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Income Tax Appellate Tribunal, ‘D‘ BENCH
Before: SHRI AMIT SHUKLA & SHRI GAGAN GOYAL
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 25/02/2019 passed by ld. CIT (A)-51, Mumbai in relation to the penalty proceedings u/s.271E for A.Y.2014-15.
M/s. Mita Holdings Pvt. Ltd. 2. In various grounds of appeal, assessee has challenged the levy of penalty u/s.271E amounting to Rs.125,10,00,000/- and also challenging the enhancement made by the ld. CIT(A) by enhancing the penalty amount by Rs.124,50,25,000/-.
3. The brief facts as noted in the impugned penalty order is that during the course of assessment proceedings it was noticed that during the year assessee has issued 6,11,235 redeemable / convertible bonds of each Rs.1000/- amounting to Rs.61,12,35,000/-. In the assessment proceedings, it was explained by the assessee that allotment of bonds was on account of loan received in the earlier years and which has been interpreted by the ld. AO that loans were converted into the bonds and therefore, it was observed that the repayment of loan is other than the modes prescribed u/s.269T and therefore, assessee was liable for penalty u/s.271E. In response to show- cause notice, assessee had submitted that it has issued bonds to the corporate bodies from whom advances were received having coupon rate of 0.01%. These bonds are in the nature of debt and were reflecting under the head ‘long term borrowings’ as the said bonds are repayable at the option of the company after one year from the date of issue. Thus, it was stated that borrowings are in the nature of short term borrowings only, because the repayment of the said bonds could be after one year from the date of issue and therefore, the advance which was there, is in the nature of debt and it was the liability of the company and the bonds are also in the nature of debt which is also in the nature of liability of a company. Thus, there is no question that the liability in the M/s. Mita Holdings Pvt. Ltd. form of debt has been changed by converting advances into bonds which again is liability. However, the ld. AO held that bonds have been issued to the person against whom loans were outstanding and this has the effect that loans were squared up against the bonds. He referred to the provision of Section 269T and held that assessee has repaid loans otherwise by account payee cheque or account payee demand draft in the name of the person who has made loan or by using of Electronic Clearing System with the bank etc., Thus, he levied penalty of Rs.61,12,35,000/- which was the exact amount of bond issued by the assessee.
4. Before the ld. CIT(A), assessee submitted that assessee has received loans / advances which are in the nature of debt from six corporate entities amounting to Rs.61,12,35,000/-. Since, due to financial difficulties, it was unable to repay the said loan / advances, then it was mutually agreed that assessee will issue the lenders redeemable/optionally convertible bonds in lieu of the said loans/advances received in prior years. It was further explained by the assessee that its liability towards the said 6 lender corporate entities continued, since the bonds issued were also of the nature of debt and therefore, to conclude that it is a repayment of loans/advances in violation of u/s 269T is not correct because there is no repayment. Here in this case, the genuineness of the transaction has not been doubted, therefore the action of the ld. AO in levying penalty u/s 271E is not correct. Assessee’s detailed submissions are duly incorporated in the impugned appellate order.
M/s. Mita Holdings Pvt. Ltd. 5. The ld. CI T(A) asked for further additional information and from the perusal of the books of accounts of the assessee, he observed the following facts:-
5.3 From the Notes to the Annual Accounts of the assessee for the relevant year, it was noted that pursuant to a scheme of amalgamation sanctioned by the Hon'ble High Court of Kolkata vide its order dated 22.03.2016, 6 transferor/amalgamating companies, (1) M/s. Denro Holdings P. Ltd., (ii) M/s. Fiscal Securities India Ltd, (ii) M/s Goldline Tracon P. Ltd., (iv) M/s. Kartik Credit P Ltd, (v) M/s. Navodaya Exim P. Ltd and (vi) Ushaditya Trading P. Ltd. have been amalgamated with our assessee ite. M/s. Mita Holdings P. Ltd. wef 01.04.2014. Prior to this amalgamation, the aggregate loans received of Rs. 2.19.47 15,00,000/- by the amalgamating companies as well as the assessee from certain 12 lenders viz (1) Nametech Dealers P. Ltd., (ii) Netra Mercantile P Ltd., (i) Navmi Steels Trading P Ltd., (iv) New Core Steels P. Ltd. (v) Poscho Steels P. Ltd., (vi) Burn Steel Trading P. Ltd. (vii) Deep Star Alloys & Steel P. Ltd., (viii) Credence Logistics Ltd., (ix) Jaltarang Vanijya P. Ltd., (x) Novel Merchants P. Ltd., (xi) Mona Digital Equipments and (xii) Punsuni Agents P Ltd were converted into convertible debentures after making book adjustments by way of journal entries. The complete details in respect of this conversion of loans into convertible debentures in the hands of the assessee as well as the 6 transferor/amalgamating companies is explained in Annexure I to this appellate order. In the cases of the assessee, M/s. Denro Holdings P Ltd and M/s Ushaditya Trading P. Ltd, the concerned Addl./Jt. CIT levied penalty u/s. 271E since the loans were converted into convertible debentures after making book adjustments by way of journal entries but such action was apparently not taken by the Jurisdictional AOs/Addis in the cases M/s. Fiscal Securities India Ltd., M/s. Goldline Tracon P. Ltd., M/s Kartik Credit P. Ltd. and M/s. Navodaya Exim P. Ltd M/s. Mita Holdings Pvt. Ltd.
6. Ld. CIT (A) also referred to the decision of the Hon’ble Jurisdictional High Court in the case of Triumph International Finance (I) Ltd., reported in 345 ITR 270 (Bombay High Court), wherein the Hon’ble High Court has held that penalty u/s.271E is not leviable in a case where the loans are squared up by way of book adjustments or by way of journal entries, provided they are bonafide commercial transactions. Thereafter, the ld. CIT(A) carried out his own enquiry and verification to ascertain as to whether the loans received by the amalgamating companies in earlier years in their books as well as the assessee and their subsequent conversion into debentures can be termed as bonafide and he also sought for report from the Jt. Director of Investigation, Unit 7(1). The report was obtained from ITD/ITBA system which provided the details of some 12 lender entities and status of their returns and assessments.
7. The ld. CIT(A) observed that in the assessment orders passed u/s.143(3) r.w.s. 153A in the case of four entities which was part of Crest Topworth Group who were subjected to search action on 10/10/2012, certain irregularities were found and in their books there were huge differences in the balances reported of the creditors, debtors, loans given / taken etc., His relevant observations in this regard reads as under:-
5.5 From the copies of the assessment orders u/s 143(3) rws 153A in the cases of M/s Netra Mercantile Private Ltd., M/s Posco Steels Pvy. Ltd., M/s Deepstar alloys & Steel P. Ltd. and Navmi Steels trading Pvt. Ltd. which were accompanied with the report of the Jt.DIT (Inv.), it was observed that all these 4 M/s. Mita Holdings Pvt. Ltd. companies are part of Crest Topworth Group which was subjected to search action on 10.10.2012 by the DGIT (Inv), MP & Chhattisgarh and wherein major irregularities were found including maintaining 2 sets of books of accounts, one for Income Tax purpose and another for Banks, ROC, etc. At the time of search action, an aggregate disclosure of Rs. 250 crs, was made by Crest Topworth Group, but was not honoured. There were huge differences in the balances reported of the creditors, debtors, loans given/taken in the said 2 sets of books of accounts. Also, the persons responsible for maintaining the books of accounts had admitted that the transactions of sales, purchases, etc are not genuine. Moreover, in the case of M/s Mona Digital Equipments, it was informed that its name has been struck off from the ROC and the last Income-tax return filed by it is of the year relevant to AY 2007-08.
8. Accordingly, he issued notice of enhancement as to why the penalty u/s.271E in respect of conversion of loans into debentures in respect of the said 5 lenders not only relating to the assessee but also relating to the amalgamating companies should not be levied in the hands of the assessee. After reproducing his show-cause notice and also incorporating the reply submitted by the assessee against the levy of penalty for amounting aggregating to Rs. 125,10,00,000/-and adjudicating the penalty of Rs. 61,12,35,000/- as levied by the ld. AO he has though deleted the penalty levied by the AO but has enhanced the penalty on loans received in the earlier years by the amalgamating companies. The reasons for enhancing the penalty in his show cause notice are as under:- 2 In this matter, pursuant to a scheme of amalgamation sanctioned by the Hon'ble High Court of Kolkata vide its order dated 22.03.2016, M/s Denro Holdings P Ltd. Ma Fiscal M/s. Mita Holdings Pvt. Ltd. Securities India Ltd., M/s Gold Line Tracon P Ltd, M/s Kartik Credit P Ltd, Navodaya Exim P Ltd and Ushaditya Trading P Lld have been amalgamated with M/s. Mita Holdings P. Ltd. (the assessee) w.e.f. 01.04.2014 Prior to this amalgamation, the aggregate loans allegedly received of Rs 219,47, 15,00,000/- by the assessee as well as the said 6 amalgamated from (i) Ma Nametech Dealers P Ltd. (Rs 14,16,40,000/-), (ii) M/s Navmi Steel Traders P Ltd. (Rs 55,43,35,000/-), (iii) M/s Netra Mercantiles P Ltd. (Rs 45,24,75,000/-), (iv) M/s New Core Steels P Ltd (Rs 65,45,000/-), (v) M/s Poscho Steels P Ltd (Rs 17.08,00,000), (vi) M/s Bum Steel Trading P Lid (Rs 1,97,75,000/-), (vii) M/s Deep Star Alloys & Steel P Ltd (Rs 4,33,90,000/-), (vii) M/s Credence Logistics Ltd. (Rs 30,60,00,000/-), (x) M/s Jaltarang Vanijya P Ltd (Rs 23,50,00,000/-), (x) M/s Novel Merchants P Ltd (Rs 5,27,55,000/-), (x) M/s Mona Digital Equipments (Rs 3,00,00,000/-) and (xii) M/s Punsuni Agents P Ltd (Rs 18,20,00,000/-), were converted into convertible debentures. In the cases of M/s. Mita Holdings P. Ltd., Ms. Denro Holdings P. Ltd. and M/s. Ushaditya Trading P Ltd., the concemed Add/Jt CIT has levied penalty u/s 271E since the loans from the said 12 lenders were converted into convertible debentures after passing journal entries which is a violation of the provisions of Sec. 269T.
The Hon'ble Jurisdictional High Court in the case of Triumph International (22 taxman.com 138) has held that penalty us. 271E cannot be levied in a case where the loans are squared up by way of journal entries provided the said transactions are bonafide commercial transactions For the purpose of ascertaining whether the transactions of conversion of the said alleged loans into convertible debentures are bonafide transactions, in respect of the said 12 lenders, the Investigation Wing was asked to carry out necessary verification and report if any adverse inference has been drawn against the said 12 lender companies prior to the said amalgamation w.e.f.
M/s. Mita Holdings Pvt. Ltd. 01.04.2014. In response, the Investigation Wing has submitted the necessary factual report on the basis of enquiries carried out through ITD/TBA system. The position which emerges on the basis of the enquiries conducted in respect of the lender companies by the Investigation Wing through ITDATBA system as well as the examination of the Annual reports etc. of certain lenders submitted by the assessee in course of the appellate proceedings, is summarized as under- (i) Netra Mercantile P. Ltd. This lender company has allegedly given aggregate loans of Rs. 45.24 crs to the assessee and the said 6 amalgamated companies. This lender company belongs to Crest Topworth Group which was subjected to search action by the Investigation Wing on 10.10.2012. Shri Abhay Lodha, main person of this Group, vide letter dated 31.10.2012 had made an aggregate offer of undisclosed income of Rs. 250 crs. for the entire group. Subsequently, Shri PC Lodha, CA and uncle of Shri Abhay Lodha had confirmed the disclosure of Rs. 250 crs, in his statement on oath recorded on 04.11.2012. Against the search action, the assessee had filed a writ petition before the Hon'ble Bombay High Court, however, the same was dismissed vide order dated 13.10.2016. In course of the search action, it was observed that this lender company was maintaining two sets of accounts, one set of account for Income tax purposes and another set of accounts for the banking authorities, ROC etc. Further, there were two different Auditors for the said two sets of accounts. The differences in the balances reported in the said two sets of accounts for the years ending 31.03.2009 to 31.03.2011, as reported in the common assessment order of this lender, related to the search action is enclosed at Annexure 1 From this Annexure 1, it can be observed that there are major variations in the figures of share application money, secured M/s. Mita Holdings Pvt. Ltd. loan, unsecured loan, investments, stock as well as debtors and creditors. The figures of loans and sharo application money as per the Income Tax returns are much higher than the figures reported in the accounts submitted to the banks, ROC etc. For exemple. In the year ending 31.03.2009, in the Income Tax retum, shero application money has been shown to be of Rs 3437 crs as against Nil in the accounts reported to the banks. ROC etc. Similarly, the figures of loans reported in the Income Tax Return is of Rs. 29.99 crs as against Rs. 14.92 crs shown to the Banks, ROC etc. Also, the figures reported in the Income Tax retum related to debtors and creditors are much higher than the figures reported in the accounts submitted to the banks, ROC etc. For example, for the year ending 31.03.2009, the debtors and creditors shown in the Income Tax return are of Rs. 521.82 crs. and 571 8 crs. as against only Rs. 57.01 crs and 39.8 crs, respectively shown to the Banks, ROC etc. Also, the investments as per the Income Tax returns are much higher than the investment reported to the Banks, ROC etc. For example, the investment shown in the Income Tax return for the year ending 31.03.2009 is of Rs 40.46 crs. as against only Rs 2.46 crs reported to the Banks ROC etc. Moreover, the sales and the profit before tax reported in the Income Tax returns are much lower than the figures reported to the Banks, ROC etc. For example, for the year ending 31.03.2009, the sales and profit before tax shown in the Income Tax return are of Rs 357 16 crs and Rs. 19.04 lakhs as against the figures reported to the Banks, ROC etc of Rs 379,38 crs and Rs 4.54 crs, respectively Moreover, in course of the search action, Shri Kundan Sethya, key person and Shri Dhananjay Nandkumar Narse admitted in their statements recorded, that the entries of sales and purchases recorded in the books of the various entities of the group are only accommodation entries and do not represent actual sales/purchases.
M/s. Mita Holdings Pvt. Ltd. In response to notice issued u/s 153A, this lender company did not file its return of income for the years relevant to A. Ys. 2011- 12 & 2012-13. Moreover, the reqular return of income for the year relevant to search date ie for AY. 2013-14 was also not filed In respect of A. Ys. 2009-10 and 2010-11, the assessee offered additional income of Rs 3.71 crs. in the returns filed in response to notice u/s. 153A. The assessee in course of the search related assessment proceedings was specifically asked to reconcile the differences in the figures reported in the Income Tax returns and the figures reported to the Banks, ROC etc. However, there was no compliance and the AO was constrained to complete the assessment u/s 144. From the accounts submitted by this lender company as per the Income Tax return for the year ending 31.03.2011, it is observed that loans and advances are shown to be of Rs. Nil as against the aggregate loans claimed to have been given of Rs.45.24 to the assessee and the said 6 amalgamaed companies. The factual position which emerge from the findings of the search action as well as the non-submission of the returns of income in response to notice u/s 153A for the years ending 31.03 2011 and 31.03.2012 and non-filing of the regular return for the year ending 31.03.2013 raises serious doubts about the bonafide of the alleged loan given by this lender company to the assessee and the said other 6 amalgamated companies ii) Posco Steels P. Ltd. This leader has allegedly given aggregate loans of Rs.17.08 crs to the assessee and the said 6 amalgamated companies. This lender also belongs to Crest Topworth Group which was subjected to search action by the Investigation Wing on 10.10.2012 The actual position in Posco Steel P Lid is quite similar to that of Netra Mercantile P. Ltd. there also two sets of accounts with huge variations in the figures were found during the search action. Further, as mentioned earlier, in course of the search action, Shri Kundan Sethya key person and Shri Dhananjay Nandumar Narae admitted in their statements recorded that the entries of cats M/s. Mita Holdings Pvt. Ltd. and purchases recorded in the books of the various entities of the group are only accommodation entries and do not represent actual sales/purchases. The difference in the balances reported in the two sets of accounts for the years ending 31.03.2009 to 31.03.2011 as reported in the common assessment order of this lender company related to the search action is enclosed at Annexure 2. The loans and advances shown in the Income Tax return for the year ending 31.03.2012 are of Rs. Nil as against the aggregate loan claimed to have been given of Rs. 17.08 or to the assessee, and the said 6 amalgamated companies. The factual position which emerges from the findings of the search action as well as the non-submission of the return of income in response to notice us 153A for the year ending 31.03.2012 and non-filing of the regular return for the year ending 31.03.2013 raises serious doubts about the bonafide of the alleged loan given by this lender company to the assessee and the other amalgamated companies. iii) Navmi Steel Trading P. Ltd. This lender has allegedly given aggregate loans of Rs. 55 43 crs to the assessee and the said 6 amalgamated companies. This lender also belongs to Crest Topworth Group which was subjected to search action by the Investigation Wing on 10.10.2012 Further, as mentioned earlier in course of the search action Shri Kundan Sethya, key person and Shri Dhananjay Nandkumar Narse admitted in their statements recorded, that the entries of sales and purchases recorded in the books of the various entities of the group are only accommodation entries and do not represent actual sales/purchases. For the years relevant to A.YS. 2007-08 to 2009-10, the said lender offered undisclosed income of Rs. 8.87 crs. in response to notices issued u/s. 153A. Since, there was no compliance in course of the search related assessment proceedings, the AO adopted a profit margin of 2 19% as disclosed in the case of M/s. Posco Steel P Ltd. and computed the concealed income of the assessee for the various relevant years. From the return of income of the assessee for the year M/s. Mita Holdings Pvt. Ltd. ending 31.03.2012 is observed that the loans and advances given are shown to be of Rs. Nil as against the aggregate loan claimed to have been given of Rs 55.43 crs to the assessee and the said 6 amalgamated companies. The factual position which emerges from the findings of the search action as well as the non-submission of the returns of income in response to notice u/s 153A for the years ending 31.03.2011 and 31.03.2012 and non-filing of the regular return for the year ending 31.03.2013 raises serious doubts about the bonafide of the alleged loan given by this lender company to the assessee and the other amalgamated companies (iv) Deep Star Alloys & Steel P Ltd. This lender company has allegedly given aggregate loans of Rs 4.33 crs to the assessee and the said 6 amalgamated companies. This lender company also belongs to Crest Topworth Group which was subjected to search action by the Investigation Wing on 10.10.2012. Further as mentioned earlier in course of the search action. Shri Kundan Sathya By person and Shri Dhananjay Nandkumar Narse admitted in their statements recorded that the entries of sales and purchases recorded in the books of the various entities of the group are only accommodation entries and do not represent actual sales-purchases. For the years relevant to A Ys 2007-08, 2009-10 and 2010- 11, the said lender offered undisclosed income of Rs. 55.73 lakhs in response to notices issued u/s 1534. Since, there was no compliance in course of the search related assessment proceedings, the AO adopted a profit margin of 2.19% as disclosed in the case of M/s. Posco Steel P Ltd and computed the concealed income of the assessee for the various relevant years. The AO also made an addition in the year relevant to A. Y. 2012-13 u/s. 56 (2)(vii) being the investment made in shares of Akshata Mercantile P Ltd. at a price which was less than the market value. The factual position which emerges from the findings of the search action as well as the non-submission of the returns of income in response to notice u/s. 153A for the years ending 31.03.2011 and 31.03.2012 and M/s. Mita Holdings Pvt. Ltd. non-filing of the regular return for the year ending 31.03.2013 raises serious doubts about the bonafide of the alleged loan given by this lender company to the assessee and the other amalgamated companies. v) Mona Digital Equipments P. Ltd. This lender company has allegedly given aggregate loans of Rs. 3 crs. to the assessee and the said 6 amalgamated companies. It is observed that last return filed by this lender is for the year relevant to A.Y. 2007-08 and thereafter, no returns have been filed. Moreover, the name of this lender company has been struck off from the ROC. This factual position raises serious doubts about the bonafide of the alleged loan given by this lender company to the assessee and the other amalgamated companies. 5 In view of the aforesaid discussion, the transactions of conversion into debentures of the alleged loans received by the assessee from the aforesaid 8 lenders after passing journal entries, does not appear to be bonafide transactions.
It is observed that M/s Denro Holdings P Ltd. and M/s. Ushaditya Trading P. Ltd. had merged with the assessee and therefore, the penalty u/s 271E for the said alleged loans received by M/s. Denro Holdings P Ltd. and M/s. Ushaditya Trading Ltd. from the aforesaid 8 lenders, which were converted into debentures by way of journal entries, was required to be levied in the hands of the assessee itself. However, the AO appears to have wrongly levied penalty u/s. 271E in the hands of M/s Denro Holdings and M/s Ushaditya Trading P Ltd. It is therefore proposed to levy penalty u/s 271E in respect of the alleged loans received by M/s. Denro Holdings P. Ltd. and M/s. Ushaditya Trading P. Ltd. from the aforesaid 8 lenders, in the hands of the assessee itself, which will result into appropriate enhancement.
Moreover, it is also observed that M/s. Fiscal Securities India Ltd., M/s. Goldline Tracon P. Ltd., M/s. Karthik Credit P.
M/s. Mita Holdings Pvt. Ltd. Ltd. and M/s. Navodaya Exim P. Ltd. had also amalgamated with the assessee. However, penalty u/s. 271E has not been levied in respect of the alleged loans received by these 4 amalgamated entities from the aforesaid 8 lenders, which were converted into debentures. Since these 4 entities had also amalgamated with the assessee, penalty u/s. 271E in respect of the said alleged loans received by M/s. Fiscal Securities India Ltd., M/s. Goldline Tracon P. Ltd., M/s. Karthik Credit P. Ltd. and M/s. Navodaya Exim P. Ltd. from the aforesaid 8 lenders, is also required to be levied in the hands of the assessee itself which will result into further appropriate enhancement.
Your submissions/reply, if any, to the aforesaid proposed enhancement should positively be submitted by 29.01.2019”
The ld. CIT (A) then held that all the actions under the Act can be initiated to continue or conclude against the transferee/ amalgamated company and therefore, all the proceedings will be initiated in the hands of the assessee company which got amalgamated with the assessee. Because as per the scheme of amalgamation w.e.f. 01/04/2014 of the relevant all liabilities including tax proceedings in respect of transferor / amalgamated entities have to be considered in the hands of the assessee alone being the transferee / amalgamated company. Since, subject matter of the appeal is in the violation of law in repay of loan by modes other than the ones prescribed by the provisions of Section 269T, therefore, after the amalgamation, assessee became liable for such breach that was committed by all the transferor / amalgamating entities which now have merged into the assessee. Hence, enhancement does not transgress beyond the subject matter of present appeal.
In this regard, he made following observations:- 5.10.9 It is observed that in the instant case, we.f the date of amalgamation i.e, 01.04.2014, the 6 transferor / amalgamating companies of M/s Denro Holdings P Ltd., M/s Ushaditya Trading P Ltd. M/s Fiscal Securities India Ltd., M/s Goldline Tracon P Ltd, M/s Kartik Credit P Ltd and M/s Navodaya Exim P Ltd. ceased to exist since they got amalgamated with the assessee being the transferee / amalgamated company. In view of this position, the Income Tax proceedings can only be initiated, continued or concluded in the hands of the assessee even for the defaults committed by the said 6 transferor /amalgamating companies even prior to the period of the date of amalgamation i.e., 01.04.2014.
In so far as plea taken by the assessee that since transaction of conversion of loan / advances into convertible debentures after passing journal entries falls within the ambit of ‘reasonable cause’ as held by the Hon’ble Jurisdictional High Court, he held that onus is on the assessee to prove that transaction is genuine and bonafide. However, with respect to penalty levied by the ld. AO in respect of transaction entered into with 7 lenders falls within the reasonable cause and therefore, penalty is not leviable. His relevant observation in this regard reads as under:- 5.11.7 It is observed that in respect of the transactions of conversion of loans to debentures in the assessee company as well as 6 amalgamating/transferor companies for the 7 lenders, M/s Namtech Dealers P Ltd., M/s New Core Steels P Ltd., M/s Burn Steel Trading P Ltd., M/s Credence Logistics Ltd., M/s Jaltarang Vanijya P Ltd., M/s Novel Merchants P Ltd. and M/s Punsuni Agents P Ltd., it is observed that the said 7 lender companies are part of the assessee group itself. Moreover, the M/s. Mita Holdings Pvt. Ltd. assessee has also furnished their confirmations and other supporting evidences in respect of the said transactions related to conversion of loans to debentures. It is observed that in the case of Lodha Group of cases, the transactions of repayments were among the entities of Lodha Group itself and after considering this important fact, the Hon'ble ITAT had held that the said transactions fall within the ambit of "reasonable cause and therefore penalty u/s 271E is not leviable. The decision of the Hon'ble ITAT in Lodha group of cases has been upheld by the Hon'ble Jurisdictional High Court and the further SLP of the Department has also been dismissed. Therefore, it is held that the action of the AO of levying penalty in respect of the transactions entered into with the said 7 lenders M/s Namtech Dealers P Ltd, M/s New Course Steels P Ltd., M/s Burn Steel Trading P Ltd., M/s Credence Logistics Ltd, M/s Jaltarang Vanijya P Ltd, M/s Novel Merchants P Ltd. and M/s Punsini Agents P Ltd falls within the ambit of "reasonable cause" and therefore penalty u/s 271E is not leviable.”
However, in respect of four other lenders, he observe that M/s Netra Mercantile P Ltd., M/s Navmi Steels Trading P Ltd., M/s Poscho Steels P Ltd and M/s Deep Star Alloys & Steel P Ltd. which belong to Crest Top Worth Group, he noted that in the course of search action, these lenders were found to be maintaining two sets of books of accounts, one for Income Tax purpose and another for banks, ROC, etc. and there were huge differences in the balances reported of creditors, debtors, loans given / taken in the said two sets of books of accounts. Further, these lenders had not even filed their Returns of Income in response to notice u/s 153A for the year relevant to AY 2014-15 wherein the said alleged transaction of conversion of loans into bonds had taken place and also for certain other years. Moreover, in course of the present appellate proceedings, though M/s. Mita Holdings Pvt. Ltd. the assessee provided confirmations and other evidences in respect of the other lenders, such confirmations, etc in respect of the said 4 lenders of Crest Top Worth Group were not submitted. In view of the adverse findings of the search action, in the case of Crest Top Worth Group, the onus was clearly on the assessee to explain the business exigencies which required that the said transactions of conversion of loans to debentures are carried out by modes other than account payee cheque or demand draft.
It is also pertinent to note that the assessee in the present proceedings has contended that originally advances were received from the said lenders which were converted into debentures in the relevant year. However, ld. CIT (A) noted that in the Tax Audit Report of the assessee, these transactions are now being claimed to be of the nature of loans and not of the nature of advances. To ascertain the actual nature of the original transactions, whether they were of the nature of loans or of the nature of advances, the assessee was asked to furnish the Tax Audit Reports of the earlier years when the said loans / advances were received. However, the assessee has failed to provide the requisite Tax Audit Reports to ascertain as to whether the original transactions were of the nature of loans or of the nature of advances. The assessee contended that the original loans/advances were received several years back and it is not legally bound to maintain such old records. However, he observed from the ledgers that some of the said transactions of loans/advances are quite recent related to the years ending M/s. Mita Holdings Pvt. Ltd. 31.03.2011 & 31.03.2012 and therefore this contention of the assessee is found to be erroneous.
Ld. CIT(A) further held that assessee had entered into transaction of accommodation entries with the aforesaid four lenders of Crest Topworth Group. The relevant observation in this regard reads as under:- “5.11.10 Further, as regards the contention of the assessee that even assuming that the said 4 lenders of Crest Topworth Group are engaged in the business of accommodation entries, then also the assessee cannot be penalized, it is noted that an accommodation transaction involves receipt / payment of cheque and corresponding payment/receipt of cash. Thus, if the assessee has entered into transactions of accommodation entries with the said 4 lenders of Crest Topworth Group, the assessee also is clearly party to the dubious transactions and cannot wash its hands by claiming that it had no role and it cannot be said to have conspired with them. It is also noted that the assessee claims that the advances were received from one of the lenders, M/s Netra Mercantile P Ltd several years ago by it and the six transferor / amalgamating companies which were converted into bonds in the relevant year, however, from the return filed by M/s Netra Mercantile P Ltd. for the year ending 31.03.2011, it is observed that the loans & advances given by this lender are shown to be of only Rs Nil as against Rs 45.24 crores claimed by the assessee and the 6 transferor / amalgamating companies. Similarly in the case of another lender, M/s Poscho Steels P Ltd for the year ending 31.03.2012, loans & advances given are shown to be of Rs Nil as against Rs 17.08 crores claimed by the assessee and the 6 transferor / amalgamating companies. Similarly, in the case of M/s Navmi Steels Trading P Ltd for the year ending 31.03.2012, loans & advances given are shown to be of Rs Nil as against Rs 55.43 M/s. Mita Holdings Pvt. Ltd. "crores claimed by the assessee and the 6 transferor / amalgamating companies. 5.11.11 In view of the above detailed factual position, it is held that the assessee has not been able to demonstrate that the said transactions of conversion of loans to debentures in respect of the lenders, M/s Netra Mercantile P Ltd., M/s Navmi Steels Trading P Ltd, M/s Poscho Steels P Ltd and M/s Deep Star Alloys & Steel P Ltd was a genuine and a bonafide transaction and also not able to explain the business exigency which prevented it and the 6 transferor amalgamating companies from undertaking the conversion of loans into debentures by way of modes other than the ones specified. Moreover, the assessee has also not explained as to how can the transactions of conversion of loans to debentures in respect of the lender, M/s. Mona Digital Equipments Ltd., whose name has been struck off from ROC and who has not filed the return of income from AY 2008-09 onwards, can be considered as bonafide transactions undertaken on account of business exigencies.
Thereafter, the ld. CIT(A) has discussed various judgments on power of enhancement and finally has levied / enhanced the penalty of Rs.25.10 Crores after observing as under:- “5.137 As regards the contention of the assessee that the power to levy penalty in available to an Appellate Commissioner only under the provisions of Sec. 271(1) of the Act the same is also found to be erroneous. As per Sec 251(1)(b) of the Act, the powers of the Appellate Commissioner includes the power to enhance a penalty as well This is not a case of levy of a new penalty on the quantum enhancement made by the CIT(A) which is governed by the provisions of sec. 271(1) This only is a case of enhancement of the penalty already levied by the AO u/s 271E. After the amalgamation, the liability for the penalty u/s 271E in all the cases of violation of provisions of Sec 269T on M/s. Mita Holdings Pvt. Ltd. account of repayment other than by the prescribed modes including in respect of the said 6 transferor/amalgamating companies, was on the appellant itself. The levy of penalty u/s 271(1)(c) of the Act by the CIT(A) is when the CIT(A) himself has made a new addition or disallowance leading to enhancement in the corresponding quantum order This is not the case here. Thus the argument of the appellant that penalty u/s 271E cannot under any circumstances be enhanced by a CIT(A), is grossly fallacious. 5.13.8 As regards the contention of the assessee that more than 6 months have already lapsed from the initiation of the penalty proceedings u/s 271E and therefore the enhancement cannot be made in the present appellate proceedings, it is observed that the Act does not prescribe any limitation of time for disposal of appeals and therefore, it also implies that an enhancement of assessment/penalty by CIT(A) is also not bound by any limitation of time. This view is supported by the decision of the Hon'ble Special Bench of ITAT in the case of Dewan Chand Amrit Lal (98 ITD 200). The instant case Involves enhancement of penalty us. 271E which has already been levied by the Range-head. However, while levying this penalty u/s. 271E, the Range-head had only considered the violation made by the transferee company and not by the transferorfamalgamating companies prior to the amalgamation. The instant case is only of enlargement of the scope of levy of penalty u/s 271E to the transferor/amalgamating companies which had amalgamated with the assessee. Similarly, the other contention of the assessee that the power of CIT(A) to enhance is restricted to the source which is subject matter of assessment and therefore, the proposed enhancement cannot be made, is rejected since the proposed enhancement relates to the said lenders wherein the transactions of conversion of loans/advances into debentures in respect of the said 6 transferor/amalgamating companies were not considered by the Range Head for levy of penalty u/s 271E M/s. Mita Holdings Pvt. Ltd. in the hands of the amalgamated assessee company, which cannot be considered to be a new source. 5.14 In view of the above detailed discussion, it is held that in respect of the 4 lenders of Crest Topsworth Group viz M/s Netra Mercantile P Ltd., M/s Navmi Steels Trading P Ltd., M/s Poscho Steels P Ltd. and M/s Deep Star Alloys & Steel P.Ltd., penalty is to be levied u/s 271E in the hands of the assessee not only in respect of the loans converted to debentures prior. to amalgamation in the assessee but also in respect of the loans converted into debentures prior to the amalgamation in the transferor / amalgamating companies viz M/s Denro Holdings P. Ltd., M/s Ushaditya Trading P. Ltd, M/s Fiscal Securities India Ltd., M/s Goldline Tracon P. Ltd., M/s Kartik Credit P. Ltd and M/s Navodaya Exim P. Ltd. The aggregate loans related to M/s Netra Mercantile P Ltd., M/s Navmi Steels Trading P Ltd. M/s Poscho Steels P Ltd. and M/s Deep Star Alloys & Steel P Ltd converted into debentures in respect of the assessee company and in the said 6 transferor / amalgamating companies is of amounts Rs 45,24,75,000/-, Rs 55,43,35,000/- Rs 17,08,00,000/- and Rs 4,33,90,000/- respectively, totally aggregating to Rs 122,10,00,000/ On this aggregate amount of Rs 122,10,00,000/- penalty u/s 271E is held to be leviable in the hands of the the assessee itself being the transferee / amalgamated company Moreover, since in respect of one another lender company, M/s Mona Digital Equipment P Ltd. whose name has been struck off by the ROC and it has not filed its return of income from AY 2008-09 onwards, the transaction of conversion of loan to debentures is also held to be not bonafide and accordingly it is held that penalty u/s 271E is leviable in the hands of the assessee in respect of the loan from this lender and also in respect of the loans received from this lender in the said 6 transferor / amalgamating companies viz M/s Denro Holdings P. Ltd, Ms Ushaditya Trading P. Ltd, M/s Fiscal Securities India Ltd., M/s Goldline Tracon P. Ltd., M/s Kartik Credit P Ltd and M/s Navodaya Exim P. Ltd. for an M/s. Mita Holdings Pvt. Ltd. aggregate amount of Rs 3,00,00,000/- However, the loans received from the other balance 7 lenders which are all related entities of the assessee and for which the necessary confirmations, evidences etc have been submitted by the assessee in the present proceedings, it is held that that the conversion of loans to debentures falls within the definition of "reasonable cause' and therefore, penalty u/s 271E is not to be levied. To sum up, it is held that the assessee is liable for levy of penalty u/s 271E for an aggregate amount of Rs 125,10,00,000/- (Rs. 1,22,10,00,000/- + Rs. 3,00,00,000/-) as against the penalty of Rs 61,12,35,000/- levied by the Range- head, which results into an enhancement of Rs 63,97,65,000/-
Thus, Ld. CIT (A) has deleted penalty levied by the ld. AO holding that loan received from other lenders which the ld. AO has levied penalty are of related entities of the assessee and for which the necessary confirmations, evidences etc have been submitted by the assessee in the present proceedings and such conversion of loans to debentures falls within the definition of "reasonable cause' and therefore, he deleted the penalty. However, in respect of four lenders of Crest Topsworth Group viz M/s Netra Mercantile P Ltd., M/s Navmi Steels Trading P Ltd., M/s Poscho Steels P Ltd. and M/s Deep Star Alloys & Steel P.Ltd., he held that penalty is to be levied not only in respect of loans converted to debentures prior to amalgamation in the assessee but also in respect of the loans converted into debentures prior to the amalgamation in the transferor / amalgamating companies viz M/s Denro Holdings P. Ltd., M/s Ushaditya Trading P. Ltd, M/s Fiscal Securities India Ltd., M/s Goldline Tracon P. Ltd., M/s Kartik Credit P. Ltd and M/s M/s. Mita Holdings Pvt. Ltd. Navodaya Exim P. Ltd. which aggregated to Rs.122.10 Crores and further Rs.3 Crores from the loan received from lender in the erstwhile six amalgamating companies. DECISION 17. We have heard both the parties at length and perused the relevant finding given in the impugned appellate order as noted above. In so far as the penalty which has been levied by the ld. AO u/s.271E amounting to Rs.61,12,35,000/- which was on account of conversion of loan into redeemable convertible bonds has been deleted by the ld. CIT(A) for which there is no appeal filed by the department. The reasons for deletion of penalty have already been mentioned above. 18. Now, the issue is with regard to enhancement made by the ld. CIT (A) whereby he has levied penalty of Rs.125.10 Crores. The penalty u/s.271E is levied if a person repays any loan or amount or deposit in violation of Section 269T. Section 269 T provides for mode of repayment of certain loans or deposits otherwise than by an account payee cheque or account payee demand draft drawn in the name of person who has made the loan or deposit which exceeds to Rs.20,000/- or more. The entire edifice for levy of penalty u/s.271E is based on reasoning that earlier loan take by erstwhile amalgamating company who had taken loan from very same lender companies of Crest Topworth Group which was found to be involved in some kind of accommodation entries are bogus or non-genuine. He is doubting the genuineness and bonafide transaction of loans in M/s. Mita Holdings Pvt. Ltd. the earlier years by the erstwhile companies and drew the adverse inference that, since these loans were bogus, therefore, conversion of this loan into convertible debentures in this year should be subjected to levy of penalty u/s.271E. If the loans were bogus in those years in the hands of those transferee companies, then it is unfathomable as to how in the year in which the loans have been converted into convertible debentures which is also a kind of debt, penalty u/s.271E can be levied? 19. It is not a case that any violation on account of section 269T has been found in the cases of those erstwhile companies has been found. What is being sought to be added in the hands of the assessee company is addition of cash credit u/s 68 on account of loans taken in the earlier years by the erstwhile amalgamating companies, in the garb of penalty u/s.271E for converting bogus loan into redeemable bonds in this year. His observation is that assessee could not furnish confirmation of lenders in respect of original loan transaction; therefore, the conversion of the same into debenture amounts to repayment of loan is in violation of Section 269T. We are unable to appreciate such kind of logic and reasoning for levy of penalty. If loan taken in earlier years itself is being treated as bogus or non-genuine, which according to CIT (A) was liable to be taxed as non-genuine, then how penalty is leviable u/s.271E in this year when it is being treated as repaid in the opinion of Ld. CIT (A). Again the question is how a loan taken in earlier years by erstwhile companies which have been amalgamated in the assessee after this assessment year, can a conversion of bond / debenture be M/s. Mita Holdings Pvt. Ltd. treated as repayment of loan. This is completely outlandish and inexplicable reason beyond any legal parlance or any binding judicial precedence. All those observations made by Ld. CIT (A) on basis of some search or enquiry in the case of Crest Topworth Group where it was alleged that certain lending companies controlled by it has given loans to erstwhile companies, i.e., amalgamating companies is wholly irrelevant while dealing with the issue of levy of penalty u/s.271E which is very specific to the conditions given in Section 269T which envisages that repayment of loan otherwise than banking channels.
Another important fact is that if advances / loans are received in earlier years which have been shown as short term borrowings in the F.Y. 2012-13, then how adverse inference can be drawn about same loan in the A.Y. 2014-15. One debt has been converted into another kind of debt, because the bonds are also in the nature of debt which is reflected in the long term borrowings in the balance sheet as on 31/03/2014. Once it is debt which is a liability of the assessee, how it can be treated as repayment of loan received in the earlier years. The liability towards the lender entities has not been discharged as there is no repayment, because the liability still subsists against the name of the same party in the books.
The ld. CIT(A) has relied upon information which he had called for and came to the conclusion that transaction on receipt of loan is itself doubtful and has given his exhaustive finding and observation based doubting the genuineness of the loan taken in M/s. Mita Holdings Pvt. Ltd. the earlier years. The issue before the ld. CIT(A) was whether there is any default in terms of Section 269T justifying the levy of penalty u/s.271E. Once, the original transaction of loan is not a subject matter of any assessment proceedings nor there is any action u/s. 263 or reopening under Section 148 in respect of loan taken in earlier years in the hands of assessee company or erstwhile amalgamating companies and in fact, there is no whisper about these transactions being genuine or non-genuine. Then how the said loan is doubted so as to justify penalty u/s.271E stating that non-genuine loan has been repaid by issuance of bond. The only issue which was required to be decided by the ld. CIT (A) was, whether the issue of bonds against existing liability can be construed as default u/s.269T especially when the ld. AO in the assessment proceedings is not doubted the genuineness of the advances given and the source of funds. Accordingly, we hold that ld. CIT (A) has exceeded his jurisdiction to decide issue pertaining to quantum proceedings in the penalty proceedings u/s.271E. He was not deciding any quantum proceedings in appeal where he can examine all these issues.
22. Even in the case of entities on which ld. CIT(A) has levied penalty by exercising his power of enhancement, it is seen from his own order that in their books, the borrowings were in the nature of short term in the earlier years and there was no repayment of loan in form till 31st March 2014. The amalgamation by the Hon’ble Calcutta High Court from 31/03/2014; all the four legal entities have filed the return of M/s. Mita Holdings Pvt. Ltd. income and assessments were completed in their hands. Therefore, the assessment which already stand completed and loans wherein it has been accepted in their hands prior to the amalgamation, then we do not find any reason or occasion as to why such loans are to be doubted in the hands of the amalgamated company and specifically in the proceedings u/s.271E. Therefore, in our view, the penalty levied / enhanced by the ld. CIT (A) is bad in law and on facts and is hereby quashed. Accordingly, the penalty levied by the ld. CIT (A) for a sum of Rs. 125,10,00,000/- is deleted.
In the result, appeal of the assessee is allowed. Order pronounced on 20th April, 2023 Sd/- Sd/- (GAGAN GOYAL) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 20/04/2023 KARUNA, sr.ps Copy of the Order forwarded to :
1. 1. The Appellant 2. The Respondent.