Repayment of Loan in Cash – Legal Boundaries and Reasonable Cause Exception:

Case: Kamaljeet Kaur Gill v. JCIT – [2025] 174 taxmann.com 17 (Chhattisgarh High Court)

Introduction

Cash transactions are closely monitored under Indian tax laws to prevent tax evasion and promote transparency. Among the key statutory restrictions is Section 269T of the Income-tax Act, 1961, which prohibits the repayment of loans or deposits of ₹20,000 or more in cash. Violation of this provision invites penalty under Section 271E, equal to the amount repaid.

However, the law also recognizes genuine hardship through Section 273B, which provides that no penalty shall be imposed if there was a “reasonable cause” for the default. In a recent and significant ruling, the Chhattisgarh High Court offered clarity on this exemption by accepting lender-driven compulsion as a “reasonable cause.”

Statutory Framework

Section 269T – Mode of Repayment

Section 269T mandates that no person shall repay any loan, deposit, or specified advance of ₹20,000 or more otherwise than by:

• Account payee cheque,

• Account payee bank draft,

• Electronic clearing system through a bank account, or

• Prescribed electronic modes.

Objective: To curb black money and ensure traceable financial transactions.

Section 271E – Penalty for Contravention

If Section 269T is violated, Section 271E imposes a penalty equal to the amount repaid in contravention. The penalty is imposed by the Joint Commissioner and is categorized as a civil liability, not criminal punishment.

Importantly, as part of Chapter XXI (penal provisions), Section 271E is subject to strict interpretation, as consistently held by courts.

Section 273B – Reasonable Cause Clause

Section 273B provides relief by stating:

“No penalty shall be imposable... if the assessee proves that there was reasonable cause for the said failure.”

• The term “reasonable cause” is not statutorily defined.

• Courts interpret it to mean a bona fide, compelling reason preventing compliance by a prudent person under normal circumstances.

Judicial Analysis: Kamaljeet Kaur Gill’s Case

Factual Summary

• The assessee repaid loan instalments in cash exceeding ₹20,000.

• The financer insisted that repayments be made in cash.

• The Assessing Officer imposed penalty under Section 271E for violating Section 269T.

• Both the CIT(A) and ITAT upheld the penalty.

• The assessee appealed to the High Court.

High Court’s Ruling

The High Court emphasized several important legal principles:

1. Strict Construction of Penal Law:
   Section 271E being penal, must be applied narrowly and fairly. A mere technical breach without dishonest intent does not automatically warrant penalty.

2. Purpose of Section 273B:
   The Court reaffirmed that the purpose of Section 273B is to prevent hardship to bona fide taxpayers who acted under circumstantial compulsion or commercial necessity, and not to penalize honest conduct.

3. Lender’s Compulsion as Reasonable Cause:
   The assessee’s inability to repay via banking channels was due to the lender’s insistence on cash. The Court held that this external compulsion constituted a reasonable cause under Section 273B.

4. Bona Fide and Genuine Transaction:
   Since there was no intent to conceal, no evasion of tax, and the transaction was genuine, the breach was technical, not willful.

Held: The penalty under Section 271E was not leviable as the assessee had established a “reasonable cause” within the meaning of Section 273B.

Legal Principle Emerged

Provision	Mandate / Consequence	Exception via Section 273B
Section 269T	Restricts cash repayment of loans ≥ ₹20,000	Must repay through bank/digital mode
Section 271E	Penalty = Amount repaid in violation	Strictly construed as penal
Section 273B	No penalty if reasonable cause proven	Includes external compulsion, bona fide business conduct

This decision strengthens the proposition that commercial realities, if documented and reasonable, can be valid grounds for relief from penal provisions.

Implications for Taxpayers

• Substance Over Form: Where the intent is honest and the transaction is genuine, courts will favor substance over technical formality.

• Documentary Evidence Crucial: Taxpayers relying on Section 273B must demonstrate compulsion or hardship with evidence – e.g., lender communication, cash receipts, or business records.

• Not a Blanket Exemption: This ruling does not license indiscriminate cash transactions. It merely upholds fairness in specific circumstances of compulsion beyond control.

Conclusion

The Chhattisgarh High Court’s ruling in Kamaljeet Kaur Gill v. JCIT is a welcome affirmation of taxpayer rights under the reasonable cause doctrine. It sends a clear message: penalty is not to be imposed mechanically; rather, it must be based on intention, conduct, and commercial reality.

Tax professionals and businesses should take note of this judgment when advising clients on penalty exposure under Sections 269T and 271E. Where compliance fails due to genuine business compulsions, Section 273B remains a strong shield, provided the conduct is bona fide and properly documented