Penalty on Cash Transactions

1. The Finance Act, 2017 has introduced Section 269ST which prohibit receipt of an amount exceeding Rs 2 lakhs by any person in cash and Section 271DA which penalises such receipt with a penalty equal to 100% of such amount.

2. Section 269ST – Mode of undertaking transactions

“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 bank account.”

3. Permitted Exceptions – The provisions of Section 269ST 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; or

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

4. Definitions

(a) “banking company” means a company to which the provisions of the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in Section 51 of that Act.

(ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949).

5. Section 271DA

“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.” 

6. Rationale for introducing Section 269ST

The Explanatory Memorandum to Finance Bill, 2017 states the rationale for introducing Section 269ST and Section 271DA in the following words :-

“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  two  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.”

7. Key points to be noted –

(a) Restriction u/s 269ST and penalty u/s 271DA is on the recipient of money, not on the payer of money.

(b) The terms “transaction”, “event” or “occasion” are not defined under the Income Tax Act, 1961. The legislative intent behind the provision is that people may not split their payments into smaller tranches and avoid the applicability of the provision. 

(c) The term “person” has been defined in Section 2(31) of the Income Tax Act, 1961 to mean and include an Individual, a Hindu undivided Family, an Association of person or Body of Individuals, a Partnership Firm including a Limited Liability Partnership, a company and every artificial juridical person (say a local authority or a diety). In essence, the scope of Section 269ST is very wide and covers all types of assessable persons, whether or not they are liable to Income Tax.

(d) Transaction of the nature referred to in Section 269SS – that is borrowing of money or purchase or sale of immovable property in excess of 20000 rupees from one person – are excluded from the ambit of Section 269ST. 

(e) No exclusion has been made in respect of Section 269T. In case of a borrower making a repayment in excess of 2 lakhs in cash, the borrower will be liable to penalty u/s 271E read with Section 269T and recipient (lender) will be liable to penalty u/s 271DA read with 269ST.

(f) Hitherto, under section 273B, Penalty was not leviable under various provisions of the Income Tax Act, 1961 if the assessee was able to prove that there was a “reasonable cause” for such contravention / failure. The phrase “reasonable cause” has also been dealt with in a number of Judicial pronouncements. Now, under proviso to Section 271DA, a new phrase “good and sufficient reason” has been coined by the legislature to avoid the applicability of penalty on transactions covered under Section 269ST.

(g) Pending Exemption notification by Central Government, 

(i) Withdrawals of more than Rs 2 Lakh per day from a Banking company / Cooperative Bank falls within the ambit of Section 269ST.

(ii) Receipt Transactions through Entities licensed by RBI as Payment and Settlement Systems operators (such as Online Wallets / Prepaid Payment Instruments) falls within the ambit of Section 269ST simply because they are not Banking Companies / Electronic Clearing System through Bank Account.

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