DCIT CEN CIR 7(3), MUMBAI vs. NAMINATH BUILDERS & FARMS P. LTD, MUMBAI

PER BENCH:

These appeals filed by the Revenue are arising out of the orders of Commissioner of Income Tax (Appeals)-49, Mumbai [in short CIT(A)], in appeal Nos. CIT(A)-49/IT269,268,270 & 271/2015-16, CIT(A)-49/IT- 190,189,258,259/2015-16 vide order dated 19.10.2016, 18.10.2016. The penalties were levied by Addl. Commissioner of Income Tax, Central Circle Range-7, Mumbai for AYs 2008-09, 2009-10 & 2012-13 vide order of even date 28.09.2015 under section 271D & 271E of the Income Tax Act, 1961 (hereinafter the ‘Act’). 2. The only common issue in these appeals of Revenue is against the order of CIT(A) deleting the penalties levied by the additional CIT central range, Mumbai under sections 271 D & 271E of the Act for accepting & repayment in cash loan/ deposit/ transactions made through journal entries in excess of ₹20,000/-in violation of the provisions of section 269SS & 269T of the Act by holding that the genuineness of transactions made through journal entries is not in doubt and consequently there is a reasonable cause for accepting & repayment in cash loan/ deposit/ transactions made through journal entries in excess of ₹20,000/-. For this Revenue has raised the following two grounds in ITA No. 113/Mum/2017 for deletion of penalty levied under section 271D of the Act: -

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“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty of ₹ 22,90,605/- levied under section 271D of the Income Tax Act, 1961 on the ground that genuineness of the transaction made through journal entries is not in doubt.

“4.0. The brief facts of the case are that the appellant is a Private Limited company engaged in the business of Land Development and

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construction of real estate properties. The appellant filed its return of income on 1007.2005 declaring loss at Rs.9,92,801/- for A.Y. 2005-09. The case was reopened vide notice dated 8.10.2013 u/s.148. The assessment u/s.143(3) r.w.s. 147 of the Act was completed on 30.3.2015 determining total income at Rs.4.83,160/-. A reference for consideration of penalty u/s.271D & 271E of the I.T. Act was received by the Addl. CIT., Central range-7 from the A.O. (DCIT, Cent. Cir.7(3). Mumbai through letter dated 25 6.2015 intimating that the assessee has accepted loans/deposits from various sister concerns through Journal Entries i.e otherwise than account payee cheque/draft, thereby stating that the assessee has violated the provisions of section 269SS of the Income tax Act. The total of such entries are as under: -

Sl. Name of the Sister Credits (₹) No. Concerns 1. Lodha Developers Pvt. Ltd 17,6,666 2. Shantinath Designer 2,38,939 Construction Pvt. Ltd. 3. Shri Vardhvinayak Builders 3,05,000 Pvt. Ltd Total 22,90,605 A show cause notice was issued to the assessee on 3307.2015 in which assessee company was asked to explain as to why penalty u/s.271 D should not be levied. The authorized representative of the assessee company appeared and filed a reply on 13.07.2015. The

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Addl. CIT did not accept the contention of the assessee and penalty order under section 271D has been passed on 28.09.2015.”

And finally, deleted the penalty by observing that in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. Triumph International finance (I.) Ltd. dated 12.06.2012 the loan taken or repayment of loan through general entries in the books of accounts attracts penalty under section 271D and 271E of the Act. But, before 12.06.2012 there is a reasonable cause in view of the decision of Hon’ble Bombay High Court in the case of assessee’s group concerns in the case of CIT vs. Lodha Properties Development Pvt. Ltd. in ITA No. 172 of 2015 and others, wherein the Hon’ble High Court exactly on similar circumstances and transactions arising out of the same group of companies deleted the penalty by holding that the assessee has reasonable cause under section 273B of the Act for entering into such transactions through journal entries for the reason that the decision of Hon’ble Bombay High Court in the case of Triumph International Finance (I) Ltd, the same was delivered only on 12.06.2012 and on that date Hon’ble Bombay High Court has clarified the position that the receiving of deposits or loans through journal entries would certainly be hit by the provisions of section 269SS and 269T of the Act. The CIT(A) observed as under:-

“Ground No.4 to 9 are against the finding of the Addl CIT that penalty was leviable u/s.271D of the Act since no reasonable cause could be found in this case. In this regard it is observed that the words 'reasonable cause' have not been defined under the I.T. Act, though, it has been interpreted by various courts. The Hon'ble Delhi High Court has enunciated the meaning of the term 'reasonable cause' in the case of Azadi

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Bachao Andolan Vs. Union of India 252 ITR 471 to be a cause which prevents a man of average intelligence and ordinary prudence, acting under normal circumstances, without negligence or inaction or want of bonafide.

In Woodward Governors India (P) Ltd. Vs CIT 118 Taxman 433 (Delhi). the Hon'ble Delhi High Court considered the meaning of reasonable cause and held Reasonable cause as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do.

In the case of CIT vs Triumph International Finance (I.) Ltd. (supra), the Hon’ble Bombay High Court has held:

(i) that the Tribunal was not justified in holding that repayment of loan or deposit through journal entries did not violate the provisions 269T of the Act.

(ii) That it would have been an empty formality to repay the loan or deposit amount by account- payee cheque or draft

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and receive back almost the same amount towards the sale price of the shares. Neither the genuineness of the receipt of loan or deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business had been doubted in the regular assessment. There was nothing on record to suggest that the amounts advanced by Investment Trust of India to the assessee represented the unaccounted money of the Investment Trust of India or the assessee. The fact that the assessee-company belonged to the Ketan Parekh group involved in the securities scam could not be a ground for sustaining penalty imposed under section 271E of the Act if reasonable cause was shown by the assessee for failing to comply with the provisions of section 2697. Settling claims by making journal entries in the respective books is also one of the recognized modes of repaying loan or deposit. Therefore, on the facts, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan or deposit was not a bonafide transaction and was made with a view to evade tax, the cause shown by the assessee was a reasonable cause and in view of section

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273B of the Act, no penalty under section 271E could be imposed for contravening the provisions of section 269T of the Act.

7.5. In the appellant’s case the genuineness of the transaction made through journal entries is not in doubt and it has not been shown either in the assessment proceedings or in the penalty proceedings that unaccounted income of the lender or the borrower was involved. From the assessment order passed u/s.143(3) dated 30.3.2015, it is noted that the total income has been assessed after making the following additions i) land & brokerage income- Rs.5,00,000/- (ii) P&L difference in ROI filed- Rs.568 (iii) disallowance u/s.37 towards capital expenditure - Rs.3,305/- and (iv) disallowance uls40(a)(i)Rs.932,739/- and penalty proceedings u/s.271(1)(c) have been initiated. This additional income represents the additional income disclosed before the Settlement Commission, which was not allowed to be proceeded with vide order u/s.245D(1) dated 12.2.2013. However, there is no finding that the transactions by way of journal entries were not bonafide or had been undertaken to evade tax.

7.5.1. Further, the appellant has submitted that there was reasonable cause for the above said contravention of section 269SS since (i) the journal entries have been made with the group concerns under the bonafide belief that such

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transactions would not be hit by the provisions of section 269SS in view of various judicial decisions on this issue, including the decision of High Court of Delhi in the case of Noida Toll Bridge 262 ITR 260 and (ii) such loans by way of journal entry transactions were undertaken for various commercial reasons like assigning of receivables for operational efficiency, payment on behalf of group concern for squaring up transactions, for ease in consolidation of accounts, rectification entries etc. In this regard I find that the decision dated June 12, 2012, of the Hon'ble Bombay High Court in the case of CIT vs. Triumph International Finance(l) Ltd (supra), holding that repayment of loan/deposit by way of journal entries was in contravention of provision of section 269T has been given after the close of the financial year 2011-12 relevant to A.Y.2012- 13. In my considered opinion the above said reasons do constitute reasonable cause within the meaning of section 273B of the Act, particularly in light of the fact that there is no finding that such transactions were undertaken to evade tax. Reliance is placed on the decision of the ITAT dated 27.6.2014 in the case of Lodha Builders Pvt Ltd vs ACIT ITA No.4761M/2014 and ITA No.481/M/2014 A.Y.2009-10 and five other group cases. wherein under similar facts and circumstances, it has been held that the assessee has shown reasonable cause and

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therefore, the penalty imposed u/s.271D/271E of the Act are not sustainable.

7.5.2. In the penalty order the Addl.ClT has observed that the plea of the assessee for the benefit of reasonable cause cannot be accepted as the spirit of the Bombay High Court judgement (in the case of CIT vs Triumph International Finance(l) Ltd) is only that such transactions which are in the nature of squaring up with the same party can only claim the benefit of reasonable cause. This observation is found to be without merit particularly in light of the decision of High Court of Bombay in the case of CIT vs MIs. Triumph International Finance(l) Ltd ITA No.5745 of 2010 dated 17.8.2012 for the A.Y.2000-01, as noted in para 6.3 above, wherein the appellant company and its sister concern MIs. Triumph Securities Ltd had transactions of sale and purchase with common customers and the credit/debit liabilities were settled through journal entries and it was held 'that the transactions in question were undertaken not with a view to receive loans/deposits in contravention of Section 269S3, but in a view to extinguish the mutual, liability of paying/receiving the amounts by the assessee and its sister concern to the customers. In the absence of any material on record to suggest that the transactions in question were not reasonable or bonafide and in view of section

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273B of the Act, we see no reason to interfere with the order of the Tribunal in deleting the penalty of Rs.22.99 crores.

7.5.3. It has also been observed by the AddI.CIT that it shall not be out of place to mention that the assessee group has made a disclosure before the Hon’ble Income Tax Settlement Commission. Mumbai. of undisclosed income arising out of transactions with and by various group entities which are also the subject matter of investigation pursuant to the direction of Hon’ble ITSC. Hence it cannot be ruled out that the entities through whom such repayment/acceptances are done are not pan of a chain of entities involved in transaction for the purpose of tax evasion. In this regard the appellant has submitted that no investigation pursuant to the order of the Settlement Commission was pending on 28.9.2015 i.e the date of levy of penalty since the order of the Settlement Commission u/s.245D(4) was passed on 28.11.2014. Thus, the above said observation is found to be based on presumptions and do not justify the levy of penalty u/s.271D of the Act.

8.0. In view of above discussion, the levy of penalty of Rs. 22,90,605/- u/s.271D is found to be not justified and the same is hereby cancelled, Ground No.4 to 9 taken by the appellant are allowed.

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9.0. In ground No.10 it has been contended that the AddI.CIT erred in not following the decision of the ITAT, Mumbai in ITA No.475 to 481 of 2014 in respect of identical penalties levied in assessee’s own and associate company cases. In view of the findings given in para 7.3.2. and 7.5.1. above, wherein the above said decision of the ITAT, Mumbai has been followed, this ground is allowed.”

“The grounds taken by the appellant and the facts of the case are similar to those taken in appeal against levy of penalty uls.271D of the Act for the A.Y 2008-09, discussed in paras above. The AD. has levied the penalty of Rs 2649622/- u1s.271E of the Act, holding that the appellant has contravened the provisions of section 269T of the Act without any reasonable cause, in respect of the total debits of Rs.2649622/- which represent repayment of loans by way of journal entries to its sister concerns as under:

Sl.No. Name of the sister concern Debits (Rs.) 1. Lodha Developers Pvt. Ltd 8,96,380 2. Aasthavinayak Real Estate 4,30,976 Pvt. Ltd. 3. Ajitnath Hi-Tech Builders 10,810 Pvt. Ltd 4. Lodha Buuilders Pvt. Ltd 10,33,525 5. Shantinath Designer 2,72,931 Constructions Pvt. Ltd. 6. Shri Vardhvinayak Builders 5000

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Pvt. Ltd Total 26,49,622/- The reasons for levying the penalty u/s.271E is on the same lines as stated in the penalty order u/s.271D of the Act. The submissions made by the appellant are on the same lines as for the appeal with respect to penalty u/s.2710 of the Act. From the details filed, it is observed that out of the amount of Rs.2649,622/-, the debit amounts of Rs.10,33,525/represents transfer of credit balance of Lodha Builders Pvt Ltd to LDPL Similarly, the debit amount of Rs.430,9761- in the account of Asthavinayak Real Estate Pvt Ltd and of Rs.272,931/- in the account of MIs. Shantinath Designer Construction Fvt Ltd represents the transfer of credit balance from these accounts to LDPL. The debit amount of Rs.896,270/- in the account of LDPL represents reduction in its credit balance by way of allotment of equity shares of the said value to it. Other smaller amounts are also of similar nature.

I find that penalty has been levied in respect of journal entries which have been undertaken to assign loans, payment on behalf of group concern for squaring up transactions and for ease in consolidation of accounts, rectification entries etc.”

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Palava Dwellers Pvt. Ltd in ITA No. 6422/Mum/2016 for AY 2012-13 vide order dated 15.06.2018 by observing as under:

“11. Before us, it was claimed by the assessee that the journal entries pointed out by the AO and during penalty proceedings by the Addl.CIT, are not loan or deposits of money in view of explanation (III) to section 269SS of the Act, which gives the definition of loan or deposit for the purpose of this section. The learned Counsel for the assessee relied on the Bombay High Court decision in the case of assessee’s group concerns in the case of CIT vs. Lodha Properties Development Pvt. Ltd. in ITA No. 172 of 2015 and others, wherein the Hon’ble High Court exactly on similar circumstances and transactions arising out of the same group of companies deleted the penalty by holding that the assessee has reasonable cause under section 273B of the Act for entering into such transactions through journal entries for the reason that the decision of Hon’ble Bombay High Court in the case of Triumph International Finance (I) Ltd, the same was delivered only on 12.06.2012 and on that date Hon’ble Bombay High Court has clarified the position that the receiving of deposits or loans through journal entries would certainly be hit by the provisions of section 269SS and 269T of the Act as under: -

“(d) We find that the impugned order of the Tribunal has on application of the test laid

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down for establishment of reasonable cause, for breach of Section 269SS of the Act by this Court in Triumph International Finance (supra) found that there is a reasonable cause in the present facts to have made journal entries reflecting deposits. The Tribunal while relying upon the order of this Court in Triumph International Finance (supra) has held that in the present facts, neither the genuineness of receipt of loans / deposits by way of an adjustment through journal entries carried out in the ordinary course of business has been doubted in the regular assessment proceedings. It held in the present facts the transaction by way of journal entries was undisputedly done to raise funds from sister concerns, to adjust or transfer balances to consolidate debts, to correct clerical errors etc. Further, the Tribunal records that as observed by this Court in Triumph International Finance (supra) that journal entries constituted a recognized modes of recording of transactions and in the absence of any adverse finding by the authorities that the journal entries were made with a view to achieve purposes out side the normal business operations or there was any involvement of money, then, in these facts there was a reasonable cause for not complying with Section 269SS of the Act.

(e) Mr. Mohanty's submission that the test laid down in Triumph International Finance

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(supra) will have no application in the present facts in view of the large number of entries in this case as compared to only one entry in the case before this Court. The test of reasonable cause can not, in the present facts be determined on the basis of the number of entries. If there was a reasonable cause for making the journal entries, then, the number of entries made, will not make any difference. Besides, on facts, the Tribunal was satisfied with the reasons given by the Assessee for reasonable cause and this finding is not shown to be perverse. Finally, the issue of there being a reasonable cause or not is an issue of fact. No inference of law and / or issue of interpretation is to be made. The decision relied upon by the Revenue in case of Premier Breweries Ltd.(supra) concerned itself with the issue of a claim for deduction under Section 37 of the Act on the basis of the Agreements entered into between the parties. The inference of law in that case was whether on the facts, it could be inferred that the claim for deduction is in respect of expenditure incurred wholly and exclusively for the purposes of the business. Thus, it would involve a question of interpretation of the agreements etc. from which an inference is to be drawn. Further, it also involves application of principles of law to the facts for the purposes of deductions and, therefore, it would lead to a question of law. Therefore, the Court held in the facts of that case that a question of law does arise.

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(f) In this case, the issue of reasonable cause is an inference of fact from facts and, therefore, a question of fact. The Supreme Court decision in Sree Meenakshi Mills Ltd. Vs. Commissioner of Income Tax, 31 ITR 28 had laid down the tests to determine a question of law and / or fact. In the above context, the Court observed that when the finding is one of fact, the fact that it itself is an inference from other basic facts, will not alter its character as one of fact. Therefore, the issue of there being reasonable cause or not, is a question of fact and unless it is shown to be perverse, we would normally not interfere.

(g) In the above circumstances, the view taken by the Tribunal on the facts before it, is a possible view and does not give rise to any substantial question of law.

18 ITA Nos. 112-115& 133&134/Mum/2017 the judgement was pronounced and prior the date of decision of Hon’ble Bombay High Court in the case of Triumph International Finance (I) Ltd (supra) there was a reasonable cause for the assessee to receive deposit of loan or repayment of the same through journal entries. Accordingly, the assessee’s case is squarely falls under a reasonable cause under section 273B of the Act and therefore, in our view, penalties levied by the addl. CIT under section 271D and 271E of the Act has rightly been deleted by CIT(A). Hence, we confirm the order of CIT(A) and this issue of Revenue’s appeal is dismissed.” 8. In view of the above, we confirm the orders of CIT(A)’s and all these of Revenue are dismissed. 9. In the result, the appeals of Revenue are dismissed.

Order pronounced in the open court on 15-10-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 15-10-2018 kao kI ga[- .

Sd/- Sd/- (मनोज कुमार अग्रवाल / MANOJ KUMAR AGGARWAL) (महावीर स िंह /MAHAVIR SINGH) (लेखा दस्य / ACCOUNTANT MEMBER) (न्याययक दस्य/ JUDICIAL MEMBER) मुिंबई, ददनािंक/ Mumbai, Dated: 15-10-2018 सुदीप सरकार, व.निजी सचिव / Sudip Sarkar, Sr.PS

19 ITA Nos. 112-115& 133&134/Mum/2017 आदेश की प्रनिलिपप अग्रेपिि/Copy of the Order forwarded to : अपीलाथी / The Appellant 1. प्रत्यथी / The Respondent. 2. आयकर आयुक्त(अपील) / The CIT(A) 3. आयकर आयुक्त / CIT 4. ववभागीय प्रयतयनधि, आयकर अपीलीय अधिकरण, मुिंबई / DR, ITAT, 5. Mumbai गार्ड फाईल / Guard file. 6.

आदेशािुसार/ BY ORDER, त्यावपत प्रयत //True Copy// उप/सहायक पंजीकार (Asstt. Registrar) आयकर अपीिीय अचिकरण, मुिंबई / ITAT, Mumbai