Section 269SS of the Income Tax Act, 1961, was introduced to curb the practice of accepting loans or deposits in cash, particularly to prevent tax evasion and unaccounted income in the informal economy. This provision mandates that loans or deposits above ₹20,000 should not be accepted in cash but through recognized banking channels or prescribed payment methods.
Full Text of Section 269SS
Under Section 269SS, no person shall accept, or agree to accept, any loan or deposit of ₹20,000 or more in cash. Transactions must be conducted via banking channels or other accepted methods such as bank drafts, cheques, or electronic payments like NEFT, RTGS, IMPS, etc.
Prohibition on Acceptance of Loans or Deposits in Cash
The core of Section 269SS is its prohibition against accepting large loans or deposits in cash. Specifically:
- The restriction applies to loans or deposits of ₹20,000 or more.
- Any transaction above this threshold must be conducted through banking channels, cheques, drafts, or electronic transfers.
Penalty for Violating Section 269SS
If a person violates the provisions of Section 269SS by accepting or repaying loans or deposits in cash exceeding ₹20,000, they are liable for a penalty under Section 271D. The penalty is equivalent to the amount of the loan or deposit in violation of the law. For instance, if ₹30,000 is accepted in cash as a loan, the penalty imposed will be ₹30,000.
Applicability of Section 269SS
Section 269SS applies to:
- Individuals, Hindu Undivided Families (HUF), partnership firms, companies, associations of persons (AOP), and other entities that accept loans or deposits.
- It applies to loans or deposits received from another person, irrespective of whether they are a related party.
Conditions and Provisions Under Section 269SS
- Cash Transactions for Loan or Deposit:
The section targets cash transactions, promoting the use of formal financial channels for loans and deposits. - The ₹20,000 Threshold:
If a loan or deposit exceeds ₹20,000, it must be made via electronic payment, cheque, or bank draft. - Definition of Loan or Deposit:
- Loan: Any amount borrowed, whether for personal or business purposes.
- Deposit: Amounts received by an entity with the understanding that they will be repaid in the future.
Transactions Exempted from Section 269SS
While Section 269SS aims to restrict cash transactions, certain transactions are exempt:
- Financial Institutions and Banks:
Transactions involving banks, government entities, and regulated financial institutions are exempt from this provision. - Agricultural Loans:
Loans granted for agricultural purposes by institutions like NABARD are not subject to Section 269SS. - Loans from Close Family Members:
Loans or deposits made between close relatives may not fall under the purview of this section. - Transactions via Third Parties:
If the loan or deposit is routed through a third party, the transaction will still be considered a violation if the payment is in cash and exceeds ₹20,000.
Penalties for Violations
Under Section 271D, if the provision of Section 269SS is violated, a penalty equal to the loan or deposit amount can be imposed. Notably:
- Even if the loan is repaid within the same financial year, the penalty is still applicable.
- Repayment does not absolve the violator from the penalty.
Conditions Where Section 269SS Does Not Apply
There are certain instances where Section 269SS is not applicable:
- Agricultural Loans: Loans taken for agricultural purposes are exempt.
- Loans from Recognized Financial Institutions: Banks, cooperative societies, and government institutions are not bound by Section 269SS.
- Loans or Deposits Between Family Members: In some cases, loans between close relatives might be exempt, depending on the nature of the transaction.
Recent Amendments to Section 269SS
Recent amendments have focused on:
- Encouraging Digital Transactions: The government has promoted digital payments to reduce cash use and enhance transparency.
- Suggestions for Limit Increases: While suggestions for increasing the threshold of ₹20,000 have been made, the current limit remains unchanged.
Case Laws and Judicial Precedents
1. CIT vs. M/s. Bahubali Enterprises (2010)
- Issue: Whether accepting loans exceeding ₹20,000 in cash violates Section 269SS.
- Outcome: The Court ruled that accepting loans exceeding ₹20,000 in cash was a violation, and the penalty under Section 271D was upheld.
2. Shiv Raj Gupta vs. CIT (2003)
- Issue: Dispute over accepting loans exceeding ₹20,000 in cash.
- Outcome: The Court held that the penalty could not be avoided even if the loan was repaid before the assessment.
3. M/S. Narmada Prasad Agarwal vs. ITO (2015)
- Issue: Whether accepting a loan in cash beyond ₹20,000 violated Section 269SS.
- Outcome: The Court imposed a penalty, emphasizing that such violations must be penalized.
Conclusion
Section 269SS of the Income Tax Act serves as an essential tool to discourage unaccounted cash transactions and promote formal financial channels. The provisions of the section are aimed at improving transparency in financial dealings and reducing tax evasion. Violations of these rules attract substantial penalties, ensuring that businesses and individuals adhere to the prescribed methods for accepting loans or deposits. With exemptions for certain transactions, Section 269SS strikes a balance between regulating cash flows and accommodating essential financial practices like agricultural loans and family transactions.
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