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Taking or Repayment of Loans and Deposits (Mode of Payment)

Taking or Repayment of Loans and Deposits (Mode of Payment)

It is inevitable for any company or an individual to keep growing without the help of one or the other source of funding. One of the most preferred sources of funding is taking loans or deposits from banks or financial institution or private associations.

Section 269SS :- Mode of taking Loans and Advances

Section 269SS PROVIDES that any loans or deposits shall not be taken or accepted from any other person , 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 and 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

Thus it is clear that no person can accept any loan or deposit of Rs 20000 or more otherwise than by way of an account payee cheque or an account payee draft. The limit of Rs 20000 will also apply to a case even if on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from such depositor is remaining unpaid and such unpaid amount along with the loan or deposit to be accepted, exceeds the aforesaid limit.

This can be explained with an example: If Mr X has a credit balance of a loan of Rs 19000 from Mr Y. Now in this case Mr X cannot take loan in excess of Rs 999 more from Mr Y except with an account payee cheque or account payee bank Draft.

Exemptions from section 269SS: The Following persons are exempted from the purview of section 269SS:

a) Government ;
(b)any banking company, post office savings bank or co-operative bank ;
(c) any corporation established by a Central, State or Provincial Act ;
(d) any Government company as defined in section 617 of the Companies Act, 1956
(e) other notified insititutions
(f) where the depositor and the acceptor are both having agricultural income and neither of them have any taxable income.

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 Loans and Advances

Section 269T of Income Tax Act provides that any branch of a banking company or a cooperative society, firm or other person shall not repay any loan or deposit 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

(1) The amount of the loan or deposit together with interest is Rs 20000 or more, or

(2) The aggregate amount of loans or deposits held by such person, either in his own name or jointly with other person on the date of such repayment together with interest, is Rs 20000 or more.

For example if X is having loan of Rs 30000 outstanding to Y. Then X cannot repay such loan in cash to Y.

Exemptions from Section 269T : The Following persons are exempted from the purview of section 269T:

a) Government ;
(b) any banking company, post office savings bank or co-operative bank ;
(c) any corporation established by a Central, State or Provincial Act ;
(d) any Government company as defined in section 617 of the Companies Act, 1956
(e) other notified insititutions

Consequenses 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.

CASE LAWS

No Penalty to be levied u/s 271D or 271E if there is reasonable cause : As per Section 273B of Income Tax Act no penalty shall be levied if the failure to comply with the provisions of section 269SS or 269T is due to some reasonable cause. Now the question arises what can be a reasonable cause to justify the violation of the provisions of section 269SS and 269T. Some of the reasonable causes based upon judicial decisions are provided as follows:

A genuine transaction made in an emergency, doesnot 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 [2006] 99 TTJ (Jd.) 177 it was held that Assessee was not aware of provisions of section 269SS or 269T. His councel 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. [2008] 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 [2005] 279 ITR 587 (Mad.)

Cash Transaction made on Sunday. No penalty could be imposed in such a case.- ITO v. Narsing Ram Ashok Kumar [1993] 47 ITD 38(Pat)

Transfer of money exceeding Rs. 20000 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.[2000] 68 TTJ (Jp) 44

Loan in cash under compelling circumstances have been held to be reasonable cause: Industrial Enterprises v. DCIT [2000] 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 [2001] 73 TTJ (Pune) 246.

Repayment or receipt of amount to partners: 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 withdrawl 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) [2008] 304 ITR 172 (Raj.)

Deposit assessed as income, No penality can be imposed u/s 271D in such case: It was held by Jodhpur Tribunal in Bajrang Textiles v. Additional CIT [2009] 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: Acceptence 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.)]

There is increase in level of financial transactions in nature of taking or repayment of loan or deposit. In today's time, almost all people who are doing financial transaction are aware about online mode of financial transactions; perhaps all preferred to do online transactions in comparison to physical cheque or pay order mode of financial transaction for the reasons of convenience, promptness and flexibility in operational timings.

There are certain statutory provisions on mode of taking or accepting certain loans and deposits under Income Tax Act. There is statutory provision under section 269SS of the Income Tax Act, 1961, which states that no person shall take or accept from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of loan or deposit is exceeding INR 20,000. Further, Section 269T of the Income tax provides for mode of repayment of certain deposits. It states that no company (including a banking company), co-operative society or firm shall repay to any person any deposit otherwise than by an account payee cheque or account payee bank draft where the amount of the deposit, or where the amount of the deposit is to be repaid together with any interest, the aggregate of the amount of the deposit and such interest, is INR 20,000.

In the present scenario many banking transactions take place by way of Net banking facilities that include Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Electronic Funds Transfer (EFT) and Electronic Clearing Service (ECS). Use of payment gateways for online transactions as well as credit cards is also on the rise and inevitable. Having said that, there are many inconveniences due to compulsion in using cheque or demand draft mode of payment for financial transaction of regular nature viz. making repayment or pre-payment of loan or deposits.

Following are the concerns raised over mode of payment mentioned under Section 269SS and 269T of the Income Tax Act, 1961;

1. Non availability of online mode of payment option,

2. Limit specified under the section is very old and less, which is inconsistence with current time.

3. Other Issues: More inconvenience in case of cheque / DD transaction and late payment penalties due to delay in cheque clearances on time before Due Date.

Therefore, in order to address all these issues in connection with mode of payment, it is recommended to the Finance Minister of India to consider mode of transfers like RTGS, NEFT, EFT, ECS etc be included as valid modes of fund transfers under Section 269SS and 269T of the Income Tax Act, 1961.