Section 269SS: Mode of taking or accepting certain loans and deposits

This section gets applicable in following situation as per clause a, b and c

1. Where a person accepts a two cash loan and/or deposit of Rs.10,000 each from a single person
2. Where a person has taken a loan of Rs.20,000 by cheque and he wants to take another loan from the same person, say for Rs.3000.
3. Where a person has taken a loan of Rs.14000 by cheque and he wants to take further a loan of Rs.6000 or 8000

The second proviso to this section shall not be applicable in case the either lender or borrower have any income other than agriculture income i.e. if either lender or borrower have any income chargeable under head income from other sources (either PGBP/Capital gain/other sources) than this section shall not be applicable.

Realated Cases:

1. Whether current account transactions between sister concerns or related parties(Directors) amounts to violation of section 269SS and 269T. Any payments or repayments made pursuant to current account maintained between parties cannot be considered as violation of 269SS and 269T CIT V. Idhayam Publications Ltd., (2006) 285 ITR 221 (Mad). In this case there was a current account in the books of the assessee in the name of the one of the directors who used to pay money into the current account and also withdraw money from the same. The department treated these payments and withdrawals as violation of section 269T as they were made in cash. Disapproving the action of the department the High court has held that “the deposit and withdrawal of money from the current account could not be considered as a loan or advance. Accordingly the order of the tribunal by which the penalty was cancelled was affirmed. Similar view taken by ITAT Bench, B, Banglore in the case of M/s CANARA HOUSING DEVELOPMENT CO. Vs. ACIT ITA No.1425/Bang/2008.

2. Whether the provisions of above section applies to payments or receipt by way of journal entries? Provisions of section 269SS and 269T are not applicable in case where there are journal entries and payment was ultimately paid through account payee cheque. Commissioner Of Income-Tax vs Noida Toll Bridge Co. Ltd. (2003) 184 CTR Del 266. Further  acknowledgement of debt by the assessee company by passing a journal entry in the books of accounts would not come within the ambit of the words “loans or deposits of money” as mentioned in Section 269 SS., Sunflower Builders Pvt. Ltd. 61 ITD 227, V.N. Parekh securities Pvt. Ltd. (ITA No.3316 & 3317/Mum/2004).

3. Whether when transactions are bonafide, disclosed in the books of accounts and even made in cash, attracts penalty u/s 271E/271D. In the case of Narsingh Ram Kishor Kumar Vs. Union of India and Others a reference has been made to the explanatory notes of finance act, 1984 by which section 269ss was inserted. It was interalia mentioned that unaccounted cash found during search and seizure operations is often explained by tax payers as representing loans or deposits from various persons. With a view to countering this devise a new section has been inserted debarring the person from taking or accepting loans or deposits otherwise than by account payee cheque or demand draft. Hence where the transactions entered in cash are genuine and reasonable cause, as required u/s 273B, is shown penalty u/s 271E/271D is not called for. In the case of CIT Vs. Sunil Kumar Goel, (2009) 315 ITR 163 (P&H) it has been mentioned that under section 273B, the assessee is permitted to show cause and tender explanation. The explanation of the assessee was found to be bona fide by the tribunal  and it was also held that it was not aimed at avoiding any tax liability. The genuineness of the transaction was accepted. In the case of CIT Vs. Balaji Traders, 303 ITR 312 (Mad) it has been held that deletion of penalty was justified in a case where:- (i) creditors are genuine and transactions not doubted (ii) there is no revenue loss to the exchequer, and (iii) there is business exigency forcing the assessee to take cash loan. In the case of Omec Engineers Vs. CIT (2007) 294 ITR 599, it was held that where there is no finding that transactions were not genuine and there is no malafide intention, the penalty could not be sustained in law. In the case of CIT Vs. Maheshwari Nirman Udyog, (2008) 302 ITR 201 (Raj), it has been held that where a reasonable explanation is furnished, levy of penalty u/s 271D is not justified.

4. Whether when the loan or deposit is treated as the undisclosed income of the assessee, penalty can be imposed on the same transactions:- In the case of CIT Vs. Standard Brands Ltd. (2006) 285 ITR 295, it has been held that where deposit received in cash has been treated as undisclosed income in the hands of the assessee, no substantial question of law arises from the order of Tribunal wherein penalty u/s 271D is deleted.

5. Meaning of loan or deposit: In the case of Baidyanath Plastic Industries (P) Ltd. 230 ITR 522. In case of Loan it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement. However in the case of deposit it is generally the duty of the creditors to seek the depositee and make a demand for it. While Articles 19 and 21 of the Limitation Act fix the period within which a suit for recovery of a loan can be filed which is three year from date of borrowing, Article 22 deals with the period of limitation for suits for money on account of deposit which is three years from the date demand is made by the depositor.

6. whether receipt of share application money in cash amounts to violation of section 269SS? No, share application money in case is neither a loan nor a deposit as duly held by the Delhi High Court in the Case of CIT Delhi IV Vs. I P India Pvt. Ltd. 2011-TIOL-811-HC-DEL-IT observing that “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. Reliance was placed on the decision of Director of Income Tax (Exemption) vs ACME  Educational Society wherein it was held that a loan grants temporary use of money, or temporary accommodation, and that the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it has been made, on fulfillment of certain conditions”. However the transaction should be bonafide and shares should have issued or otherwise if the shares have not been issued and money is repaid the intention of receiving the money as share application money should be clear which can be established by showing that authorized capital has been increased or later on shares has been issued.

7 . Whether receipt and payment of Partners Capital by partnership firm amounts to violation of section 269SS and 269T. No, Says the Ahemdabad Income Tax Appellate Tribunal in the Case of ITO, Ward 2(1) vs. Universal Associates, 2011-TIOL-498-ITAT-AHM, as partners capital is neither a loan nor a deposit.

8.  Whether advance received for sale of goods paid in cash amounts to violation of section 269T. Yes, Says the Allahabad High court in the case of Chaubhey Overseas Corporation Vs. CIT  [2008] 303 ITR 9 (ALL). Trade deposits are included in the definition of Deposit.

9.  Whether Payments made on behalf of lender considered as repayment of loan by the assessee fall within the purview of Section 269SS and 269T. As the repayment will be made in these cases through journal entries provision of section 269SS and 26T will not be applicable, as discussed above in point no. 2

10. Disclosure in Auditor’s Report under Tax Audit. Auditor’s are required to disclose the payment of a loan or deposit along with Interest Rs.20000 or more.