INTRODUCTION

1. While presenting the Union Budget on 1st February, 2017, the Hon'ble Finance Minister, Mr. Arun Jaitley said that there were two tectonic policy initiatives, namely, passage of the Constitution Amendment Bill for GST and demonetisation of high denomination bank notes. He further said that demonetisation of high denomination bank notes was in continuation of a series of measures taken by our Government during the last two years and that tax evasion for many had become a way of life. The proposed ban on receipt of a sum of ` 3 lakhs or more in cash by inserting section 269ST is a part of the series of such measures which has been adopted following the recommendations of the Special Investigation Team (SIT) on black money.

In this article, attempt is made to examine the impact of the proposed amendment which are aimed at curbing the proliferation of cash and generation of black money. Tremors of a tectonic movement are clearly felt.

THE PROPOSED AMENDMENT

2. The Finance Bill, 2017 proposes to insert section 269ST in the Act effective from 1st April, 2017 which reads as under:

"269ST. No person shall receive an amount of three 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:

Provided that the provisions of this section shall not apply to—

(i) any receipt by—

(a) Government;

(b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 269SS;

(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify.

Explanation.—For the purposes of this section,—

(a) “banking company” shall have the same meaning as assigned to it in clause (i) of the

Explanation to section 269SS;

(b) “co-operative bank” shall have the same meaning as assigned to it in clause (ii) of the Explanation to section 269SS.".

ANALYSIS OF THE PROPOSED AMENDMENT

3. The section proposes to impose a total ban on receipt of a sum of ` 3 lakhs or more otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account (i.e. in cash) when the same is received under either of the following three specified circumstances:

The first circumstance relates to a person making the payment in a day.  It applies to receipts during a day from a particular person which shall be aggregated for considering the specified limit.  However, in a day, the aggregate of the receipts may exceed the specified sum if the same are from different persons and none of them makes payment exceeding the said limit.  

The second circumstance relates to a transaction.  It envisages that no single transaction should exceed the specified limit.  For example, a single financial transaction of say, Rs 10 lacs, is made. The amounts due against this transaction may be received, say, in four equal instalments of Rs 2.5 lacs each on different days.  Although each of such receipts on daily basis are within the prohibited limit and not covered by the first circumstance, such receipts would fall under the prohibited category as they pertain to a single transaction.  This is a very important condition which prevents circumventing the limit by splitting it over several days.  In this connection, it is important to compare these provisions with those of section 40A(3) of the Act wherein no such condition is imposed even after certain proposed amendments in the Finance Bill,2017.  Therefore, it is a general practice to make payments of Rs 19000 or so (i.e. below Rs 20000) on several days in relation to a single transaction so as to remain outside the purview of section 40A(3).  

Even after prescribing the second circumstance, the legislature felt that the above measures are  inadequate and so, it prescribed the third circumstance under which restriction is placed on  transactions relating to one event or occasion from a person.  For example, in respect of a single event or occasion of a marriage or other ceremony or a meeting, the transactions are split into different categories e.g, catering, decoration, rent, travel, etc. in such a manner that each transaction is within the specified limit.  Such split financial transactions would not be covered by the restrictions imposed by the first and second circumstances.  But the third circumstance would cover them as they would pertain to one event or occasion from a person.  Here, it is also important to note that this circumstance is prescribed in relation to an event or occasion from a person.  So, if the receipts are from different persons, the same would not be covered by the third circumstance, even if the same relates to a single event or occasion.   To elaborate, a person may receive charges for decoration from the groom's side and for catering from the bride's side and so on from other relatives.  In this way, persons making the payments would be different even if the same pertain to a single event or occasion.  It remains to be seen whether such cases would be covered by the third circumstance.  When such lacunas would be exploited, there may be retrospective amendments, which are resorted to in spite of the Finance Minister's assurance, after Vodafone's fiasco, that the Government would shun  retrospective amendments. By such surgical strike, persons spending huge amounts out of unaccounted money on marriages of their children would be caught without the aid of section 133A(5).

Notwithstanding the three circumstances explained above, another question arises as to whether receipts from same person are permitted if the same is below the specified limit and on different days.  It seems that it  would be outside the purview of the ban to be imposed by section 269ST, if  the same is not in relation to a single transaction and/or same event/occasion.   

SCOPE OF THE PROVISION

4. The restriction applies to a recipient of a specified sum of money otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account (i.e. in cash), irrespective of the nature of receipt which may be from proceeds of sales of goods, income of whatsoever nature - taxable or not, gifts, capital receipts, loans, advances, government grants, subsidies, encashment of bonds/securities, encashment of instruments like National Savings Certificates, proceeds of Life Insurance Policies, scholarships, sale of shares, transactions between related parties and so on. In short, the restriction is very wide and covers all sorts of imaginable transactions - notwithstanding that a payer may or may not pay the specified sum due to any restriction imposed on him by any other provision of the Act.

Needless to mention that the above restriction applies only to a payee of the specified sum and it in no way effects the payer, unless he is prohibited from making payment under any other provision. For example, a Post Office can't  make cash payment against the maturity proceeds of a National Saving Certificate if the amount exceeds the specified limit of ` 50000.  Assuming that the Post Office pays a sum of Rs 3 lakhs in cash in contravention of restrictions imposed on it, such receipt in the hands of the recipients would be, prima facie, covered by the provisions of section 269ST.  Whether such a situation would be considered a reasonable cause or not in penal proceedings u/s. 271DA remains to be seen. 

OTHER MEASURES

5. Apart from the proposed restriction by section 269ST, a recipient of cash is required to comply with several other provisions of the Act. e.g.

a) He has to obtain the Permanent Account Number (PAN) of the payer or Form no. 60 from him if the sum exceeds the various limits specified according to the nature of the transactions entered into. [Rule 114B]

b) He has to verify the accuracy of the PAN [Rule 114C].

c) He has to furnish a statement containing particulars of Form No. 60 [Rule 114D].

d) He has to furnish a statement of the Specified Financial Transactions (SFT) in Form No. 61A [Rule 114E].

e) He has to collect tax at source (TCS) if the sale exceeds the prescribed limit. [Section 206C(1D)]. 

Notwithstanding the provisions contained in Section 269ST of the Act, a person receiving cash for the specified limit would have to comply with the above provisions also to the extent the same are applicable in his case and in case of failure, he would be subjected to penal consequences as envisaged in the relevant provisions. In other words, even if a recipient of a sale proceeds in cash for Rs 3 lakh or more, collects PAN and TCS from the payee and reports the transaction, he would not escape from the penal consequences for violating the provisions of section 269ST.  If he does not collect PAN and TCS and comply with other applicable provisions, he would be subjected to penal consequences for defaults under those provisions also in addition to the penal consequences for violating the provisions of section 269ST.

EXCEPTIONS

6. The proposed section 269ST would not be applicable in following cases:

"(i) any receipt by—

(a) Government;

(b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 269SS;

(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify".

The reason for exempting transactions of the nature referred to in section 269SS is that such transactions are subject to penal consequences under section 271D which are similar to that proposed for contravention of section 269ST in section 271DA.  So, if not exempted, it would amount to double punishment for the same offence.

It may be noted that, for the time being, no exception is made in case of Non-banking financial companies, PSUs, Government Departments and local bodies, etc.

AN UNINTENDED LACUNA OR A TROJEN HORSE?

7. The above exceptions apply in case of receipts by a Government and/or a banking company, post office savings bank or a co-operative bank. But it does not apply to a receipt from these entities exceeding the limit.

On a careful consideration of the above provision, it is felt that withdrawals from a bank and/or any of such specified entities would be covered by the proposed restriction.  It is not known whether it is an unintended lacuna or the legislature contemplated to impose a ceiling on such withdrawals, indirectly. 

Apart from withdrawals, the restriction would cover all kinds of receipts from the specified entities e.g., Government Grants, Subsidies, Loans, Assistances, etc. - though it is unlikely that these entities would be making payments in cash. 

PENALTY

8. The Finance Bill, 2017 also proposes to insert Section 271DA in the Act so as to provide as follows: 

“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.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.” 

TREMORS OF A TECTONIC MEASURE

9. As stated earlier, the proposed section 269ST would apply to all kinds of receipts of a sum in cash exceeding the specified limit and under specified circumstances, irrespective of the nature of receipt. In contrast, reference may be made to restrictions on payments by a payer under sections 40A(3) and/or 80G of the Act. After the proposed amendment of Section 40A(3) by the Finance Bill, 2017, the restrictions on the payer would relate to payments for expenditure claimed as deduction in computation of income from business or profession and also for acquisition of capital assets. Even after the enlarged scope of section 40A(3), there would be several occasions when a person can make payment in cash exceeding the limit specified therein, e.g., payments for personal expenses, purchase of capital items for personal use, donations for which no deduction is claimed u/s. 80G, etc. Such payments are outside the purview of the provisions of section 40A(3). Thus, so far as a payer is concerned, he can still make cash transactions exceeding the specified limit.  On the other hand, a payee cannot receive any sum in cash in excess of the specified limit irrespective of the nature and purpose of receipt.

It is irrelevant whether the person receiving the specified sum in cash is assessed to income tax or not.  It is also irrelevant as to what is his source of income e.g., salary, rent, business, agricultural income or any exempt income. The restrictions would apply to receipt of fees by educational institutions, hospitals and to donations by temples, etc.  It would apply to transactions between two related persons or between such persons - where both the payer and the payee  are exempt from payment of tax.  In a lighter vein, it may be stated that even if a husband pays specified amount of cash to his wife for household expenses, the receipt in the hands of the wife would be covered by the impugned restrictive provision. It would be a good exercise to consider whether such payments made on different days would be aggregated or not under the plea that the series of payments are in relation to a single transaction or event.

For gauging the magnitude of the tremor, a new Richter scale would have to be invented.

CONCLUSION

10. Borrowing words from the budget speech, it is stated that the above-stated measure is an important turning point in the path of curbing the menace of black money and a move towards 'cashless or less-cash' economy. Among the various measures proposed in the Finance Bill, 2017, this measure is, in the opinion of the Author, the most significant, destined to have a permanent and far-reaching impact upon the way in which a financial transaction would take place in future. Every citizen of the country should be conversant with this provision.