Cash loans between agriculturists under section 269SS held excluded from prohibition, penalty under section 271D quashed

Interpretation of the second proviso to section 269SS clarifies that cash loans between persons who both derive agricultural income and have no other income chargeable to tax are excluded from the prohibition on cash borrowings; where an assessees non-agricultural income is below the taxable threshold it is not "chargeable to tax" and the exclusion applies, and unchallenged assertions that lenders lacked taxable income are accepted. Consequently the statutory prohibition in section 269SS did not apply in the case described and the penalty imposed under the companion penalty provision was held unsustainable, allowing the taxpayers appeal.

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Issues: Whether penalty under section 271D of the Income-tax Act, 1961 is sustainable where cash loans were availed from agriculturists and both lender and borrower have only agricultural income and no income chargeable to tax, thereby invoking the second proviso to section 269SS of the Income-tax Act, 1961.

Analysis: The factual matrix shows the assessee (an agriculturist) availed cash loans from other agriculturists for purchase of agricultural land. The departmental authorities accepted the major part of the loans and it is undisputed that the transactions were in cash. The second proviso to section 269SS excludes the application of section 269SS where both lender and borrower have agricultural income and neither has any income chargeable to tax under the Act. The assessee's declared non-agricultural income was below the taxable threshold and therefore not "chargeable to tax". The Revenue did not rebut the claim that the lenders had no income chargeable to tax.

Conclusion: Penalty under section 271D is unsustainable and is deleted; decision rendered in favour of the assessee.

Ratio Decidendi: Where both lender and borrower are agriculturists and neither has any income chargeable to tax under the Income-tax Act, 1961, the second proviso to section 269SS excludes the operation of section 269SS and consequent penalty under section 271D cannot be sustained.

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