Articles 

Penalty for cash transactions of Rs 3 Lakh or more | CA Prakash Hegde and CA Raghavendra N.

809 Views

Penalty for cash transactions of Rs 3 Lakh or more

By CA Prakash Hegde and CA Raghavendra N.

During 2011, acting on a petition, the Supreme Court of India (‘SCI’) had ordered the appointment of a Special Investigation Team (‘SIT’) headed by a former judge to handle the menace of black money.  Since then, the SIT has been submitting its reports relating to various kinds of studies and recommendations.  During July 2016, the SIT, headed by retired Justice M.B. Shah, submitted its fifth report to the SCI on methods to curb black money in the economy.

It had reported that a large amount of unaccounted wealth is stored and used in the form of cash.  Considering the provisions which exist in various countries and also the reports and observations of various courts regarding cash transactions, the SIT opined that there is a need to put an upper limit to cash transactions.  It recommended a total ban on cash transactions of Rs 3 Lakh and above.  It had also suggested an upper limit of Rs 15 Lakh on cash holding.

The Finance Minister Mr Arun Jaitley has accepted the recommendation of the SIT with respect to restrictions on cash transactions of Rs 3 Lakh and above.  [Fortunately or unfortunately, the other recommendation on upper limit of Rs 15 Lakh on cash holding has not been considered at the moment.]  In the Finance Bill 2017 presented on 01 February 2017, the Finance Minister has proposed to include the following section in the Income Tax Act, 1961 (‘the Act’).

269ST. Mode of undertaking transactions

No person shall receive an amount of three 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 a bank account:

Provided that the provisions of this section 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;

(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify.

Explanation.—For the purposes of this section,—

(a) “banking company” shall have the same meaning as assigned to it in clause (i) of the

Explanation to section 269SS;

(b) “co-operative bank” shall have the same meaning as assigned to it in clause (ii) of the Explanation to section 269SS.

Analysis of the above provisions:

The following aspects may be noted in respect of the proposed section:

  • Proposed section 269ST restricts any person from receiving an amount of Rs 3 Lakh or more otherwise than by
    • (a) account payee cheque or
    • (b) account payee bank draft or
    • (c) electronic clearing system through a bank account.
  • As may be noted from the proposed section, restriction on receipt of an amount of Rs 3 Lakh or more in cash is applicable if it is received,
    • from one person in a day, irrespective of the number of transactions (e.g. cash receipts from one person in a single day due to several sale transactions);
    • in respect of a single transaction, even if received over several days / years (e.g. cash receipts spread over several days but in relation to a single sale transaction);
    • in respect of a single transaction, even if received from several persons (e.g. cash receipts from several persons for a single sale transaction);
    • from one person, even if received in respect of several transactions and even if received over several days / years but relating to one ‘event’ or ‘occasion’ (e.g. cash receipts from one person over several days for different activities like decoration, stage preparation, catering etc. but for a single mega event).
  • Restriction is applicable to all kinds of persons; whether individuals, firms, companies, trusts etc. from receiving an amount of Rs 3 Lakh or more except through one of the specified three modes. However, the restriction does not apply to amount received by Government, any banking company, post office savings bank or co-operative bank.  Further, the Central Government is authorized to specify other persons or class of persons or receipts to whom / which these provisions would not be applicable.
  • The proposed section appears to cover most of the combinations of situations and therefore, quite comprehensive in restricting cash transactions above the specified limit.
  • A possible view is that the proposed section restricts even receipt of cash on withdrawal of Rs 3 Lakh or more in a day from one’s own bank account as the exceptions provided therein do not cover such situations! As noted above, the exceptions cover only the amount received by the Government or banks etc. and transactions of the nature referred to in section 269SS.  Transactions referred to in section 269SS are ‘taking or accepting certain loans, deposits and any specified sum’ (i.e. sum of money in relation to transfer of immoveable property) but do not include withdrawal of deposit / cash.   Therefore, it may be contended that withdrawal of cash of Rs 3 Lakh or more from one’s own bank account is a ‘receipt’ prohibited by this proposed section.

An argument against the above view could be that withdrawal of cash from one’s own bank account is not a ‘transaction’ as the heading prefixed to the proposed section is ‘Mode of undertaking transactions’ and is not expected to cover an activity which is not a ‘transaction’.  However, the term ‘transaction’ has not been defined in the Act (though the term ‘international transaction’ has been defined which in turn refers to the term ‘transaction’ itself without defining what it is).  Drawing reference from Chapter VII of the Finance Act 2005 which had introduced the erstwhile Banking Cash Transaction Tax, withdrawal of cash from a bank account is also a transaction! Therefore, the argument that withdrawal of cash from a bank account is not a ‘transaction’ may not be acceptable.

Another argument could be that withdrawal of cash from one’s own bank account is not a ‘receipt’ as contemplated in the proposed section.  This interpretation may also not be accepted as the withdrawal from bank account results in actual receipt of cash in  the hands of the person withdrawing the same.

Therefore, the interpretation of the provisions of this section in relation to withdrawal of cash of Rs 3 Lakh or more in a day from a bank account may lead to litigation with the income-tax authorities.  An amendment to the proposed section is required to avoid litigations if such an interpretation is not the intention of this proposed section.

  • The restriction under this proposed section will take effect from 01 April 2017.
  • The restriction under the provisions of this section is applicable to transactions equivalent to Rs 3 Lakh as well. Where the amount of cash received is less than Rs 3 Lakh, say, Rs 2,99,000, the restriction is not applicable.
  • Though the proposed section does not specifically define the term ‘cash transactions’, the provisions are intended to curb cash transactions and encourage transactions through banking system as per the recommendations of the SIT as noted above.
  • Transactions like taking or accepting loan or deposit or any specified sum which are referred to in section 269SS of the Act will still be covered under the provisions of section 269SS as a lower limit of Rs 20,000 will continue to be applicable to them.
  • It may be interesting to note that though the proposed section does not refer to receipt from sale of agricultural produces, the Notes on Clauses (page no. 80) accompanying the Finance Bill 2017 states that “the said restriction shall not apply to………….any receipt from sale of agricultural produce by any person being an individual or Hindu Undivided Family in whose hands such receipts constitutes agricultural income”!!

The above sentence in the Notes on Clauses is in contradiction with the provisions of the proposed section as the proposed section does not grant any exemption for agricultural receipts!  Perhaps, the Finance Minister might have thought of relaxing the provisions for agricultural receipts initially and then he might have changed his mind but forgot to update the Notes on Clauses!!  Since the proposed Section 269ST has not relaxed the restriction for agricultural income, the provisions would be equally applicable to agricultural receipts.

Further, the Finance Minister has also proposed to insert the following section in the Act:

 271DA. Penalty for failure to comply with provisions of section 269ST

(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.

As a result of the above proposed section, where anybody receives Rs 3 Lakh or more in cash, he will be liable to pay a penalty equal to the amount received, unless he proves that there were ‘good and sufficient reasons’.  What are these good and sufficient reasons depends on the facts and circumstance of each case and perhaps, the simplest example could be a medical emergency.

Even if a receipt of an amount is exempt under the provisions of section 56(2) [i.e. received from a relative or on the occasion of marriage of the recipient etc.] penalty may still become payable unless the recipient can prove that there were good and sufficient reasons.   Interpretation of a few terms like ‘a single transaction’, ‘one event or occasion’, ‘good and sufficient reasons’ are bound to lead into litigations.