Applicability of Section 269SS and 269T of Income Tax Act
Section 269SS and 269T has been introduced under the Income Tax Act to mitigate evasion of tax through Case transactions in form of loans, advances or deposits. Unaccounted cash representing concealed income, in many occasions, when found by the Income Tax Authorities, the tax payers take the shelters of explaining the same to be a loan receipts. The provisions of these sections prohibit receipt of loan or repayment of deposits otherwise than by account payee cheque or account payee draft, as a measure to curtail transactions in unaccounted money.
Section 269SS: Mode of taking or accepting certain Loans and Deposits
269SS: No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft if,—
(a) the amount of such loan or deposit or the aggregate amount of such loan and deposit ; or
(b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid ; or
(c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b),
is twenty thousand rupees or more.
Exemptions from Section 269SS:
Provided that 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,—
(a) Government ;
(b) any banking company, post office savings bank or co-operative bank;
(c) any statutory corporation established by a Central, State or Provincial Act ;
(d) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) ;
(e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette
Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.
Explanation.—For the purposes of this section,—
(i) “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in section 51 of that Act;
(ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949) ;
(iii) “loan or deposit” means loan or deposit of money.
Consequences of contravention of section 269SS:
Section 271D of Income Tax Act 1961 provides that if a loan or deposit is accepted in contravention of the provisions of section 269SS then a penalty equivalent to the amount of such loan or deposit may be levied by the Joint commissioner.
Section 269T: Mode of repayment of certain loans or deposits
269T: No branch of a banking company or a co-operative bank and no other company or 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 drawn in the name of the person who has made the loan or deposit if—
(a) the amount of the loan or deposit together with the interest, if any, payable thereon, or
(b) 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, if any, payable on such loans or deposits,
is twenty thousand rupees or more.
Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid :
Exemptions from Section 269T:
Provided further that nothing contained in this section shall apply to repayment of any loan or deposit taken or accepted from—
(ii) any banking company, post office savings bank or co-operative bank;
(iii) any corporation established by a Central, State or Provincial Act;
(iv) any Government companies defined in section 617 of the Companies Act, 1956 (1 of 1956);
(v) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.
Explanation.—For the purposes of this section,—
(i) “banking company” shall have the meaning assigned to it in clause (i) of the Explanation to section 269SS;
(ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(iii) “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature.
Consequences of contravention of section 269T:
Section 271E of Income Tax Act 1961 provides that if a loan or deposit is repaid in contravention of the provisions of section 269T then a penalty equivalent to the amount of such loan or deposit repaid may be levied by the Joint commissioner.
Earlier, Sections 269SS and 269T were pertained to commercial loans, but now it has been extended to loans between individuals as well.
These sections are applicable to individual assessee also if he is covered under tax audit.
But few transactions on which these sections do not apply are:
(i) Sale proceeds collected by the selling agent will not be considered as loan or deposit.
(ii) A current account is not excluded from the definition of the deposit’. Therefore, if the transactions in a current account exceed the amount of Rs.20,000/-, it will be necessary to give the information against this sub-clause. This is the position even if no interest is paid on current account.
(iii) When there is a mixed account, the transactions relating to loans and deposits (temporary advances) should be segregated from other accounts and the transactions relating to loans / deposits only should be stated under this clause.
(iv) Advance received against agreement of sale of goods is not a loan or deposit.
(v) Opening credit balance of loan taken in earlier years is not specifically required to be disclosed. However, while giving figures of maximum amount outstanding at any time during the year or while giving information about repayment of loan/deposit, the opening balances in the loan accounts will have to be taken into consideration.
(vi) Even if the loans are taken free of interest the information will still have to be given.
(vii) Security deposits against contracts, etc. will be covered by the definition of ‘deposit’ and therefore, such information will have to be given.
(viii) Loans and deposits taken or accepted by means of transfer entries constitute acceptance of deposits or loans otherwise than by account payee cheques. Hence, such entries have to be reported under this clause. The entries that relate to transactions with a supplier and customer will not be treated as loans or deposits accepted.
- If a partner introduces capital in cash in the firm or withdraws the same to the tune of Rs 20000 or in excess of Rs 20000, then Provisions of section 269SS or 269T shall not be attracted as the introduction of capital or withdraw from firm cannot be called as loans or deposits.
- Amount paid by firm to partners or vice versa- is payment to self and does not partake the character of loan or deposits in general law. Provisions of section 269SS are not applicable to such facts (CIT v. Lokhpat Film Exchange (Cinema)  304 ITR 172 (Raj.)
- Deposit assessed as income, No penalty can be imposed u/s 271D in such case: It was held by Jodhpur tribunal in Bajrang Textiles v. Additional CIT  122 (JD.) 190 that where the A.O having treated the impugned amount of deposit as income, he is precluded from treating the same amount as deposit or loan for the purpose of section 269SS and levy penalty u/s 271D. The penalty ought to be cancelled.
- Acceptance or repayment through Journal entry do not attract section 269SS or 269T: Acceptance or repayment through Journal Entry would not come within the ambit of the words ‘loans or deposits’-section 269SS applies only where money passes from one person to another by way of ‘loan or deposit’[CIT v. Noida Toll Bridge Co. Ltd. 262 ITR 260 (Del.)]
- A genuine transaction made in an emergency, does not attract penalty u/s 271D: held in Mrs Rupali R. Desai v. ACIT 88 ITD 76 (Mum.). In ITO v. Shree Mahaveer Industries 82 TTJ 549 (Jd.) it was held that cash paid to meet medical treatment expenditure in emergency, does not attract penalty u/s 271D.
- In ITO v. Prabhulal Sahu  99 TTJ (Jd.) 177 it was held that Assessee was not aware of provisions of section 269SS or 269T. His council did not apprise him about the provisions. No penalty u/s 271D shall be attracted.
- Where Depositors residing in rural areas are not having access to banking facility and are ignorant of relevant provisions of law, it would constitute bonafide reasons for payment in cash. (ACIT v. Vinman Finance & Leasing Ltd.  306 ITR (AT) 377 (Visakha.)
- Loan given by relatives on Sunday for safe custody and for use in business. No contravention of section 269SS takes place- ITO v. T.R. Rangarajan  279 ITR 587 (Mad.)
- Cash Transaction made on Sunday. No penalty could be imposed in such a case.- ITO v. Narsing Ram Ashok Kumar 47 ITD 38(Pat).
- Transfer of money exceeding Rs. 20,000 by way of bank voucher instead of a/c payee cheque or draft does not attract penalty u/s 271D as the transaction are through banking channels only held in Asst. CIT v. Jag Vijay Auto Finance (p) Ltd. 68 TTJ (Jp) 44.
- Loan in cash under compelling circumstances have been held to be reasonable cause: Industrial Enterprises v. DCIT  68 TTJ (Hyd) 373.
- Where the Lenders did not have any bank account which compelled the assessee to accept the loan in cash. This has been considered as reasonable cause in Balaji Traders v. DCIT  73 TTJ (Pune) 246.
- Transactions between sister concerns in current account for short and temporary period was held not to be a loan or deposit in Patiram Jain & Others Vs. Union of India (1996) 225 ITR 409 (MP).
- The Calculation of Penalty is on the amount exceeding Rs.20,000/- and the entire sum so obtained in contravention of the provisions of section 269SS is not to be taken as penalty. CIT Vs. Ajanta Dyeing and Printing Mills (2003) 264 ITR 505 (Raj.).
- The Madras High Court in CIT Vs. Rugmini Ram Ragav Spinners P. Ltd 304 ITR 417 has held that contribution towards Share Capital shall not be treated as loan and advance for the purpose of Section 269SS.
- In CIT VS. Idhayan Publications Ltd. (2006) 285 ITR 221 (Mad.) the assessee company received cash loans from director. It was held that the term ‘deposit’ does not include any amount received from a director or a shareholder of a private limited company as per the Companies (Acceptance of Deposits) Rules, 1975. Hence, it was held that no penalty could be imposed on such transactions.