ACIT -14 (2) , MUMBAI vs. REDWOOD I.T. SERVICES P.LTD, MUMBAI

This appeal was initially disposed of by the Tribunal, vide its order dated 05-07-2022, wherein the Tribunal had reversed the order passed by Ld CIT(A) and confirmed the penalties levied. However, the assessee had raised an oral ground before the Tribunal under Rule 27 of the Appellate Tribunal Rules contending that there was ‘reasonable cause’ for the assessee in accepting and repaying the loan otherwise than by way of Account payee

The background of this issue is discussed in brief. Shri Chandan Asrani is one of the promoters of the assessee company and director. Smt. Daya Rani is his sister and is also a share holder of the assessee company. The assessee had taken loan of Rs.5.00 crores from Shri Chandan Asrani in the earlier years and it was outstanding as on the beginning of the year. During the year under consideration, the assessee has passed a journal entry as on 31.3.2013 through which, a sum of Rs.3.40 crores was transferred from the account of Shri Chandan Asrani to the account of Smt Daya Rani. It resulted in repayment of loan of Rs.3.40 crores from Shri Chandran Asrani and receipt of fresh loan of the very same amount from Smt. Daya Asrani. The assessee also accounted for interest amount of Rs.4,43,885/- on the above said loan and the said interest was also assigned to Smt Daya Rani. In effect, the assessee has repaid a sum of Rs.3.44 crores to Shri Chandan Asrani and received loan of Rs.3.40 crores from Smt Daya Asrani by passing journal entries. The AO treated the same as violation of provisions of sec. 269SS and 269T of the Act, since the transactions of receipt and repayment of loans have been carried out otherwise than by way of account payee cheque or account payee bank draft. Accordingly, the AO reported these transactions to the JCIT.

The JCIT levied penalty of Rs.3.40 crores u/s 271D of the Act for accepting loan otherwise than by way of account payee cheques/drafts, i.e., in violation of the provisions of sec.269SS of the Act. He also levied a penalty of Rs.3.44 crores u/s 271E of the Act for repaying the loan in violation of the provisions of sec. 269T of the Act. The Ld CIT(A) deleted both the penalties and hence the revenue filed appeal before the Tribunal.

As noticed earlier, the co-ordinate bench of Tribunal reversed the order passed by Ld CIT(A) and confirmed the penalties levied u/s 271D & 271E of the Act. In the miscellaneous petition filed by the assessee pointing out that the Tribunal has not adjudicated the ground relating to availability of “reasonable cause”. Accordingly, the order so passed by the Tribunal was recalled for the purpose of adjudicating the above said contention of the assessee.

The Ld A.R submitted that, as per the provision of sec.273B of the Act, the penalties u/s 271D and 271E are not leviable if there exists “reasonable cause” for violating the provisions of sec. 269SS and 269T of the Act respectively. Inviting our attention to pages 13 and 17 of the paper book, the ld A.R submitted that both Shri Chandan Asrani and Smt Daya Asrani are having running accounts with the assessee company. Since both are related to each other and since both are the shareholders of the assessee company, the amount of Rs.3.40 crores was transferred by passing a journal entry from the Account of Shri Chandan Asrani to the account of Smt Daya Asrani. He submitted that, if the said journal entries were not passed, then the assessee should have repaid Rs.3.40 crores to Shri Chandan Asrani, who in turn, should have transferred the said amount to Smt Daya Rani. Thereafter, Smt Daya Rani should have transferred the said amount to the assessee company. These transactions would have given hardships in complying with the provisions of sec. 269SS/269T of the Act and the same would have been an empty formality. He submitted that the assessee has actually avoided

The Ld A.R submitted that the assessee company should have sufficient bank balance for repaying the loan of Rs.3.40 crores to Shri Chandan Asrani. He submitted that the journal entry was passed on 31.3.2013 and on that date, the assessee was having aggregate bank balance of Rs.58.30 lakhs only. He submitted that Shri Chandan Asrani had given a letter to the assessee company stating that he has gifted the amount of Rs.3.40 crores and accordingly requested to transfer the loan standing in his name to the name of Smt Daya Asrani. The assessee company is required to honour the said letter and since it did not have enough funds in its bank account, the assessee was constrained to pass the journal entry due to business compulsions. Accordingly, the Ld A.R submitted that non-availability of funds with the assessee to carry out the above said transactions would constitute ‘reasonable cause’ in terms of sec.273B of the Act. He submitted that assessee has not taken any loan or repaid any loan in cash, which was the primary purpose of introducing sec. 269SS/269T of the Act. The Ld A.R placed his reliance on the following case laws in support of his contentions:- (a) ADI vs. Kum. A.B. Shanthi (2002)(122 Taxman 574)(SC)

The Ld D.R, however, submitted that the assessee has not proved the alleged hardships claimed now. He submitted that the assessing officer has doubted the documents furnished by the assessee and further the assessee has not shown existence of reasonable cause in terms of sec.273B of the Act. Accordingly, the Ld D.R contended that the immunity provided in sec. 273B of the Act will not be available to the assessee in the facts and circumstances of the case.

We heard rival contentions and perused the record. We noticed earlier that the order passed by the co-ordinate bench in this appeal has been recalled in order to examine as to whether there existed reasonable cause in terms of sec. 273B of the Act for violating the provisions of sec. 269SS and 269T of the Act which would protect the assessee from levying of penalty u/s 271D and 271E of the Act. If there existed “reasonable cause, then no penalty u/s 271D and 271E could be levied upon the assessee.

The facts, as noticed earlier is that the assessee had received loan in the earlier years from Shri Chandran Asrani, who is a shareholder and director of the assessee company. The above said person proposed to gift a sum of Rs.3.40 crores to his sister Smt Daya Asrani. Accordingly, he requested the assessee to transfer the loan due to him to his sister Smt Daya Asrani. In this regard, he gave a letter to the assessee on 1st of March, 2013 directing to transfer funds to Smt Daya Asrani. The assessee passed a journal entry to transfer the loan from the account of Shri Chandan Asrani to Smt Daya Asrani, i.e., the account of Shri Chandan Asrani was debited and the account of Smt Daya Asrani was credited. The effect of passing the above said journal entry is that the loan standing in the name of Shri Chandan Asrani stood repaid and a fresh loan was taken from Smt Daya Asrani. Since the loan was repaid/taken otherwise than by a way of account payee cheque/demand draft, the same resulted in violation of provisions of sec.269T (repayment of loan) and sec 269SS (accepting of loan). Both these

It is the submission of the Ld A.R that the repayment of loan by way of account payee cheque to Shri Chandan Asrani would have resulted in entering into multiple transactions as discussed earlier. They would have resulted in hardships and would be an empty formality to comply with the provisions of sec. 269T and 269SS of the Act. Accordingly, it was submitted that the journal entry was passed in order to avoid empty formalities and hardships. Further, the AO has not doubted the genuineness of entries. Accordingly, he submitted that the same shall constitute reasonable cause in terms of sec. 273B of the Act. In this regard, the Ld A.R placed reliance on the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of CIT vs. Triumph International Finance (I) Ltd (supra).

The facts available in the above said case are that M/s Triumph International Finance (I) Ltd is a share broker and had accepted loan from M/s Investment Trust of India. It also sold some shares to M/s Investment Trust of India. The sale consideration from above said company was adjusted against the loan by passing a journal entry. The Hon’ble Bombay High Court held that repayment of loan by passing journal entry violates the provisions of sec.269T of the Act. However, it held that there existed reasonable cause, in the facts of those case, in passing a journal entry and accordingly held that the penalty is not leviable in terms of sec.273B of the Act. It was held as under:-

In the instant case also, we notice that the assessee was requested by its creditor Shri Chandan Asrani to transfer his credit to Smt Daya Asrani. As discussed earlier, the exchange of account payee cheques/bank drafts would have been an empty formality to repay/receive the loan. Another crucial aspect is that both the creditors are shareholders belonging to

The Ld A.R also pointed out one more reasonable cause, i.e., the assessee was having aggregate bank balance of Rs.58.30 lakhs only as on 31.3.2013. Hence the assessee could not have repaid a sum of Rs.3.40 crores to Shri Chandan Asrani. Since the request of Shri Chandan Asrani was to transfer funds to Smt Daya Asrani, which he had gifted, the assessee company has honoured the instructions by passing journal entry. Since the assessee was having insufficient funds with it, there was a business compulsion to pass journal entry. If the provisions of sec.269SS/269T are violated due to business exigencies, the same shall constitute reasonable cause within the meaning of sec.273B of the Act. For this proposition, we derive support from the decision rendered by Bangalore bench of Tribunal in the case of Padmanabha Mangalore Chowta vs. Addl/ Joint CIT (ITA No.:1147/Bang/2022), wherein it was held as under:-

In view of the foregoing discussions, we are of the view that there existed reasonable cause within the meaning of sec. 273B of the Act for the assessee in passing the journal entries transferring loan amount from the account of Shri Chandan Asrani to the account of Smt Daya Asrani.

Accordingly, we hold that penalty u/s 271D and 271E of the Act should not have been levied in the hands of the assessee. Accordingly, we uphold the decision rendered by Ld CIT(A) in view of the existence of reasonable causes.

In the result, the appeal filed by the revenue is dismissed. Order pronounced in on 20.9.2023.