From time to time, many important decisions are given by the tax courts and tribunals of the country regarding the rules and provisions of the Indian Income Tax Act, which are a big lesson for the common taxpayers. One such recent and highly discussed case has come before the Income Tax Appellate Tribunal (ITAT), where a taxpayer found it very expensive to take a loan of Rs 15 lakh in cash from his friends and relatives.
The Income Tax Department had imposed a huge penalty on the taxpayer considering this cash transaction as a flagrant violation of Section 269SS. The taxpayer had approached the tribunal challenging this order, but the ITAT made it clear that income tax rules cannot be flouted under the guise of family or friendly relations, and the penalty imposed by the department is completely legal.
According to the rules of Section 269SS of the Income Tax Act, if any person accepts in the form of cash a loan, advance or transfer of any property amounting to Rs 20,000 or more from any other person, then it is legally prohibited. All such financial transactions should be done either through Account Payee Cheque, Account Payee Bank Draft or through authorized banking channels like Electronic Clearing System (ECS) or Net Banking, UPI.
The main objective of this rule is to stop the flow of black money in the economy and maintain complete transparency in financial transactions. In this case, the taxpayer had taken a huge amount of Rs 15 lakh in lump sum or in cash from his acquaintances, which was much more than the prescribed limit, and this was the reason why it came to the attention of the Income Tax Department.
When the Income Tax Department initiated action to impose penalty on this cash loan under Section 271D, the taxpayer in his defense argued that he was suddenly in dire need of money and there was a delay in getting the loan from the bank, hence he immediately took cash help from his friends and relatives.
The taxpayer also argued that the transaction was completely transparent and bona fide, and there was no intention of tax evasion of any kind. However, the ITAT judges rejected these arguments outright. The Tribunal clarified in its judgment that mere existence of 'reasonable cause' or urgent need in the eyes of law does not constitute exemption from the mandatory provisions of section 269SS unless the taxpayer proves that he had no access to the bank system or there was some other extraordinary circumstance.
After this historic decision, Chartered Accountants (CAs) and tax experts across the country have advised taxpayers to exercise utmost caution while doing any kind of financial transaction with their friends, brothers or relatives. Even if you have to borrow money from someone in an emergency, never do cash transactions, but always use bank transfer, check or digital means.
If you take this amount through the bank, even if the amount is in lakhs, it will be considered completely safe and legally valid in the eyes of the Income Tax Department. This decision once again reminds us how important it is for every citizen to follow the income tax rules, otherwise even a small negligence can lead to a penalty of thousands and lakhs of rupees.