The Hindu Business Line : Diluted check on the cash route

If a taxpayer has accepted loan in contravention of Section 269 SS, it is better to admit it as income and pay tax at 30 per cent instead of proving it as loan which might be subjected to penalty at 100 per cent.

V. K. Subramani

The provisions of law are drafted with multiple objectives. One of the provisions meant to regulate taxpayers relates to acceptance and repayment of loans and deposits. Section 269 SS of the Income-Tax (I-T) Act mandates acceptance of loan only by means of account-payee crossed cheque or bank draft if the loan/deposit is Rs 20,000 or more.

Penalty for infraction of the provision would be met with penalty equal to the amount of loan/deposit. This harsh penalty makes the taxpayers to look for alternative routes to defeat the real intent of the law.

However, if each loan/deposit is below the limit then the regulatory provision could be made toothless. To avoid such lapse, the statute provides for an aggregate ceiling for loan/deposit from one person at Rs 20,000.

Hence, if a person has accepted Rs 18,000 as cash loan from another person, he cannot accept any further cash loan from the same person beyond Rs 1999. If he accepts Rs 2,000 then that Rs 2,000 will be the quantum of penalty for violating the provision.

However, if the loan is repaid fully or in part, then fresh loan could be accepted to the extent the aggregate amount does not touch the livewire limit of Rs 20,000.

A similar analogy is applicable for repayment of loan which is separately provided for in Section 269 T. Both Sections 269 SS and 269 T have exceptions which are applicable for dealings with government, banking companies, post-offices and government companies, etc. When the provisions were enacted into the statute book it was stated that the objective of the enactment was to check routing of black money into regular books in the guise of loans by the taxpayers.

Hence, the natural course of investigation would be first to check the genuineness of the loan and if the AO is satisfied with the genuineness, then the next consequence is to deliberate on levy of penalty.

Expanded coverage

In Chaubey Overseas Corporation vs CIT (2008 303 ITR 9 Allahabad) the assessee received advance money from brokers for supply of silk fabrics. Since the taxpayer could not supply the required silk fabrics he returned the amount in cash. Whether the repayment of advance towards supply is covered by Section 269 T and whether the payment in cash is liable for penalty was deliberated in this case.

The court held that the expression deposit of “any nature” appearing in Section 269 T would cover all sorts of deposits, including trade deposit. Accordingly, the levy of penalty by the AO was upheld by the court.

Unfortunately, the court also observed that repayment of loan or deposit covered by Section 269 T is applicable even for genuine loan or deposit and, hence, the AO need not look into the genuineness of the transaction for exempting the taxpayer from levy of penalty.

Book entries

A welcome relief to the taxpayers however was given by the Gujarat High Court in CIT vs Natvarlal Purshottamdas Parekh (303 ITR 5). It was held that acceptance and repayment of loans by book entries between the family members is not to be penalised.

This case was however decided on facts and the assessee was managing the affairs of all the family members and that being the reasonable cause gave reprieve to the assessee from penalty. Precedent for exempting loan or deposit by means of book entry from levy of penalty could be found in CIT vs Noida Toll Bridge Co Ltd (260 ITR 262 Delhi).

Reasonable cause

In CIT vs Jayasakthi Benefit Fund Ltd (303 ITR 29) the assessee accepted loan and deposits in contravention of Section 269 SS as the depositors were all agriculturists who did not have bank accounts. The depositors, while confirming the deposit, also confirmed that they did not have any bank account.

Accordingly, the levy of penalty was deleted by the court since the transaction of accepting the loan or deposit was genuine. Precedent for such decision could be found in CIT vs Kundrathur Finance and Chit Co (283 ITR 329). Similar decision was rendered in Deputy CIT vs Vignesh Flat Housing Promoters (303 ITR AT 453 Chennai).

(The author is an Erode-based chartered accountant. Reponses to blfeedback@thehindu.co.in)

In CIT vs Balaji Traders (303 ITR 312) it was held that if business exigency prompts a taxpayer to accept cash loan, it could be a reasonable cause for non-levy of penalty. Similarly, where the assessee borrows loan and repays in contravention of Sections 269 SS and 269 T from a sister concern, the levy of penalty could be avoided if the transactions are genuine and violation is backed by reasonable cause as held in CIT vs Lakshmi Trust Co (303 ITR 99 Madras).

Way out

This shows that the penalty provision is more than severe and only breeds dubious methods for circumventing the same. The real impact of the provision would come to light if the tax administration publishes the details of the number of cases in which the penalty proceedings were initiated and ultimately levied vis-À-vis the number of cases in which the “reasonable cause” had gone to dilute the application of statutory provision.

The lawmakers may think of providing realistic quantum of penalty for infraction of statutory provisions which might bring tax collection to the exchequer, less litigation and better administration of law.