Builder B needed bridge funds for a project. A friend lent him ₹40 lakh in cash — no bank transfer, just hard currency, with a simple promissory note. A year later, B repaid the ₹40 lakh, again in cash.
At scrutiny, the AO finds the cash loan + cash repayment in B's books. Sec 269SS: accepting a loan / deposit of ₹20,000+ in cash → penalty under Sec 271D = 100% of the amount = ₹40 lakh. Sec 269T: repaying a loan / deposit of ₹20,000+ in cash → penalty under Sec 271E = 100% = another ₹40 lakh.
The friend genuinely lent the money. B genuinely repaid. No income was concealed. Yet the mode of the transaction (cash, not banking channel) triggers ₹80 lakh in penalties on a ₹40 lakh loan. The penalty isn't about hiding income — it's about using cash.
- Sec 269SS: you cannot ACCEPT a loan / deposit / specified sum of ₹20,000 or more in cash. Must be by account-payee cheque / draft / ECS / banking channel.
- Sec 269T: you cannot REPAY a loan / deposit of ₹20,000 or more in cash. Same banking-channel requirement.
- Penalty: Sec 271D (for 269SS violation) + Sec 271E (for 269T violation) = 100% of the amount, each. Both ends can be penalised.
- "Reasonable cause" defence (Sec 273B): genuine emergency, no banking access, bona fide transaction → penalty may be waived at AO's discretion. Burden on taxpayer.
- Exceptions: loans between agriculturists (both having only agricultural income), Government, banks, and specified institutions. Plus property advances are covered by a separate ₹20,000 limit in 269SS.
What counts (and the limits)
- Loan / deposit ≥ ₹20,000 in cash: prohibited under 269SS (accept) + 269T (repay).
- Aggregate rule: multiple smaller cash amounts from the same person, if aggregate ≥ ₹20,000, are caught. Can't split a ₹40,000 loan into 3 cash tranches.
- "Specified sum": 269SS also covers advance received for transfer of immovable property — ₹20,000 cash advance for a property deal is prohibited.
- Sec 269ST (separate): receiving ₹2,00,000+ in cash from a single person per day / transaction / event → 100% penalty (Sec 271DA). This catches large cash receipts beyond just loans.
- Sec 40A(3) (separate): business expense paid in cash > ₹10,000/day to single person → disallowed as deduction.
The exceptions
- Agriculturist-to-agriculturist: where both parties have only agricultural income (no taxable income), cash loans are exempt from 269SS.
- Government, banking companies, cooperative banks, post office savings, specified institutions: transactions with these are exempt.
- Reasonable cause (Sec 273B): genuine emergency (medical, no banking access, festival-day cash need) with documentation — AO can waive penalty. Many ITAT rulings have accepted bona-fide-emergency defences.
What you should do instead
- All loans / deposits / repayments ≥ ₹20,000: via account-payee cheque, NEFT, RTGS, UPI, IMPS, or bank draft.
- Document the loan: loan agreement, lender's PAN, lender's source of funds, interest terms (if any). Even genuine family loans need banking trail + documentation.
- Property advance: never take property booking advance in cash above ₹20,000. Builders / sellers caught repeatedly.
- Inter-company loans: always banking channel. Companies caught for inter-corporate cash loans face the same 100% penalty.
- Director's loan to / from company: banking channel only. Plus check Sec 185 (Companies Act) + Sec 2(22)(e) deemed dividend implications.
269SS / 269T exist to prevent a specific evasion pattern: a person caught with unexplained cash claims "it was a loan from a friend" — and the "friend" confirms it. Pre-269SS, this was an easy way to explain away black money. By requiring banking channel for all sizeable loans, the law makes the "friendly cash loan" explanation impossible to fabricate after the fact. The penalty on genuine cash loans is collateral damage of an anti-evasion design.
Quick answers
Technically 269SS applies even to family loans. But genuine emergency + relative + documentation = "reasonable cause" under Sec 273B; penalty often waived. Best practice: even family loans of ₹20k+ via bank transfer.
A genuine gift (no repayment obligation) from a relative is exempt under Sec 56(2)(x), and isn't a "loan" under 269SS. But large cash gifts hit Sec 269ST (₹2L limit). Document gift vs loan clearly; the characterisation matters.
Sec 269T violation → Sec 271E 100% penalty = ₹50,000. Defend via reasonable cause if genuine. Going forward: repay via banking channel always.
No — 269SS is about loans / deposits, not sale consideration. But Sec 269ST limits cash sale receipts to under ₹2L per person per transaction / day. And large cash sales attract scrutiny under Sec 68 / AIS.
Loans from cooperative banks are exempt. Loans from cooperative credit societies (non-banking) — generally NOT exempt; treated like any other person. Check the entity's exact status.
When you might want help
Two situations: (1) Received a 271D / 271E penalty notice — reasonable-cause defence preparation. (2) Cash-intensive business wanting clean loan / advance documentation going forward.
Cash-transaction penalty?
271D / 271E defence, reasonable-cause documentation, clean banking-channel setup. Fixed scope.
"Builder B" is a composite illustration. Your specific situation depends on actual transaction facts + reasonable-cause grounds.