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Direct deposit over Rs.3 lacs into bank account not to invite penalty

February 17, 2017[2017] 78 taxmann.com 119 (Article)
339 Views

Thus far a receipt of loan or deposit or advance against property in excess of Rs. 20,000/- otherwise than by an account payee cheque or account payee bank draft or use of ECS is liable to penalty equivalent to such sum received. Section 269SS insists for such method and section 271D provide for a penalty for not following the prescribed method. The only recourse available to escape such penalty is when the recipient is able to show a reasonable cause for receipt of a sum in contravention of the requirements of section 269SS. Ideally therefore the recipient of money is exposed to penalty in limited forms of transactions specified in section 269SS so to say loans or deposits or advance in property transfer transactions.

The Finance Bill 2017 has proposed a new section 269ST next in line to section 269SS to further expand scope of restrictions on cash transactions exponentially. The proposed section reads as under:

S.269ST. No person shall receive an amount of three 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.'

The Explanatory memorandum further narrates the following as objects of this proposal:

Restriction on cash transactions

In India, the quantum of domestic black money is huge which adversely affects the revenue of the Government creating a resource crunch for its various welfare programmes. Black money is generally transacted in cash and large amount of unaccounted wealth is stored and used in form of cash.

In order to achieve the mission of the Government to move towards a less cash economy to reduce generation and circulation of black money, it is proposed to insert section 269ST in the Act to provide that no person shall receive an amount of three lakh rupees or more,—

(a)   in aggregate from a person in a day;
(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 account payee bank draft or use of electronic clearing system through a bank account.

It is further proposed to provide that the said restriction shall not apply to Government, any banking company, post office savings bank or co-operative bank. Further, it is proposed that such other persons or class of persons or receipts may be notified by the Central Government, for reasons to be recorded in writing, on whom the proposed restriction on cash transactions shall not apply. Transactions of the nature referred to in section 269SS are proposed to be excluded from the scope of the said section.

It is also proposed to insert new section 271DA in the Act to provide for levy of penalty on a person who receives a sum in contravention of the provisions of the proposed section 269ST. The penalty is proposed to be a sum equal to the amount of such receipt. The said penalty shall however not be levied if the person proves that there were good and sufficient reasons for such contravention. It is also proposed that any such penalty shall be levied by the Joint Commissioner.

It is also proposed to consequentially amend the provisions of section 206C to omit the provision relating to tax collection at source at the rate of one per cent. of sale consideration on cash sale of jewellery exceeding five lakh rupees. These amendments will take effect from 1st April, 2017.

Thus the objects behind the proposed provisions are twinfold viz.:

1.   The words 'adversely affects the revenue of the Government' point to an object to check tax evasion;
2.   The words 'to move towards a less cash economy to reduce generation and circulation' further point to a thrust to encourage cash less transactions.

Ordinarily speaking therefore after 1.4.2017 no person can receive in cash an amount exceeding Rs. 3lac from a person or in respect of single transaction or in respect of single event or occasion failing which he shall be subject to penalty equivalent to the amount received in cash u/s 271DA. But whether such penalty can be imposed even if one receive deposits in cash directly into the bank account? The answer to this may lie in the interpretation of section 40A (3) which also impose restrictions on cash transactions. Section 40A (3) provide restrictions on cash payments on trading account in excess of Rs. 20000/-. For the very fact that the assessee in CIT v. Smt. Shelly Passi [2013] 350 ITR 227/213 Taxman 213/31 taxmann.com 173 (Punj & Har.) paid the money amounting to Rs. 60,19,000 directly in the bank account of supplier the P&H High Court held that the assessee had not violated the provisions of section 40A(3) of the Income-tax Act, 1961.

Following the ruling of P & H High Court the Kolkata bench of ITAT in Smt. Shila Mondal v. ITO in ITA No. 336/2014 dated 12.8.2016 also outlined the object of section 40A(3) as under:

"It is pertinent to note that the primary object of enacting section 40A(3) were two folds, firstly, putting a check on trading transactions with the object to evade the liability of tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to be fallen on account of non-observation of Section 40A(3) of the Act must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. The ld. AR has directly deposited the cash in the account of the companies and has produced the sales bills of the company. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash."

Yet further the Kolkata bench in Ramnagar Pachwai and C S (S) Shop v. ITO [2016] 50 ITR (Trib.) 332 in grating allowance of deduction u/s 40A (3) held that the assessee had taken enough precautions to ensure that the payee did not escape the ambit of taxation on the receipts by directly depositing the cash in the bank account of the payee.

Further u/s 271DA if there exists reasonable cause for failure to comply with sections 269 ST of the Income-tax Act, 1961 penalty need not be imposed. The Telangana and AP High Court in Gururaj Mini Roller Flour Mills v. Addl CIT [2015] 370 ITR 50/231 Taxman 662/56 taxmann.com 336 held that if an assessee bona fide took a particular step and that in turn, resulted in contravention of section 269SS or section 269T penalty cannot be imposed, as a matter of course. Further since the objects behind the proposal to tax the recipient of money in cash in excess of Rs. 3 lacs are likewise motivated by the objects similar to the ones chosen for enacting section 40A (3) in the Act any deposit of cash direct in to the account of the supplier /recipient would be a good and reasonable cause to also escape penalty under the new section 269ST.

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