Penalty for cash transactions: cash transactions over Rs 20,000 may incur a penalty; can you take a cash loan?

It is now mandatory to mention PAN and Aadhaar for cash transactions totaling Rs.20 lakh in a financial year. Although this rule was introduced recently, cash transactions have always been a concern for the tax authorities. Under Section 269SS of the Income Tax Act 1961, one cannot take out a loan or pay more than Rs 20,000 in cash. Any violation may invite a severe penalty under Section 271D, which may be equal to the amount of the loan or deposit. Small entrepreneurs and contractors often need to borrow quickly. Loans from certain institutions such as banks, ministries and post offices are exempt, but cash transactions with other entities must meet the Rs 20,000 limit or incur a heavy penalty.

Family Loans

However, there is another source of funds which is not within the limit of Rs.20,000. One is allowed to take out cash loans from family members to meet business requirements. In a recent case of Balwan Singh v Asstt. ICT [2022], the Delhi court said that if the assessee can prove that they have reasonable cause to accept/repay money to meet business needs, a penalty under Section 271D and of section 271E cannot be imposed. For example, an entrepreneur is in urgent need of funds and takes out a cash loan of Rs. 80,000 from his wife. If we go with a plain reading of the law, the assessee has violated the provisions of Section 269SS. However, if he can prove that there was an urgent need and that there were no other means, the penalty provided for in section 271D can be avoided.

Of course, whether a situation can be treated as a business requirement will depend on the merits of the case. Under Section 273B, it is at the discretion of the assessing authority not to impose a penalty if satisfied that there was reasonable cause to take the cash loan. Even if the borrowed amount is more than Rs.2 lakh, the penalty will not be imposed if the assessing authority is satisfied with the proof of urgency submitted by the assessee.

Routine Cash Transactions Many businesses rely on cash transactions. For example, an agency responsible for providing security guards to various governmental and non-governmental organizations must pay salaries at the beginning of the month. However, due to insufficient bank balance, the branch owner borrows Rs 2.4 lakh from a friend to pay one of his employees.

The assessee can easily prove that the loan was taken out due to a lack of funds and that it was a real emergency. But the tricky part is whether the cash payment can be claimed as a business expense. Section 40A(3) of the Income Tax Act, read with Rule 6DD of the Income Tax Rules, provides that a person assessed by GETTYIMAGES may not make cash payments of more than 10,000 rupees per day to one person. If the assessee does so, payment will not be authorized as a business expense. Unfortunately, all of the judgments in this regard went against the assessees and dismissed these payments as deductible expenses. These cases include CIT v Idhayam Publications Ltd. (Madras High Court, 2007), CIT v Sunil Kumar Goel (Punjab & Haryana High Court, 2009), Anant

against Addl. CIT (Kolkata High Court, 2010), Kusum Dhamani v Addl. CIT (Jaipur Court, 2014) and Deputy CIT v Rupen Das (Kolkata High Court, 2011).

Can the lender also be penalized?

We know that taking out a cash loan carries penalties, but can the lender also be penalized? There are two provisions relating to cash lending transactions, and both concern the borrower and not the lender. Section 269SS relates to the acceptance of cash loans and Section 269T relates to the repayment of cash loans. Thus, the lender will not be penalized under any of these sections.

At the same time, the employee who received salary of Rs.2.4 lakh in cash can be penalized under Section 271E. He might have to cough up a penalty equal to the amount received in cash. But there is a small escape hatch here. If the transaction was made in an area where there was no banking services, the cash payment will not be treated as a violation of Section 269SS and the penalty under Section 271D cannot be imposed. This was the ruling of the Supreme Court in the case of Chief Commissioner of Income Tax v Sahara India Financial Corporation Ltd in 2020.

(The author
is a
Jamnagar-based Chartered Accountant.)