14-09-2011

Provisions of Section 269SS and 269T u

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Provisions of Section 269SS and 269T under Income Tax Act

by Am it Bajaj on 22 July 2010
Published in Incom e Tax | Com m ents

Provisions of Section 269SS and 269T under Income Tax Act

Financ e is the important part and need of every business. The own c apital of a person may not be always sufficient to meet the needs of financ e of the business. Therefore the Loans and deposits bec ome nec essary and important to meet the financ ial needs of the business. But while taking loans and ac cepting deposits one also has to keep in mind the restric tions imposed under the Income Tax Act on the mode of taking such loans and deposits. Quick Links Such provisions regulating the mode of acc epting or taking loans or deposits and mode of repayment of certain loans and deposits are contained under sec tion 269SS and 269T of the Inc ome Tax Ac t 1961. Section 269SS: Sec tion 269SS provides that any loan or deposit shall not be taken or ac c epted from any other person otherwise than by an acc ount payee c heque or acc ount payee bank draft if, (a) the amount of suc h loan or deposit or the aggregate amount of suc h loan and deposit ; or (b) on the date of taking or acc epting suc h loan or deposit, any loan or deposit taken or ac c epted earlier by such person from the depositor is remaining unpaid and the amount or the aggregate amount remaining unpaid ; or (c ) 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 : s . Thus it is clear that no person can acc ept any loan or deposit of R 20000 or more otherwise s . than by way of an ac c ount payee cheque or an acc ount payee draft. The limit of R20000 will also apply to a case even if on the date of taking or acc epting suc h loan or deposit, any loan or deposit taken or ac c epted earlier by suc h person from suc h depositor is remaining unpaid and suc h unpaid amount along with the loan or deposit to be acc epted, exc eeds the aforesaid limit. s . This can be explained with an example: If Mr X has a credit balance of a loan of R19000 from s . Mr Y. Now in this case Mr X c annot take loan in excess of R999 more from Mr Y except with an ac c ount payee c heque or acc ount payee bank Draft. Exemptions from section 269SS: The Following persons are exempted from the purview of sec tion 269SS: a) Government ; (b) any banking company, post offic e savings bank or co-operative bank ; (c ) any c orporation established by a Central, State or Provinc ial Act ; (d) any Government c ompany as defined in sec tion 617 of the Companies Act, 1956 (e) other notified insititutions
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them have any taxable income.

Provisions of Section 269SS and 269T u

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(f) where the depositor and the acc eptor are both having agric ultural inc ome and neither of

Consequences of contravention of section 269SS:

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Section 271D of Inc ome Tax Ac t 1961 provides that if a loan or deposit is acc epted in contravention of the provisions of sec tion 269SS then a penalty equivalent to the amount of suc h loan or deposit may be levied by the Joint c ommissioner. Section 269T : Sec tion 269T of Inc ome Tax Act provides that any branch of a banking company or a cooperative soc iety, firm or other person shall not repay any loan or deposit otherwise than by an ac c ount payee cheque or ac c ount payee bank draft drawn in the name of the person, who has made the loan or deposit, if s . (1) The amount of the loan or deposit together with interest is R20000 or more, or (2) The aggregate amount of loans or deposits held by suc h person, either in his own name s . or jointly with other person on the date of such repayment together with interest, is R 20000 or more. . s For example if X is having loan of R30000 outstanding to Y. Then X cannot repay suc h loan in cash to Y. Exemptions from Section 269T: The Following persons are exempted from the purview of sec tion 269T: a) Government ; (b) any banking company, post offic e savings bank or co-operative bank ; (c ) any c orporation established by a Central, State or Provinc ial Act ; (d) any Government c ompany as defined in sec tion 617 of the Companies Act, 1956 (e) other notified insititutions Consequenses of contravention of section 269T: Section 271E of Inc ome Tax Act 1961 provides that if a loan or deposit is repaid in contravention of the provisions of sec tion 269T then a penalty equivalent to the amount of suc h loan or deposit repaid may be levied by the Joint commissioner. No Penalty to be levied u/s 271D or 271E if there is reasonable cause : As per Sec tion 273B of Inc ome Tax Ac t no penalty shall be levied if the failure to c omply with the provisions of sec tion 269SS or 269T is due to some reasonable cause. Now the question arises what can be a reasonable c ause to justify the violation of the provisions of sec tion 269SS and 269T. Some of the reasonable c auses based upon judicial dec isions are provided as follows: Repayment or receipt of amount to partners: If a partner introduc es capital in c ash in . s s . the firm or withdraws the same to the tune of R20000 or in exc ess of R20000, then Provisions of sec tion 269SS or 269T shall not be attracted as the introduction of c apital or withdrawl from firm c annot be called as loans or deposits. Amount paid by firm to partners or vic e versa- is payment to self and doesnot partake the charac ter of loan or deposits in general law. Provisions of sec tion 269SS are not applic able to suc h fac ts( CIT v. Lokhpat Film Exchange (Cinema) [2008] 304 ITR 172 (Raj.) Deposit assessed as income, No penality can be imposed u/s 271D in such case: It was held by Jodhpur tribunal in Bajrang Textiles v. Additional CIT [2009] 122 (JD.) 190 that where the A.O having treated the impugned amount of deposit as inc ome, he is precluded from treating the same amount as deposit or loan for the purpose of sec tion 269SS and levy penalty u/s 271D. The penalty ought to be c anc elled. Acceptance or repayment through Journal entry donot attract section 269SS or 269T: Ac ceptenc e or repayment through Journal Entry would not c ome within the ambit of the words loans or deposits-section 269SS applies only where money passes from one person to another by way of loan or deposit[CIT v. Noida Toll Bridge Co. Ltd. 262 ITR 260 (Del.)] A genuine transaction made in an emergency, doesnot attract penalty u/s 271D: held in Mrs Rupali R. Desai v. ACIT 88 ITD 76 (Mum.). In ITO v. Shree Mahaveer Industries 82 TTJ 549 (Jd.) it was held that cash paid to meet medical treatment expenditure in emergenc y, does not attract penalty u/s 271D. In ITO v. Prabhulal Sahu [2006] 99 TTJ (Jd.) 177 it was held that Assessee was not aware of provisions of sec tion 269SS or 269T. His counc el did not apprise him about the provisions. No penalty u/s 271D shall be attrac ted.
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Provisions of Section 269SS and 269T u

Where Depositors residing in rural areas are not having ac c ess to banking fac ility and are ignorant of relevant provisions of law, it would constitute bonafide reasons for payment in cash. (ACIT v. Vinman Finance & Leasing Ltd. [2008] 306 ITR (AT) 377 (Visakha.)

Loan given by relatives on Sunday for safe custody and for use in business. No contravention of section 269SS takes place- ITO v. T.R. Rangarajan [2005] 279 ITR 587 (Mad.) Cash Transaction made on Sunday. No penalty c ould be imposed in suc h a c ase.- ITO v. Narsing Ram Ashok Kumar[1993] 47 ITD 38(Pat) . Transfer of money exceeding Rs20000 by way of bank voucher instead of a/c payee cheque or draft doesnot attract penalty u/s 271D as the transaction are through banking channels only held in Asst. CIT v. Jag Vijay Auto Finance (p) Ltd.[2000] 68 TTJ (Jp) 44 Loan in cash under compelling circumstances have been held to be reasonable c ause: Industrial Enterprises v. DCIT [2000] 68 TTJ (Hyd) 373 Where the Lenders did not have any bank account whic h c ompelled the assessee to ac c ept the loan in c ash. This has been c onsidered as reasonable cause in Balaji Traders v. DCIT [2001] 73 TTJ (Pune) 246

Although the provisions of sec tion 269SS and 269T have been enacted with a view to s . prevent the inc rease in black money and to stop the tax evasion. Still the amount of R20000 is very small in the present sc enario considering the rate of inflation resulting in dec rease in value of money and the rise in pric es of various goods, whic h in turn also has enhanced the working c apital needs of every businessman.Therefore the limits u/s 269SS and 269T also need to be raised similar to the increase in the audit limit u/s 44AB whic h has been done to benefit the small assessees in the current budget by the Finance minister. Author: Amit Bajaj Advocate Email: amitbajajadvocate@hotmail.com M +919815243335
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18 Comments for this Article

Rakesh Pillai
Wrote on 19 August 2011

Thanks....

Abhijeet Vasant Lande.

Wrote on 15 August 2010

Thanks Sir

Abhijeet Vasant Lande.

Wrote on 15 August 2010

Thanks Sir

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Provisions of Section 269SS and 269T u

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