ANKITA KNITWEAR LTD,MUMBAI vs. ACIT - 12(1)(1), MUMBAI

ORDER

PER N.K. PRADHAN, AM

filed by the assessee reads as under: On the facts and circumstances of the case and in law, the authorities below have erred in confirming/levying the penalty us/ 271E r.w.s. 274 and 273B of the IT Act amounting to Rs.1,12,500/- and the reasons assigned for doing so, were wholly and not in accordance with the facts of the case and provisions of Income Tax Act, 1961 and the rules made there under.

3. Briefly stated, the facts are that during the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee had repaid loan of Rs.1,12,500/- in cash to one of its Directors Smt. Jayanti Jhawar in violation of provisions of section 269T of the Act. In response to a query raised by the AO, the assessee submitted that it had made the payment in cash towards the salary/remuneration which its Director Mrs. Jayanti Jhawar was entitled to receive. It was stated that however, instead of debiting the same to the Directors remuneration payable, the same was debited to her unsecured loan account. Accordingly, the three entries (Rs.12,500/- and Rs.30,000/- dated 29.09.2010 and Rs.70,000/- dated 03.10.2010) aggregating to Rs.1,12,500/- were reflected in her loan account instead of salary account. The said two accounts were subsequently regularized. Thus it was stated that there is no violation of any compliance of section 269T as alleged. Further it was submitted that the company can make the payment of salary in cash to the Director and by mistake the two accounts were opened and the entries were made in one account instead of another account. However, the AO was not convinced with the above explanation of the assessee for the reason that the Director of the company Smt. Jayanti Jhawar had lent monies to the company which was subsequently repaid by it in cash in two trenches within a short period of 4 days i.e. from 29.09.2010 to 03.10.2010 respectively. There was no evidence on record to show that this was not a repayment of loan in cash. The AO further observed that the story of payment of remuneration in cash is disproved by the fact that an amount of Rs.12,500/- and Rs.30,000/- was paid on the same date on 29.09.2010. Further, on 03.10.2010 a sum of Rs.70,000/ was paid to the Director Mrs. Jayanti Jhawar. The AO specifically observed that the Director’s remuneration payable to Mrs. Jayanti Jhawar during the FY 2010-11 has been reported by the assessee at Rs.1,20,000/-. Therefore, the payment of Rs.1,12,500/- between 29.09.2010 to 03.10.2010 cannot take shape of Director’s remuneration by any stretch of imagination. The AO further observed that given the factual matrix, disallowance u/s 40A(3) for making cash expenses above Rs.20,000/- other than account payee cheque or other than account payee demand draft, would have been made in the assessee’s case. With the above reasons, the AO levied a penalty of Rs.1,12,500/- u/s 271E of the Act.

4. In appeal, the Ld. CIT(A) held as under: “4.7 I have gone through the penalty order and submissions made in this regard. It is noted that the entire matter pertains to repayment or unsecured loans of Rs.1,12,500/- to Mrs. Jayanti Jhawar Director of the company in violation of provisions of section 269T. The Auditor has highlighted this violation in the Audit Report which became the basis of levy of penalty by the AO. The AR has opposed the penalty and submitted that the appellant company had made the payment in cash towards the salary/remuneration to the director Mrs. Jayanti Jhawar. It is claimed that the said salary was being regularly and consistently being paid to her as and when desired by her. That a sum of Rs.1,20,000/- was the salary/directors remuneration was paid/payable to her and out of which she has withdrawn a sum of Rs.1,12,500/-. In addition to the above she had also lent some monies to the company as unsecured loan. An opening Balance of Rs.2,77,988/- was lying credited in her loan account with the company and a further sum of Rs.2,45,000/- was lent by her. Now as against the salary payable of Rs.1,20,000/- to her, the aforesaid payment of Rs.1,12,500/- ought to have been debited in that account but instead of that, it was wrongly debited to her unsecured loan account. The director’s remuneration remained fully credited at Rs.1,20,000/- and was shown as current liability. It is noted that the company is a separate legal entity and there was no exemption provided in the section 269T for loans taken from or repaid to a Director / shareholder of a company. In the present case there is an apparent repayment of unsecured loans of Rs.1,12,500/- in cash to Mrs. Jayanti Jhawar Director of the company as evidenced by the account books and the auditor's report, which is in clear violation of provisions of section 269T which leads to levy of penalty u/s 271E. It is noted that the assessee has not been able to establish that the amounts paid in cash were not repayment of loans as pointed by the auditor but were rather payments of outstanding remuneration as claimed by the AR. It is also not a case where the loan was repaid in cash to the Director for any reasonable cause by the company which will save the appellant the rigour of section 271E. In view of this discussion and having regards to the facts of the case the levy of penalty u/s 271E by the AO of Rs.1,12,500/- for violation of provisions of section 269T is found to be in order and is upheld in appeal.”

5. Before us, the Ld. counsel of the assessee files a copy of ledger account of Director Remuneration Payable (Jayanti Jhawar) and a copy of the Form No. 3CA. The Ld. counsel further submits that a sum of Rs.1,20,000/- was the salary/Director’s remuneration paid/payable to Mrs. Jhawar and out of which she had withdrawn a sum of Rs.1,12,500/-. In addition to the