Blog # 9. Understanding S.269ST of Income Tax Act

Amid the brunt of the De-monetization, which was relatively fresh in the minds of the common people, Budget 2017 spelt out a loud message. The message was very clear; the government wanted the economy to be digitally equipped with no or very less cash transaction. While it seems impossible for the government to have an absolute cash free economy, but the tremors of the change can be felt.

The budget 2017 has brought with it several measures which aims to stop or minimize tax evasion, money laundering and generation of black money. One of such measures happens to be putting a cap on the cash transactions. This has been done by bringing section 269ST which bars persons receiving money in cash. Though section 269SS very well corresponds to the idea and existed since the inception of the Income Tax Act, 1961 (“IT Act”) but the application of such section is limited to only loans and deposits while section 269ST has a very wide scope. The sae is as under for your ready reference:-

269ST. Mode of undertaking transactions.

No person shall receive an amount of two 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.]

 The proposed section is envisaged to have a far reaching effect on the transactions and so much that even withdrawal of money from the banks will also be under the tax net. However, this is only one tremor of the quake and there are more to it. Thus in an attempt to unearth the intricacies, we have tried to collate and analyze a list of questions on the section and its probable impact.

1. What is the intent behind the insertion? When is the insertion effective from?

The intent of the section is clearly to put restriction on the cash transaction and reduce the quantum of black money which affects the revenue of the government. Black money is generally transacted in cash and large amount of unaccounted wealth is stored and used in the form of cash. Therefore in a bid to control unaccounted money, the section has been proposed which will limit cash transactions and in essence the black money. The section will come in effect from the financial year 2017-18 i.e. Assessment year 2018-19 onwards.

2. What does the provisions of the section 269ST say?

 No person shall receive an amount of two lakh rupees or more—

in aggregate from a person in a day; or

in respect of a single transaction; or

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—

any receipt by—

• government;
• any banking company, post office savings bank or co-operative bank;
• transactions of the nature referred to in section 269SS;

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

3. What kind of the receipts are within the ambit of the section?

The provisions of the section are applicable to all kinds of receipts irrespective of its nature, if the amount is in cash and above the specified limit.

4. What are the instances that may trigger application of section 269ST?

The transaction is applicable to all such cases where the amount is received in cash and exceeds the threshold limit of Rs. 2 lacs. Further the ambit of the section has been increased by adding certain circumstances.  Let us look at the section :

First limb : Receipt from a person in a day.

It states that a person cannot receive any amount in cash from a single person in a day. This means that if a person is paying Rs. 1,50,000 in cash then the person receiving can receive. However if a person pays in cash in different tranches during the day, the aggregate amount of which is 2 lacs and more, the person receiving cannot receive. So an obvious question comes, if a person pays in cash on different days, then will he be covered. The answer to question lies in the second leg.

Second Limb : In respect of single transaction

It simply states that no single transaction should exceed Rs. 2 lacs or more. Thus if a person splits a invoice relating to a single transaction into different invoices of smaller values, then also the person receiving such amount cannot receive in cash. However what would happen if there are multiple cashflows i.e. typically in case of loan transactions whereby repayment is done in number of installments, the answer to this question lies in the third leg.

Third Limb : In respect of the transaction relating to one event or occasion from the person

 It simply states that if a person receives cash in different transactions but all the transaction relate to one event or occasion, then also the recipient cannot receive cash. That is to say if all the transaction relating to one event adds up to Rs. 2 lacs or more, then the person receiving the same cannot receive. Typically in case of a loan transaction, each EMI will represent an event and consequently it cannot be broken into multiple transactions.

5. What does the term event in the section 269ST mean?

The term “Event” in section 269ST means an accounting event. That is to say, every such event which is required to be accounted for will be termed as an “Event”.  For example, each lease payment in a lease transaction may be called an “Event” as separate invoice is required to be raised. Similarly, each EMI for which a separate invoice is raised will be an “Event”.

Further, the word “event” or “occasion” in the law are vague and may cause a lot of confusion. The intent behind the provision is that people may not split their payments into various tranches and avoid the provision. The extended scope of the offence of the section is, therefore, anti-avoidance, and not to extend the scope of the provision to smaller value transactions which otherwise are not hit by the section.

The legal meaning of the expression “event” is Eventus est qui ex causa sequitur; et dicitur eventus quia ex causis evenit. An event is that which follows from the cause, and is called an “event” because it eventuates from causes.

However, it does not seem that the intent of the law is to use the word event in a legal sense. The context is making of commercial transactions and therefore, the word should be understood in commercial sense.

For example,

• Example No.1 : if a person sells goods of Rs 2,10,000, for which the payment of Rs 2 lacs is made by cheque immediately. Subsequently, a payment of Rs 10000 is made in cash. Can it be argued that Rs 10000 pertains to a single event, viz., the sale, and therefore, the section is attracted? One must read the section with its opening words, which talk about receiving an amount of Rs 2 lacs or more in cash. Therefore, the transaction or series of transactions must pertain to receipt of Rs 2 lacs or more in the aggregate. In addition, the transactions must be so interrelated or integrated that the effectively form part of the same event, but are segregated merely to avoid the section.
• Example No. 2 – a person sells goods of Rs 2 lacs. The terms of payment provide for payment in 4 installments of Rs 50000 each over 4 months. The buyer pays the price in cash. Is it a contravention of the section?. Here the underlying issue is the meaning of the term transaction. The transaction, of course, is the making of the payment. Is it possible to argue that the transactions pertain to one event or one occasion? The underlying commercial terms of the transaction provided for 4 payments spread over 4 months. Each payment is an event and it is difficult to argue that the sale is an event, and the payments are simply transactions that follow from that event.
• Example 3 – assume that a lender has given a loan of Rs 2 lacs. EMIs amount to Rs 10000 per month and are payable over 24 months. Can it be argued that all the EMIs must be aggregated together, because they pertain to the same event, which is giving of the loan? In our view, “one event or occasion” cannot be pertaining the cause or the agreement from which the payments come. As stated before, the intent of the section cannot be hit small amounts such as Rs 10000 in cash – because then there is an unintelligible distinction between a transaction involving a sizeable payment of Rs 2 lacs in one go, and 24 installments over 24 months, with each payment being only Rs 10000. The bar of the section is on large value transactions in cash.

6. Who all are required to comply with the provisions of section 269ST?

The section starts with the words “No persons” and the term person has been defined in the section 2(31) of the IT Act. It includes an individual, HUF, AOP, BOI, Firm company etc. In essence the scope of the section is very wide as it is applicable to all kind of receipts and on every person receiving such receipts.

7. Does it cover cash received by borrowers also?

On a plain reading of the section it appears that all kind of receipts are covered by the section, therefore it appears cash received by the borrowers also gets covered. However when we look at the exclusion part of the section, it states that the provision of the section is not applicable to transaction of nature referred in section 269SS. While section 269SS is applicable in situations where a person receives cash as loan or deposit. Consequently a borrower is not covered by the section 269ST.

8. Are provisions of section 269ST and 269T mutually exclusive?

The provisions of the section 269 ST and 269T are mutually exclusive. Section 269T imposes obligation on the borrower and is restricted to loan and deposits while section 269ST imposes obligation on the recipient and covers all kinds of receipts whether loan, deposits or otherwise.

9. Impact of the section 269ST on NBFCs?

In context of NBFCs, section 269ST would impact the transactions of the following nature, where cash is being used for giving effect to the same

• Receipt of down payment
• Acceptance of security deposit
• Sale of second hand repossessed motor vehicles
• Refurbishment expenses

Where the quantum of the aforesaid transactions exceeds Rs. 2 lacs, the same would be required to be given effect, through banking channels. Hence the transactions which have been given effect to till date in cash terms, the same will not be possible after this section is enforced.

Further to illustrate, for e.g. where a particular transaction of sale of repossessed asset has been given affect to by an NBFC, and a single invoice of Rs 5,00,000 has been raised by them on the buyer. Generally there is an upfront receipt of cash on the event of sale and if the cash received happens to be Rs. 2 lacs or more then the same will fall under the net of the section.

10. Does the section cover loan repayment also?

Section 269ST states that no person shall receive an amount of Rs. 2 lacs or more:

• from a single person in a day in cash or
• in respect of a single transaction or
• in respect of multiple transactions relating to the same event from a single person.

So, if a company receives any amount in cash whether it is loan repayment or otherwise through a mode other than prescribed, the section will very well apply.

11. If the answer to question 10 is yes, then whether the limit of Rs. 2 lacs received in cash will be calculated by taking: a) repayment during the tenure of loan b) repayment during the financial year c) each EMI received by the company. 

Section 269ST covers loan repayment and is subject to the restrictions given in three legs. The provisions of section 269ST will be applicable in the following cases:

• Where an amount of Rs. 2 lacs or more is received from a single person against a single transaction;
• Where an amount of Rs. 2 lacs or more is received from a single person against more than one transactions in a particular day;
• Where multiple amounts are paid, which adds up to Rs. 2 lacs or more and the same relates to a single event or occasion. By the term event we mean an accounting event and therefore each EMI becomes an event.

CBDT Vide Circular 22/2017 clarified that in respect of receipt in the nature of repayment of loan by NBFCs or HFCs,  the  receipt  of  one  instalment  of  loan repayment in  respect  of  a  loan shall constitute  a ‘single transaction’ as  specified  in  clause  (b)  of  section  269ST of  the Act and  all  the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions section 269ST. Check Circular 22/2017

12. What is the consequence for the violation of the section?

It has been proposed to introduce section 271DA in the Income Tax Act 1961, the section provides that if a receipt is received in contravention of the provisions of section 269ST, then a penalty equivalent to the amount of such receipt may be levied on the recipient by the Joint commissioner.

Clarification till date by CBDT

1. CBDT Vide Circular 22/2017 2017 clarified that in respect of receipt in the nature of repayment of loan by NBFCs or HFCs, the  receipt  of  one  instalment  of  loan repayment in  respect  of  a  loan shall constitute  a ‘single transaction’ as  specified  in  clause  (b)  of  section  269ST of  the Act and  all  the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions section 269ST.

  

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