INCOME TAX OFFICER, RACE COURSE ROAD vs. ANAMALLAIS BUS TRANSPORT PRIVATE LIMITED, POLLACHI

During assessment proceedings, it was noticed that the assessee company had advanced Rs.14,00,00,000/- to M/s.Sakthi Sugars Ltd. in earlier years. During the year under consideration, M/s.Sakthi Sugars Ltd. made repayments to three creditors of the assessee, namely M/s.Hapline Commodities Ltd. amounting to Rs.3,55,00,000/-, M/s.Padam Sugar Co. amounting to Rs.4,59,50,000/-, and M/s.Medicare Clinic Pvt. Ltd. amounting to Rs.20,50,000/- aggregating to Rs.8,35,00,000/-. In the books of accounts of the assessee, these repayments were accounted for by passing journal/book entries in the ledger account of M/s.Sakthi Sugars Ltd. on 31.03.2018. The AO took the view that the assessee had thereby effected repayment of loans otherwise than by way of account payee cheque, bank draft, Electronic Clearing System or any other electronic mode, in violation of Section 269T of the Act, and accordingly initiated penalty proceedings u/s.271E of the Act.

The penalty order was originally passed on 15.02.2022 u/s.271E of the Act. Aggrieved, the assessee filed Writ Petition No. 5914 of 2022 before the Hon'ble High Court of Judicature at Madras. The Hon'ble Madras High Court vide order dated 16.03.2022 in W.P. Nos. 5911 & 5914 of 2022 set aside the impugned orders and remitted the matters back for reconsideration, directing that fresh notice giving two weeks' time be issued to the assessee, which shall be the final opportunity. Pursuant to the said directions, fresh proceedings were initiated and a fresh penalty order was passed on 23.11.2022 u/s.271E of the Act, imposing a penalty of Rs.8,35,00,000/- (equivalent to the alleged loan repayment in violation of Section 269T of the Act).

Before us, the ld.CIT(DR) appearing for the Revenue contended that the ld.CIT(A) erred in deleting the penalty. It was submitted that the assessee had repaid loans to three creditors through a sister concern by passing journal entries, which is clearly not one of the prescribed modes u/s.269T of the Act. It was further contended that mere passing of journal entries, without actual payment through banking channels, constitutes a contravention of Section 269T of the Act, thereby attracting the mandatory penalty u/s.271E of the Act.

On the other hand, the ld.AR appearing for the assessee strongly supported the order of the ld.CIT(A). It was submitted that the assessee had advanced Rs.14,00,00,000/- to M/s. Sakthi Sugars Ltd. in earlier years. Since M/s.Sakthi Sugars Ltd. was liable to repay this amount to the assessee, it made payments to three creditors of the assessee on the assessee's instructions, as a mode of discharging its own liability to the assessee. The consequent squaring off of the respective payables and receivables was reflected as journal entries in the books of both entities, in consonance with normal accounting practice, and was duly reflected in the audited Balance Sheets. There was, at no stage, any movement of cash or money in any form in the hands of the assessee. The ld.AR further submitted that the transactions with M/s.Padam Sugar Co. (Rs.4,59,50,000/-) and M/s. Medicare Clinic Pvt. Ltd. (Rs.20,50,000/-) had, in any event, payments been made by M/s.Sakthi Sugars Ltd. through banking

We have carefully considered the rival submissions, perused the orders of the authorities below, the material on record, and the judicial precedents cited.

The core question before us is whether the repayment of loans, reflected purely through journal/book entries in the books of accounts without any actual movement of money, attracts the prohibition u/s.269T of the Act, and whether the consequential penalty us.271E of the Act is leviable.

Section 269T of the Act stipulates that no branch of a banking company or a co-operative society, and no other company or co-operative society or firm or other person shall repay any loan or deposit made with it or any specified advance received by it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit or paid the specified advance, or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, where the amount of the loan or deposit or specified advance, together with interest, exceeds Rs.20,000/-. The penalty for violation of this provision is prescribed u/s.271E of the Act, which mandates that the penalty shall be equal to the amount of loan or deposit repaid in violation. However, such penalty is not leviable provided there is reasonable cause within the scope of Section 273B of the Act.

The AO treated these book entries as repayment of loan by the assessee otherwise than through prescribed modes u/s.269T of the Act. In doing so, he proceeded on the erroneous assumption that there was actual cash movement in the hands of the assessee, which the facts clearly negate. The entire exercise was one of set-off of mutual obligations between the assessee and M/s.Sakthi Sugars Ltd., which is a well-recognised and legitimate mode of settlement in commercial practice and is not prohibited by Section 269T of the Act.

The Hon'ble High Court of Madras, in its order dated 07.12.2023 in W.P.No.29209 of 2023 arising out of proceedings connected to the very same transactions, examined the books of accounts and the audited Balance Sheet of the assessee and recorded significant findings. The Court observed that the assessee had advanced Rs.14,00,00,000/- to M/s.Sakthi Sugars Ltd. and that, pursuant to the assessee's instructions, M/s.Sakthi Sugars Ltd. had made

The above findings of the Hon'ble High Court of Madras, though rendered in the context of a writ petition pertaining to recovery proceedings, directly bear upon the question of the applicability of Section 269T to the transactions in question and constitute a strong judicial recognition that the penalty proceedings us.271E of the Act were not justified on the facts of the case. These findings reinforce the conclusions arrived at by the CIT(A) and deserve due weight.

Further, it is an admitted position that the transactions with M/s.Padam Sugar Co. (Rs.4,59,50,000/-) and M/s.Medicare Clinic Pvt. Ltd. (Rs.20,50,000/-) had resulted in actual payments through banking channels by M/s.Sakthi Sugars Ltd. The relevant ledger confirmations to this effect were

With respect to the transaction with M/s.Hapline Commodities Ltd. (Rs.3,55,00,000/-), there was no actual outflow or inflow of cash in the hands of the assessee. The set-off of the receivable from M/s.Sakthi Sugars Ltd. against the payable to M/s.Hapline Commodities Ltd. was effected purely through book entries. It is well-settled law, consistently upheld by various High Courts and this Tribunal, that Section 269T applies only where there is actual repayment of a loan or deposit and that mere book entries/journal entries, without any actual movement of money, do not constitute repayment in contravention of Section 269T of the Act. Reference in this regard may be made to the decision of the Hon'ble Bombay High Court in the case reported in 412 ITR 316, the ratio of which has been affirmed by the Supreme Court as well as the Andhra Pradesh & Telangana High Court in the case reported in 370 ITR 50. Even assuming for the sake of argument that there was a technical violation, the transaction was effected purely out of commercial considerations being a standard set-off of mutual obligations which clearly constitutes “reasonable cause” within the meaning of Section 273B of the Act. Accordingly, even on this alternative ground, the penalty is not leviable.

Be that as it may, the Journal entries would not constitute violation in terms of Section 271E of the Act and in the absence of any finding by the AO that the journal entries were made with a view to achieve any purpose outside normal business operations, or that there was any involvement of money or cash, the levy of penalty u/s.271E of the Act is not sustainable.

The Rule 27 petition filed by the assessee on the legality of the initiation of the penalty proceedings would become academic and hence dismissed as infructuous.

In the result, the appeal of the Revenue is dismissed.