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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