THE ITO, WARD -1,, SURAT vs. SHREE MADHI SURALI VIBHAG NAGRIK SAHAKARI DHIRAN MANDLI LTD., SURAT

सुनवाईकीतारीख/ Date of hearing: 11.02.2020 उ�घोषणाक�तार�ख/Pronouncement on: 12.02.2020 आदेश /O R D E R

PER SANDEEP GOSAIN, JM:

2. Grounds raised

by the Revenue read as under: “1. Whether on the facts and circumstances of the case and in law the action of Ld. CIT(A) in deleting the penalty of Rs.28,66,93,898/- & Rs.27,12,01,825/- levied u/s. 271D and u/s. 271E of the I.T. Act respectively was not perverse as he based his decision relating to the deletion of the penalty on the wrong and misplaced analogies?

2. Whether on the facts and circumstances of the case and in law, the observation of the Ld. CIT(A) that these credit societies functions as an alternative to the bank and, therefore, the activities of these Societies are covered by the proviso to Section 269SS of the I.T. Act is not perverse as this Page 2 of 10 DCIT, Ward-1, Surat Vs. Shree Madhi Surali Vibhag Nagrik/ A.Y. 2010-11 proviso specifically covered banking companies, Post Office Saving Bank or Co-op. Banks, and all these entities are specifically defined in Explanation to Section 269SS of the Act and assessee-society is not covered by these definitions? 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A), Surat ought to have upheld the order of the Assessing Officer. It is, therefore, prayed that the order of the Ld.CIT(A)-I Surat may be set-aside and that of the Assessing Officer's order may be restored.”

Page 3 of 10 DCIT, Ward-1, Surat Vs. Shree Madhi Surali Vibhag Nagrik/ A.Y. 2010-11 upon the order passed by the ld.Assessing Officer while imposing penalty and also relied upon the statement of facts submitted before this Tribunal which are reproduced below:

“ The assessee is a Co-operative Society and the return of income for the A.Y. 2011-12 was filed by it on 15.10.2010 declaring Nil income. The assessment u/s. 143(3) of the Act was finalized on 01.03.2013 determining total income at Rs. 5,13,290/-. During the course of assessment proceedings, it was observed by the AO that the assessee had accepted and repaid deposits of Rs. 20,000/- or more otherwise than by account payee cheque or bank draft in contravention of provisions of Section 269SS and 269T of the I.T.Act amounting to Rs. 28,66,93,898/- and Rs. 27,12,01,825/- respectively. The details of the same were available in Cash Book submitted by the assessee during the course of assessment proceedings.

3. Being aggrieved with the penalty orders, the assessee preferred an appeal before the CIT(A) and the Ld. CIT(A) vide his order No. CAS- 4/252 & 253/2014- 15 dated 08.12.2015 deleted both the penalties levied u/s. 271D & 271E of the I.T. Act, on the following grounds;- (i) The appellant is a Registered Society and has been functioning as a Co-Op. Credit Society for its members and in the process, the appellant society has been carrying on the activities which are in many ways similar to the banking activities. It opens different types of accounts including accounts similar to savings bank account for its members, where amounts can be withdrawn immediately on demand. It is observed that the intention of the legislature in enacting the provisions of Section 269SS and 269T of the Act; were envisaged to apply to the loan/deposit accepted by a person for his own purposes and not keeping in mind case like that of appellant’s where control and ownership remains with the person to whose credit money stand as a member of the Society. Also the member can keep the deposit for a period which is according to their convenience. The amount has sometimes to be repaid by the assessee to its member immediately on demand. These features distinguish the case of the assessee from other ordinary assessees. Therefore, the provisions of Section 271D/271E are to be viewed in the background of these aspects. The authority vested with power to impose penalty has a discretionary power not to levy the penalty. It is also noted that no addition on account of these impugned deposits in the return of income, it means that deposits are considered genuine. The veracity of the creditors is not doubted by the Revenue. The AO did accept the deposits as genuine. The breach of provisions of Section 269 SS/269T (if any), occurred from a bona fide belief. (ii) Cash payments and receipts were made because of business exigency. In fact these credits societies function in villages/talukas,

Page 4 of 10 DCIT, Ward-1, Surat Vs. Shree Madhi Surali Vibhag Nagrik/ A.Y. 2010-11 etc. for farmers or illiterate people, etc. as an alternative to banks and if deposits are taken/repaid only in cheques, they may lose all relevance. The income of the assessee is exempt u/s 80Pjof the Act and the circumstances show that there was in all probability a bona fide belief of the assessee (that such cash deposits accepted in the "saving accounts from the respective account holder do not contravene the provisions of Section 269SS of the Act), which could easily be reinforced by the fact that the I.T. Department in so many years has not objected to it. Not only this, but even Chartered Accountant who audited the books of accounts of the society was not showing these as being in contravention of the Act, in the relevant columns of the Audit Report for years. (iii) In the present case, there exists reasonable cause in accepting the deposits in cash and paying by cash, assessee may therefore be exonerated from the levy of penalty. Further, the words ' any other person' in section 269SS and Section 269T do not denote the directors of the assessee or members of the assessee society when read with the legislative intent as reproduced in Board Circular No. 387, dated 6th September, 1984. The term 'any other person' in the context of introduction of Section 269SS appears to mean persons who are not very intimately or very closely connected with the assessee. In the present case, the assessee accepted the deposits and repaid the same to the members, according to the bye - laws of the society. In view of the transactions which took place between the assessee and its members, the strict provisions of the Section 269SS/269T may not be applicable and is very plausible opinion of the provision. In view of the above, the appellant was in all probability functioning under bona fide belief. (iv) A harmonious construction of the relevant provisions of Section 271D, 271E and 273B clearly reveals the use of expression 'shall be liable to pay' and the provisions of Section 273B providing that no penalty would be leviable if the person concerned proves that there is reasonable cause for the said failure clearly indicates that these provisions given a discretion to the authority to impose the penalty or not to impose the penalty. Such discretion has to be exercised in a just and fair manner having regard to the entire facts and materials existing on record. Ordinarily, a plea as to ignorance of law cannot support the breach of a statutory provisions of law or on account of bona fide belief, coupled with the fact that transactions in question are genuine and bonafide, transactions were undertaken during the regular course of its business will not result in levy of penalty u/s 271D and 271E.

4. The decision of the Ld. CIT(A) in deleting the penalty is not acceptable for the following reasons :- (i) First of all, the Ld. CIT (A) has deleted the penalty u/s 271D & 271E by accepting the submission of the assessee that it had accepted and repaid deposit or loan above Rs. 20,000/- or more otherwise than by an account payee cheque or account payee bank draft on bona fide belief that the provisions of Section 269SS and 269T are not applicable in its case. This action of the Ld. CIT (A) is not acceptable as the provisions of Section_269SS are very much clear as reproduced by the then JCIT, Ragne-6, Surat, while passing the penalty order. This provision of Section does not distinguish the bona fide belief or mala fide belief of the assessee to accept or repay the deposit or loan. Further, The Ld. CIT(A) has observed that the AO did

Page 5 of 10 DCIT, Ward-1, Surat Vs. Shree Madhi Surali Vibhag Nagrik/ A.Y. 2010-11 accept that the deposits are genuine and the breach of provisions of Section 269SS & 269T, if any, is occurred from a bona fide belief. This observation of the Ld. CIT(A) is not acceptable as the genuineness of the transactions does not come under purview of provisions of Section 269SS and 269T of the Act. The provisions of Section 269SS & 269T are very much clear that breach of these provisions shall attract penalty u/s 271D & 271E respectively. (ii) With regard to the observation of the Ld. CIT(A) that no addition was made on account of these impugned deposits in the return of income and the veracity of the creditors is not doubted by the revenue, it is to state that if veracity is doubted, the addition would be made u/s. 68 of the Act and no penalty is required to be levied. Penalty has been levied as the assessee had submitted that these are loan amount and could not prove the 'reasonable cause' for accepting and repaying the deposit or loan from/to its members Rs. 20,000/- or more otherwise than by an account payee cheque or account payee bank draft. (iii) The Ld. CIT(A) also held that, in fact these credits societies function in villages/talukas, etc. for farmers or illiterate people, etc. as an alternative to banks and if deposits are taken/repaid only in cheques, they may lose all relevance. In this regard it is pertinent to mention that Madhi - Surali is not a village but a town and it is a big market for trading of food grains and has adequate banking facilities where banks like Bank of Baroda and Surat Dist. Co-Op. Bank have branches at Madhi and Dena Bank has branch at Surali. The assessee itself maintains accounts with the above mentioned banks. It is also brought on record that the assessee is a registered Co-Op. Credit Society and working since last 40 years. The Society has a total deposits over Rs. 3000 lacs and earned Interest of over Rs. 200 las for A.Y, 2010-11 The Society is professionally managed and the books of accounts of the Society are regularly audited u/s 44AB of the Income Tax Act by a qualified Chartered Accountant. Therefore, the case of the assessee society cannot be compared with any illiterate individual when deciding whether there was a reasonable cause in not complying with the provisions of Section 269SS. (iv) The argument that it had an bonafide belief that it can accept and repay loan or deposit in cash as is done by the Co-Op. Banks and provisions of Section 269SS are not applicable in its case is not acceptable because it is not believable that a Society managed by professionals and in existence for last 40 years does not understand the differences in laws, rules and regulations governing a Cooperative Society and a Cooperative Bank. The Co-Op. Banks, besides being governed by the State Cooperative Laws are also regulated by the Reserve bank of India as per the Banking Regulation Act, 1949. The Cooperative banks are required to obtain a license from the Reserve Bank of India, under the provisions of Section 22 of the Banking Regulation Act, 1949, and maintenance of Cash Reserve Ratio and Statutory Liquidity Ratios norms of Minimum Capital Requirements as per the guidelines of RBI and other functions are supervised by the RBI. The assessee Society is not functioning under Banking Regulations Act, 1949, and hence no such compliances required from the Society. (v) The assessee has also not come under any exemptions provided in provisions of Section 269SS.

Page 6 of 10 DCIT, Ward-1, Surat Vs. Shree Madhi Surali Vibhag Nagrik/ A.Y. 2010-11 (vi) In view of the above, it is clear that penalty u/s. 271D & 271E of the Act was rightly levied in this case as there is a clear cut breach of provisions of Section 269SS and 269T as the assessee has failed to prove the element of reasonable cause' for accepting or repaying the deposits Rs. 20,000/- or more otherwise than by account payee cheque or account payee bank draft. (vii) The facts of the cases referred by the Ld. CIT(A) are different from that of the case of the assessee.

The operative portion of the order of ld.CIT(A) is contained in para no.8 of its order, same is reproduced as below: “8. I have carefully gone through the impugned penalty orders, the submissions of the appellant, the case law on the issues covered and the facts of the case. It is observed that the appellant is a Registered Society and has been functioning as co-operative credit society for its members and in the process, the appellant society has been carrying on the activities which are in many ways similar to the bank activities. It opens different types of accounts including accounts similar to savings bank account for its members, where amounts can be withdrawn immediately on demand. The appellant is subject to rules laid down by Cooperative Societies Act and the assesses has been carrying out operations with its members In nature of taking money as deposits arid providing money on credit to those members who need ft. Its nature of activity is such and there is no doubt that its acceptance of money is not finked to a situation where it may need to explain with mala fide attentions possession of cash/ money. It is observed that the intention of the legislature in enacting the provisions of sec. 269SS and 269 T of the Act; were envisaged to apply to the loan / deposit accepted by a person for his own purposes and not keeping in mind cases like that of appellant's where the control' and ownership remains with the person to whose credit money stand as a member of the Society, The assesses like present is hot Obliged to question the source of deposit made toy it's members. Also, the member can keep the deposit for a period which' is according to their convenience. The amount has sometimes to be repaid by the assessee to its member immediately on demand. These features distinguish the case of the assessee from other ordinary assessees. Therefore, the provisions of s, 271D/271E ore to be viewed in the background of these aspects. Further, the assessee is subject to periodical inspects and audits by various statutory authorities. the deposits received by the assessee, which was carrying on the activities of proving credits, were not in the nature-of taking of any loans or deposits for the purpose of funding its project as a source of investment; rather, it was in the business of accepting deposits; that in view of the nature of such business, the scrutiny of the deposits could not be the same as in the case of assessee making entries of deposits on account of loan etc to be used for its own

Page 7 of 10 DCIT, Ward-1, Surat Vs. Shree Madhi Surali Vibhag Nagrik/ A.Y. 2010-11 investment The authority vested with the power to Impose penalty has a discretionary power not to levy the penalty. It is also noted that there is no addition on account of these impugned deposits in the return of income; it means that deposits are considered genuine. Veracity of creditors is not" doubted by the Revenue. AO did accept the deposits as genuine, The breach of provisions of s. 269SS/269T (if any,), occurred from a bona fide belief. Ex facie, it is a venial breach. The law takes no notice of trivialities. 8.1 Cash payments and receipts were made because of business exigencies. In fact these credit societies function in Villages/Talukas etc. for farmers or illiterate people etc. as an alternative to banks and if deposits are taken/repaid only in cheques, they may loose all relevance. The income of the assessee is exempt under s. 80P of the Act and the circumstances show that, there was in all probability a bonafide belief of the assessee (that such cash deposits accepted in the savings accounts from the respective account holders do not contravene the provisions of sec. 269SS of the Act) which could easily be reinforced by the fact that the I T department in so many years has not objected to it. Not only this, but even the Chartered Accountant who audited the books of account of the society was not showing these as being in contravention of the Act, in the relevant columns of the Audit reports for years. 8.2 The imposition of penalty for failure to perform statutory obligation is only a discretionary power of the authority exercising judicial functions on consideration of all the relevant circumstances. If the assessee acted on genuine belief that penal provisions have no application to deposits and it applied only to other kind of assessees, then penalty could not be levied. As such, in present case, there exists reasonable cause in accepting the deposits in cash and paying by cash, assessee may therefore be exonerated from the levy of penalty. The other contention of the assessee's counsel is that the words 'any other person' in s. 269SS and s. 269T do not denote the directors of the assessee or members of the assessee society, when read with the legislative intent as reproduced in Board Circular No. 387, dt. 6th Sept., 1984 [1984 43 CTR (TLT) 3]. The term 'any other person' in the context of introduction of s. 269SS appears to mean persons who are not very intimately or very closely connected with the assessee. In the present case the assessee accepted the deposits and repaid the same to the members; according to the bye-laws of the assessee society. In view of the transactions which took place between the assess©© and its members, the strict provisions of the s. 2695S/269T may not be applicable, and is a very plausible opinion of the provision. In view of the above the appellant was in all probability functioning under bona fide belief. In this regard, reliance is placed on the fallowing judgments: 1) Dillu Cine Enterprises (P) Limited V/s Additional Of (2002) SO ITD 2) Citizen Co-operative Society Limited V/s Additional OT (2010). 41 DTR 0305. 8.3 One has to keep in view the intent of the legislature behind enacting s. 269SS/269T, where it is clear that the loan or deposit brought in by the assessee was not to explain its unaccounted cash and a plausible opinion that members of the assessee society are not covered by the expression 'any other person' occurring in s. 2A9SS. The transaction can also be attributed to various exigencies of business carried on by the assessee and: thus constitutes a 'reasonable cause as contemplated by s. 2738., Reliance Is placed on: following; case low: 1) CIT V/s Maa Khodiyar Constructions {2014J 365 ITR 474 (Guj).

Page 8 of 10 DCIT, Ward-1, Surat Vs. Shree Madhi Surali Vibhag Nagrik/ A.Y. 2010-11 2) CIT V/s Sahara India Mutual Benefit Company Limited (2013) 257 CTR (Del) 225. 8.4 More so, the assessee has been carrying on the business activities of taking deposits and giving credits and it is having bona fide belief that provision of s. 269SS/269T is not applicable to the assessed case and same coupled with genuineness of the transaction constituted a reasonable cause and: in such case the default on the part of the assessee is merely of a technical or venial nature and no penalty be levied. Reliance is placed on following case low:- 1) CIT V/s Bombay Conductor Electricals (2008) 301 ITR 238 Guj. 2) Omec Engineers V/s CIT (2007) 294 ITR 599, Jharkhand 3) Farrukhbad Investment (I) ltd. V/s JCIT (2003) 80 TTJ 82.ITAT Delhi 4) DIT (Exemption) V/s All India Deaf and Dumb Society 2005 198 CTR Del 376. 5) CIT V/s Maheshwari Nirman Udhyog 2007 211 CTR (Raj) 8.5 To sum up, a harmonious construction of the relevant provisions of s:s, 271D; 27IE and 273B clearly reveals the use of expression ‘shall be liable to pay’ and the provisions of s. 273.6 providing that no penalty would be leviable if the person concerned proves that there is reasonable cause for the said failure clearly indicates that these provisions give a discretion to the authority to impose the penalty or not to impose the penalty. Such discretion has to be exercised in a just and fair manner having regard to the entire facts and materials existing on record. Ordinarily, a plea as to ignorance of law cannot support the breach of a statutory provision but the fact of such a technical break due to ignorance of the relevant provisions of law or on account of bona fide belief, coupled with the fact that transactions in question are genuine and bona fide, transaction were undertaken during the regular course of its business will not result in levy of penalty under ss. 271D and 271E. In view of the above discussion, the undersigned is inclined to delete the penalty levied under ss. 271D and 271E of the IT Act for the asst. yrs. 2010-11. 8.6 The appellant has also challenged (ground 2 in both the appeals) the working of the quantum of penalty saying the amounts considered were including amounts received in earlier years and transferred in books in the year with no fresh deposits and repayments. As the basis of imposition itself is decided against the revenue, the grounds in both appeals have become redundant.”

Page 10 of 10 DCIT, Ward-1, Surat Vs. Shree Madhi Surali Vibhag Nagrik/ A.Y. 2010-11