Section 269ST of the Income Tax Act, 1961

Introduction:

Section 269ST of the Income Tax Act, 1961, was introduced with the aim of curbing the use of cash transactions in business dealings. This section prohibits cash transactions above a specified limit, with a view to promoting digital transactions and curbing black money circulation. This article provides an overview of the provisions of Section 269ST and the implications of non-compliance with examples and a few related case laws.

Limit under Section 269ST:

According to Section 269ST of the Income Tax Act, 1961, no person will receive from another person, an amount of Rs. 2 lakhs or more in aggregate in a day, in respect of a single transaction or in respect of transactions relating to one event or occasion except by way of:

1. Account payee cheque,
2. account payee bank draft or
3. Use of an electronic clearing system through a bank account.

Applicability of Section 269ST

This section applies to all types of transactions, including those related to:

1. Sale or purchase of goods or services,
2. Loan or repayment of the loan, or
3. Any other transaction.

The section also applies to transactions between Related Parties, such as a company and its director or a firm and its partners.

Non-Applicability of Section 269ST

Section 269ST of the Income Tax Act, 1961 does not apply to:

1. Withdrawal from a bank, post office savings bank or cooperative bank
2. Persons or receipts by Central Government
3. Loan payments by NBFC (Non-Banking Financial Company) or HFC (Housing Finance Company) – Section 269SS
4. Receipts by Government Persons or receipts notified by Central Government

Implications of Non-Compliance:

Non-compliance with Section 269ST can result in various penalties and consequences. The person receiving the cash payment in violation of this section can be liable to pay a penalty equal to the amount received in cash. The penalty can be imposed by the Assessing Officer after giving the person an opportunity to be heard.

Additionally, the person making the payment in cash in violation of this section may not be able to claim the payment as an expense while calculating their taxable income. This can result in a higher tax liability for the person making the payment.

RELATED EXAMPLES:

• Example of Cash Transaction above the Prescribed Limit: Suppose Mr. X wants to buy a piece of land worth Rs. 5 lakhs from Mr. Y. If Mr. X pays Mr. Y in cash, which is above the prescribed limit of Rs. 2 lakhs, then this transaction will be considered as a violation of Section 269ST. In such a case, Mr. Y may be liable to pay a penalty equal to the amount received in cash. Also, Mr. X may not be able to claim the payment as an expense while calculating their taxable income.
• Example of Multiple Cash Transactions within a Day: Suppose a customer wants to purchase goods worth Rs. 3 lakhs from a dealer. The dealer may not receive cash payments of more than Rs. 2 lakhs from the same customer within a day, as this will be considered a violation of Section 269ST. In such a case, the dealer may ask the customer to make the payment through an account payee cheque or account payee bank draft or use an electronic clearing system through a bank account to comply with the provisions of the section.

Landmark Judgements:

• Kishanchand Chellaram vs. CIT (1980)

In this case, the assessee received cash payments of more than Rs. 2,000 from a single party on several occasions. The Assessing Officer disallowed the expenses claimed by the assessee on the grounds that the payments were in violation of Section 269ST. The assessee challenged the disallowance.

The ITAT upheld the disallowance and the assessee had violated the provisions of the section. The ITAT also noted that the assessee had not produced any evidence to show that the cash payments were made due to any emergency or exceptional circumstances.

• Meenakshi Overseas vs. ITO (2018)

In this case, the assessee received cash payments of Rs. 2 lakhs or more from a single party on two occasions. The Assessing Officer imposed a penalty under Section 271DA for violation of Section 269ST. The assessee challenged the penalty.

The CIT upheld the penalty, stating that the assessee had violated the provisions of the section. It had not produced any evidence to show that the cash payments were made due to any emergency or exceptional circumstances. The CIT also noted that the assessee had not maintained proper books of accounts to substantiate the transactions.

• Karan Gupta vs. ITO (2021)

In this case, the assessee received cash payments of more than Rs. 2 lakhs from a single party on several occasions. The Assessing Officer disallowed the expenses claimed by the assessee on the grounds that the payments were in violation of Section 269ST.

Conclusion:

To promote digital transactions and curb the use of cash transactions in business dealings, the Income Tax Act, 1961 introduced Section 269ST. Non-compliance with this section can result in penalties and consequences. For example, the authorities can disallow the claimed expenses and impose a penalty equal to the amount received in cash.

Are you unsure about the implications of Section 269ST on your business? Contact us today.