A. Introduction

The Provisions of Section 269SS of the Income Tax Act, was introduced to curb cash transactions and prevent the proliferation of black money.  The section mandates that loans, deposits, or specified sums exceeding ₹20,000 must be transacted through account payee instruments, electronic clearing systems, or other prescribed electronic modes. Failure to comply with these provisions incurs penalties under Section 271D, amounting to 100% of the transaction value. However, Section 273B provides relief from these penalties if reasonable cause for non-compliance with Section 269SS can be demonstrated.

B. Background:

Sections 269SS and 269T of the Income Tax Act, 1961, were enacted to dissuade taxpayers from conducting transactions involving unaccounted funds, thereby evading taxes. These provisions specifically target cash transactions, aiming to ensure transparency and accountability in financial dealings. Section 273B serves as a safeguard, offering leniency in cases where non-compliance with Sections 269SS or 269T occurred due to reasonable grounds beyond the taxpayer's control.

C. Detailed Overview of Section 269SS

Section 269SS prohibits individuals from accepting loans, deposits, or specified sums exceeding ₹20,000 from another person unless the transaction is conducted through account payee cheques, account payee bank drafts, electronic clearing systems via a bank account, or other prescribed electronic modes. The objective is to prevent the infusion of unaccounted funds into the economy and to ensure that financial transactions are traceable and verifiable for tax purposes. Exceptions to this rule include transactions with government entities, banks, cooperatives, certain corporations, and other bodies as notified by the Central Government.

D. Electronic Modes as per Rule 6ABBA, Income Tax Rules, 1962

To comply with Section 269SS, transactions can be executed through various electronic modes specified under Rule 6ABBA of the Income Tax Rules, 1962. These include credit cards, debit cards, net banking, Immediate Payment Service (IMPS), Unified Payment Interface (UPI), Real-Time Gross Settlement (RTGS), National Electronic Fund Transfer (NEFT), BHIM Aadhar Pay, and any other modes as prescribed by the Central Government.

E. Penalty under Section 271D

Section 271D imposes a penalty equal to the amount of the loan, deposit, or specified sum accepted in contravention of Section 269SS. The penalty is levied by the Joint Commissioner following an assessment and satisfaction of the non-compliance.

F. Protection under Section 273B

Section 273B of the Income Tax Act provides relief from penalties under Sections 271D and 271E if the taxpayer establishes a reasonable cause for the violation of Section 269SS or 269T. This provision recognizes that there may be genuine reasons beyond the taxpayer's control that led to the non-compliance with the prescribed modes of transaction. The burden of proof lies with the taxpayer to demonstrate such reasonable cause before the assessing authority.

G. Issues Pertaining to Sections 269SS, 271D, and 273B

I. Requirement for Recorded Satisfaction by Assessing Officer:

In the case of CIT vs. Jai Laxmi Rice Mills Ambala City (379 ITR 521) = [TS-5083-SC-2015-O], the Hon’ble Supreme Court of India examined the issue of imposing penalty under section 271E of the Income Tax Act. Section 271E deals with penalties for contravention of provisions related to loans or deposits in cash exceeding a specified limit, which is also governed by section 269SS. The Court held that for penalties under section 271E to be validly imposed, the assessing officer must explicitly record satisfaction regarding the contravention in the assessment order.

The Supreme Court's rationale was based on the principle that penalty provisions should not be applied mechanically but with due consideration to the facts and circumstances of each case. This requirement ensures that penalties are imposed only when there is a deliberate or willful violation of the law, and not merely due to inadvertence or technicalities.

Importantly, sections 271E and 271D of the Income Tax Act are considered pari materia, meaning they are similar in substance and purpose. Section 271D pertains to penalties for contravention of the provisions related to loans or deposits, primarily covered by section 269SS. Therefore, the Supreme Court's reasoning in the context of section 271E extends to section 271D as well.

Following the precedent set by the Jai Laxmi Rice Mills case, subsequent judicial authorities have applied the requirement of recording satisfaction before initiating penalty proceedings under section 271D read with section 269SS. For instance, the Hon’ble Telangana High Court in Srinivas Reddy Redeppagaari vs. JCIT (WP No. 4428 of 2022)] = [TS-6219-HC-2022(TELANGANA)-O] and the Chennai Tribunal in DCIT vs. Subramaniam Thanu (ITA No. 785 of 2023) have both upheld that penalties cannot be imposed without the assessing officer first recording satisfaction of the contravention in question.

Therefore, the principle established by the Supreme Court in the Jai Laxmi Rice Mills Ambala City case underscores the procedural safeguard that must be adhered to before penalties can be levied under sections 271D and 269SS of the Income Tax Act. This ensures fair application of penalty provisions and upholds the rights of taxpayers against arbitrary or unjust penalties.

II. Absence of Tax Evasion Intent:

Chapter XXB of the Act was introduced to address transactions that involve unaccounted money being recorded as loans and deposits in books of accounts, especially when taxpayers present confirmatory letters from such parties to support their explanations. The Hon’ble Supreme Court, in the case of Asst. Director of Inspection v. Kum. A.B. Shanthi (255 ITR 258) = [TS-5015-SC-2002-O] elucidated that the objective behind section 269SS is to prevent taxpayers from providing false explanations for unaccounted funds or fictitious entries in their accounts. Often, during search and seizures, undisclosed money is uncovered, and taxpayers commonly justify these amounts as loans or deposits from relatives or friends, leaving room for manipulation of records by lenders to support the taxpayer's claim. The primary intent of section 269SS is to curb such practices.

When a taxpayer breaches section 269SS without resulting in tax evasion, these violations are considered technical in nature. According to the rationale established by the Hon’ble Supreme Court in Hindustan Steel Ltd. Vs. State of Orissa (83 ITR 6) = [TS-7072-ITAT-2020(DELHI)-O], penalties are not applicable for technical or venial breaches. Furthermore, the Hon’ble Jharkhand High Court in OMEC Engineers vs. CIT (169 Taxmann 158) defined reasonable cause as circumstances beyond the control of the assessee. Thus, if the violation occurred due to reasons beyond the assessee's control, penalty under section 273B of the Act would not be imposed.

III. Ignorance of Law as Reasonable Cause:

In the realm of tax law, the principle of "ignorance of law is no excuse" generally prevails, implying that individuals are expected to comply with statutory provisions regardless of their awareness of those laws. However, various judicial forums have taken a nuanced view on this principle in practical applications, as supported by several landmark cases:

1. Motilal Padampat Sugar Mills Co. Ltd vs. State of Uttar Pradesh 1979 taxmann.com 210 (SC) having Civil Appeal No. 1597 OF 1972 dt. 12-12-1978: = [TS-5027-SC-1978-O]

In this landmark case, the Supreme Court of India articulated that there is no presumption that every individual knows the law. The court emphasized that it would be unreasonable to expect citizens to be aware of all legal provisions, given the complexity and breadth of statutory laws. Therefore, ignorance of the law can be considered as a reasonable cause if the taxpayer can demonstrate that they were genuinely unaware of the statutory requirement.

2. CIT vs. Saini Medical Store [2005] 276 ITR 79 (Punjab & Haryana)] = [TS-5290-HC-2005(PUNJAB & HARYANA)-O]:

The Punjab and Haryana High Court, in this case, upheld that a bona fide belief in compliance with the law, coupled with the genuineness of transactions, constitutes reasonable cause under Section 273B of the Income Tax Act. The court emphasized that if the taxpayer acted in good faith and without any fraudulent intent, penalties may be waived or reduced based on the circumstances presented.

3. ACIT vs. Vinman Finance & Leasing Ltd [2008] 115 ITD 115 (Visakhapatnam) = [TS-5121-ITAT-2008(VISAKHAPATNAM)-O]:

The Income Tax Appellate Tribunal (ITAT), Visakhapatnam Bench, in this instance, considered the claim of ignorance of law as a valid defense. The tribunal ruled that where the taxpayer demonstrated ignorance of the provisions coupled with bona fide reasons for non-compliance, such as lack of awareness of the legal requirements or practical difficulties in compliance, it constituted reasonable cause under Section 273B. The ITAT held that in such cases, penalties should not be imposed as the taxpayer's explanation constituted a valid defense against the imposition of penalties.

These precedents collectively recognize that while ignorance of the law is not generally an excuse, there are circumstances where it can be a valid reason, particularly when combined with bona fide intentions and lack of awareness about legal requirements. However, it is crucial for the assessee to substantiate their claim of ignorance with credible evidence and demonstrate that the violation was unintentional and without fraudulent intent. This approach ensures a balanced application of the law, considering practical constraints and individual circumstances.

IV. Bonafide Belief and Genuine Transactions:

In the case of CIT vs. Saini Medical Store [2005] 276 ITR 79] = [TS-5290-HC-2005(PUNJAB & HARYANA)-O], the Hon’ble Punjab and Haryana High Court addressed the concept of reasonable cause under section 273B of the Income Tax Act. The court held that a bona fide belief, along with the genuineness of the transactions, constitutes reasonable cause. The term "bona fide" implies that the belief or claim should be made in good faith, without any intention of fraud or deceit. In the context of income tax law, "genuine transaction" refers to a transaction conducted not with the purpose of evading tax.

If an assessee demonstrates before the Assessing Officer (AO) that the transaction was undertaken in good faith and without any intent to evade tax, then according to section 273B of the Act, no penalty can be imposed. This provision acts as a safeguard against penalizing taxpayers for inadvertent errors or genuine misunderstandings, provided they can establish the absence of fraudulent intent or tax evasion. It underscores the importance of assessing each case on its merits and considering the taxpayer's intent and the genuineness of their transactions before levying penalties under the Income Tax Act.

V. Constraints Related to Banking Facilities:

Section 269SS of the Income Tax Act outlines specific conditions under which transactions must be executed, particularly requiring that all parties involved have banking facilities. This provision poses practical challenges in scenarios where geographical constraints or other factors prevent one or more parties from having access to banking services. In such cases, complying with the strict requirements of section 269SS becomes impossible.

The principle of "lex non cogit ad impossibilia" applies here, meaning the law does not compel anyone to perform something that is impossible. This principle acknowledges that the law and its administration should not enforce requirements that are beyond practical feasibility. The Hon’ble Allahabad Tribunal, in the case of Rich Paints Ltd. vs. ITO-4(2) (MANU/IB/0242/2020), emphasized this principle, highlighting that legal obligations cannot be enforced when they are impossible to fulfill.

Similarly, the Hon’ble Visakhapatnam Tribunal in ACIT vs. Vinman Finance & Leasing Ltd = [TS-5121-ITAT-2008(VISAKHAPATNAM)-O]. (supra) recognized the practical limitation of section 269SS. In this case, the Tribunal deleted the penalty imposed under section 271E of the Act, considering that all depositors involved were from a village and agricultural background without access to banking facilities. This situation was deemed a reasonable cause under section 273B of the Act, which provides relief from penalties if a genuine and reasonable cause is demonstrated for non-compliance.

Conclusion:

The provisions of Sections 269SS, 271D, and 273B of the Income Tax Act play a critical role in regulating financial transactions and deterring tax evasion through stringent penalties. While Section 269SS mandates compliance with specific modes of transaction, penalties under Section 271D are contingent upon the severity and intent of non-compliance. Section 273B acts as a safeguard, providing relief from penalties if reasonable cause for non-compliance is established. Judicial interpretations ensure that penalties are imposed judiciously, considering the circumstances and intent of the taxpayer, thereby upholding fairness and t