Finance plays an important role in every business. Most of the time, personal funds are insufficient to fulfill an individual’s business requirements. They are then required to take a loan or accept deposits. However, before taking a loan or accepting some amount of deposits, it is necessary to know the restrictions that the Income Tax Department imposes under Section 269T and Section 269SS.
These sections regulate the mode through which one accepts deposits and takes loans and the mode through which one repays these.
What is Section 269SS of the Income Tax Act?
As per Section 269SS, any deposit or loan or any specific amount should not be accepted from any person other than by an account payee bank draft, account payee cheque, or through an electronic clearing system via bank account, if:
- The deposit, loan, or specified sum is Rs. 20,000 or more.
- Let us take an example to understand better. Rajat wants to take a loan of Rs. 50,000 from his friend Anand. Since this amount is more than Rs. 20,000, he cannot accept this in cash.
- The sum of the above three points is Rs. 20,000 or more.
- The total deposit, loan, and specified sum are Rs. 20,000 or more. Modifying the above example, let us assume Rajat wants a loan of Rs. 10,000 and an advance of Rs.15,000 from his friend Anand. However, he cannot accept this amount in cash as it is more than Rs.20,000 (10,000+15,000 = 25,000). This will violate Section 269SS of the Income Tax Act.
- A person has already received the loan or specified sum or deposit through the depositor; however, the amount of the loan or specified sum, or deposit has not been paid back. In such a situation, if the specified sum, deposit, or loan is Rs. 20,000 or more.
- For example, Rajat accepted a loan from Anand on 1st July 2021 by crossed cheque for Rs 15,000. On 20th January 2022, Rajat asked for another loan from Anand of Rs 8,000. It is to be noted that the earlier loan amount is still unpaid. Since the total loan outstanding comes to Rs 23,000 (15,000 + 8,000), which is more than Rs 20,000, the provisions of Sec 269SS will be activated. Thus, Rajat cannot accept the new loan on 20th January 2022 through the mode of cash.
In a nutshell, we can say that an individual is not allowed to accept cash deposits or loans of Rs. 20,000 or more from other people under Section 2699 of the Income Tax Act.
Specified Modes of Transactions under Section 2699
Below are the specified modes of accepting deposits, loans, or specified sums:
- Account payee cheque/bank draft
- Electronic Clearing System (ECS) through a bank account
- Net Banking
- Credit Card
- Debit Card
- RTGS
- NEFT
- BHIM
- IMPS
- UPI
Exemptions under Section 269SS of the Income Tax Act
The exceptions or exemptions of Section 269SS are:
1) Any specified sum, loan, or deposit ‘accepted or taken from’ or accepted or taken by the below-mentioned entities:
- The Government
- Any corporation established by the State, Central, or Provincial Act
- Any post office savings bank, banking organization, or corporative bank
- Any Government organization mentioned in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013)
- Any institution, body, association, class of institution, bodies, or associations mentioned in the Official Gazette
This means if a person receives a loan or specific sum or deposits from any of the entities mentioned above, or if the entities accept any deposit or loan or some specific sum from any individual, the provisions of Section 269SS of the Income Tax Act will not enforce.
2) An individual having agricultural income only accepts deposits or takes loans from another person who is also earning income from agriculture only.
3) If one receives cash from their relatives in a time of emergency. The intention here should not be to avoid taxes.
4) When the partners are contributing cash capital in some partnership firm.
Penalty on Dispute of Section 269SS
If a person accepts loans and deposits in cash above the prescribed limit, he is liable to pay a penalty of 100% of the total loan or deposit amount. The receiver of the money needs to ensure that the provisions of Section 269SS are met while accepting cash payments. However, the penalty can be waived if the receiver proves with proper reasoning the cause for such transactions.
What is Section 269T of the Income Tax Act?
Section 269T of the Income Tax Act prohibits an individual from repaying the deposit or specified sum, or loan otherwise than by a bank draft of an account payee or account payee cheque or through the electronic clearing system of a bank account, if:
- The deposited amount of the deposit or loan, including the interest amount, is Rs. 20,000 or more, or,
- The total sum of the deposit or loan, adding the interest amount held by an individual in their name or with some person (jointly), is Rs. 20,000 or more.
In other words, a person is not allowed to repay the deposit or loan in cash if the amount is equal to Rs. 20,000 or more under Section 269T of the Income Tax Act.
Exemptions under Section 269T of the Income Tax Act
An individual repaying Rs. 20,000 or more for the repayment of a deposit or loan does not have to obey the Section 269T of the Income Tax Act if they pay to the below-mentioned parties:
- The Government
- Any organization established by the State, Central, or Provincial Act
- Any banking organization, cooperative bank, or post office savings account
- Various notified institutions
- Any government organization that is defined in Section 617 of the Companies Act, 1956.
Penalty on Dispute of Section 269T of the Income Tax Act
If the repayment of the deposit or loan in cash is above the prescribed limit, he is liable to pay a penalty of 100% of the deposit amount or the loan repaid.
According to Section 273B of the Income Tax Act, 1961, there is no penalty levied on an individual if they fail to obey the inclusions of section 269T or 269SS of the Income Tax Act because of some reasonable cause.
Reasonable causes wherein penalty is not attracted under Section 269SS and Section 269T of the Income Tax Act
- Receipt or repayment of partners’ amount: If one of the partners adds cash capital to the organization or withdraws Rs.20, 000 or more, then the provisions of section 269T and section 269SS are not attracted because capital introduction and withdrawal are not considered as deposits or loans.
- No penalty is imposed under Section 271D when the deposit is accessed as income: There is no penalty imposed for the income deposited.
- Amount paid by the partner to the firm or vice-versa: The amount that is paid by the firm to the partner, or vice-versa does not levy a penalty.
- Repayment or acceptance by journal entry does not attract penalty under Section 269SS or 269T: Repayment or acceptance via Journal Entry is not considered as a deposit or loan. Therefore, this kind of payment does not attract any kind of penalty under section 269SS or section 269T of the Income Tax Act, 1961.
- Any genuine transaction made at the time of emergency does not levy a penalty: Cash that is paid to meet emergencies also does not attract any penalty.
Sections 269SS and 269T for NBFCs
The Reserve Bank of India (RBI) released a notification stating that high-value gold loans (Rs. 1 lakh and above) can only be disbursed by cheque.
The notification mentions “On review, and in line with the rules issued under Section 269SS and 269T of the Income Tax Act, 1961, the requirements under the Income Tax Act, 1961, as amended from time to time, would apply to all NBFCs with immediate effect. Currently, the relevant threshold under the Income Tax Act, 1961 is Rupees Twenty thousand”.
This notification thus means that NBFCs are not allowed to disburse more than Rs. 20,000 in cash against gold loans. NBFCs will have to proceed for clearance via cheques.
Conclusion
Tax evasion is one of India’s most serious problems, leading to economic inequalities. Thus, section 269SS and section 269T of the Income Tax Act were introduced to curb the increasing cash transactions that lead to the accumulation of black money. Together, both these laws stipulate that neither payment nor repayment of deposits or loans can be made in cash if the sum of amounts exceeds Rs. 20,000.
