Penalty U/s 271DA For Violation Of S. 269ST Of The Income-tax Act, 1961

CA Vinay Kawdia has examined the entire law applicable to sections 269ST and 271DA of the Income-tax Act, 1961. These provisions were inserted by the Finance Act 2017 to prohibit specified cash transactions and levy a penalty for contravention. The author has analyzed numerous judgements and explained with clarity the precise impact of these provisions

In order to curb black money and related unaccounted wealth and to achieve the vision of the Government to move towards a cash less economy, the Finance Act 2017 introduced new section 269ST w.e.f. 01.04.17 to the effect that 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.

As a natural consequence, section 271DA was introduced to provide for the levy penalty by joint commissioner for contravention of provisions of section 269ST as follows:

S. 271DA. (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.

A. Legislative background:

Earlier, provisions of sections 269SS and 269T of the I.T. Act, 1961 were introduced in the Act to prohibit acceptance and repayment of loans/deposits/specified sums in cash in excess of Rs. 19999/- with the intention to check the introduction of black money. The CBDT in the circular No. 387 dt.6/9/1984 ITR (St) expressed the said intention of the legislature.

With this legislative intention in mind, courts used to cancel the penalty levied u/s 271D/271E for contravention of provisions of section 269SS/269T as the case may be, by observing that the acceptance/ repayment of loan in the cash being genuine and bona fide, there is mere technical breach or venial violation of the provision of section 269SS/ 269T of the I.T. Act 1961 and hence penalty under section 271D/271E may not be imposed.

Hon. Supreme Court’s in the case of Hindustan Steel Ltd V/s State of Orisa reported in 83 ITR 26 held that, an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of it’s obligation. The penalty will not also be imposed merely because of it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of authority to be exercised judicially and on a consideration of all relevant circumstances. Even if a minimum penalty is prescribed the authority competent to impose penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or when there is breach flows from the bona fide belief that the offender is not liable to act in the manner prescribed by the statute.

Bombay High Court in CIT vs. Triumph International Finance (345 ITR 270)
It is not established that there is a deliberate and intentional violation of the provisions by the assessee in order to hide any income or to evade any payment of tax. Even if the assessee has technically contravened provisions of section 269T, in absence of finding to effect that repayment of loan/deposit was not a bona fide transaction and was made with view to evade tax, no penalty under section 271E could be imposed for contravening provisions of section 269T.
To summarize, even if there is technical violation of provisions of Section 269SS and Section 269T, as per settled judicial principals, no penalty u/s 271D or 271E is leviable if,

– The transaction under question is genuine

– The transaction is duly recorded in books of the parties to the transaction

– Identity and confirmation of parties to the transaction is on record

– No black money/tax evasion/malafide intention is involved in the transaction

Courts, while taking the liberal view as above, generally refers to the legislative intent behind the introduction of S. 269SS/ 269T which was to prevent proliferation of black/unaccounted money deposited with banks and other persons by introducing the system of repayment through A/c payee cheques and drafts and thus to ensure that the identity of payee is established….. [CBDT circular No. 387 dt.6/9/1984 ITR (St)]

Thus, if entire transactions of the loans and the acceptance or repayments thereof are shown in the regular books of accounts and assessee was acting in a bonafide belief coupled with genuineness of the transactions, it constitutes a reasonable cause within the meaning of section 273 B of the I.T. Act so as to come out of the rigors of penal provisions of section 271D and 272E.

A.1) This view is fortified by following judgments:

I. The jurisdictional ITAT Pune in the case of Muslim Urban co-op Credit Society ltd (2005) 96 ITD 83 (Pune), has held that “the facts and circumstances of the instant case clearly indicated that there was a reasonable cause and therefore, no penalty was leviable. It is settled law that reasonable cause can be a cause which prevents a man of average intelligence and ordinary prudence acting under normal circumstances without negligence or inaction or want of bona fide. In the instant case, the department had not impeached that the transaction are not genuine. Similarly, no transaction was noticed outside the books of accounts. The repayments of deposits were made to the members of the society and it was obvious that the assessee society entertained a bonafide belief that no contravention of any provisions of the Act was being made while the repayments of loans/deposits in cash. In the circumstances, no penalty under sections 269 T read with section 271E could be imposed.”

II. The Hon. Mumbai Tribunal in case of Karnataka Ginning And pressing factory v/s Jt CIT (77 ITD 478) has held that when the genuineness of the borrowings were not doubted by A.O and A.O was satisfied with the assessee’s explanation regarding the nature & source of the amount, the transactions of deposits does not fall within the mischief of section 269SS.

III. Similarly it is held that in the case of Addl. CIT Vd Smt. Prahati Baruah (2003) 113 Taxman 74 (Gau)(Mag), that the introduction of section 269 SS and 269 T in the statute was to prevent proliferation of black/unaccounted money deposited with banks and other persons by introducing the system of repayment through A/c payee cheques and drafts and thus to ensure that the identity of payee is established. When the identity is known and genuineness of loan transaction was not in doubt, if any could be set to be a technical default for which no penalty would be leviable.

IV. In the case of Bhagwati Prasad Bajoriya 183 CTR 484, the Hon. Gauhati High Court has held that the penalty under section 271D was not leviable for the reason that transaction of loan finds place in the books of accounts of the assessee.

V. The Hon. High Court of Jharkhand has held in the case of Omec Engineers v/s CIT, reported in (2008) 217 CTR (Jharkhand) 144 that: There being no finding of A.O., CIT (A) or tribunal that the transactions in violations of s. 269SS were not genuine, assessee’s return of having been accepted under s 143(3) after scrutiny, there being also no finding that transactions were malafides aimed at disclosing concealed money, imposition of penalty under 271D merely for technical mistake could not be sustained.

B) Issues for consideration:

– Are favorable judgments’ rendered in context of section 269SS be still relevant for the purpose of application or otherwise of section 269ST r.w.s. 271DA?

– What could constitute “good and sufficient reason” so that penalty u/s 271DA is not levied for contravention of the provisions of section 269ST?  And, is it same as “reasonable cause”?

B.1) Legislative intent behind section 269ST:

The chapter XX-B which contains the sections 269SS/T/ST, is titled as “Requirement as to mode of acceptance, payment or repayment in certain cases to Counteract Evasion of Tax” making legislative intent aptly clear behind introduction of concerned sections.
Press release dt. 05.04.17 clarifies the legislative intent even further behind introduction of s. 269ST in following words:

“Various legislative steps have been taken by the Finance Act, 2017 to curb black money by discouraging cash transaction and by promoting digital economy.
These prominently include placing restriction on cash transaction by introduction of new sections 269ST & 271DA to the Income-tax Act………..”

B.2) Reasonable cause vs. Good and sufficient cause:
In view of proviso in section 271DA itself, there is no consequential amendment u/s 273B of the Act which saves from general penalties if the assessee proves that there was reasonable cause for the failure to observe the mandatory provisions of the Act such as S. 269SS, 269T etc.

Section 273B reads as follows:
[Penalty not to be imposed in certain cases.
273B. 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 sub-section (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.

In other words, Finance Act 2017, instead of amending section 273B, inserted a proviso to section 271DA itself to the effect that, no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention of section 269ST. However, what could constitute good and sufficient reasons for contravention have not been defined.

B.2.1) Reasonable cause- Meaning:

Azadi Bachao Andolan vs. Union of India [2001] 116 TAXMAN 249 (DELHI)
………What would constitute reasonable cause cannot be laid down with precision. It would depend upon factual background ……….. Reasonable cause, as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence. The expression ‘reasonable’ is not susceptible to a clear and precise definition; for an attempt to give a specific meaning to the word ‘reasonable’ is trying to count what is not number and measure what is not space. It can be described as rational according to the dictates of reason and is not excessive or immoderate. The word ‘reasonable’ has in law the prima facie meaning of reasonable with regard to those circumstances of which the actor, called on to act reasonably, knows or ought to know. The reasonable cause can be reasonably said to be a cause which prevents a man of average intelligence and ordinary prudence, acting under normal circumstances, without negligence or inaction or want of bona fides.

‘Reasonable cause’ as defined by The Law Lexicon (3rd Edition):

“as applied to human action, that which would constrain a person of average intelligence and ordinary prudence; probable cause; legal cause.”

B.2.2) Good and sufficient cause – Meaning:

Supreme Court in Arjun Singh v. Mohindra Kumar & Ors., AIR 1964 SC 993
“……….but we might observe that we do not see any material difference between the facts to be established for satisfying the two tests of "good cause" and "sufficient cause". We are unable to conceive of a "good cause" which is not "sufficient" as affording an explanation for non-appearance, nor conversely of a "sufficient cause" which is not a good one and we would add that, either of these is not different from "good and sufficient cause" which is used in this context in other statutes. If, on the other hand, there is any difference between the two it can only be that the requirement of a "good cause" is complied with on a lesser degree of proof than that of "sufficient cause".

‘Good cause’ as defined by The Law Lexicon (3rd Edition):
“Reason which is found to be adequate or proper and justified by a court or a competent authority dealing with the matter”

‘Sufficient cause’ as defined by The Law Lexicon (3rd Edition):

“The expression ‘sufficient cause’ implies no negligence nor inaction nor want of bonafides on the part of the party”

“Sufficient cause means some cause beyond the control of the party and for successfully invoking the aid of the court the claimant must have acted with due care and attention.”

“The expression sufficient cause implies the presence of legal and adequate reason. The word ‘sufficient’ means ‘adequate’, ‘enough’, “as much as may be necessary to answer the purpose intended.” Etc.

With this background, if we compare the two terms specifically in the context of section 269ST and the backdrop in which the said section was introduced, it appears that even if there is mere technical violation of provisions of section 269ST without any malafide intentions, still without there being any compelling circumstances behind the conscious contravention of section 269ST, it would not be “Good and Sufficient cause” so as to come out of penal action u/s 271DA. It will not be out of place to mention here that, the casual and routine contraventions will also hamper the new and prominent intent of the Govt. to promote digital economy.

Conclusion:

Therefore, if all the favourable ingredients as discussed above in the context of 269SS/269T are present in the transactions of the nature specified in section 269ST, judgments’ rendered in context of section 269SS will surely be relevant for the purpose of application or otherwise of section 269ST r.w.s. 271DA. However, those ingredients will be necessary but may not be sufficient to avoid the rigors of penalty u/s 271DA and court will look for further good and sufficient reasons to justify the contravention of S. 269ST. This is because proving the presence of good and sufficient reasons appears to be more onerous than proving the presence of reasonable cause.

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