Sections 269SS and 269T exist for one purpose: to create a traceable paper trail for loan and deposit transactions. Before these provisions were introduced, taxpayers routinely accepted and repaid large sums in cash, with no banking record to verify whether the transaction was genuine or a mechanism for laundering unaccounted income. The department had no way to distinguish a real business loan from a fabricated entry.
These sections force every loan and deposit transaction above Rs 20,000 into the banking system, where it leaves a permanent record that the Assessing Officer can verify during scrutiny.
Section 269SS: Restriction on Accepting Loans and Deposits
No person shall accept from any other person any loan or deposit or any specified sum of Rs 20,000 or more otherwise than by:
- Account payee cheque
- Account payee bank draft
- Electronic clearing system (ECS) through a bank account
- Other prescribed electronic modes (NEFT, RTGS, IMPS, UPI)
What Counts as a "Loan or Deposit"
The terms "loan" and "deposit" are not defined in the Income Tax Act. Courts have interpreted them broadly:
- Loan: Any sum borrowed by one person from another, with an obligation to repay. Includes both interest-bearing and interest-free loans, formal and informal arrangements. A cash loan also has to be explained as a credit in your books, so the Section 68 documentation rules for unsecured loans apply alongside Section 269SS.
- Deposit: Any sum placed with a person for safekeeping or earning interest. Fixed deposits with companies and security deposits with landlords are common examples.
"Specified Sum" (Added by Finance Act, 2015)
The Finance Act, 2015 inserted the term "specified sum" into Section 269SS to cover advance payments received in relation to the transfer of an immovable property. This amendment targeted the real estate sector, where large cash advances were common. After this amendment, a builder or property seller cannot accept Rs 20,000 or more in cash as an advance or earnest money for a property deal.
The Rs 20,000 Threshold: Aggregate, Not Per Transaction
The threshold is per person, aggregate. If Ramesh lends you Rs 10,000 in cash on 1 April and another Rs 15,000 in cash on 15 April while the first loan is still unpaid, the aggregate outstanding is Rs 25,000. The 15 April cash loan violates Section 269SS, even though each individual receipt was below Rs 20,000.
The aggregate also includes any existing outstanding balance. If Ramesh already has an unpaid loan of Rs 15,000 with you, and he gives you another Rs 8,000 in cash, the combined outstanding of Rs 23,000 triggers the provision.
Section 269T: Restriction on Repaying Loans and Deposits
Section 269T mirrors 269SS on the repayment side. No person shall repay any loan or deposit or specified advance of Rs 20,000 or more otherwise than by account payee cheque, account payee bank draft, ECS, or prescribed electronic mode.
The same Rs 20,000 aggregate threshold applies. The same categories of transactions are covered.
Why Both Sections Exist
269SS catches the person who accepts a loan, deposit or specified sum in cash. 269T catches the person who repays it in cash. Giving a loan in cash is not itself covered by 269T. A single cash loan that is taken in cash and later repaid in cash therefore triggers both sections for the borrower: 269SS when it is accepted, and 269T when it is repaid.
Section 269ST: The Rs 2 Lakh Cash Receipt Restriction
Section 269ST (introduced by Finance Act, 2017) is a broader provision that restricts any person from receiving Rs 2,00,000 or more in cash in aggregate from a person in a day, or in respect of a single transaction, or in respect of one event or occasion.
Section 269ST covers all cash receipts, not just loans and deposits. It applies to sales, services, gifts, and any other receipt. On the payment side, Section 40A(3) disallows business expenses paid in cash above Rs 10,000 a day, and large cash deposits are reported to the department by banks under SFT.
269SS (Rs 20,000) and 269ST (Rs 2,00,000) operate separately. A cash loan of Rs 50,000 violates 269SS. A cash sale of Rs 3,00,000 violates 269ST, with a penalty equal to the amount received under Section 271DA. A cash loan of Rs 3,00,000 violates 269SS only, because Section 269ST does not apply to receipts covered by Section 269SS.
Penalties: Sections 271D and 271E
| Violation | Penalty section | Penalty amount |
|---|---|---|
| Accepting a loan, deposit or specified sum in cash (269SS) | 271D | Equal to the amount accepted |
| Repaying a loan, deposit or specified advance in cash (269T) | 271E | Equal to the amount repaid |
| Receiving Rs 2 lakh or more in cash (269ST) | 271DA | Equal to the amount received |
The penalty is equal to the entire cash amount, not a percentage or a flat fee. If you accept a Rs 5,00,000 loan in cash, the penalty under Section 271D is Rs 5,00,000.
Who Imposes the Penalty?
Until 31 March 2025, penalties under Sections 271D, 271DA and 271E could be imposed only by the Joint Commissioner of Income Tax, so a penalty order passed by an Assessing Officer below that rank was without jurisdiction. The Finance Act 2025 inserted a proviso in each of these sections: any penalty imposed on or after 1 April 2025 is imposed by the Assessing Officer. Under the Income Tax Act, 2025 (Sections 450, 451 and 453) the Assessing Officer imposes these penalties as well.
Time Limit for Penalty Proceedings
Section 275, as substituted by the Finance Act 2025 with effect from 1 April 2025, sets a single outer limit: no penalty order can be passed after six months from the end of the quarter in which the proceedings during which penalty action was initiated are completed (where the related order is not under appeal), the appellate order is received by the jurisdictional Principal Commissioner or Commissioner (where it is under appeal), or, in any other case, the notice for imposition of penalty is issued.
Exempted Persons and Transactions
Section 269SS and 269T do not apply to transactions with the following entities:
- Government
- Banking companies: Any company to which the Banking Regulation Act, 1949 applies, including banks referred to in Section 51 of that Act
- Co-operative banks (as defined for Section 80P(4))
- Post office savings bank
- Statutory corporations: Corporations established by a Central, State or Provincial Act
- Government companies as defined in Section 2(45) of the Companies Act, 2013
- Notified institutions: Institutions, associations or bodies notified by the Central Government in the Official Gazette
Loans or deposits taken from, or repaid to, these entities are outside 269SS/269T. The rationale is that these entities already maintain comprehensive records, so the anti-evasion purpose of the provision is already served.
Separately, the Finance Act 2023 raised the threshold from Rs 20,000 to Rs 2 lakh for a deposit accepted by, or a loan taken from, a primary agricultural credit society or a primary co-operative agricultural and rural development bank by or from its member, and for the corresponding repayments under Section 269T.
What About Agricultural Income?
There is a specific exemption: Sections 269SS and 269T do not apply where both the person giving and the person accepting (or repaying) have agricultural income and neither has any income chargeable to tax. Outside that narrow case, agriculturists have to rely on the Section 273B reasonable cause defence, which tribunals have accepted where banking facilities were not accessible.
Section 273B: The "Reasonable Cause" Defense
Section 273B provides that no penalty shall be imposed under Sections 271D or 271E if the person proves that there was reasonable cause for the failure to comply with 269SS or 269T.
The burden of proof lies on the assessee. The AO (or Joint Commissioner) is not required to proactively consider reasonable cause; the taxpayer must raise it and substantiate it.
What Qualifies as Reasonable Cause?
Courts and tribunals have accepted the following as reasonable cause in various cases:
-
Genuine business urgency. Where cash was accepted or repaid to prevent a real business loss at a time when banking channels were unavailable.
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Banking facility not accessible. Rural areas where the nearest bank branch is far away, or situations where banks were closed.
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Bona fide transactions with no tax evasion intent. Where the transaction is genuine, reflected in books, and both parties have disclosed it in their returns, tribunals have in several cases held that a technical violation does not warrant a 100% penalty.
-
Lender's circumstances. Cases where the lender specifically needed cash repayment (for example, for a medical emergency) have sometimes been accepted, usually alongside other supporting facts.
-
Transactions between family members. Where a parent lends cash to a child from household savings, and both parties have disclosed the transaction, tribunals have occasionally accepted the family context as a reasonable cause.
What Does NOT Qualify as Reasonable Cause?
- "I did not know about the law" is not reasonable cause.
- "The other party insisted on cash" is usually insufficient on its own.
- "The amount was below Rs 20,000 per transaction" when the aggregate exceeds Rs 20,000 is not a defense.
- "My accountant did not advise me" is not considered reasonable cause by most tribunals.
Journal Entry Transactions: A Grey Area
A contentious issue arises when loan transactions are routed through journal entries (book entries) rather than actual cash or bank transfers. For example, A owes Rs 5,00,000 to B, and B owes Rs 5,00,000 to C. Instead of moving money, A records a journal entry crediting C directly and debiting the loan to B.
Courts and tribunals have not spoken with one voice. Some decisions have refused to penalise genuine, recorded journal entries, often on the reasonable cause ground under Section 273B, while the department argues that settling a loan by any mode other than the banking channels listed in the section is a contravention, since the sections speak of the mode of repayment and not only of physical cash.
The safer approach is to route all loan and deposit transactions through bank accounts, even if a journal entry would achieve the same economic result.
Reporting in Tax Audit (Form 3CD)
If your business is under tax audit under Section 44AB, the tax auditor must report under:
- Clause 31(a) and 31(b): Particulars of each loan or deposit, and each specified sum, of Rs 20,000 or more accepted during the year, including whether it was received by account payee cheque, draft or bank transfer
- Clause 31(c): Particulars of each repayment of such loans, deposits or specified advances made during the year, including the mode of repayment (clause 31(d) covers repayments received otherwise than by account payee cheque, draft or bank transfer)
If the audit report shows a cash acceptance or repayment, it is often the starting point for penalty proceedings, and the report itself becomes evidence.
Tip for firms and companies: Before the tax audit begins, review all cash receipts and payments above Rs 20,000. If violations exist, prepare your reasonable cause documentation in advance rather than scrambling after the penalty notice arrives.
Under the Income Tax Act 2025
The Income Tax Act 2025 (effective 1 April 2026) carries these provisions forward for tax year 2026-27 onwards with the same Rs 20,000 and Rs 2 lakh thresholds and penalties equal to the amount:
| 1961 Act | 2025 Act | Subject |
|---|---|---|
| 269SS | 185 | Mode of taking or accepting loans, deposits and specified sum |
| 269ST | 186 | Rs 2 lakh cash receipt limit |
| 269T | 188 | Mode of repayment of loans, deposits and specified advance |
| 271D | 450 | Penalty for contravening Section 185 |
| 271DA | 451 | Penalty for contravening Section 186 |
| 271E | 453 | Penalty for contravening Section 188 |
For transactions up to 31 March 2026 (AY 2026-27 and earlier), the 1961 Act section numbers above apply.
This guide references Sections 269SS, 269T, 269ST, 271D, 271DA, 271E, 273B and 275 of the Income Tax Act, 1961 (as amended by the Finance Act 2023 and the Finance Act 2025), Sections 185, 186, 188, 450, 451 and 453 of the Income Tax Act, 2025, Rule 6ABBA of the Income Tax Rules, 1962 and clause 31 of Form 3CD. The reasonable cause examples are drawn from published ITAT and High Court decisions. Readers should consult a tax professional for case-specific advice before responding to a penalty notice.
