Cash Payment Restrictions under the Income Tax Act, 1961: Understanding Provisions of Section 269SS, 269T & 269ST

Since time immemorial, cash has been the go-to method of receiving and accepting payments in any trade. Even in terms of financing businesses, cash has been the preferred mode of holding and spending.  As times progressed, the method, modes and nuances of business have also changed. However, certain things remain constant and in terms of business, the cry for finance remains constant. 

 

With the start-up culture growing, expanding leaps and bounds and dipping sooner than expected, finance has become the most important “first question” than ever. Our fathers and grandfathers have all started trade with their own “bizness” to be where they are today by addressing the question of finance with their savings, any other means of personal finance and using the revenue for further expansion. The start-up culture calls this mode of finance as “bootstrapping”.  The start-up culture and their solutions in this sense is only a millennial recognition of what our fathers and grandfathers have done so long.  

 

But sometimes, bootstrapping may not suffice the financial needs of the venture and extending your hand for financial help to your relatives, family members, friends or any financial institution may become the need of the hour. 

 

While receiving income from business or accepting financial assistance and using it to address the needs of the business may be the only concern on the forefront, it is fundamental to given the cash payment restrictions under the Income Tax Act, 1961 an equal footing to avoid sitting with your account at the end of the financial year and evaluating options to avoid tax incidence and penalties. 

 

This article explores the understanding of how much maximum loan can be taken or given under the Indian Income Tax Laws.

 

Sections 269SS, 269T and 269ST of the Income Tax Act, 1961 regulate the “Mode of Taking Loans / Deposits & Repayment of Such Loan / Deposits and acceptance of cash payments, cash restrictions thereof be it in the form of loans, deposits or advances or for any other reason. 

Keeping in mind the mode of taking loans and deposits and the repayment of the same, The Finance Act 2017 also introduced a section that imposes cash restrictions on acceptance of cash receipts relating to a particular transaction to curb down evasion of taxes & regulation and controlling the circulation of black money in a country like India where cash transactions are highly preferred in order to evade taxes since such transactions pose difficulties for the Income Tax department to pursue. 

 

• Mode of accepting loans, deposits and advances:  

 

Section 269SS of the Income Tax Act 1961 states that a person cannot accept, in excess of INR 20,000, any loan or deposit or any advance or any specific amount or the aggregate of any loan, deposit or advance more from any other person otherwise than by account payee cheque, demand draft or through any electronic mode of payment. In calculating the limit of INR 20,000, any sum of money that remains unpaid to the lender prior to the date of acceptance of a further loan, deposit or advance shall also be taken into account. 

This section merely imposes a restriction on the mode of acceptance loan, deposit or advance. A loan, deposit or advance accepted from the same person sum totalling to an amount less than INR 20,000 can be accepted in cash. 

Let’s understand this provision by way of an example:

 

Mr. ABC wants to take a loan of Rs. 8,000/-, an advance of Rs. 7,000/- and a deposit of Rs. 8,000/- from the same person. The total is Rs. 23,000 [8000 + 7000 + 8000]. Then in such a case, he cannot accept this whole amount in cash as the sum of all specified amount exceeds Rs. 20,000/-.

 

• Repayment of loans, deposits and advances: 

 

Section 269T of Income Tax Act, 1961 provides for the mode for repayment of loans, deposits and advances. According to Section 269T, a person is restricted from repaying any loans, deposits or advances exceeding Rs. 20,000/- by means other than by an account payee cheque, a demand draft or through any electronic mode of payment. Therefore, loans, deposits or advances not over INR 20,000 can be repaid in cash. 

 

• Restriction on cash transactions above INR 2,00,000 in a single day:

 

Section 269ST is an exception to the restriction contained in Section 269SS. As per Section 269ST, no person shall receive an amount of INR 2,00,000 or more in any mode other than by an account payee cheque or an account payee demand draft or use of any electronic clearing system through a bank account:

1. In aggregate from a person in a day; or
2. In respect of a single transaction; or
3. In respect of transactions relating to one event or occasion from a person

In simple terms, this section restricts a person to accept any cash receipts beyond Rs 2,00,000/- in respect of a single transaction or from any single person or for multiple inter-related transactions. This section was mainly introduced to curb tax evasion and regulation & circulation of black money.

 

• Exceptions to all the above sections:

 

 

The restrictions stated in Section 269SS, 269ST and 269T do not apply to: 

 

1. Government 
2. Any Banking company, post office saving bank or Co-operative Bank
3. Any corporation established by the State, Central or Provincial Act
4. Any Institution, class of Institution, bodies or associations as may be notified by the Central Government.

 

 

• Consequences on non-compliance:

 

The penalty for contravention of Sections 269SS, 269ST and Section 269T is fine of equivalent to the loan or deposit or receipts that are taken or accepted by such person.

 

• Clarifications regarding cash transactions: 

 

While there are various provisions and exceptions on how much maximum loan can be taken or given in cash in India, there are also various scenarios in which such transactions can be permitted.

 

For the purpose of section 269SS & 269ST of Income tax Act,1961  it has been clarified that there shall be no penalty levied under the governed sections if there are reasonable causes for which certain judicial decisions have been passed.

1. Repayment or acceptance by journal entry in Books of Accounts is not considered as loans or deposits. Then, no penalty is levied under these sections.
2. The transaction is genuine and is made at in time of any emergencies.
3. capital contribution in cash by the partners in the firm.
4. A person earning only agricultural income can accept loan or deposit in cash from another person if such another person is also earning only agricultural income.

 

 

• Reporting of Transactions:

 

The tax auditor has to report the transactions that have been hit by the provisions of aforesaid sections under clause 31 of Form 3CD. To clarify, both the parties i.e. the payer and receiver of such transactions have to report such transactions along with full details of another party (PAN, address, mode of payment/receipt, etc)

The introduction of these provisions helps in controlling the circulation of black money & thereby promotes the digital economy in a country like India. These provisions are in line with the reforms introduced by our Prime Minister Shree Narendra Modi.

 

Disclaimer: Nothing in this blogpost is intended to be a source of advertising or solicitation or provide any form of advice on law or tax or both and therefore independent legal advice must be procured. The writer is not responsible for the consequence of any action taken by the reader relying on material/information provided in this blog.