Introduction
S. 269SS of the Income-tax Act, 1961 (‘Act’) is a stringent anti-abuse provision enacted to curb unaccounted cash transactions in the Indian financial system. It mandates that no person shall accept any loan or deposit of Rs. 20,000 or more unless it is made by an account payee cheque, bank draft, or prescribed electronic mode. Violation of this provision attracts a penalty under s. 271D, equal to the amount of the loan or deposit so accepted. However, the law also recognises practical business realities and provides relief under s. 273B, which allows for non-imposition of penalty if the assessee can demonstrate a ‘reasonable cause’ for the contravention.
Over the years, courts and tribunals have interpreted these provisions in the context of genuine business transactions, especially where funds are routed through banking channels and only accounting entries are passed in the books, rather than any actual cash movement. This balance between legislative intent and practical application forms the backdrop for the judicial analysis that follows.
The Income Tax Appellate Tribunal, Mumbai’s order in the case of Jeevangani Films v. Joint Commissioner of Income Tax[i] is a robust reaffirmation of the principle that tax law must be interpreted collectively, both in letter and spirit, especially when penal provisions are involved.
Brief Facts
Jeevangani Films (‘Assessee’), a partnership firm engaged in the business of film production, distribution and related activities. In the ordinary course of its business, the Assessee regularly dealt with the vendor, Rajat Enterprises, for the distribution and promotion of films.
During assessment year 2015-16, the Assessee was liable to pay Rajat Enterprises a total of Rs. 25,00,000/- towards the work done by them. Out of the said amount, the Assessee paid an initial amount of Rs. 10,00,000/- from its own funds, and the outstanding amount of Rs. 15,00,000/- was financed by obtaining a loan from Goldencrest Financial Services Pvt. Ltd., a non-banking financial company (‘NBFC’).
The NBFC proceeded to pay the remaining amount directly to Rajat Enterprises on behalf of the Assessee.
Consequently, the Assessee proceeded to record the loan from the NBFC in its books of account by way of a journal entry recognising the liability amounting to Rs. 15 lakhs.
Subsequently, the Assessee filed its income tax return under s. 139. However, penalty proceedings were initiated against the Assessee, alleging that the provision mentioned under s. 269SS of the Act had been violated. During the penalty proceedings, the Assessing Officer treated the journal entry reflecting the loan as contravening the provisions of s. 269SS of the Act and levied a penalty of Rs 15 lakh under s. 271D.
Held
On appeal, the Tribunal noted the availability of documentary evidence submitted by the Assessee in both the penal proceedings and the normal assessment proceedings.
It further observed that the provisions mentioned under s. 269SS of the Act applies to transactions where an Assessee has accepted a deposit or loan through a mode which is not an account payee cheque, draft or any other prescribed banking mode. The scope of the aforementioned section was therefore held to be restricted to transactions involving the acceptance of money. It does not extend to cases where a debt or liability has arisen merely due to book entries. The legislative intent of s. 269SS was stated to prevent cash transactions, as is evident by a bare perusal of clause (iii) of the Explanation given to the said section.
Considering the factual position and the findings of Bombay High Court in the case of CIT v. Triumph International (I) Finance[ii], wherein it was observed that in the absence of any material on record to suggest that the transactions in question were not reasonable or bona fide no adverse inference ought to be drawn if in view of S. 273B of the Act.
Accordingly, the penalty of Rs. 15 lakh imposed under s. 271D of the Act was omitted, and the appeal of the Assessee was allowed.
Our Analysis
In an era where technology is advancing at an exponential rate and modern banking is on the verge of eliminating cash transactions, the Tribunal’s approach is commendable for its insistence on substance over form. The essence of the transaction was a legitimate business loan, routed through proper banking channels, with the Assessee merely recording the resultant liability in its books. A journal entry to record a bank-transferred loan does not violate the law against cash loans, and no penalty should follow if the transaction is genuine and well-documented.
The Revenue’s entire case rested on the technical argument that the Assessee, by recording a loan via a journal entry (after an NBFC directly paid the Assessee’s vendor through banking channels), had violated S. 269SS, and was hence liable to be penalised under s. 271D of the Act. The Tribunal, however, has rightly looked beyond the mere form of the transaction and examined its substance, reiterating the legislative intent behind s. 269SS.
S. 269SS of the Act prohibits the acceptance of loans or deposits, except by an account payee cheque, draft, or prescribed electronic mode, if the amount exceeds Rs. 20,000. The mischief sought to be addressed is clear: to prevent the introduction of unaccounted money into the system. In this case, the funds issued as a loan were never in the possession or ownership of the Assessee, specifically in the form of cash. The payment was routed directly from the NBFC to the vendor through banking channels, and the Assessee had merely recognised the liability in its books by way of a journal entry.
The Tribunal’s reading and interpretation of the section, particularly its reference to the explanation that a ‘loan or deposit’ means a ‘loan or deposit of money’, make it clear that a mere book entry, without receipt of money, falls outside the scope of the provision.
The Tribunal’s reliance on the presence of documentary evidence and the acknowledgement of cash transactions versus other banking channels reflects a careful application of three key High Court judgments: CIT v. Noida Toll Bridge Co. Ltd.[iii], CIT v. Worldwide Township Projects Ltd.[iv], CIT v. Triumph International Finance (I) Ltd. (supra).
This order provides much-needed clarity and relief to businesses engaging in complex transactions where, for operational reasons, payments may be made directly to third parties and liabilities are recorded and recognised via book entries or newer banking methods.
In sum, the Tribunal’s order is a textbook application of the law as clarified by higher courts. It reiterates that the Act’s penal provisions must be invoked with circumspection, and only in cases where the legislative mischief—namely, cash-based tax evasion—is present, thus reaffirming that penalties cannot be levied solely on technical grounds.
End Notes
[i] 2025 SCC OnLine ITAT 2326 dated 06.03.2025.
[ii] (2012) /345 ITR 270 (Bombay).
[iii] (2003) 262 ITR 260 (Delhi).
[iv] (2014) 367 ITR 433 (Delhi).
Authored by Deb Zyoti Das, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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