Analysis of Section 269SS or 269T- Implications of taking or repaying Loan in Cash

Finance, being backbone of any kind of business, has been important for flourishing businesses from past so many years. So it is important in our daily life too where we help our friends, pals, relatives or colleagues in times of crisis and urgency. So often loan is extended and at times it is taken too for various purposes. But few of us know that our tendency to help or seek help from others is always under the scanner of tax authorities. Tax-statute prohibits any payment or receipt of loan or deposit in cash beyond specified limit subject to some conditions. Also, it has been apparent from the judgment of different authorities that even bonafide transactions have been frequently brought under the scrutiny. Adding to grief of taxpayers, the penalty in this regard is too severe.  Below extract will give you more insight on the related sections of Income-tax Act, 1961.

1.   Applicability of Section 269SS and 269T

1.1 Acceptance of loan:

When we accept loan from any person, section 269SS of Income-tax Act, 1961 is attracted. Section 269SS deals with mode of acceptance of loan which states that no person shall after the date 30-6-1984 take or accept from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft, if any of the following amount exceeds 20000.

a)       Any amount of loan or deposit or the aggregate amount of loan or deposit;

b)      On the date of taking loan or deposit, any amount of loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid irrespective of the fact whether re-payment has fallen due or not and

c)       The amount or aggregate amount along with the amount referred to in 1 and 2.

If any of the above bifurcated amount cross specified limit, then provisions of section 269SS become applicable. The provisions of this section shall not apply to any loan or deposit taken or accepted from or any loan or deposit taken or accepted by following.

(i)      Government

(ii)     Any banking company, post office saving bank or cooperative bank

(iii)    Any corporation established by a central, state or provincial act

(iv)    Any government company

(v)     The person having agricultural income from the person also having agricultural income and none of them has any income chargeable to tax under the income tax act.

1.2 For Repayment of Loan:

Similarly when we repay loan to the person from whom it was taken then section 269T become applicable. Section 269T deals with mode of repayment of certain loans or deposits which states that:

No Branch of a banking company or a co-operative bank and no other company of co-operative society and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft in the name of the person who has made the loan or deposit if any of the following amount Rs. 20000 or more.

• the amount of the loan or deposit together with the interest, if any payable thereon or
• the aggregate amount of the loans or deposits held by such person with the branch of the banking
• company or co-operative bank or as the case may be the other company or co-operative society or the
• firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest accrued on it.

2. Guiding factors to section 269SS and 269T

Now question arises that what are those guiding factors which actually invokes these provisions of section 269SS and 269T. These factors are as follows:

2.1     Loan must be taken in personal capacity

2.2   Absence of bonafide belief must be apparent from transaction in consideration

2.3 Loan acceptance or repayment amount inclusive of interest should not exceed  specified limit

2.4 Nature of transactions to decide the applicability of section 269SS and 269T

· Transaction in nature of current account

· Receipt and payment of Partners’ Capital by partnership firm

· Receipt of share application money in cash

· Trade-deposits

These factors decide the applicability of section 269SS and 269T.

2.1     Loan must be taken in personal capacity

Starting with the very first requisite, it is important to know that to bring section 269SS in action, loan must be taken in personal capacity. If a person receives any deposit as an agent or servant and not on his own behalf in excess of limit specified by the statute, the provisions of Sec 269SS does not apply. In view of the provisions of the Indian Contract Act, it is clear that the act of the agent is to be considered as act of the principal. If loan has been taken on behalf of its principals and not in own account then the entire deposits collected would be deemed as to be taken in fiduciary capacity or intermediary. The same criterion applies to those firms also who are carrying business on behalf of other companies. This rule was established in ACIT v Sahara India [2006] 100 ITD 93(Luck). However, the provision of section 269SS can be considered in the hands of the principals, who operate the schemes for collecting the deposits in cash in excess of limit specified through their agents.

2.2  Absence of bonafide belief must be apparent from transaction

The next ingredient which is required to bring section 269SS in action is non-existence of bonafide relief in acceptance or payment of loan or deposit. If there is no finding that transactions were not genuine and there is no malaise intention, the penalty could not be sustained in law due to failure of compliance of section 269SS. The penalty cannot be justified if reasonable explanation can be served. Now to prove bonafide relief it is important to take note of following points which construe to its existence:

· Creditors are genuine and transactions cannot be doubted

· There is no revenue loss to the exchequer and

· There is business exigency forcing the assessee to take cash loan

If above mentioned points are satisfied, then 269SS will not be applicable. This was established inCIT v. Balaji Traders (2008) 303 ITR 312 (Mad). Although facts and circumstances need to be looked into, to prove existence of bonafide belief even after presence of the above mentioned points.

2.3   Loan acceptance or repayment amount inclusive of interest should not exceed specified limit

The loan acceptance or repayment has to be seen with amount inclusive of interest. Loan or deposit up to Rs 20,000 can be accepted from one person as per provisions of section 269SS of the Income Tax Act, 1961. But due care should be taken that the amount being taken now together with the earlier accumulated balance (including interest) should also not exceed Rs.20,000. Similarly, if a business concern accepts fixed deposits of Rs. 18000 from its customers under any incentive plan and it promises to pay Rs. 22000 after certain period of time, then such amount should be paid by account payee cheque only.

2.4     Nature of transactions to decide the applicability of section 269SS and 269T

·   Transaction in nature of current account

  If the nature of transaction in relation to receipt or payment of amount is in the nature of current account and has been carried out between proprietor of firm and the Director-cum-shareholder, then, provisions of section 269 SS or 269T cannot be made applicable.  In this regard, we need to look the relevance of above statement in light of Companies Act. As per the Companies Act, under Companies (Acceptance of Deposit) Rules, 1975, under rule 2(b)( ix), deposit does not include any amount received from a Director or a shareholder of a Private Limited Company.

Therefore, the transaction between proprietor of firm and the Director-cum-Shareholder is not a loan or deposit as per said act. It must be taken as only current account in nature and since no interest is leviable on such transaction it cannot be termed as loan or deposit. So, transactions in the nature of current account, particularly in sister concerns, has been kept out of the purview of section 269SS. CIT vs. Idhayam Publications Ltd. (2006) 285 ITR 221 (Mad)may be considered in this regard.

Receipt and payment of Partners’ Capital by partnership firm

The amount deposited by partner to the firm as Capital Contribution is not Loan or deposit of money. It is so because there cannot be a contract of service between a firm and one of its partners. For the purpose of Sections 269SS and 269T, the firm and partners cannot be considered to be separate entity. Thus, amount paid by partners to firm or vice-versa is a payment to self and does not partake the character of loan or deposits in the normal course of business. This view was taken in CIT vs. R.M. Chidambaram Pillai etc. [1977] 106 ITR 292 (SC) and ITO, Ward 2(1) vs. Universal Associates, 2011-TIOL-498-ITAT-AHM can be referred for same.

·    Receipt of share application money in cash

The key issue which needs attention, is whether receipt of share application money in cash violates section 269SS. In general, the answer is no, but the real factors which keep 269SS away seems to be ambiguous. Let us see why receipt of share application money in cash cannot be termed as loan.

Loan grants temporary use of money or temporary accommodation and the very 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. But such is not the case with share application money. In this regard two points can be considered:

a) Whether receipt of share application money in cash is within the ambit of the purposes for which Section 269SS was fragmented?

 Section 269SS was formulated with the view to prevent transactions involving black money and to ensure that payments of Rs. 20000 and above are traceable to transactions through the banking route. Hence, in normal course of business, receipt of share application money in cash cannot be termed as dubious until circumstances suggests the same. If the intentions of receiving the money as share application money is clear which can be established by showing that authorized share capital has been increased or later on shares has been issued, then section 269SS cannot be implanted on assessee.

b) Is it apparent from circumstances that share application money constitutes Loan or Deposit?

If receipt of share application money in cash has been clothed in such a manner that there is an obligation on the company to return or refund the money to the applicant, then 269SS will be applicable. In short, if circumstances suggest that the amount is repayable after notice or repayable after a period it will bound to attract section 269SS.In Bhalotia Engineering Works (P) Ltd v CIT (2005) 196 CTR  619 (Jhar HC) it was held that section 269SS is applicable to Share Application money also.

Trade-deposits

Trade deposits are included in the definition of Deposit for the applicability of section 269SS. Generally, trade-deposits are accepted or given to fulfill the heavy demand of certain commodity. So, it is pertinent that such deposits are in the nature of advance. In such cases, on account of failure to meet demand, the person who had received the advance is under a legal obligation to return it. When deposits are taken, certainly it has to be returned after certain period of time. This view was taken by Allahabad High court in the case of Chaubhey Overseas Corporation v. CIT [2008] 303 ITR 9 (ALL).

      3. Conclusion

I   In order to invoke the provisions of section 269SS or 269T, the above mentioned guiding factors need to be looked into. If any of the guiding factors is present then it is better to admit the deposit or loan as income which has been received in contravention of section 269SS and pay tax on same instead of proving it as loan which might be subjected later to penalty at 100 per cent. It is obvious that the penalty provision is more than severe and only rear uncertain methods for outwitting 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 statue may think of providing appropriate quantum of penalty for infraction of statutory provisions. It might bring less irrelevant litigation and better administration of law.

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