August 29, 2019

Does the IT department reverse penalties?

Arvind Rao
Founder, Arvind Rao & Associates

Does the IT department reverse penalties?

The word ‘penalty’ never invokes any happy emotions, especially from the person on whom it is being levied. Be it the game of football or the Income Tax Act (‘the Act’).  The dictionary defines penalty as a punishment imposed for breaking a law, rule or contract. So, the Income Tax Act not only levies tax on any income earned by taxpayers but also levies interest for late payment of taxes. And to top it all, it also levies penalties if tax payers are caught evading / avoiding taxes albeit with ill-intentions.

Individual tax payers are the most affected by penalty levies as it accentuates the pain of paying taxes that was otherwise not paid at the time of filing their returns. Now, there are quite a handful of offences / errors / mistakes for which the Act provides levying penalties. There are penalties for events ranging from not filing tax returns on time or not filing at all to under-reporting of income or non-reporting of income too. This article is aimed at providing you with insights on one such penalty provision that is most applicable to individuals and which you may encounter most commonly in your conversations with clients.

Section 269SS of the Act provides that no person shall take or accept any loan or deposit in cash from any other person for an amount exceeding Rs. 20,000 subject to certain exceptional circumstances or when dealing with the specified institutions as provided under the Act. Likewise, section 269T provides that no person shall repay any loan or deposit in cash, made with it for an amount exceeding Rs. 20,000. This section too has provided for certain exceptional situations and specified institutions where this condition has been relaxed. In case of violation of any of these sections, the tax officer can levy a penalty on the tax payer for an amount which can be equal to the amount accepted or repaid in cash.

 This penalty clause is regarded as one of the most dangerous clauses as the penalty is directly proportional to the loan amount taken or repaid in cash. And let’s not forget that this provision does not exempt transactions within family members (as covered under Case A below). Businessmen too have been subjected to this penalty for their business advances (Case B below). At the same time, transactions between husband and wife have also been penalized (Case C below).

This article presents three such recent cases that deal with special situations [read as those which are not expressly covered under the provisions of the Act] when it comes to how individuals have argued themselves out of situations where they were penalized by the tax officers. These are sure to be a handy tool for you during your client conversations to address their tax concerns and guide them towards a better resolution to their problems.

Case A: Penalty on cash deposits / loans accepted from family members to buy property:

In a case that was decided by the Hyderabad Tax Tribunal, the tax payer contended that his family members had intended to purchase a property and therefore had entered into an agreement for sale. For this purpose, the members had requested the tax payer to make a Demand Draft (DD) for which he had accepted the total amount of Rs. 629,000 in cash and then made out the DD. Further, as the transaction did not go through; the DDs were cancelled and the amounts were repaid to his children. The tax officer had levied penalty in the assessment order under the above referred sections. The tax payer submitted that this transaction was not in the nature of loan and hence the penalty is not leviable.

The Hyderabad Tax Tribunal has held that in cases where the transactions are genuine and enough reasons are offered by taxpayers to justify cash transactions, the penalty under the respective sections are not leviable.

Case B: Business advances

During the assessment of a tax payer, who was engaged in the transportation business, the tax officer observed that while he had declared in his tax returns a total sum of Rs. 71.61 lakhs as amounts received from business, the total receipts in his bank account was Rs. 89.06 lakhs. The tax payer submitted that the 3 parties had advanced money for transportation of their goods, but later on had taken back their advances since the work could not be undertaken. Further, advances totalling to approx. 21.5 lakhs were repaid in cash. The tax officer accordingly levied penalty of an amount equal to the advances paid in cash, for violation of the provisions of the Act.

The Cuttack Tax Tribunal observed that the terms loans or deposit has been defined in the Act to mean any loan or deposit of money which is repayable after notice or repayable after a period. On a perusal of facts of the case, it observed that the tax payer had received advance money from prospective clients in the course of his transportation business; which can neither qualify as a loan or deposit within the meaning as defined in the prohibitive section of the Act. This is supported by the fact that the amount returned to the clients has been without interest. The penalty was accordingly ordered to be deleted.

Case C: Loan transactions between husband and wife

In this case, the tax payer had shown a loan of Rs. 88 lakhs from his wife, during the relevant year. During assessment, the tax payer explained that out of this amount, Rs. 63,000 was received directly from his wife. The tax payer further submitted that an amount of Rs. 22 lakhs were received by him as an advance against sale of his property, where in it was further explained that the said sum was initially received by the tax payer from four parties towards the sale of one of his properties. Due to some reasons, the deal did not materialize and the purchasing parties agreed to take another property which was in the name of the tax payer’s wife. Accordingly, the tax payer categorized the said amount in his account books as loan received from his wife, since the money was now payable by the purchasing parties to his wife and not him.

In view of the penalty provisions, as discussed above, the tax officer was not convinced with the explanation provided by the tax payer with regard to the amount of Rs. 22 lakhs standing in his books shown as a loan from the wife. Accordingly, the officer levied a penalty of Rs. 22 lakhs on the tax payer.

The Tribunal, on the basis of facts of the case, observed that section 269SS of the Act is applicable for a loan or deposit. In both these cases, there is a relationship of debtor and creditor between the person giving money and receiving money. In case of deposits, the depositor benefits by way of earning interest from the party accepting the deposit and in case of a loan, the lender earns interest from the borrower at whose instance the money is advanced.

The transactions between husband and wife are not covered under the above provision as long as they are not for commercial use. Such transactions cannot be categorized as either loan or gift as no ‘interest’ element is involved and there is no promise to return the amount with or without interest.


The penalty was accordingly ordered to be deleted.



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