PERSONAL TAX: There is no fine on genuine cash transactions

A taxpayer had duly filed his return of income within the due date for assessment year 2010-11. During the course of assessment proceedings, the taxpayer duly furnished the details as requested by the tax officer.

The taxpayer was surprised when he received a notice seeking to levy penalty along with the assessment order. The tax officer had initiated penalty proceedings against the taxpayer on the ground that the taxpayer had received loans in cash and also repaid the loans in cash; which was in violation of the provisions of sections 269SS and 269T of the Income Tax Act ('the Act').

Section 269SS of the Act provides that no person shall take or accept any loan or deposit in cash, from any other person, for an amount exceeding Rs 20,000 subject to certain exceptional circumstances, or when dealing with specified institutions as provided under the Act. Likewise, section 269T provides that no person shall repay any loan or deposit in cash, made with it for an amount exceeding Rs 20,000. This section, too, has provided for certain exceptional situations and specified institutions where this condition has been relaxed. In case of violation of any of these sections, the tax officer can levy a penalty on the taxpayer for an amount which can be equal to the amount accepted or repaid in cash.

During the penalty proceedings, the taxpayer contended that his family members had intended to purchase a property and, therefore, had entered into an agreement for sale. For this purpose, the members had requested the taxpayer to make a Demand Draft (DD), for which he had accepted the total amount of Rs 6,29,000 in cash, and then made out the DD. Further, as the transaction did not go through; the DDs were cancelled and the amounts were repaid to his children. The taxpayer submitted that this transaction was not in the nature of loan and, hence, the penalty is not leviable. The tax officer, however, did not accept this contention and observed that as the situation described by the taxpayer did not fall under any of the exceptions provided by the said sections; he levied penalty under the applicable sections. The first level appellate authority confirmed the penalty order by the tax officer.

When the case came up for hearing before the Income Tax Tribunal, the taxpayer referred to the copy of the agreement for sale, wherein all the parties, that is, the sons and daughter-in-law of the taxpayer (being alleged to have given loans to the taxpayer) have been listed as parties to the sale and also having paid the consideration. A copy of the DD made towards the stamp duty and registration fees payable along with the pay-in slips prepared for the deposits were submitted to demonstrate the use of cash. The relevant extract of the bank account, where the amount was deposited for the purpose of making the DD and further deposit of the amount after cancellation of the DD was also duly submitted. The taxpayer had chosen to transact with the said bank only for the purpose of convenience, as there were no DD charges payable there.

The Tribunal observed that in cases where the transactions are genuine and enough reasons are offered by taxpayers to justify cash transactions, penalty under the respective sections are not leviable. In the said case, it was held that the amounts received and repaid by the taxpayer are not in the nature of loan, but merely transactions undertaken on behalf of his children.

The writer is a SEBI Registered Investment Adviser