Capital Contribution Sec 269ST?

[Hithik]

Whether capital contributions made by partners in cash exceeding the threshold under S.269, contributed as a single sum or in multiples., would this tax fall under S.269ST(c) as receipts arising from a single event as capital call or partnership agreement.?

[YAGAY andSUN]

Section 269ST of the Income-tax Act, 1961 prohibits receipt of Rs. 2,00,000 or more otherwise than by an account payee instrument or prescribed electronic modes, in three situations, including under clause (c), i.e., in respect of transactions relating to one event or occasion from a person.

Capital contribution by a partner to a partnership firm is a capital receipt in the hands of the firm and represents an inflow pursuant to the partnership arrangement. The firm and the partner are distinct persons for the purposes of Section 269ST.

Where a partner makes capital contribution in cash exceeding Rs. 2,00,000, whether:

• as a single lump sum, or

• in multiple instalments aggregating to Rs. 2,00,000 or more,

the applicability of Section 269ST depends on the characterization of the underlying transaction.

If the contribution is made pursuant to a single capital call, obligation under the partnership deed, or a defined event (e.g., induction of partner, agreed capital infusion), such receipts may be regarded as relating to "one event or occasion" within the meaning of clause (c). In such a case, splitting the contribution into multiple cash instalments would not obviate the prohibition, and the aggregate receipt would attract Section 269ST.

Conversely, where capital contributions are independent, unrelated infusions made at different points of time without linkage to a single event or obligation, an argument may be advanced that clause (c) is not attracted. However, even in such cases, clause (a) (receipt from a person in a day) or clause (b) (in respect of a single transaction) may still operate, depending on facts.

Accordingly, capital contributions in cash exceeding the prescribed threshold are susceptible to violation of Section 269ST, particularly where they are traceable to a single capital arrangement or obligation. The safer and legally compliant course is to route such contributions through prescribed banking channels to avoid exposure to penalty under Section 271DA.

AI Summary

Cash capital contributions and section 269ST may trigger prohibition where payments arise from one capital arrangement. Section 269ST restricts cash receipts of Rs. 2,00,000 or more, and partner capital contributions to a partnership firm may fall within clause (c) where they arise from one event or occasion. A capital contribution is a capital receipt in the firm's hands, and splitting the payment into instalments does not avoid the prohibition if the contribution is referable to a single capital call, partnership obligation, or agreed capital infusion. Independent and unrelated infusions may stand on a different footing, though clauses (a) and (b) may still apply on the facts.