Money moves both ways between me and my company on a current account. Is that a loan under 269SS?
No. Deposits into and withdrawals from a running current account between a director and the company are not a loan or advance, so ss.269SS and 269T do not reach them and penalty on that footing cannot stand.
Decided by the High Court (Madras High Court — P. D. Dinakaran J and P. P. S. Janarthana Raja J (judgment by Janarthana Raja J)) on 2006-01-23, reported as (2006) 285 ITR 221 (Mad); (2007) 163 Taxman 265 (Mad); Tax Case (Appeal) No. 1315 of 2005, AY 1992-93. It bears on section 269SS, section 271D of the Income Tax Act 1961, in Cash Transaction Limits and Penalty matters.
Director's current accounts are a standing target for s.271D, because the officer reads each credit as a separate loan accepted in cash. The Court looks at the character of the account instead of the label on the entries: mutual dealings, sums moving both ways, a fluctuating balance, and no stipulation for interest or repayment on demand. That is the test to plead, and it is what distinguishes a current account from a loan account on your own facts.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was a company publishing books. For assessment year 1992-93 the Assessing Officer found that it had accepted a cash loan of Rs 2,94,000 from M/s Manian Creations, a sister concern, and treated that as a breach of s.269SS. A show cause notice under s.271D was issued on 19 September 1997; the assessee replied on 27 September 1997 that the dealings with Mr S.V.S. Manian, the proprietor of Manian Creations, were current account in nature and not a loan or deposit. The Deputy Commissioner rejected that and levied a penalty of Rs 2,94,000. The Commissioner (Appeals) deleted it on the footing that the Madras High Court had in Kumari A.B. Shanthi declared s.269SS unconstitutional. On the Revenue's appeal — which pointed out that the Supreme Court had since reversed that declaration and upheld the section — the Tribunal held on the merits that the transaction was not a loan or advance, and the Revenue appealed under s.260A.
The appeal was dismissed on the footing that no substantial question of law arose (para 5). Mr S.V.S. Manian was a Director of the assessee company, and the orders below showed a running current account in his name in the assessee's books, into which he paid money and out of which he withdrew money. To sustain the penalty the Revenue had to establish that what the assessee received was a loan or deposit within the meaning of s.269SS; the deposit and withdrawal of money from the current account could not be considered a loan or advance. The amount was shown in the balance sheet as an unsecured loan from directors, but under rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975 a deposit does not include any amount received from a director or a shareholder of a private limited company. The transaction between the company and the director-cum-shareholder was therefore not a loan or deposit but current account in nature, with no interest charged, and there was no violation of s.269SS (paras 4-5).
The Court did not reason from mutuality. It made four points. The counterparty was a Director of the assessee company. The books showed a running current account in his name with money moving in and out. The burden lay on the Revenue to establish that what was received was a loan or deposit within s.269SS, and mere deposit and withdrawal in a current account is not a loan or advance. And the label in the balance sheet — unsecured loan from directors — did not settle the character of the receipt, because rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975 excludes from 'deposit' any amount received from a director or shareholder of a private limited company; no interest was charged on the account. On that footing the Tribunal's order disclosed no error and no substantial question of law arose (paras 4-5).
The deposit and the withdrawal of the money from the current account could not be considered as a loan or advance.
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Handle my notice → Ask a CA on WhatsAppNo. Deposits into and withdrawals from a running current account between a director and the company are not a loan or advance, so ss.269SS and 269T do not reach them and penalty on that footing cannot stand. This was decided by the High Court (Madras High Court — P. D. Dinakaran J and P. P. S. Janarthana Raja J (judgment by Janarthana Raja J)) and bears on section 269SS, section 271D of the Income Tax Act 1961. It is reported as (2006) 285 ITR 221 (Mad); (2007) 163 Taxman 265 (Mad); Tax Case (Appeal) No. 1315 of 2005, AY 1992-93. Director's current accounts are a standing target for s.271D, because the officer reads each credit as a separate loan accepted in cash. The Court looks at the character of the account instead of the label on the entries: mutual dealings, sums moving both ways, a fluctuating balance, and no stipulation for interest or repayment on demand. That is the test to plead, and it is what distinguishes a current account from a loan account on your own facts. If it applies to you, the first step is this: File the full year's ledger of the account showing movement in both directions and a fluctuating balance, not just the entries the officer has picked.
The assessee was a company publishing books. For assessment year 1992-93 the Assessing Officer found that it had accepted a cash loan of Rs 2,94,000 from M/s Manian Creations, a sister concern, and treated that as a breach of s.269SS. A show cause notice under s.271D was issued on 19 September 1997; the assessee replied on 27 September 1997 that the dealings with Mr S.V.S. Manian, the proprietor of Manian Creations, were current account in nature and not a loan or deposit. The Deputy Commissioner rejected that and levied a penalty of Rs 2,94,000. The Commissioner (Appeals) deleted it on the footing that the Madras High Court had in Kumari A.B. Shanthi declared s.269SS unconstitutional. On the Revenue's appeal — which pointed out that the Supreme Court had since reversed that declaration and upheld the section — the Tribunal held on the merits that the transaction was not a loan or advance, and the Revenue appealed under s.260A. The matter was decided on 2006-01-23 by the High Court (Madras High Court — P. D. Dinakaran J and P. P. S. Janarthana Raja J (judgment by Janarthana Raja J)). On those facts the High Court held as follows. The appeal was dismissed on the footing that no substantial question of law arose (para 5). Mr S.V.S. Manian was a Director of the assessee company, and the orders below showed a running current account in his name in the assessee's books, into which he paid money and out of which he withdrew money. To sustain the penalty the Revenue had to establish that what the assessee received was a loan or deposit within the meaning of s.269SS; the deposit and withdrawal of money from the current account could not be considered a loan or advance. The amount was shown in the balance sheet as an unsecured loan from directors, but under rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975 a deposit does not include any amount received from a director or a shareholder of a private limited company. The transaction between the company and the director-cum-shareholder was therefore not a loan or deposit but current account in nature, with no interest charged, and there was no violation of s.269SS (paras 4-5).
The Court did not reason from mutuality. It made four points. The counterparty was a Director of the assessee company. The books showed a running current account in his name with money moving in and out. The burden lay on the Revenue to establish that what was received was a loan or deposit within s.269SS, and mere deposit and withdrawal in a current account is not a loan or advance. And the label in the balance sheet — unsecured loan from directors — did not settle the character of the receipt, because rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975 excludes from 'deposit' any amount received from a director or shareholder of a private limited company; no interest was charged on the account. On that footing the Tribunal's order disclosed no error and no substantial question of law arose (paras 4-5). In the words reproduced by the source cited on this page: "The deposit and the withdrawal of the money from the current account could not be considered as a loan or advance."
It was decided by the High Court on 2006-01-23 and is reported as (2006) 285 ITR 221 (Mad); (2007) 163 Taxman 265 (Mad); Tax Case (Appeal) No. 1315 of 2005, AY 1992-93. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 269SS, section 271D, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed on the footing that no substantial question of law arose (para 5). Mr S.V.S. Manian was a Director of the assessee company, and the orders below showed a running current account in his name in the assessee's books, into which he paid money and out of which he withdrew money. To sustain the penalty the Revenue had to establish that what the assessee received was a loan or deposit within the meaning of s.269SS; the deposit and withdrawal of money from the current account could not be considered a loan or advance. The amount was shown in the balance sheet as an unsecured loan from directors, but under rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975 a deposit does not include any amount received from a director or a shareholder of a private limited company. The transaction between the company and the director-cum-shareholder was therefore not a loan or deposit but current account in nature, with no interest charged, and there was no violation of s.269SS (paras 4-5). It arises in Cash Transaction Limits and Penalty matters, on section 269SS, section 271D of the Income Tax Act 1961, and was decided by Madras High Court — P. D. Dinakaran J and P. P. S. Janarthana Raja J (judgment by Janarthana Raja J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Confirm on record that there is no stipulation for interest or for repayment on demand, since those are the features that mark a loan or deposit. Check how the account is described in the books and the audited accounts; a heading calling it a loan account will be used against you. Do not argue this where the money moves only one way — the reasoning rests on mutuality.
Still good law. A later Division Bench of the same Court in Vasan Healthcare (P.) Ltd. v. Addl. CIT [2019] 103 taxmann.com 26 (Mad), decided 5 February 2019, restated the ratio of this decision at para 28 — that the Revenue must establish a loan or deposit within s.269SS, and that under rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975 an amount received from a director or shareholder of a private limited company is not a deposit — and then held it inapplicable on the facts before it, where the director was a conduit for cash borrowed from an outside financier and the pattern had recurred over several years (paras 29-30, 42-43). The Supreme Court dismissed the assessee's petition against that decision on 22 January 2021 [2021] 125 taxmann.com 266 (SC). Counsel in Vasan Healthcare also recorded, at para 8.8, that CIT v. Kailash Triple Sterlized Water (Chennai) (P.) Ltd. [2008] 215 CTR 198 (Mad), decided 13 November 2007, was rendered following this decision; that characterisation comes from the submission recorded in the judgment, not from a reading of Kailash Triple itself. Nothing overruling or doubting this decision was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read against the reported judgment. The facts are now confirmed: a cash receipt of Rs 2,94,000 in assessment year 1992-93 from M/s Manian Creations, whose proprietor Mr S.V.S. Manian was a Director of the assessee company, and a s.271D penalty of the same amount. Two things change how the decision should be used. Its operative ground is not the mutuality of a running account but rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975, under which an amount received from a director or shareholder of a private limited company is not a deposit — so the balance sheet label 'unsecured loan from directors' did not settle the matter. And the appeal was dismissed on the footing that no substantial question of law arose. On later treatment, the same Court in Vasan Healthcare (P) Ltd v Addl CIT [2019] 103 taxmann.com 26 (Mad) restated that ratio but held it inapplicable where the director was a conduit for cash borrowed from an outside financier over several years; the assessee's petition against that decision was dismissed by the Supreme Court on 22 January 2021. Note also that s.269T does not appear in this judgment and has been removed from the section list. The judgment does not address repayment under s.269T, or a current account with someone who is not a director or shareholder of the company. The report describes the assessee as a private limited company in the body while the cause title reads 'Idhayam Publications Ltd.', and the reasoning depends on the private limited company characterisation. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed on the footing that no substantial question of law arose (para 5). Mr S.V.S. Manian was a Director of the assessee company, and the orders below showed a running current account in his name in the assessee's books, into which he paid money and out of which he withdrew money. To sustain the penalty the Revenue had to establish that what the assessee received was a loan or deposit within the meaning of s.269SS; the deposit and withdrawal of money from the current account could not be considered a loan or advance. The amount was shown in the balance sheet as an unsecured loan from directors, but under rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975 a deposit does not include any amount received from a director or a shareholder of a private limited company. The transaction between the company and the director-cum-shareholder was therefore not a loan or deposit but current account in nature, with no interest charged, and there was no violation of s.269SS (paras 4-5).
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