taxman 211 (Mum) (Mag.)
there were common partners between the assessee firm and its
sister concern. Instead of partners making withdrawals from the
sister concern which would deflate the capital, the assessee firm
took cash loans from its sister concern to enable the partners
to withdraw those amounts from the books of the assessee firm
which arrangement was gone through under the advise of the accountant
in order to project a better picture of the financial position
of the sister concern for the purpose of taking a loan from the
bank for a certain project. It was held that the exhibition of
the accounts in the balance sheet filed with the bank was an overriding
consideration and in the anxiety to do so the provisions of section
269SS had not been kept in view. The fact that the assessee-firm
acted on the advice of the accountant was also supported by an
affidavit filed by the partner. There was no reason to disbelieve
the averments contained in the affidavit. Under the circumstances,
therefore, the penalty imposed on the assessee under section 271D
was not justified.
-
Cash
deposited by Director in bank account of the company
In
Dillu Cine Enterprises (P.) Ltd. vs. Addl. CIT (2002) 80 ITD
484 (Hyd.) the assessee was domestic company in which public
was not substantially interested. All the three directors, who
managed the company, had personal accounts in the form of current
account in the books of the company. One of the directors, who
was actively looking after the company, brought in the funds from
this personal account whenever the company was in requirement
of funds. He was also withdrawing money as and when he required
the same. Penalty u/s. 271D was levied on account of amounts given
by the Director to the company. It was held that the expression
"reasonable cause" has to be considered pragmatically and as it
was an open transaction done to meet exigencies of business, it
could be said to have constituted "reasonable cause". As the company
had issued certain cheques and they were coming up for encashment,
the active Director of the assessee considered it expedient to
deposit cash in the bank account of the company to save the situation.
The assessee had a ‘bonafide’ belief that no offence was committed.
The levy of penalty was not automatic. In the light of the above,
both on law and on facts, the penalty levied u/s. 271D was not
sustainable. Similar view has been taken in Chandra Cement
Ltd. vs. Dy. CIT (2000) 68 TTJ (Jp.) 35.
-
In
the case of Kachha Arhatiya
In
Hissaria Brothers vs. Jt. CIT (2001) 73 TTJ (Jodh.) 1 the
assessee was a Kachha Arhatiya and was dealing with village agriculturists
and was under bona fide belief that cash transactions were permissible
with farmers. The dealing between the assessee and the farmer-constituents
were in cash. Sometimes they took sums in cash from the assessee-firm
and sometimes they gave the sums to assessee-firms, so that their
prospective requirements might be met. For making deposits in
cash and receiving payments in cash penalties were levied against
the assessee under sections 271E and 271D. It was held that the
assessee acted under bona fide belief and did have reasonable
and sufficient cause as provided u/s. 273B, so as to exonerate
the assessee of the default/ defiance, under sections 271D and
271E.
-
Where
assessee-firm engaged in business of commission agency and trading
in agricultural produce had been keeping sale proceeds of its
parties (living in remote area) for purpose of safe custody
In
ITO vs. Bharadiya Trading Co. (2003) 85 ITD 42 (Pune) (SMC)
it was held that where assessee-firm engaged in business of
commission agency and trading in agricultural produce had been
keeping sale proceeds of its parties (living in remote area) for
purpose of safe custody, imposition of penalty treating such amounts
as loans taken and repaid in cash, was not justified because assessee
kept money of constituents under bonafide belief and it being
covered by Circular No. 556, dtd. 23-2-1990, such transactions
were not hit by provisions of sections 269SS and 269T and the
said bonafide belief constituted reasonable cause.
-
Where
assessee had accepted deposits in cash from agriculturists who
had no bank accounts
In
ITO vs. Ganesh Wooden Industries (2003) SOT 44 (Ahd) (SMC)
it was held that where assessee had accepted deposits in cash
from agriculturists who had no bank accounts, default was merely
technical and venial in nature which had not resulted in loss
to the Government revenue and therefore penalty was not attracted.
-
Cash
loans from friends serving as a bridge loan as and when emergency
arose
In
Industrial Enterprises vs. Dy. CIT (2000) 73 ITD 252 (Hyd.)
it was held that where though assessee had succeeded in securing
certain loans sanctioned by banks and financial institutions,
those finances had not come in time to meet financial needs of
assessee during construction stage of factory and therefore assessee
was very much constrained to accept cash loans from its friends
as and when emergency arose, assessee could be said to have been
prevented by reasonable cause from complying with provisions of
section 269SS.
-
Cash
loan from wife for construction of house
In
Dr. B.G. Panda vs. Dy. CIT (2000) 111 Taxman 86 (Cal) (Mag)
it was held that where assessee due to urgency of situation obtained
certain loan from his wife in cash for construction of house which
was naturally a joint venture for prosperity of family and transaction
did not involve any interest element and there was no promise
to return amount with or without interest, it could be said that
there was a reasonable cause for not complying with section 269SS.
-
Where
assessee had allegedly received a loan in cash from his wife and
was under bonafide belief that amount was not to be returned
In
ITO vs. Tarlochan Singh (2003) 128 Taxman 20 (Asr.) (SMC) (Mag)
it was held that where assessee had allegedly received a loan
in cash from his wife for investment in acquisition of immovable
properties, and assessee was under bonafide belief that amount
was not to be returned, no penalty was leviable as (a) keeping
in view the contents of the departmental Circular No. 387, it
was never the intention of the Legislature to punish a party involved
in a genuine transaction. (b) the wife had given money to husband
for prosperity of the family only and there was no evidence that
the amount in question was taken for commercial use. Though the
revenue considered it loan, but there was no material on record
to show that the assessee had returned the amount received from
the wife or paid interest thereon (c) intention of Legislature
was never to punish a party involved in genuine transactions.
-
Where
recurring defaults have not been pointed out/ commented on by
Auditors/Assessing Officer
In
Farrukhabad Investment (I) Ltd. vs. JCIT (2003) 85 ITD 230
(Delhi) it was held that where professional auditors
did not point out any violation of provisions of section 269SS/269T,
and senior officers of department passed assessment order u/s.
143(3) for some years without commenting about any such violation,
assessee’s ignorance of these provisions could be said to be bonafide
and no penalty was imposable.
-
Where
loans in cash up to Rs. 20,000/- were accepted by assessee, under
an impression that acceptance of cash deposit up to Rs. 20,000/-
would not attract penalty.
In
Shreenathji Corpn. vs. Asst. CIT (1997) 58 TTJ (Ahd.) 611
it was held that where loans in cash up to Rs. 20,000 were
accepted by the assessee, who was in construction business to
meet exigencies of construction work as assessee was under an
impression gathered from certain circular and advertisement that
acceptance of cash deposits upto Rs. 20,000/- would not attract
penalty, assessee could be said to have a reasonable cause for
accepting deposits in cash. Similar view has been taken in ITO
vs. Satya Prakash Gupta (2004) 85 TTJ (Jd.) 18.
-
Where
assessee, a dentist, took bona fide loans for buying a flat and
for purposes of business
In
Dr. Deepak Muchala vs. ITO (1997) 58 TTJ (Bom) 524 it was
held that section 271D was introduced to prevent abuse of laws
and to discourage tax avoidance and tax evasion. In particular,
it was meant to circumvent the device by which the tax-payers
often explain away unaccounted cash or unaccounted deposits found
in the course of searches carried out by the Department. Thus
where assessee, a dentist, took bona fide loans for buying a flat
and for purposes of business, without complying with provisions
of section 269SS, provisions of section 271D were not to be invoked.
-
Genuine
belief that provisions are not applicable constitutes reasonable
cause
Reference
may be made to CIT vs. Eetachi Agencies – 248 ITR 525 (Bom)
-
Where
identity of payee is established and genuineness of transaction
is not doubted
In
Addl. CIT vs. Smt. Prahati Baruah (2003) 133 Taxman 74 (Gau)
(Mag) it was held that the introduction of section 269T and
section 271E in the statute is to prevent proliferation of black/
unaccounted money deposited with banks and other persons by introducing
the system of repayment through account payee cheques and drafts
and, thus, to ensure that the identity of the payee is established.
Where the identity of the lender to whom repayment had been made
was known to the department and the genuineness of the loan transaction
was not in doubt, it could not be said that the breach of law,
if any, was deliberate and the default, if any, could be said
to be a technical default for which no penalty would be leviable.
-
Genuine
transaction – penalty deleted
Reference
may be made to CIT vs. Bhagwati Prasad Bajoria (HUF) (2003)
263 ITR 487 (Gau)
-
Bona
fide belief, coupled with genuineness of transactions, would constitute
a reasonable cause for not invoking provisions of section 271E
In Faridkot-Bathinda
Kshetriya Gramin Bank vs. Jt. CIT (2002) 125 Taxman 268 (Asr.)
(Mag.) the assessee was a rural bank. The officers
and staff of the bank primarily dealt with illiterate agriculturists.
The staff of the assessee-bank was working in an area where their
exposure to banking and other laws like income-tax, was very limited.
They repaid certain deposits in excess of Rs. 20,000/- in cash.
Due to ignorance of law, the concerned officer was under bona
fide belief that repayments exceeding Rs. 20,000/- could be made
in cash also. It was held that in the instant case it could be
safely held that the bona fide belief coupled with the genuineness
of the transactions constituted a reasonable cause, as provided
under section 273B.
-
Where
repayment of loans is in cash as creditors are not willing to
accept cheques or drafts due to unfavourable credibility of the
assessee company
In Premier
Art Silk Processors (P. ) Ltd. vs. Dy. CIT (2005) 142 Taxman 13
(Ahd) (Mag) the creditors demanded repayment of loans to be
made only in cash and were not ready to accept payment by cheque
or draft because the assessee’s credibility in the market
was not favourable due to losses incurred. It was held that there
was a reasonable cause for the default and the penalty was deleted.
- Illustrative
cases showing non existence of reasonable cause
- Ignorance
of law is no excuse for violation of provisions of sections 269SS
and 269 TT where assessee is represented by two C.As. and an Advocate.
In
Udaichand Santosh Kumar Jain vs. ITO (2003) 79 TTJ (Indore)
88 it was held that where assessee was represented
by two C.As. and an Advocate ignorance of law was no excuse for
violation of provisions of sections 269SS and 269 TT and the same
would not constitute reasonable cause.
-
Where
loan taken by partner of assessee–firm by account payee cheque
was deposited by partner in cash with firm showing it as loan
from partner.
In
Goyal Construction Co. vs. Asst. CIT (2003) 127 Taxman 46 (Agra)
(Mag) it was held that penalty was justified even where
loan taken by partner of assessee–firm by account payee cheque
was deposited by partner in cash with firm showing it as loan
from partner.
-
Urgency
of immediate funds is to be established to establish reasonable
cause.
In
ITO vs. Sunil M. Kasliwal (2003) 80 TTJ (Pune) (TM) 1
it was held that the assessee contended that loans in cash
was taken from cousin sister of his mother because of urgent requirement
of machines. Held that the exigency was stated to be the requirement
of machine. How urgent that requirement was, was not known. The
machine was not purchased soon after taking the loan. This indicated
that the assessee could have complied with the requirements of
section 269SS without much difficulty. It is the duty of every
citizen to respect law. Majesty of law is to be maintained. Therefore,
there existed no reasonable cause for accepting these loans in
cash and as such penalty was justified.
- Question
of law
The
following questions were held to be questions of law
-
Whether
the Tribunal was right in cancelling penalty levied u/s. 271D/
271E in view of the provisions of section 269SS/269T ? [CIT
vs. Ramraj Ramgopal (2003) 179 CTR (Raj) 88.]
-
Whether
on facts and in the circumstances of the case the Tribunal was
not justified in confirming the penalty of Rs. 92,000/- u/s. 271D
? [National Surgical Corporation vs. CIT (2000) 242 ITR 667
(AP).]
-
Whether
on the facts and in the circumstances of the case, no penalty
was leviable under section 271D on the amount of Rs.20,000 received
by the assessee from R and Rs. 20,000/- received from D on the
ground that those amounts were in the nature of ‘Amanat’ and not
loan or deposit within the meaning of section 269SS ? [Jagir
Singh Balraj Kumar & Co. vs. CIT, (1999) 235 ITR 146 (Punj.)]
- Others
- Where
the word ‘deposit’ had not been mentioned by the lower authorities
in the show cause notice under section 271E
In
Udaichand Santosh Kumar Jain vs. ITO (2003) 79 TTJ 88 (Indore)
it was held that imposition of penalty would not become invalid
just because the word ‘deposit’ had not been mentioned by the
lower authorities in the show cause notice under section 271E.
-
Where
cash transactions exceeding the specified limit have been admitted
by the assessee
In
Dhanji R. Zalte vs. ACIT (2004) 265 ITR 205 (Bom) the assessee
was an advocate specializing in land acquisition cases who had
admitted during search proceedings that he had accepted/ repaid
loans/deposits in excess of Rs. 20,000/- by cash. Despite the
aforesaid admission, the assessee contended that it was obligatory
upon the revenue to establish that he had raised loans in contravention
of section 269SS. It was held that in presence of admission by
assessee that transactions in question were loans taken by him,
initial onus, which was on revenue, was shifted on assessee to
prove that what he had stated was not true and transactions were
not loan. In absence of any such attempt by assessee, revenue
was not under any obligation to establish that assessee had raised
loans in violation of provisions of section 269SS.
- Conclusion
Penalties
under sections 271D and 271E would be leviable where any person accepts/
takes or repays loan/ deposit in cash in excess of Rs. 19,999.99/-.
The quantum of penalty would be the sum of loan/ deposit which exceeds
the limit of Rs.20,000/-. The pre-requisite condition for the levy
of the aforesaid penalties is that the cash transaction must result
in a loan or deposit. Transactions between family members wherein
there is no obligation to repay or wherein the amount is held in trust,
payment by partner to a firm or repayment of capital amount by firm
to partner, temporary advances and withdrawals from joint account
do not result in loan/ deposit and are therefore outside the purview
of the aforesaid provisions. The aforesaid penalties are neither automatic
nor mandatory, but are directory in nature; i.e., the said penalties
would not be leviable if there exist reasonable cause for the default
in view of the provisions of section 273B.
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