It is now mandatory to mention PAN and Aadhaar for cash transactions aggregating Rs.20 lakh in a financial year. While this rule has been introduced recently, cash transactions have always been an area of concern for the tax department. Under Sec 269SS of the Income Tax Act, 1961, one cannot take a loan or pay more than Rs 20,000 in cash. Any violation can invite a stiff penalty under Section 271D, which can be equal to the loan or deposit amount. Small businessmen and entrepreneurs often need to borrow in a hurry. Loans from certain institutions such as banks, government departments, and Post Offices are exempted, but cash transactions with other entities must comply with the Rs.20,000 limit or invite a heavy penalty.
Loans from family
However, there is another source of funds that is not within the Rs.20,000 limit. One is allowed to take cash loans from family members to meet business exigencies. In a recent case of Balwan Singh vs Asstt. CIT , the Delhi Tribunal stated that if the assessee can show a reasonable cause for accepting/repayment of cash to meet business requirements, then penalty under Section 271D and Section 271E cannot be levied. For instance, an entrepreneur needs funds urgently and takes a cash loan of Rs.80,000 from his wife. If we go with plain reading of the law, the assessee has violated the provisions of Section 269SS. However, if he can prove that there was an urgent need and there was no other means, the penalty under Section 271D can be avoided.
Of course, whether a situation can be treated as a business exigency will depend on the merits of the case. Under Section 273B, it is left to the discretion of the assessing authority to not levy a penalty if it is satisfied that there was a reasonable cause for taking the cash loan. Even if the borrowed amount is more than Rs 2 lakh, the penalty will not be levied if the assessing authority is satisfied by the proof of exigency submitted by the assessee.
Routine transactions in cash Many businesses rely on cash transactions. For example, an agency engaged in providing security guards to various government and non-government organizations needs to pay salaries at the beginning of the month. However, because of insufficient bank balance, the agency owner borrows Rs.2.4 lakh cash from a friend to pay one of his employees.
The assessee can easily prove that the loan was taken due to shortage of funds and that it was a bona fide emergency. But the tricky part is whether the cash payment can be claimed as a business expense. Section 40A(3) of the Income Tax Act, read with rule 6DD of Income Tax Rules, says that an GETTYIMAGES assessee cannot make cash payments of more than Rs.10,000 in a day to a person. If the assessee does so, the payment will not be allowed as a business expenditure. Unfortunately, all judgements in this regard have gone against the assessees and disallowed such payments as deductible expenses. These cases include CIT vs. Idhayam Publications Ltd. (Madras High Court, 2007), CIT vs Sunil Kumar Goel (Punjab & Haryana High Court, 2009), Anant Himatsingka vs Addl. CIT (Kolkata High Court, 2010), Kusum Dhamani vs Addl. CIT (Jaipur Tribunal, 2014) and Deputy CIT vs Rupen Das (Kolkata High Court, 2011).
Can lender be penalised too?
We know that taking a loan in cash invites penalty, but can the lender be also penalised? There are two provision relating to cash loan transactions, and both are for the borrower, not the lender. Section 269SS relates to acceptance of cash loans and Section 269T is for repayment of cash loans. As such, the lender will not be penalized under any of these sections.
At the same time, the employee who took a salary of Rs.2.4 lakh in cash can be penalised under Section 271E. He might have to cough up a penalty equal to the amount received in cash. But there is a small escape hatch here. If the transaction was done in an area where there was no banking facilities, the cash payment will not be treated as a contravention of Section 269SS and penalty under section 271D cannot be levied. This was the Supreme Court’s ruling in the case of Principal Commissioner of Income Tax vs Sahara India Financial Corporation Ltd in 2020.
Source By : economictimes