I sold land in October 2017. I invested some of the proceeds in a residential apartment. The remaining amount has been kept as fixed deposit in a capital gain account since March 2018. Is this amount taxable? If so, what will be the tax rate? Will there be any penalty applicable? From 1 April 1988, if a tax payer earning long-term capital gain on sale of an asset desires to utilize the net consideration for purchase or construction of residential house within three years from the date of sale of the capital asset, he is exempt from capital gain tax, according to the provisions of Section 54(F) of the Income Tax (IT) Act, 1961. He has to deposit the sales consideration in an authorized branch of banks authorized to receive deposits and maintain accounts. The amount deposited in the account is permitted for withdrawal for purchase of house for self-residence within three years of receipt of sales consideration. If not utilized within three years, the long-term capital gain on sale of the capital asset is subject to tax. Permission of the IT department is necessary for withdrawing money from this account after three years if house is not purchased for self-residence. If the amount deposited in the capital gain account is not utilized for the specified purpose before the expiry of the specified time, the amount of capital gain not utilized is chargeable to tax as capital gain in the financial year in which the time period expires. Recently, I have started redeveloping a cooperative housing society. I am not fully aware of Section 269SS of the Income Tax (IT) Act, 1961. Can you elaborate? —By Mehernosh Dated 31/10/2019 No person can accept from any other person any loan, deposit or specified sum other than by an account payee cheque, bank draft or by use of electronic clearing system through bank account if the aggregate amount is Rs 20000 or more, as per Section 269SS of the IT Act. Specified sum means any money receivable, whether as advance or otherwise, on transfer of an immovable property, whether or not the transfer takes place. Section 269SS is attracted if, on the date of accepting the sum, if any amount in excess of Rs 20000 taken earlier from the depositor is unpaid. However, these provisions do not apply to any loan, deposit or specified sum taken from or accepted by government; any banking company, post office saving bank or cooperative bank; any corporation established by the Central, state or provincial Act; any government company; and any other notified institutions. The Central Board of Direct Taxes has notified HDFC, Bombay, for the home-saving plan scheme, loan-linked deposit scheme and certificate of deposit scheme including cumulative interest scheme for the purpose. The provisions of the section will not apply when the person from whom the sum is taken or accepted and the person by whom the loan, deposit or specified sum is taken or accepted have agricultural income; and neither of them has any income chargeable to tax under the IT Act. Penalty is levied on a person taking or accepting certain loans, deposits or specified sum in contravention of provisions of Section 269SS. The penalty is equal to the loan or deposit or specified sum so taken or accepted. When the revenue department has treated the loan transaction as undisclosed income, penalty under Section 271D of the IT Act for violation of Section 269SS does not arise. In situations when a reasonable cause is produced, penalty under Section. 271D cannot be levied. In the case of Commissioner of IT v Manoj Lalwani, it was held by the Rajasthan High Court (HC) that a cash loan taken by the tax payer in an exceptional situation and immediately deposited in a bank to meet the urgent demand of time-bound supply is considered to be a reasonable cause. Mere recording of liability in the books of account by way of journal entry without money being transacted is outside the ambit of Section 269SS. ‘Deposit' does not include any amount received from a director or shareholder of a private limited company, as per the Companies (Acceptance of Deposits) Rules. Hence, no penalty can be imposed on such transactions. Advance for supply of goods does not fall within the purview of Section 269SS. The Madras and Gujarat HCs have held that contribution to share capital cannot be treated as loan or advance for the purpose of Section 269SS. However, a contrary view has been taken by the Jharkhand HC in the case of Bhalotia Engineering Works. It was held that share application money, even though not treated as loan, can be taken as deposit within the meaning of Section 269SS. Therefore, acceptance in excess of Rs 20000 in cash violates Section 269SS.  

I am one of the developers of a building under construction. I want to sell certain portion of an apartment to one of my close relatives by passing a journal entry. Is this permissible?

—By Kasad dated 05/11/2019

A person cannot accept any loan, deposit or specified sum otherwise than by an account payee cheque, draft or use of electronic clearing system through a bank account if the amount exceeds Rs 20000, under Section 269SS of the Income Tax (IT) Act, 1961. However, the rule is not applicable if the loan, deposit and specified sum is taken or accepted by the government, bank, post office, savings bank, co-operative bank or a government company. Specified sum means any money receivable, whether as advance or otherwise, for transfer of an immovable property, whether or not the transfer takes place.

A bank, co-operative bank, company, firm or any other person will not repay any loan or deposit made with it or any specified advance received by it otherwise than by an account payee cheque, draft or use of electronic clearing system through a bank account if the amount exceeds Rs 20000 under Section 269T of the IT Act. However, the rule is not applicable for repayment of loan, deposit or specified advance taken or accepted from the government, bank, post office, savings bank, co-operative bank or a government company. Specified advance means any sum of money in the nature of advance received for transfer of an immovable property, whether or not the transfer takes place.

Penalty under Sections 271D and 271E of the IT Act is applicable for violation of provisions of Sections 269SS and 269T. If a person takes, accepts or repays any loan, deposit or specified sum in contravention of the provisions of the sections, he is liable to pay as penalty a sum equal to the amount. However, by virtue of Section 273B of the IT Act, the penalty is not levied if the tax payer shows there was reasonable cause for failure.

Mens rea is not an essential ingredient for attracting civil liability such as penalty under Section 271D. Ignorance of law is no excuse for violation of provisions of Sections 269SS and 269T. Though these two sections use the words ‘otherwise than by an account payee cheque or draft', the provisions are meant to hit only cash transactions, as evident from the Central Board of Direct Transfer circular dated 06 July 1984.

Mere recording of liability in the books of account by way of journal entry without money being transacted is clearly outside the ambit of Section 269SS. Provisions of Sections 269SS and 269T are not applicable when there are journal entries and payment is ultimately paid through account payee cheque.

Acknowledgement of debt by the tax payer by passing a journal entry in the books of accounts does not come within the ambit of the words ‘loans or deposits of money', mentioned in Section 269SS.

However, there are several contrary decisions that have held that as Section 269 SS prohibits acceptance of deposits and loans otherwise than by account payee cheques or account payee bank drafts, these provisions may also hit genuine transfer entries in the books of accounts.

I am a non-resident Indian (NRI). In the past I have received gifts from relatives as well as non-relatives. I have credited those gifts into my capital account and never paid any income tax (IT). Now I have been cautioned about my action. Can you explain the reason for such advice?

—By Deepa dated 30/11/2019

Gifts received are taxable in the hands of the recipient under the head, ‘Other sources'. There is no tax on the donor. Gift means any sum of money, moveable property or immovable property received without consideration or inadequate consideration. Any sum received as gift without consideration up to Rs 50000 in a year is not taxable. Further, gift from specified relative, on occasion of marriage and under Will are exempt from tax, as per section 56 (2) of the IT Act, 1961. The limit of Rs 50000 does not apply in such cases.

Income of NRIs accruing, arising or received in India is taxable. At present, gift of money received by a resident is taxed in the hands of the recipient, subject to certain exceptions. However, for NRIs including foreign companies based outside India, such gifts are not taxable as they do not accrue or arise or are received in India. These are capital receipts. To ensure that such gifts by a resident to an NRI are subject to tax under Section 56(2), Section 9 of the IT Act was amended from 5 July 2019. The amendment provides that such income is taxable under the head, ‘Income from other sources'. Thus, any sum of money paid on or after 05 July 2019 by a resident to a person outside India is now taxable. Section 56(2) (x), which provides for taxation of a gift or a deemed gift when the value of the gift exceeds Rs 50000, will now apply to such gift given by a resident to an NRI. If there is a treaty with any country, the relevant article of applicable double taxation avoidance agreement will continue to apply for such gifts as well.

Gifts received by NRIs from specified relations under Will or on occasion of marriage will not attract tax. But acquaintances, friends and other close relations come under the purview of the IT. So any sum of money exceeding R 50000 received by an NRI as gift from a non relative is taxable.

The Union Budget 2019-20 had proposed that any sum of money paid or property situated in India is transferred by a resident individual to a person outside the country without any consideration should be be considered as taxable in the hands of the received. However, while passing of the Finance Bill, the reference to property situated in India was omitted. Therefore, only money transfers made by resident individuals to NRIs or foreign companies are treated as taxable instead of both money and property transfer as originally proposed. The onus is on the recipient to disclose such gifts if they originate in India and pay tax on them.

In all such cases, the resident will have to deduct tax at source at applicable rates, under Section 195 of the IT Act. Resident Indian gifting money to an NRI is responsible for withholding the tax at source and depositing it in the government treasury within seven days of the end of the month in which the tax is withheld.

The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same.
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