CHAPTER XII MODE OF PAYMENT IN CERTAIN CASES ETC.

185 (1)

No person shall take or accept from another person any loan or deposit or specified sum, except through—

• (a) an account payee cheque;
• (b) account payee bank draft;
• (c) electronic clearing system through a bank account; or
• (d) any other prescribed electronic mode, if,––
• (i) the amount or the aggregate amount of such loan, deposit, or specified sum; or
• (ii) the amount or the aggregate amount of any previously taken or accepted loan or deposit or specified sum by such person from such another person, which is remaining unpaid, whether due for repayment or not, as on the date of taking or accepting such amount as referred to in clause (i); or
• (iii) the aggregate of the amounts referred to in of clauses (i) and (ii), is twenty thousand rupees or more.

185 (2)

Sub-section (1) shall not apply to loans or deposits or specified sums taken or accepted from or by,––

• (a) the Government;
• (b) any banking company, post office savings bank, or co-operative bank;
• (c) any corporation established by a Central, State or Provincial Act;
• (d) any Government company as defined under section 2(45) of the Companies Act, 2013;
• (e) any institution, association, or body or class of institutions, associations or bodies notified by the Central Government.

185 (3)

The provisions of sub-section (1) shall not apply to any loan or deposit or specified sum where, the person taking or accepting such loan or deposit or specified sum and person from whom such loan or deposit or specified sum is taken or accepted, both, have agricultural income and neither has any income chargeable to tax under this Act.

185 (4)

In sub-section (1), “two lakh rupees” shall be substituted for “twenty thousand rupees” in the case of any deposit or loan, where—

• (a) such deposit is accepted by a primary agricultural credit society or a primary co-operative agricultural and rural development bank from its member; or
• (b) such loan is taken from a primary agricultural credit society or primary co-operative agricultural and development bank by its member.

185 (5)

In this section, “loan or deposit” means loan or deposit of money.

Explanation

Section Summary:

Section 185 of the Income Tax Act regulates the mode of payment for loans, deposits, or specified sums to ensure transparency and traceability. It mandates that any loan, deposit, or specified sum of ₹20,000 or more (or ₹2 lakh in certain cases) must be transacted through specified modes, such as account payee cheques, bank drafts, or electronic clearing systems. The section aims to curb cash transactions and promote accountability in financial dealings.

Key Changes:

1. Threshold Amounts: The threshold for mandatory electronic or traceable transactions is ₹20,000 for most cases, but it is increased to ₹2 lakh for transactions involving primary agricultural credit societies or primary co-operative agricultural and rural development banks.
2. Exemptions: The section provides specific exemptions for transactions involving the government, banking institutions, corporations, and certain notified entities. Additionally, it exempts transactions between individuals with agricultural income and no taxable income.
3. Clarification on "Loan or Deposit": The section explicitly defines "loan or deposit" as a monetary transaction, removing ambiguity.

Practical Implications:

1. For Individuals and Businesses: Taxpayers must ensure that loans, deposits, or specified sums of ₹20,000 or more are transacted through prescribed modes. Failure to comply may result in penalties or scrutiny by tax authorities.
2. Agricultural Sector: Farmers and agricultural societies benefit from a higher threshold of ₹2 lakh for transactions involving primary agricultural credit societies or co-operative banks.
3. Exempt Entities: Transactions with government bodies, banks, and notified institutions are exempt, reducing compliance burdens for these entities.

Critical Concepts:

1. Account Payee Cheque/Draft: A cheque or draft that is payable only to the account of the payee, ensuring the funds are credited directly to the recipient’s account.
2. Electronic Clearing System: A mode of electronic fund transfer, such as NEFT, RTGS, or UPI, which ensures traceability.
3. Specified Sum: Refers to any amount that is not explicitly a loan or deposit but falls under the purview of this section due to its nature or purpose.

Compliance Steps:

1. Use Prescribed Modes: Ensure that loans, deposits, or specified sums of ₹20,000 or more are transacted through account payee cheques, drafts, or electronic clearing systems.
2. Maintain Records: Keep proper documentation of all transactions, including details of the payer, payee, and mode of payment.
3. Verify Exemptions: Confirm whether the transaction falls under the exemptions listed in sub-section (2) or (3) to avoid unnecessary compliance steps.

Examples:

1. Scenario 1: Mr. A lends ₹50,000 to Mr. B. To comply with Section 185, Mr. B must accept the amount through an account payee cheque, bank draft, or electronic transfer.
2. Scenario 2: A primary agricultural credit society accepts a deposit of ₹1.5 lakh from its member. Since the transaction involves a primary agricultural credit society, the threshold is ₹2 lakh, and the society can accept the deposit in cash without violating Section 185.
3. Scenario 3: A government corporation lends ₹1 lakh to a private company. This transaction is exempt under sub-section (2), so the corporation is not required to use the prescribed modes of payment.

This section ensures financial transparency and reduces the risk of unaccounted cash transactions, aligning with broader tax compliance objectives.