No Penalty on Family Cash Loans u/s 271D of the Income Tax Act

It is common knowledge that firms and individuals take cash loans from family members. The Income Tax Department often invokes Section 269SS and thereafter imposes penalty under Section 271D of the Income Tax Act. It needs to be deliberated whether the actions of the Department in such cases are legally justifiable.

There are two sections in the Income Tax Act which regulate large cash transactions so that black money can be curbed and transparency is maintained in transactions. Sections 269SS and 269T are important provisions of the Indian Income Tax Act. Their main purpose is to control cash transactions, curb the flow of black money and bring transparency in the economy.

Before deliberating on the subject, it would be trite to refer to Section 269SS and Section 271D of the Income Tax Act, which are reproduced as under:

Section 269SS – Mode of taking or accepting certain loans, deposits and specified sum

No person shall take or accept from any other person (herein referred to as the depositor), any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if:

1. The amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or
2. On the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified sum taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or
3. The amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), is twenty thousand rupees or more.

Provided that the provisions of this section shall not apply to any loan or deposit or specified sum taken or accepted from, or by:

1. The Government;
2. Any banking company, post office savings bank or co-operative bank;
3. Any corporation established by a Central, State or Provincial Act;
4. Any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013);
5. Such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.

Provided further that the provisions of this section shall not apply where:

• The person from whom the loan or deposit or specified sum is taken or accepted and
• The person by whom the loan or deposit or specified sum is taken or accepted,
• are both having agricultural income and neither of them has any income chargeable to tax under this Act.

Explanation:

1. “Banking company” means a company to which the provisions of the Banking Regulation Act, 1949 (10 of 1949) apply and includes any bank or banking institution referred to in section 51 of that Act.
2. “Co-operative bank” shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949).
3. “Loan or deposit” means loan or deposit of money.
4. “Specified sum” means any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place.

1. CIT v. Smt. M. Yasodha (2013) 351 ITR 221 (Madras HC)

   In this case, the assessee, for the Assessment Year 2005–2006, claimed to have taken a cash loan of ₹20,99,393 from her father-in-law for purchasing property. The Assessing Officer initiated penalty proceedings under Section 271D on the grounds that the loan was taken in cash, violating Section 269SS.

   The Madras High Court held that since the transaction was between close relatives and did not involve any business interest, the intention was not to contravene Section 269SS. Therefore, the penalty under Section 271D was not justified.

2. Commissioner of Income Tax v. Manoj Lalwani, 22 March 2002 (2003) 180 CTR (Raj) 394 (Rajasthan HC)

   In this case, the assessee, an exporter, took a cash loan of ₹2,50,000 from his brother-in-law to meet urgent financial needs related to time-bound supply obligations. An amount of ₹2,45,000 was immediately deposited in the bank.

   The Rajasthan High Court held:

   “The Tribunal found that the loan was taken under exceptional circumstances to meet urgent commitments. Since there was no intent to violate Section 269SS and the assessee showed a reasonable cause, the Tribunal rightly set aside the penalty imposed by the revenue authorities. The Tribunal has acted in accordance with law in waiving the penalty.”

3. CIT v. Sunil Kumar Goel [2009] 315 ITR 163

   The Punjab and Haryana High Court, in the aforesaid case, held as under:

   “The Income Tax Appellate Tribunal was right in recording its conclusion that a “reasonable cause” had been shown by the respondent-assessee. The Income Tax Appellate Tribunal relied on the fact that the respondent-assessee had produced his cash books, depicting loans taken by him unilaterally before the Revenue. Another fact taken into consideration was, that no prejudice was caused to the Revenue, in the instant action of the respondent-assessee inasmuch as, the respondent-assessee did not attempt by the impugned act to avoid any tax liability. Furthermore, there is no dispute about the fact, that the instant cash transactions of the respondent-assessee were with the sister concern, and that, these transactions were between the family, and due to business exigency.

   A family transaction, between two independent assessees, based on an act of casualness, specially in a case where the disclosure thereof is contained in the compilation of accounts, and which has no tax effect, in our view establishes “reasonable cause” under Section 273B of the Act. Since the respondent-assessee, had satisfactorily established “reasonable cause” under Section 273B of the Act, he must be deemed to have established sufficient cause for not invoking the penal provisions (Sections 271D and 271E of the Act) against him.

   For the reasons recorded here-in-above, we find no merit in either of the aforesaid two appeals i.e. ITA Nos.777 and 778 of 2008, and accordingly, the said appeals are hereby dismissed.”

4. ITO v. Pramila D. Vadalia (2017) 83 taxmann.com 92 (Mumbai ITAT)

   In this case, the ITAT Mumbai Bench held that cash transactions between close family members were genuine and carried out under financial exigencies, hence no penalty could be levied under Section 271D.

5. Sonia Malik, New Delhi vs JCIT, Range-69, New Delhi (Decided on 10 May, 2019 – Delhi ITAT)

   It would be trite to reproduce para 8 & 9 of the aforesaid judgment which reads thus:

   8. I have considered the rival arguments made by both the sides and perused the relevant material on record. I have also considered the various decisions cited before me. It is a fact that the assessee during the impugned assessment year has accepted cash loan of Rs. 3,25,000/- from her parents and brother i.e., Rs. 1,25,000/- from father Shri Darshan Singh Gujral, Rs. 1,00,000/- from her mother Smt. Joginder Kaur and Rs. 1 lakh from Shri Gurdeep Singh Gujral. The capacity of the loan creditors is not in dispute since the Assessing Officer in the body of the assessment order has accepted such loan. However, the JCIT levied penalty of Rs. 3,25,000/- u/s 271D on the ground that the assessee has accepted cash loan in violation of the provisions of Section 269SS and there was no urgency in accepting such cash loan for which there was no reasonable cause.

   It is the submission of the ld. counsel that she has accepted cash loan from her parents and brother to meet the cost of stamp duty required for purchase of a property. It is the case of the ld. counsel for the assessee that the assessee was under bona fide belief that there was no breach of any provision of law and there was no intention of the assessee to evade tax. Further, there was a reasonable cause on the part of the assessee to accept such cash loan since it was required on the day of registration to meet the payment of stamp duty on purchase of the house.

   9. I find some force in the argument of the ld. counsel for the assessee. It is an admitted fact that the transaction took place between the assessee and her parents and brother. Their credit worthiness is not in dispute. The Hon’ble Madras High Court in the case of CIT vs. M. Yeshodha (supra) has held that ‘the transaction of loan between father-in-law and daughter-in-law in cash cannot be subject matter of levy of penalty u/s 271D of the Act.’

   The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Sunil Kumar Goel (supra) has held that ‘a family transaction, between two independent assessees, based on an act of casualness, specially in a case where the disclosure thereof was contained in the compilation of accounts, and which had no tax effect, established “reasonable cause” under section 273B of the Act’ and, therefore, the provisions of section 271D are not applicable.

   The Hon’ble Rajasthan High Court in the case of CIT vs. Manoj Lalwani (supra) held that when the loan in cash has been taken in view of urgent need connected with export, Tribunal was justified in deleting the penalty u/s 271D of the IT Act.

   The Delhi Bench of the Tribunal in the case of Sunil Kumar Sood vs. Jt. CIT (supra) held that where the assessee has taken loan from his wife for the purchase of house which is for the benefit of the whole family, penalty levied u/s 271D of the Act is not justified.

   Various other decisions relied on by the assessee in the synopsis also supports her case wherein under identical circumstances where the assessees had received loans in cash from close family relations, penalty levied u/s 271D was deleted.

   Since the assessee, in the instant case, has received cash loan from her parents and brother to meet the stamp duty cost for purchase of a house property for her own living, therefore, I am of the considered opinion that it is not a fit case for levy of penalty u/s 271D of the Act and the provisions of section 273B will come to the rescue of the assessee as a reasonable cause. I, therefore, set aside the order of the CIT(A) and direct the JCIT to delete the penalty. The grounds raised by the assessee are accordingly allowed.”

6. ACIT v. Mahesh P. Shah (2013) 35 taxmann.com 513 (Ahmedabad ITAT)

   The Tribunal held that acceptance of cash loans from relatives, which are later recorded in the books and explained with evidence, do not fall foul of the provisions of Section 269SS, and thus penalty under Section 271D was not sustainable.

7. B. Jayalakshmamma v. Addl. CIT (2020) 117 taxmann.com 398 (Bangalore ITAT)

   The ITAT Bangalore quashed the penalty imposed under Section 271D, ruling that loan transactions between mother and daughter made for urgent family needs are not commercial loans and hence do not attract penalty.

8. ACIT Vs. Vardaan Fashion (2015) 60 Taxmann.com 407 (Delhi-Trib.)

   It was held that where the assessee intended to purchase a property jointly, for which the assessee’s wife had advanced a sum of money to him, and when the deal for purchase of such house property did not materialize, the assessee refunded the said amount through cheque. On the question whether acceptance of cash by husband from his wife would amount to taking of loan or advance in the strict sense of Section 269SS, the Tribunal held that it cannot be construed as a loan attracting the provisions of Section 269SS of the Act. Therefore, no penalty under Section 271D could be levied.

9. ITO v. Tarlochan Singh [2003] 128 Taxman 20 (Mag)

   The Income-tax Appellate Tribunal, Amritsar Bench, was concerned with a case where the husband had taken cash of Rs. 70,000 from his wife for investment in immovable property. The Assessing Officer had levied the penalty under Section 271D, which was cancelled by the Tribunal. The Tribunal held:

   “Even keeping in view the contents of the Departmental Circular No. 387 [1985] 152 ITR (St.) 1), it was never the intention of the Legislature to punish a party involved in a genuine transaction. Therefore, by taking a liberal view in the instant case, the assessee had a reasonable cause within the meaning of Section 273B. Thus, keeping in view the entire facts of the instant case, and also keeping in view the intention of the Legislature in enacting the provisions of Section 269SS, it was to be held that the assessee was prevented by sufficient cause from receiving the money by an account payee cheque or account payee bank draft. In the instant case, the assessee was of the opinion that the amount in question did not require to be received by an account payee cheque or account payee draft. Thus, there was a reasonable cause and no penalty should have been levied.”

   From the above, it is clear that the assessee argued:

   • No violation of Section 269SS.
   • There was a reasonable cause under Section 273B.
   • A bona fide belief that he was not required to receive the amount through banking channels.
   • Alternatively, the default was a technical or venial breach not warranting penalty.

   The Tribunal emphasized that penalty provisions must be interpreted strictly and, in case of ambiguity, in favour of the taxpayer. Thus, the penalty sustained by the Commissioner (Appeals) was cancelled.

10. Sri Rajiv Manharlal Duseja, Bangalore v. Assistant Commissioner of Income Tax, Bangalore

    Decided on 4 June, 2019 (Bangalore ITAT)
    A penalty of Rs. 2.20 lakhs under Section 271D was levied in Assessment Year 2007-08 for taking cash loans from the assessee’s father and paternal aunt, allegedly violating Section 269SS of the Act.
    The facts revealed that the daughter and HUF member had given the money for a specific purpose. The source and genuineness of the loan were accepted by the Assessing Officer. The ITAT held that:

    • Such cash loans cannot be said to fall within the mischief of Section 269SS, as near relatives are not “other persons” within the meaning of the provision.
    • There was reasonable cause for accepting loans in cash under the circumstances.

11. Dr. B.G. Panda v. DCIT (2000) 111 Taxman 86

    The brief facts of the case are that the assessee obtained a certain loan from his wife for the construction of a house. This was naturally a joint venture for the prosperity of the family, and the transaction did not involve any interest element. There was no promise to return the amount with or without interest. Therefore, the provisions of Section 269SS would not apply. It could be said that there was reasonable cause within the meaning of Section 273B and, thus, no penalty under Section 271D was leviable for violation of the provisions of Section 269SS.

    The Tribunal also observed that the transactions between the husband and wife are protected from the legislation as long as they are not for commercial use. Even keeping in view the contents of Departmental Circular No. 387, it was never the intention of the Legislature to punish a party involved in a genuine transaction. Therefore, by taking a liberal view in the instant case, the assessee had a reasonable cause within the meaning of Section 273B. The Tribunal held thus:

    “Section 269SS is applicable to deposits or loans. It is true that both in the case of a loan and in the case of a deposit, there is a relationship of debtor or creditor between the party giving money and the party receiving money. In the case of a deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money, the benefit normally being the earning of interest from the party who customarily accepts deposits.

    In the case of a loan, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of the borrower, although the person who lends the money may also stand to gain by earning interest. In the instant case, this condition was not applicable because there was no relationship of depositor or creditor, as no interest was involved. This was neither a loan nor a deposit.

    At the same time, the words ‘any other person’ are obviously a reference to the depositor as per the intention of the Legislature. The communication/transaction between husband and wife is protected from the legislation as long as it is not for commercial use. Otherwise, there would be a powerful tendency to disturb the peace of families, promote domestic broils, and weaken or destroy the feeling of mutual confidence, which is the most enduring solace of married life.

    In the instant case, the wife gave money to her husband for the construction of a house, which was naturally a joint venture for the prosperity of the family only. This transaction was not for commercial use. The amount directly received by the husband (i.e., the assessee) was to the extent of Rs. 17,000 only, and the balance amount of Rs. 26,000 was paid directly to the supplier of materials required for construction.

    Though the expenditure was apparently incurred by the husband being the karta/head of the family, it could not be said that the wife could not have any interest of her own in this house being constructed. The transaction was neither a loan nor a gift, as no ‘interest’ element was involved, and there was no promise to return the amount with or without interest. It was clear that the money given by the wife was a joint venture of the family.

    Taking into consideration the overall facts and circumstances of the case, it could be said that the aforesaid piece of legislation was not applicable in the instant case. By taking a liberal view and applying the golden rule of interpretation, the assessee had a reasonable cause within the meaning of Section 273B. Therefore, the penalty should be deleted.”

Takeaway

• Nature of Relationship: If the transaction is between close family members (parents, siblings, spouses, children), courts view it as a personal arrangement rather than a commercial transaction.
• Genuineness and Bonafide: If the transaction is genuine, properly documented, and not intended to evade taxes, penalty provisions are not applicable.
• Absence of Business Motive: Penal provisions under Section 271D are aimed at curbing unaccounted money and commercial malpractices, not at punishing genuine personal transactions.

Conclusion

Courts have repeatedly emphasized a liberal and purposive interpretation of Sections 269SS and 271D when it comes to family transactions. Where loans are between close relatives for personal purposes without any tax evasion intent, no penalty under Section 271D should be imposed. However, assessees must ensure that they maintain proper evidence (such as confirmation letters, affidavits, or repayment proofs) to establish the bona fides of such cash transactions during scrutiny or assessment.

Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]