ITO - 1(2)(2), MUMBAI vs. M/S LAQUILLA INVESTMENTS CO. PVT. LTD, MUMBAI

Brief facts of the case is that original return of income was filed by the assessee showing total income of Rs.8,95,171/- which was processed and accepted by the department. Later on, the assessing officer came to know that the assessee company had made repayment of loan to the tune of Rs.5 crores which was not by means of account payee cheque during the year under consideration. And the assessing officer noted that the liability was repaid by way of a journal entry. According to him, by this action of repayment of loan other than by account payee cheque, the assessee has contravened the provisions of section 269T of the Act and so he issued a show-cause notice to the assessee calling for explanation as to why penalty under section 271E should not be levied against it. Pursuant to the same, the assessee filed its reply wherein it was stated that there was no actual repayment of loan and that it was only done by journal entry. The explanation of the assessee regarding the loan transaction was that the assessee had received interest free loan of Rs.5 crores from its parent company, Shaw Wallace Company Ltd (SWCL) during the financial year 2001. Later on, the loan was assigned by M/s SWCL group company to M/s Fire Storm Electronic Corporation Pvt Ltd (FECPL). According to the assessee, both the assessee as well as M/s FECPL were group companies belonging to the Jumbo group and the assessee by making the journal entry, the assessee squared up the loan liability (without making actual payment) with M/s SWCL and in that process, since the loan liability was assigned to M/s FECPL, the liability (loan) remains with the assessee which has to make repayment to M/s FECPL. As such, according to the assessee, the said adjustment in the books of account is outside the ambit of provisions of section 269T of the Act; and also brought to the notice of the Assessing Officer that the assessee in F.Y. 2015-16 has remitted an amount of 3 ITAs 3605/Mum/2019 & 259/Mum/2017 Rs.13 lakhs through account payee cheque to M/s FECPL and therefore, pleaded that the penalty may not be levied under section 271E. However, the assessing officer did not accept the submissions of the assessee by relying upon the decision of the Hon’ble jurisdictional High Court in the case of Triumph International Finance Pvt Ltd 345 ITR 270 that even the journal entry to show repayment of loan will be in contravention of section 269T of the Act. Further, according to the assessing officer, even section 273 of the Act would not come to the rescue of the assessee because the assessee failed to show that there existed a reasonable cause or compulsion for the failure to adhere to the provisions of section 269T of the Act while making the repayment of loan. Therefore, he was pleased to levy a penalty of Rs.5 crores under section 271E of the Act. Aggrieved, assessee preferred an appeal before the Ld.CIT(A), who deleted the same. Aggrieved, Revenue is in appeal before us.

We have heard both the parties and perused the records. First of all, we note that the issue regarding levy of penalty under section 271E for contravention of section 269T of the Act by making book adjustments / journal entry as done in this case is no longer res integra and the Assessing Officer as well as the Ld.CIT(A) has rightly taken note that the action of the assessee to have shown the transaction in question to have been routed through journal entries would be in contravention of section 269T of the Act which is evident from the decision of the Hon’ble Bombay High Court in the case of Triumph International Finance Pvt Ltd (supra) wherein the Hon’ble High Court has held in the facts of that case at para 19, as under:-

After holding that where loan / deposit has been repaid by debiting the account through journal entries, we further note that the Hon’ble High Court held in that case (Triumph International Finance Pvt Ltd) that no penalty under section 271E shall be imposed for contravention of section 269T, if reasonable cause for such contravention is shown by assessee as per section 273B of the Act, then and upheld action of Tribunal deleting the penalty. The Hon’ble High Court observed at para 23 as under:-

In the light of the above, we have to see whether the assessee was able to set up on facts “reasonable cause” for non-imposition of penalty under section 273B of the Act as held by the Ld.CIT(A) while giving relief to the assessee. On this aspect, we note that in this case also , the assessee has set up a reasonable cause as envisaged under section 273B of the Act. We note that in the facts of the present case in hand, the assessee had taken interest free loan from its parent company SWCL and was therefore, liable to repay it to SWCL. However, later M/s SWCL had assigned the loan to a group company FECPL (refer letter dated 01/03/2009 from M/s Shaw Wallace / SWCL page 116 of paper book) and pursuant to it, M/s FECPL took over the loan liability from assessee vide letter dated 31st October, 2010 which is seen placed at paper book page 114 of paper book. Thereafter, the assessee passed the journal entry on October, 31, 2010 to record transfer of loan liability towards SWCL to FECPL. It was brought to our notice that FECPL had to recover Rs.5 crores from SWCL (paper book page 48) before assigning on 31/10/2010. Therefore, it was decided mutually to adjust the loans between each other. In other words, if the assignment of loan of Rs.5 crores which assessee had to give to SWCPL, then the assessee had to make repayment of loan to SWCPL; and thereafter SWCPL had to give Rs.5 crores to FECPL. Thus, it can be seen that it would have been an empty formality for the assessee to repay to Rs.5 crores to M/s SWCL. By making the assignment of loan of SWCL to FECPL, this transaction was not necessary. Therefore, it could be seen that FECPL, had to recover from M/s SWCPL (prior to assignment) Rs. 5 crores, therefore, it was decided to square off the loan between assessee and SWCL, so that the loan transaction could be squared up between them through journal entry. Thus, it can be seen that it would have been an empty formality for the 6 ITAs 3605/Mum/2019 & 259/Mum/2017 assessee to repay Rs.5 crores to M/s SWCL; and thereafter, SWCPL to repay FECPL Rs.5 crores, and therefore, the assessee has made out a case similar to that of the case of Triumph International Finance Pvt Ltd (supra) wherein the Hon’ble High Court has held that such a transaction tantamount to “reasonable cause” for non levy of penalty under section 271E of the Act.

Moreover, one more aspect has been brought to our notice that the journal entries pertaining to present case was passed on 31/10/2010 i.e. F.Y. 2010-11 whereas the decision in Triumph International Finance Pvt Ltd (supra) was delivered on July 12, 2012 which is obviously after F.Y. 2011-12. Hence, the alternate arguments of the assessee was that it was under a boanfide belief that it’s case was covered by earlier judicial precedents on the subject that journal entries in the books of account indicating deposits / loans will not fall within the mischief of section 269SS of the Act (refer decision of as held by the Hon’ble High Court of Delhi in the case of CIT vs Noida Toll Bridge Co Ltd 262 ITR 260 (Del) wherein interalia it was held in that case that payment of Rs.4.5 crores made by the assessee by a journal entry in its books of account by creating the account of ILFS would not fall in the mischief of section 269SS of the Act when particularly payment was not made in cash. Thus, we note in the present case, journal entries were made by the assessee prior to the decision of the Hon’ble High Court in the case of Triumph International Finance Pvt Ltd (supra), and such an action of the assessee making the journal entry adjusting the loan in question can be noted to be in line with the judicial precedent as laid down in CIT vs Noida Toll Bridge Co Ltd (supra). Therefore, assessee bonafidely believed that such an action does not attract section 269T of the Act. In such a scenario, we are of the opinion that 7 ITAs 3605/Mum/2019 & 259/Mum/2017 there was reasonable cause as per section 273B of the Act for non levy of penalty under section 271E of the Act. In this context we note that such an alternate contention was considered by the Hon’ble Bombay High Court in the case of CIT vs Ajitnath Hi-Tech Builders (P) Ltd (2019) 414 ITR 316 (Bom) at clause (b) and (i) of para 3 of the order and accepted by the Hon’ble High Court. In the light of the aforesaid discussion, we do not find any reason to interfere with the impugned order of the Ld.CIT(A) deleting the penalty, so we confirm it and dismiss the appeal of Revenue.