Restrictions on cash receipt -New section 269ST of Income-tax Act, 1961 and some issues

[CA DEV KUMAR KOTHARI]

Restrictions on cash receipt -New section 269ST of Income-tax Act, 1961 and some issues

Links and references:

S.269SS, 269ST and 271DA of Income-tax Act, 1961.

NOTIFICATION NO. 28/2017 dt. 05.04.2017 found at

https://www.taxmanagementindia.com/Print/print_notifications.asp?ID=120070

Case law on validity of  S. 269SS

Asst. Director of Inspection (Investigation) Versus Kumari AB Shanthi & Chamundi Granites (P) Ltd. Versus Deputy Commissioner of Income-Tax And Another  2002 (5) TMI 4 - SUPREME Court. https://www.taxmanagementindia.com/Print/print_case_laws.asp?ID=6077

And various judgments referred to therein.

New section 269ST relating to restrictions on cash transactions and S. 271DA relating to penalty for contravention of S.269ST are reproduced below with highlights added for easy analysis and understanding:

New section 269ST.

Vide clause 84 of the Finance Act 2017 after section 269SS of the Income-tax Act, the following section has been inserted, namely:-

Mode of undertaking transactions.

‘269ST. No person shall receive an amount of two lakh rupees or more-

(a) in aggregate from a person in a day; or

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person,

Otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account:

Provided that the provisions of this section shall not apply to-

(i) any receipt by-

(a) Government;

(b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 269SS;

(iii) such other persons or class of persons or receipts, which the Central  Government may, by notification in the Official Gazette, specify.

Explanation.-For the purposes of this section,-

(a) “banking company” shall have the same meaning as assigned to it in clause (i) of the Explanation to section 269SS;

(b) “co-operative bank” shall have the same meaning as assigned to it in clause (ii) of the Explanation to section 269SS.’.

Related new section 271DA for penalty.

Vide clause 85 of the Finance Act 2017 after section 271D of the Income-tax Act, the following section has been inserted:-

Penalty for failure to comply with provisions of section 269ST. 

“271DA. (1) If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt:

Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner”.

Observations of author:

The section is very wide and it covers all type of receipts of money.

As per heading of section that is ‘Mode of undertaking transactions’ , all related parties must have concern with the provision and there must be obligation for compliance on all related parties and not only on person who receive cash. However, we find that as per language used in the provision, only one party that is the person who receives cash is covered and the other party who pays is not covered.

As per provision even cash withdrawals from bank accounts amount to amount received. However, CBDT has issued circular to exempt money received from banks from this provision. The notification is reproduced below with highlights added:

Notification - Income Tax - Income Tax

GOVERNMENT OF INDIA

MINISTRY OF FINANCE

DEPARTMENT OF REVENUE

(CENTRAL BOARD OF DIRECT TAXES)

NOTIFICATION NO. 28/2017

New Delhi, the 5th April, 2017

S.O. 1057(E).- In exercise of the powers conferred by clause (iii) of the proviso to section 269ST of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that the provision of section 269ST shall not apply to receipt by any person from an entity referred to in sub-clause (b) of clause (i) of the proviso to section 269ST.

2. The notification shall be deemed to have come into force with effect from 1st day of April, 2017.

[F.No.370142/10/2017-TPL]

DR. T.S. MAPWAL,

Under Secy.

Therefore, cash received from any banking company, post office savings bank or co-operative bank; will not be subject to restrictions.

Provision of S.269SS:

One may recall that earlier in case of S.269SS relating to receiving loans or deposit also many dispute arose, and some High Courts held that the provision is not valid for the reason that it does not cover both parties in transaction. Operation of some of such judgments were stayed by the Supreme Court. However, ultimately the validity of S. 269SS was upheld by the Supreme Court by holding that the restrictions imposed only on borrower are reasonable and the discrimination is not unreasonable.  Readers may refer to judgments on S.269SS on this website.

In Asst. Director of Inspection (Investigation) Versus Kumari AB Shanthi & Chamundi Granites (P) Ltd. Versus Deputy Commissioner of Income-Tax And Another the Supreme Court, referred to other judgments and observed and held on the following lines: 

        A Division Bench of the Gujarat High Court in Sukhdev Rathi v. Union of India 1993 (10) TMI 8 - GUJARAT High Court , also upheld the constitutional validity of section 269SS. Speaking for the Bench, acting Chief Justice G.T. Nanavati (as he then was) held:

           "A borrower by adopting the device of giving a false explanation or making false entries or by obtaining confirmatory letters is found evading payment of tax. Thus, the borrower as a class is found to be indulging in such practices. By making such false entries or by giving false explanations or by creating false evidence, it is the borrower who was found to be evading payment of tax. In the case of a lender, we fail to appreciate how while lending money by not making payment by a cheque or a draft, he would evade payment of income-tax. Therefore, though the transaction of loan can be regarded as a single transaction, and the borrower and the lender can be said to be equal integral parts, when we view them from the angle of tax evasion, we find that they cannot be regarded as equals or similarly situated. Compared to the class consisting of lenders, the class consisting of borrowers can be said to be in a position to evade tax by adopting the devices, for curbing which provisions have been made in Chapter XX-B by inserting section 269SS and other sections."

       In view of the aforesaid circumstances, we do not think that section 269SS is, in any way, violative of article 14 of the Constitution ….  

           “In that view of the matter, we do not think that section 269SS or 271D or the earlier section 276DD is unconstitutional on the ground that it was draconian or expropriatory in nature.

Position of Borrower and Lender need to be reconsidered:

It appears that in case of Sukhdev Rathi, before Gujarat High Court, the matter was not properly argued. This led to above observation of Gujarat High Court that in case of Borrower there can be case of tax evasion but not in case of Lender. With due respect, this is not correct position.

In both cases there can be case of tax evasion. The money lender can also indulge into tax evasion by lending money in cash and no recording the same and not disclosing the same to tax authorities including the source of money lent in cash. That will be undisclosed investment of the lender. For such reason we find provisions for taxation of undisclosed money and undisclosed investments etc. in the Income-tax Act.   A money lender can definitely use cash payments of loan to use his undisclosed income or money. Observations of the Gujarat High that

        “ In the case of a lender, we fail to appreciate how while lending money by not making payment by a cheque or a draft, he would evade payment of income-tax”

 have impliedly been upheld by the Supreme Court. However, with due respect, author is of firm view that this need to be reconsidered.

A money lender who is allowed to lent money otherwise than by a/c payee cheque or a/c payee draft is in equal position to evade tax, if he is allowed to lent money by way of cash transactions.

If the suspicion of tax authorities be believed, the borrower could evade tax only if a lender was willing to say and confirm that he had made a payment of loan or deposit or other advance in cash. Unless there is such lender, the borrower will not be able to establish the act of borrowing in cash.

Therefore, the person who made cash payment and the person who receive cash payment are equally situated and have similar position. If merely because of allowing cash receipt or cash payment, transaction is helpful in evasion of tax, then it is equally applicable to both parties. Therefore, with due regard to the counsels, author feels that this aspect was not properly brought to the notice of honourable Courts and therefore, this aspect need to be re-examined. There is no reason that the person who makes payment and person who receives payment are in different position in any manner and particularly when it is to curb a check on black money. 

A transaction which is duly recorded in books of account whether it be a loan taken or loan given and such books of account are meant for disclosure to the tax authorities, is naturally represents disclosed income and there should not be bias against the same. 

Section 269SS and new section 269ST:

Section 269SS and new section 269ST are different in nature and have different role to play. In case of S.269SS curb was on taking some loan or deposit in cash and this was due to experience gained by tax authorities that showing cash loans taken was  a device used to establish source of cash found during search and survey which was in excess of cash balance recorded in books of account. In that case, if suspicion of tax authorities is to be given credence, then both parties who shows cash loan received and who shows cash loan given can be acting in concert and collusion and both can be evading tax.

Section 269ST is different. It puts restriction on receiving cash payment irrespective of nature of receipt. The person who makes payment is cash is also equally beneficiary that he can use his cash for making payment otherwise than by way of proper banking channels. Therefore, restriction should be on both parties.

Therefore, in such a case both parties must be responsible for compliance. Suppose a person want to make payment in cash only, how the person receiving payment can refuse to receive such payment. If he refuse to receive he will be taking a risk of losing his receivable.

The person who is at receiving end, whether he receives money as loan, advance or deposit or any arrear money receivable from other party is in an inferior position in comparison to person who pays, if the payer want to pay in cash, the receiver  may have to accept the same, because otherwise his chance of getting payment may be lost.

Restrictions must be on all concerned parties:

In view of discussion above, in considered opinion of author, if a restriction is imposed, then such restriction must be on all concerned parties namely the person who pay money, the person who receive money and any third party on whose behalf payment is made or payment is received.

Limit of Rs. two lakh is also very low.

Revised limit of ₹ 20000/- was prescribed for S.269SS and 269TT long ago with effect from April 1, 1989. In spite of inflation those limits have not been raised. The limits for cash payments and cash receipts both must have been increased to keep in tune with inflation. However, it is only prejudice that these limits have not been raised. Rather we find that limit for S.40A (3) has been reduced to ₹ 10000/-

When a transaction is recorded in books of account and is shown from known sources there should not be suspicion merely because it is in cash. When a transaction is recorded in books of account, there is no case of evading tax.

For example, an expenditure shown in cash as duly recorded in books of account of payer, must not be disallowed. Rather enquiry should be from the recipient, whether he has shown such receipt and offered taxable element as taxable income before tax authorities. The ground reality is that tax authority (and also our Finance Ministers) are happy by making a disallowance in hands of payer instead of taxing the recipient of such payment.

Whether the provision is valid?

The provision may not be valid for several reasons like:

a. The limit of Rs. two lakh is very low and it imposes unreasonable restrictions on trade and commerce.

b. Only person receiving is made liable for compliance and in case of failure to be penalized. This is not an intelligent and reasonable classification and differentia, because, as discussed earlier, all concerned parties are similarly placed. The restriction should also be placed on person making payment/ giving money in cash and also persons on whose behalf money is paid or received.

c. Whether, this provision can be considered as incidental to imposition of tax on income is doubtful. The transaction may not necessarily have any concern with imposition and collection of tax and even evasion of tax. If a transaction is carried out in cash and recorded in books of account of all concerned parties, there cannot be a case of tax evasion unless there is case of collusion and benami transactions.

d. The provision is based on suspicion that transactions in cash are with black money, this legislative presumption is not proper. There are adequate and meaningful other provisions to curb check on black money.

e. Even transactions by a/c payee cheques are being disregarded by tax authorities and are viewed with doubt and suspicion and additions are made. Loan taken in cash was doubted and provision of S.269SS came in the Income tax Act, now loans taken even by a/c payee cheques and a/c payee draft are being doubted. There is no end of suspicion by tax authorities and bureaucrats. Therefore, prohibiting transaction in cash above certain limit will not solve the problem of suspicion. Perhaps, Hindi proverb “choro ko sare najar aate ha ichor” is applicable in most ofsuch cases, where statutory, primary evidences are rejected due to suspicion and doubts.

f. Popular Hindi proverb “Shak ki bimari ka koi ilaz nahi”. The provision is based on suspicion and it will not solve the problem of suspicion about black money.