Cheques and Balances SOME GYAN ON INCOME TAX

Cheques and Balances

Payments of Rs 20,000 or more must be by cheque; pay in cash and you could be in big trouble.
 
THE INCOME TAX ACT is not just an instrument with provisions for the levy and collection of tax. There are penalties involved, like in the case of loans and deposits above a certain amount that are taken or repaid in cash. This was because the taxman found that during raids, assessees often explained away unaccounted-for incomeas loans taken or deposits made with various people.
Some tax defaulters have been known to introduce unaccounted-for income in their books of account using benami names for loans and deposits. To counter this, the taxman introduced Section 269SS through Finance Act 1984.

When you take a loan
Effective 30 June 1984, Section 269SS debars taxpayers from ‘taking or accepting’ loans or deposits from any person otherwise than by way of an account payee cheque or account payee bank draft if the amount of either the loan or the deposit or the aggregate amount of the loan and deposit is Rs 20,000 or more. The exception: where the giver and the taker earn income only from agricultural activities and neither has any incomechargeable to tax.
It’s important here to understand the subtle distinction between a deposit and a loan. It’s true that in both cases, a debtor-creditor relationship exists between the person giving the money and the one receiving it. In the case of a deposit, however, a person deposits money for his own benefit, and earns interest from the party accepting the deposit. In the case of a loan, however, it is the borrower who needs the money, and so the lender may stand to gain in terms of interest on the loan that has been advanced.

When you repay a loan
This brings us to Section 269T that has been in effect since 11 July 1981. No banking company, co-operative bank, co-operative society, firm, person or any other company can ‘repay’ a loan or deposit otherwise than by way of an account payee cheque or account payee bank draft drawn in favour of the person who has made the loan or deposit if the amount of the loan or deposit, along with the interest payable, is Rs 20,000 or more.
This provision also applies where the aggregate amount of the loan or deposit, along with the interest payable, held by a person individually or jointly on the date of the repayment is together Rs 20,000 or more.
The exception: Section 269T provisions are not violated where a banking company or a co-operative bank credits the amount of the loan or deposit to the savings or current bank account of the person to whom the loan or deposit is to be repaid.
Exceptions to the rule  
The provisions do not apply in the case of loans/deposits taken or accepted by, or in the case of repayment of loans or deposits otherwise than by way of an account payee cheque or account payee bank draft to:

• The government;
• Any banking company, post office saving bank or co-operative bank;
• Any corporation established by a Central, State or Provincial Act;
• Any government company as defined under Section 617 of the Companies Act, 1956;
• Any institution, association or body notified by the central government in the Official Gazette.

The price you pay for a default
Under section 271D and 271E, the Joint Commissioner ofIncome Tax can impose a penalty equal to the amount of the loan or deposit taken or accepted in contravention of the provisions of Section 269SS, or the amount of loan or deposit repaid in contravention of the provisions of Section 269T. For example, if a person takes a loan of Rs 40,000 in cash from his brother, he will be liable for a penalty of an equivalent amount. Similarly, an additional penalty of Rs 40,000 will be levied if the loan is also repaid in cash. The penalty for repayment in cash is independent of whether the loan was taken in cash.

Provisions for genuine transactions
The Income Tax Act makes exceptions where a person takes or repays a loan or deposit in cash for a ‘reasonable cause’. And so, the income tax authorities do not impose a penalty if it is proved to their satisfaction that a person had a genuine reason for not abiding by the requirements of the law and borrowing or repaying a loan in cash, instead of transacting through the cheques. For example, let’s say a family member suddenly falls ill and has to be rushed to hospital in the middle of the night. There, the hospital authorities refuse to admit the patient without an upfront payment of Rs 40,000. For lack of sufficient options, it may then be necessary to borrow an amount in excess of Rs 20,000 in cash to make the payment. This can be said to be a genuine case where a person is prevented by a reasonable cause to accept a loan by cheque.
The Hyderabad Tribunal too has ruled that Section 269SS has been introduced to curb the practice of explaining away unaccounted-for money; the provisions are not applicable to transactions that are conducted in an ‘open and genuine’  manner and where no unaccounted-for money is involved. If a transaction is genuine, then a mere technical breach of the provisions should not attract a penalty. The provisions, the Tribunal held, have been introduced to deal with cases involving evasion of tax. The legislative intent of curbing tax evasion does not mean that all loans or deposits are hit, but only those that are used by tax defaulters to cover up unexplained cash or unaccounted-for deposits. The Sections, according to the Tribunal, are definitely not intended to penalise genuine transactions, where no tax evasion is involved.
In another case, a building contractor was liable to be penalised for accepting and repaying loans/deposits from two lenders in cash. The genuineness of the transactions, however, was never in doubt, since the loans were accepted and repaid in cash due to discounting of the cheques, as also dishonouring of the cheques issued by the builder. The builder, as well as the lenders (from whom the cheques were discounted by the builder and to whom the payments were made in cash due to the fact that the builder’s repayment cheques were dishonoured), were also regular income tax assessees. Therefore, the transactions were deemed bona fide and genuine and no penalties were levied under Sections 271D and 271E for contravention of Sections 269SS and 269T.

Bottomline. The income tax department doesn’t hesitate to levy a penalty for any violation of the provisions of theIncome Tax Act. As a taxpayer, you are, therefore, advised to accept loans of Rs 20,000 or more only by cheque and repay them too only by cheque. Unless, of course, you have no choice but to opt for cash transactions. If that happens, make sure you have enough ‘reasonable cause’ to do so, and the transaction is duly accounted for.;