It is common knowledge that firms and individuals take cash loans from family members. The Income Tax Department often invokes Section 269SS and thereafter imposes penalty under Section 271D of the Income Tax Act. It needs to be deliberated whether the actions of the Department in such cases are legally justifiable.
There are two sections in the Income Tax Act which regulate large cash transactions to curb black money and ensure transparency. The provisions Section 269SS and Section 269T play a crucial role in this context. Their primary purpose is to control cash transactions, restrict the flow of black money, and bring transparency to the economy.
Before deliberating further, it is pertinent to refer to Section 269SS and Section 271D of the Income Tax Act, which are reproduced below:
Section 269SS – Mode of taking or accepting certain loans, deposits and specified sums
No person shall take or accept from any other person (herein referred to as the depositor), any loan or deposit or any specified sum, otherwise than by:
- an account payee cheque, or
- an account payee bank draft, or
- use of electronic clearing system through a bank account
If:
- The amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or
- On the date of taking or accepting such loan/deposit/specified sum, any earlier unpaid amount from the depositor; or
- The total of (a) and (b) is ₹20,000 or more.
Provided that the provisions of this section shall not apply to loans, deposits or specified sums taken or accepted from or by:
- The Government
- Any banking company, post office savings bank, or co-operative bank
- Any corporation established by a Central, State, or Provincial Act
- Any Government company as defined in Section 2(45) of the Companies Act, 2013
- Such other institutions, associations or bodies as may be notified by the Central Government in the Official Gazette
Further, this section does not apply where both parties have agricultural income and neither has income chargeable to tax under the Act.
Explanation: For the purposes of this section:
- “Banking company” means a company under the Banking Regulation Act, 1949
- “Co-operative bank” has the same meaning as assigned under the Banking Regulation Act, 1949
- “Loan or deposit” means a loan or deposit of money
- “Specified sum” means any money received as advance or otherwise in relation to the transfer of an immovable property
Section 271D – Penalty for failure to comply with the provisions of Section 269SS
- If a person takes or accepts any loan or deposit in contravention of Section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit taken or accepted.
- The penalty under sub-section (1) shall be imposed by the Joint Commissioner.
From the above, it is clear that Section 271D of the Income Tax Act, 1961 imposes a penalty where any person accepts a loan or deposit of ₹20,000 or more otherwise than through prescribed modes.
However, courts and tribunals have repeatedly acknowledged that genuine transactions between family members, arising out of love, affection, or urgent financial needs, do not attract penal consequences under Section 271D. These transactions are not treated as commercial loans, and therefore, penalties under Section 271D are not justified.
At this juncture, it would be apropos to refer to Section 273B: Penalty Not To Be Imposed In Certain Cases, which reads as under:
Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of section 271, section 271A, section 271AA, section 271B, section 271BA, section 271BB, section 271C, section 271CA, section 271D, section 271E, section 271F, section 271FA, section 271FAB, section 271FB, section 271G, section 271GA, section 271GB, section 271H, section 271-I, section 271J, clause (c) or clause (d) of subsection (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA or section 272B or sub-section (1) or sub-section (1A) of section 272BB or sub-section (1) of section 272BBB or clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure.
From the plain reading of Section 273B, it is evident that penalty u/s 271D cannot be imposed if the defaulting assessee proves there was reasonable cause for the said failure.
Some Important Judgments/Case Laws with Reference to the Subject Captioned Above Are Being Discussed as Under:
- CIT v. Smt. M. Yasodha (2013) 351 ITR 221 (Madras HC)
The brief facts of the case are that the assessee, for the AY 2005-2006, claimed cash loan of Rs. 20,99,393/- taken from her father-in-law for purchasing the property. The Assessing Officer initiated penalty proceedings under Section 271D of the Income Tax Act, 1961 on the ground that the assessee had obtained a loan of Rs. 20,99,393/- in cash from her father-in-law, which is in contravention of the provision of Section 269SS of the Income Tax Act.
The Madras High Court held that when the transaction is between close relatives and there is no element of business transaction, the intention was not to contravene Section 269SS, and therefore, penalty under Section 271D was not justified.
- Commissioner of Income Tax vs Manoj Lalwani (2003) 180 CTR (Raj) 394 (Rajasthan High Court)
In the said case, the Court held thus:
“In the present case the Tribunal has found that the assessee is an exporter and was in urgent need of the money for complying with the time bound supplies and, therefore, he took a loan of Rs. 2,50,000/- from his brother-in-law Mukesh Manwani. Out of the loan so taken, an amount of Rs. 2,45,000/- was immediately deposited in the Bank, which indicates that the amount of loan, in fact, was received by him from Mukesh Manwani. It was only to meet the emergent need of time bound supplies; the loan was taken as he did not have sufficient time and funds and, that there was no intention to violate the provision of Section 269SS of the Act of 1961.
The Tribunal, in these circumstances, has arrived at a conclusion that the cash loan was taken by the assessee in the exceptional circumstances and that it is a case of reasonable cause, as a consequence thereof set aside the penalty imposed by the revenue authorities. As we have already held that on a reasonable cause being shown, the assessing authority has jurisdiction not to impose the penalty and, therefore, in our opinion, the Tribunal has acted in accordance with the law in waiving the penalty imposed on the assessee by the revenue authorities.”
- CIT v. Sunil Kumar Goel [2009] 315 ITR 163 (P&H HC)
The Punjab and Haryana High Court, in the aforesaid case, held as under:
“The Income Tax Appellate Tribunal was right in recording its conclusion that a ‘reasonable cause’ had been shown by the respondent-assessee. The Income Tax Appellate Tribunal relied on the fact that the respondent-assessee had produced his cash books, depicting loans taken by him unilaterally before the Revenue.
Another fact taken into consideration was, that no prejudice was caused to the Revenue, in the instant action of the respondent-assessee inasmuch as, the respondent-assessee did not attempt by the impugned act to avoid any tax liability. Furthermore, there is no dispute about the fact, that the instant cash transactions of the respondent-assessee were with the sister concern, and that, these transactions were between the family, and due to business exigency.
A family transaction, between two independent assessees, based on an act of casualness, specially in a case where the disclosure thereof is contained in the compilation of accounts, and which has no tax effect, in our view establishes ‘reasonable cause’ under Section 273B of the Act.
Since the respondent-assessee had satisfactorily established ‘reasonable cause’ under Section 273B of the Act, he must be deemed to have established sufficient cause for not invoking the penal provisions (Sections 271D and 271E of the Act) against him.
For the reasons recorded here-in-above, we find no merit in either of the aforesaid two appeals i.e. ITA Nos. 777 and 778 of 2008, and accordingly, the said appeals are hereby dismissed.”
- ITO v. Pramila D. Vadalia (2017) 83 taxmann.com 92 (Mumbai ITAT)
In this case, the ITAT Mumbai Bench held that cash transactions between close family members were genuine and carried out under financial exigencies, hence no penalty could be levied under Section 271D.
- Sonia Malik, New Delhi vs JCIT, Range-69, New Delhi (Delhi ITAT, decided on 10 May, 2019)
It would be trite to reproduce para 8 & 9 of the aforesaid judgment which reads thus:
8. I have considered the rival arguments made by both the sides and perused the relevant material on record. I have also considered the various decisions cited before me. It is a fact that the assessee during the impugned assessment year has accepted cash loan of Rs.3,25,000/- from her parents and brother i.e., Rs.1,25,000/- from father Shri Darshan Singh Gujral, Rs.1,00,000/- from her mother Smt. Joginder Kaur and Rs.1 lakh from Shri Gurdeep Singh Gujral. The capacity of the loan creditors is not in dispute since the Assessing Officer in the body of the assessment order has accepted such loan.
However, the JCIT levied penalty of Rs.3,25,000/- u/s 271D on the ground that the assessee has accepted cash loan in violation of the provisions of section 269SS and there was no urgency in accepting such cash loan for which there was no reasonable cause.
It is the submission of the ld. counsel that she has accepted cash loan from her parents and brother to meet the cost of stamp duty required for purchase of a property. It is the case of the ld. counsel for the assessee that the assessee was under bona fide belief that there was no breach of any provision of law and there was no intention of the assessee to evade tax. Further, there was a reasonable cause on the part of the assessee to accept such cash loan since it was required on the day of registration to meet the payment of stamp duty on purchase of the house.
9. I find some force in the argument of the ld. counsel for the assessee. It is an admitted fact that the transaction took place between the assessee and her parents and brother. Their credit worthiness is not in dispute.
The Hon’ble Madras High Court in the case of CIT vs. M. Yeshodha (supra) has held that “the transaction of loan between father-in-law and daughter-in-law in cash cannot be subject matter of levy of penalty u/s 271D of the Act.”
The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Sunil Kumar Goel (supra) has held that “a family transaction, between two independent assessees, based on an act of casualness, specially in a case where the disclosure thereof was contained in the compilation of accounts, and which had no tax effect, established ‘reasonable cause’ under section 273B of the Act” and, therefore, the provisions of section 271D are not applicable.
The Hon’ble Rajasthan High Court in the case of CIT vs. Manoj Lalwani (supra) held that when the loan in cash has been taken in view of urgent need connected with export, Tribunal was justified in deleting the penalty u/s 271D of the IT Act.
The Delhi Bench of the Tribunal in the case of Sunil Kumar Sood vs. Jt. CIT (supra) held that where the assessee has taken loan from his wife for the purchase of house which is for the benefit of the whole family, penalty levied u/s 271D of the Act is not justified.
Various other decisions relied on by the assessee in the synopsis also supports her case wherein under identical circumstances where the assessees had received loans in cash from close family relations, penalty levied u/s 271D was deleted.
Since the assessee, in the instant case, has received cash loan from her parents and brother to meet the stamp duty cost for purchase of a house property for her own living, therefore, I am of the considered opinion that it is not a fit case for levy of penalty u/s 271D of the Act and the provisions of section 273B will come to the rescue of the assessee as a reasonable cause.
I, therefore, set aside the order of the CIT(A) and direct the JCIT to delete the penalty. The grounds raised by the assessee are accordingly allowed.
- ACIT v. Mahesh P. Shah (2013) 35 taxmann.com 513 (Ahmedabad ITAT)The Tribunal held that acceptance of cash loans from relatives, which are later recorded in the books and explained with evidence, do not fall foul of the provisions of Section 269SS, and thus penalty under Section 271D was not sustainable.
- Smt. B. Jayalakshmamma v. Addl. CIT (2020) 117 taxmann.com 398 (Bangalore ITAT)The ITAT Bangalore quashed the penalty imposed under Section 271D, ruling that loan transactions between mother and daughter made for urgent family needs are not commercial loans and hence do not attract penalty.
- ACIT Vs. Vardaan Fashion (2015) 60 Taxmann.com 407 (Delhi-Trib.)It was held that where the Assessee intended to purchase a property jointly for which assessee’s wife had advanced a sum of money to assessee and when deal for purchase of such house property did not materialize, assessee refunded said amount through cheque to his wife. On the question whether acceptance of cash by husband from his wife would amount to taking of loan or advance in strict sense of section 269SS, the tribunal held that it cannot be construed as loan attracting provisions of Sec.269SS of the Act and therefore no penalty under section 271D could be levied.
- ITO v. Tarlochan Singh [2003] 128 Taxman 20 (Mag)The Income-tax Appellate Tribunal, Amritsar Bench, in the said case was concerned with a case where the husband had taken the cash of Rs. 70,000 from his wife for the purpose of investment in the acquisition of immovable property. The Assessing Officer had levied the penalty under section 271D which was cancelled by the Income-tax Appellate Tribunal holding as under:
“Even keeping in view the contents of the Departmental Circular No. 387 [1985] 152 ITR (St.) 1), it was never the intention of the Legislature to punish a party involved in a genuine transaction. Therefore, by taking a liberal view in the instant case, the assessee had a reasonable cause within the meaning of section 273B.
Thus, keeping in view the entire facts of the instant case, and also keeping in view the intention of the Legislature in enacting the provisions of section 269SS, it was to be held that the assessee was prevented by sufficient cause from receiving the money by an account payee cheque or account payee bank draft.
In the instant case, the assessee was of the opinion that the amount in question did not require to be received by an account payee cheque or account payee draft. Thus, there was a reasonable cause and no penalty should have been levied.”
From the above, it would be clear that the assessee had taken plea that:
- There was no violation of the provisions of section 269SS.
- There was a reasonable cause.
- The assessee was under the bona fide belief that he was not required to receive the amount otherwise than by an account payee cheque or account payee draft.
As an alternative submission, it was contended that the default could be considered either technical or venial breach of the provisions of law and, therefore, no penalty under section 271D was leviable.
It is well-settled that penalty provision should be interpreted as it stands and, in case of doubt, in a manner favourable to the taxpayer. If the court finds that the language is ambiguous or capable of more meaning than one, then the court has to adopt the provision which favours the assessee, more particularly where the provisions relate to the imposition of penalty.
In view of the above, the penalty sustained by the Commissioner (Appeals) was cancelled.
- Sri Rajiv Manharlal Duseja, Bangalore vs Assistant Commissioner of Income Tax, Bangalore (Bangalore ITAT, 4 June 2019)The brief facts are that a penalty of Rs.2.20 lakhs u/s 271D was levied by the Additional Commissioner of Income tax in assessment year 2007-08 for taking cash loans from father & paternal aunt in violation of provisions of sec.269SS of the Act.
The daughter and member of the HUF had given money for certain specific purpose. The source and genuineness of the loan has been accepted by the AO. The ITAT held that the said cash loans therefore cannot be said to fall within the mischief of Sec.269SS of the Act as near relatives cannot be said to be “Other person” within the meaning of Sec.269SS of the Act. In any event in the circumstances of the case, there was a reasonable cause for accepting loans in cash.
- Dr. B.G. Panda v. DCIT (2000) 111 Taxman 86The brief facts of the case are that the assessee obtained certain loan from his wife for construction of house which was naturally a joint venture for prosperity of family and transaction did not involve any interest element and there was no promise to return amount with or without interest, provisions of section 269SS would not apply and it could be said that there was reasonable cause within meaning of section 273B and, thus, no penalty under section 271D was leviable for violation of provisions of section 269SS.
The Tribunal also observed that the transactions between the husband and wife are protected from the legislation as long as they are not for commercial use. Even keeping in view the contents of the departmental Circular No. 387, it was never the intention of the Legislature to punish a party involved in a genuine transaction. Therefore, by taking a liberal view in the instant case, the assessee had a reasonable cause within the meaning of section 273B.
The Tribunal held thus:
“Section 269SS is applicable to the deposits or loan. It is true that both in the case of a loan and in the case of a deposit, there is a relationship of debtor or creditor between the party giving money and the party receiving money.
In the case of deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money, the benefit normally being the earning of interest from the party who customarily accepts deposit.
In the case of loan, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of a borrower, although the person who lends the money may also stand to gain thereby earning interest on the money lent.
In the instant case, this condition was not applicable because there was no relationship of the depositor or a creditor as no interest was involved. This was neither a loan nor a deposit.
At the same time, the words ‘any other person’ are obviously a reference to the depositor as per the intention of the Legislature. The communication/transaction between the husband and wife are protected from the legislation as long as they are not for commercial use. Otherwise, there would be a powerful tendency to disturb the peace of families, to promote domestic broils, and to weaken or to destroy the feeling of mutual confidence which is the most enduring solace of married life.
In the instant case, the wife gave money to the husband for construction of a house which was naturally a joint venture for the property of the family only. This transaction was not for commercial use.
The amount directly received by the husband (i.e., the assessee) was to the extent of Rs. 17,000 only, and the balance amount of Rs. 26,000 was given by payment directly to the supplier of the material required for the construction of the house.
Though the expenditure was apparently incurred by the husband being the karta/head of the family, it could not be said that the wife could not have any interest of her own in this house being constructed.
The transaction was neither loan nor any gift as no ‘interest’ element was involved and there was no promise to return the amount with or without interest. It was clear that the money given by the wife was a joint venture of the family.
Taking into consideration overall facts and circumstances of the case, it could be said that the aforesaid piece of legislation was not applicable in the instant case.
By taking the liberal view and applying the golden rule of interpretation, the assessee had a reasonable cause within the meaning of section 273B. Therefore, the penalty should be deleted.”
Takeaway:
- Nature of Relationship: If the transaction is between close family members (parents, siblings, spouses, children), courts view it as a personal arrangement rather than a commercial transaction.
- Genuineness and Bonafide: If the transaction is genuine, properly documented, and not intended to evade taxes, penalty provisions are not applicable.
- Absence of Business Motive: Penal provisions under Section 271D are aimed at curbing unaccounted money and commercial malpractices, not at punishing genuine personal transactions.
Conclusion
Courts have repeatedly emphasized a liberal and purposive interpretation of Sections 269SS and 271D when it comes to family transactions. Where loans are between close relatives for personal purposes without any tax evasion intent, no penalty under Section 271D should be imposed.
However, assessees must ensure that they maintain proper evidence (such as confirmation letters, affidavits, or repayment proofs) to establish the bona fides of such cash transactions during scrutiny or assessment.
Written By: Inder Chand Jain
Ph no 8279945021, Email: [email protected]
