Tax Audit Report: Credit Cooperative Society & Applicability of section 269SS & 269T Vs. The Common Error
There are two important sections in the Income Tax Act – 1961 which prohibits the transactions in cash for an amount exceeding Rs. 20,000/-. Unlike the transactions covered by section 40A(3) wherein the limit is applicable on a per day basis, limit of Rs. 20,000/-is applicable on aggregate basis.
Section 269SS prohibits an acceptance of loans/ advances or specified sums for an amount of Rs. 20,000/- or more in cash whereas section 269T prohibits repayment of loans, deposits or specified sums in cash. Specified sum includes the amount against the purchase / sale of immovable property.
Before knowing its implications on a credit co-operative societies, one need to carefully revisit section 269SS which reads as under:
CHAPTER XX-B
REQUIREMENT AS TO MODE OF ACCEPTANCE, PAYMENT OR REPAYMENT IN CERTAIN CASES TO COUNTERACT EVASION OF TAX
Mode of taking or accepting certain loans, deposits and specified sum.
269SS. 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 or through such other electronic mode as may be prescribed, if,—
(a) the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or
(b) 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
(c) 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 any loan or deposit or specified sum taken or accepted by,—
(a) the Government;
(b) any banking company, post office savings bank or co-operative bank;
(c) any corporation established by a Central, State or Provincial Act;
(d) any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013);
(e) 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 to any loan or deposit or specified sum, 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.—For the purposes of this section,—
(i) “banking company” means a company to which the provisions of the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;
(ii) “co-operative bank” shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949) ;
(iii) “loan or deposit” means loan or deposit of money;
(iv) “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.
It may be noted that only exclusions provided is to the loans or deposits accepted by the following entities:
(a) the Government;
(b) any banking company, post office savings bank or co-operative bank;
(c) any corporation established by a Central, State or Provincial Act;
(d) any Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013);
(e) 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:
Careful and minute reading of the above section would reveal that it’s the co-operative bank or banking industries which is excluded and not the credit co-operative societies. Banks are the one to whom the license is granted by the RBI under Banking Regulations Act. Credit co-operative societies by no stretch of imagination are the banks and so the acceptance by co-operative societies is clearly a violation of section 269SS.
Coming to the repayment of loans, it may be noted that section 269T reads as under:
Mode of repayment of certain loans or deposits.
269T. No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it or any specified advance received by it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit or paid the specified advance, or by use of electronic clearing system through a bank account 14[or through such other electronic mode as may be prescribed] if—
(a) the amount of the loan or deposit or specified advance together with the interest, if any, payable thereon, or
(b) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, or
(c) the aggregate amount of the specified advances received by such person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such specified advances,
is twenty thousand rupees or more:
Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid :
Provided further that nothing contained in this section shall apply to repayment of any loan or deposit or specified advance taken or accepted from—
(i) Government;
(ii) any banking company, post office savings bank or co-operative bank;
(iii) any corporation established by a Central, State or Provincial Act;
(iv) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(v) 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.
Explanation.—For the purposes of this section,—
(i) “banking company” shall have the meaning assigned to it in clause (i) of the Explanation to section 269SS;
(ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(iii) “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature;
(iv) “specified advance” means any sum of money in the nature of advance, by whatever name called, in relation to transfer of an immovable property, whether or not the transfer takes place.
Here again, an exclusions is provided in respect of repayment in cash by following categories of person:
(i) Government;
(ii) any banking company, post office savings bank or co-operative bank;
(iii) any corporation established by a Central, State or Provincial Act;
(iv) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(v) 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.
As discussed above, it’s the co-operative bank or banking industries which is excluded and not the credit co-operative societies. Banks are the one to whom the license is granted by the RBI under Banking Regulations Act. Credit co-operative societies by no stretch of imagination are the banks and so the repayment by co-operative societies is clearly a violation of section 269T.
It may be noted that the violation of section 269SS / 269T could result in hefty penalty under section 271D / Section 271E. The penalty amount could be equivalent to the amount of the loans accepted /repaid. It could have a multiplying effect. Suppose, let us consider a case of a credit society which has accepted a deposit of Rs. 50,000/- in cash on 1st April and repaid it in cash on 1st July. Now, the penalty will be applicable in such cases in section 271D as well as under section 271E. In short, this transaction of acceptance and repayment could attract a penalty of Rs. 1 Lakh.
Section 271D
271D. (1) If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted.
(2) Any penalty impossible under sub-section (1) shall be imposed by the Joint Commissioner.
Section 271E
271E. (1) If a person repays any loan or deposit or specified advance referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance so repaid.
(2) Any penalty impossible under sub-section (1) shall be imposed by the Joint Commissioner.
The most important part which requires consideration of every tax professional and auditor is that the tax audit report in form No. 3CD requires reporting of all the loans / deposits acceptance /repayment. The column not only requires the reporting of all acceptance and repayment but also the acceptance and repayment in cash.
Are you doing it? The non-reporting or false reporting is also liable for penal consequences under section 271J which reads as under:
Section 271J of the Income Tax Act, 1961 reads as under:
271J. Without prejudice to the provisions of this Act, where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Act, finds that an accountant or a merchant banker or a registered valuer has furnished incorrect information in any report or certificate furnished under any provision of this Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) may direct that such accountant or merchant banker or registered valuer, as the case may be, shall pay, by way of penalty, a sum of ten thousand rupees for each such report or certificate.
Explanation.—For the purposes of this section,—
(a) “accountant” means an accountant referred to in the Explanation below sub-section (2) of section 288;
(b) “merchant banker” means Category I merchant banker registered with the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
Now, every Auditor has to be cautious as far as reporting under section 269SS & 269T reporting by credit co-operative societies.
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