RADHAMADHAV REALCON PVT.LTD,PUNE vs. JOINT COMMISSIONER OF INCOME-TAX, RANGE - 10, PUNE

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM:

This appeal filed by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-6, Pune, dated 31.10.2017 for the Assessment Year 2013-14.

“1) The Ld. CIT(A) erred in upholding the levy of penalty of Rs.51,50,00,000 u/s 271 E of the Income Tax Act, 1961 ("Act"] for alleged violation of s. 269T of the Act, without appreciating that the appellant had not committed any default in terms of s. 269T at all. Neither was there any relevant "loan" or deposit" taken by the appellant, nor was there any "repayment" made by the appellant.

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2) The Ld. CIT(A) erred in holding that the allotment of shares against share application money amounted to a "repayment" of "loan" otherwise than by account payee cheque. The Id. CIT(A) erred in not appreciating that the relevant amounts were received by the assessee through banking channels towards share application money. In law, share application money is not a "loan" or a "deposit" for the purposes of s. 269T. Consequently, the question of repayment of any "loan" or "deposit" does not at all arise, and the provisions of s. 269T are wholly inapplicable.

3) The Ld. CIT(A) erred in failing to appreciate that (a) share application money was received through banking channels, (b) shares were duly allotted at par and without any premium, (c) all reporting requirements were complied with, (d) and the authorities under the Companies Act had not raised any objection on the transaction. Accordingly, the case was not »ne which at all involved any loan or advance. The lower authorities erred in failing to consider relevant materials, and considered irrelevant materials; and thereby reached a conclusion which no reasonable person properly instructed in the law could have reached.

4) The Ld. CIT(A) erred in proceeding on the basis that on the date of receipt of certain part of the amounts, the authorised share capital had already been fully subscribed. He failed to appreciate the authorised share capital was duly increased and no violation in this regard is pointed out by the authorities under the Companies Act. Accordingly, there is no basis for recharacterizing the share application money as being a "loan".

5) The Ld. CIT(A) erred in proceeding on the basis that the transaction of allotment of shares was non-genuine / colourable on the basis that the allottee was an "STPI company with meagre activities". This consideration is wholly irrelevant for the purposes of s. 269T. In any event, as a matter of fact, the transactions were on record during scrutiny assessment proceedings and no addition was made in respect of these transactions. On facts, the transactions cannot be categorised as particularly when the fact of allotment of shares itself is not at all disputed. The Id. CIT(A) erred in making findings on the alleged colourable nature of the transaction without considering the substantial evidence placed on record before him which indicated that the transactions were entirely genuine.

6) In any event, the Ld. CIT(A) failed to appreciate that as a matter of law, even assuming (without conceding) that there was any "loan" which was converted into share capital, that does not at all result in a violation of s. 269T. The question of levying penalty u/s 269T arises only when there is a "repayment". The conversion of a loan into share capital does not amount to a repayment.

7) Without prejudice to the above and in any event, the Ld. CIT(A) ought to have appreciated that relevant amounts were received in the previous years relevant to AY 2010-11 and 2011-12, and were already reflected as share application money in those years. Hence, even assuming (without conceding) that in law there is any repayment, the same has not occurred in the period relevant to the AY 2013-14 and hence, there is no violation of s. 269T during the period under consideration.

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8) Without prejudice to the above and assuming (without conceding) that there was any violation of s. 269T, in any event the Ld. CIT(A) ought to have held that there was reasonable cause for the same. There was factually no money which was disbursed by the appellant at all. Shares were in fact allotted. If at all there was any breach of s. 269T, it would only be of a technical nature. Inter alia for these reasons, the Ld. CIT(A) ought to have held that if at all there was any breach, the same was due to a reasonable cause, and levy of penalty would not be justified.

9) The appellant craves leave to add/alter the above grounds, each of which are without prejudice to one another.”

The above grounds indicate that Ground Nos. 1 to 6 relates to the

merits of the levy of penalty u/s.271E of the Act. Further, Ground No.7

relates to the proper year for levy of said penalty qua the year of book

entries. Finally, Ground No.8 relates to the reasonable cause for such

book entries and subsequent allotment of 9% Redeemable Preference

Shares.

includes that the assessee is engaged in the real estate business and

had plan to develop an integrated township in Pune and Mumbai. The

assessee company was originally incorporated on 02.07.2008 in the

name of M/s.Padmaji Realcon Pvt. Ltd., The same was rechristened as

M/s.Radha Madhav Realcon Pvt. Ltd. on 16.06.2010 with the

Authorized/Paid-up Capital of Rs.5 lakhs only.

4.1 During the year, the assessee filed return of income declaring Nil

income. The assessment was completed under section 143(3) of the Act

accepting the income returned by the assessee. However, in para 6 of

the assessment order, the Assessing Officer made reference to the

violation by the assessee so far as provisions of section 269T of the Act

are concerned. In the assessment proceedings, the Assessing Officer

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mentioned that the assessee received loans from M/s.VSK Technologies

Pvt. Ltd. (in short ‘VSK’) in assessment years 2010-11, 2011-12 and

2012-13 and the same was squired up by way of allotment of shares to

VSK. This method of repayment of unsecured loans was considered by

the AO as violation of provisions of section 269T of the Act. Eventually,

the Assessing Officer levied penalty on 29.09.2015 after following the

due process of law. In the said penalty order, the Assessing Officer

discussed (a) the details of unsecured loans received by the assessee in

the said assessment years; (b) the conversion of the same into share

application money (in short ‘SAM’) by way of journal entries in

assessee’s books of account; and (c) the same is finally converted into

preferential shares and allotment to M/s. VSK Technologies Pvt. Ltd. (in

short ‘VSK’). Further, the Assessing Officer discussed the details of VSK

Company, which is owned by Shri Deepak Bareja and Shri Sunil Suri;

the details of loans granted periodically by the said VSK to the assessee;

the details of Resolution passed by the company allotting the shares to

VSK; the way the Authorized Share Capital was increased from Rs.5

lakhs to Rs.60 lakhs over the years; the way the said loans given to the

company were utilized for buying the lands through Shri Digambar D

Patil and Mrs. Jyotsna Patil, Directors of the assessee company etc.,

The Assessing Officer also discussed the way the loans given to others

amounting to Rs.4.32 crores by the assessee and the way they are

written off as bad debts. Further also, Assessing Officer considered the

assessee’s arguments that the amount received by the company from

VSK is not loan or advance and in fact, from the beginning, they were

always given for share application money etc., Further, the Assessing

Officer also considered Journal entries passed by the assessee while

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converting loans and advances into share application money and then

in turn, finally into the preferential shares till the time the shares

actually allotted in the year under consideration.

The fact of non conversion of loan to share application money in

the same year in the books of VSK was also discussed. The VSK

converted the loans into share application money/preference shares in

the year under consideration only unlike the assessee.

4.2 Further, the Assessing Officer analyzed the provisions of section

269T of the Act and also the decisions cited by the assessee i.e. in the

case of CIT Vs. Noida Toll Bridge Co. Ltd. 263 ITR 260 (Delhi), CIT Vs.

Triumph International Finance (I) Ltd. 345 ITR 270 (Bom.) and Lodha

Builders Pvt. Ltd. & Others Vs. ACIT in ITA No.476/M/2014 and held

that the amount received by the assessee from VSK constitutes the

loans or advances. Thus, the Assessing Officer held that repayment of

loan by resorting to Journal entries, constitutes the contravention of

provisions of section 269T of the Act. Accordingly, AO applied the ratio

laid down by the jurisdictional High Court in the case of CIT Vs.

Triumph International Finance (I) Ltd. (supra). Eventually, AO levied

the penalty of Rs.51.50 crores qua the loans or advances converted by

the assessee by way of book entries. AO held that the assessee violated

the mode of repayment of loan specified in section 269T of the Act. The

statute provides for repayment of loans by way of account payee cheque

or account payee bank draft only.

4.3 Further, on the reasonable cause-linked submissions of the

assessee, the Assessing Officer discussed the issue of reasonable cause

qua the provisions of section 273B of the Act and held the principle of

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“empty formality” as outlined by the jurisdictional High Court in the

case of CIT Vs. Triumph International Finance (I) Ltd. (supra) do not

apply to the facts of the present case. As per discussion given in paras

11 to 13 of the penalty order, the Assessing Officer proceeded to levy the

penalty under section 271E of the Act for assessment year 2013-14.

The said paras 11 to 13 are extracted as under:-

“11. RM has allotted 51,50,000 preference shares of Rs. 100/- each in lieu of deposit received of Rs.51,50,00,000/- from VSK. The face value of equity shares of RM is valued at Rs.10/- each. However preference shares are valued at a premium. Such premium is fixed without any basis. RM has not conducted any business from the date of its incorporation which is evident from NIL turnover reported in the financials year after year. Further, RM has consistently reported losses on account of some indirect expenses. RM has claimed Real estate Development as its objective but there are no instances towards the said objective except for the company's claim that advances are given to the Directors for the purpose of procuring land. The progress on the purpose for which advances are received by the directors is not reported and nothing in support of the same is brought on record. RM has regarded loans given to other entities amounting to Rs.4.32 Cr. as bad and doubtful. Hence RM is inactive except for the isolated transaction of receiving advances from VSK and giving the same to the Directors . In these circumstances it can only be inferred that the transaction of receiving deposits from VSK and repayment of the same by allotment of preference shares at a high premium can be regarded as a colorable transaction.

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deposit of Rs.51.50 crore received by RM from VSK, repaid in contravention of sec 269T of the IT Act is not saved by a 'reasonable cause' for such violation. On account of such violation, RM is liable for penalty u/s 271E of the IT Act, a sum equal to the amount of the deposit so repaid. Accordingly I therefore levy a penalty of Rs.51,50,00,000/- (Rupees Fifty one Crore and fifty lakhs only) u/s. 271E of the IT Act for A.Y. 2013-14.”

From the contents of Para No.12 qua the reasonable cause, the AO did

not understand the essence of assessee’s submission on reasonable

cause. AO held that “allotment of preference shares does not represent

an empty formality”. Whereas the assessee’s submission says that

repayment of loan to VSK and receiving the same for share application

money by the assessee constitute an Empty formality. This wrong

understanding of AO led him to the wrong conclusion.

penalty by the Assessing Officer, the assessee filed an appeal before the

CIT(A). During the appellate proceedings, the assessee submitted that

(i) loans and advances taken by the assessee from VSK were meant

always for share application money from the very beginning of receiving

loans. Therefore, as per the assessee, the impugned loans do not

constitute the loans or advances for attracting the provisions of section

269T of the Act; (ii) the loans and advances were never repaid by cash

to the VSK and therefore, the provisions of section 269T of the Act has

no application; (iii) it is the case of receiving share application money

from VSK and in return, the shares were allotted by passing the

Resolution of the Board of the company and therefore, it is always a

case of investment in shares, hence penalty levied should not be

sustained; and (iv) notwithstanding the above, even if squiring up of

entries relating to the loans or advances, amounts to repayment by the

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assessee and such squiring did not happen in the year under

consideration. Therefore, the provisions of section 269T of the Act

should have been invoked in earlier assessment years in which loans or

advances were converted into share application money through passing

of journal entries.

5.1 Regarding the reasonable cause, the assessee argued that the

repaying loans to VSK is an impossible task as the money so received

by the assessee from VSK was already found way into the others by way

of advances for appropriation for purchase of lands, which is the core

activity of the assessee company. Receiving the said advances from

them only for returning to VSK and in turn to receive the same from

VSK through banking channels towards the share application money,

constitutes an Empty Formality. Further, assessee submitted that this

kind of empty formality can constitute reasonable case within the

meaning of section 273B of the Act and relied on the judgment of

jurisdictional High Court in the case of CIT Vs. Triumph International

Finance (I) Ltd. (supra). He also analyzed that the Assessing Officer

failed to understand the reasonable cause and the argument of the

assessee in this regard.

5.2 On considering all the arguments and the case of the AO; the

CIT(A) examined the facts of the case; analyzed the funds flow of loans

which are received by the assessee from VSK; CIT(A) analyzed the

application of funds through Directors of the company; CIT(A) noted

that the Directors never invested the same by buying the land nor

returned the money to the company; the loans and advances are in fact

not for the share application money as the assessee did not have

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adequate Authorized Capital for allotting the shares etc., Eventually,

CIT(A) held that it is case of colourable transaction and the provisions of

section 269T of the Act are squarely attracted to the transaction of

repayment of loans or advances through the journal entries with the

VSK.

5.3 Regarding reasonable cause also, the CIT(A) did not appreciate

the explanation given by the assessee and upheld the penalty levied by

the Assessing Officer. Regarding the year of levy of penalty, the CIT(A)

dismissed the same saying that the default of this kind is not

assessment year specific and penalty accordingly levied for every default

or contravention of provisions of section 269T of the Act. Eventually,

the CIT(A) confirmed the penalty as per discussion in paras 6.1.3 to 9 of

his order. The above referred decisions referred by the CIT(A) are

narrated in the said paras.

before the Tribunal with the grounds cited above.

BEFORE THE TRIBUNAL

originally incorporated, the loans were received from VSK Technologies

Pvt. Ltd.(VSK) and also provided date-wise details of loans received. Ld.

Counsel submitted that the assessee received Rs.2.5 crores in

assessment year 2010-11 towards the share application money.

Further, the assessee received Rs.49.24 crores in assessment year

2011-12. Thus, the total amount of unsecured loans / deposits / share

application money works out to Rs.51.74 crores.

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A.Y. Amount received as share application money 2010-11 2.50 crores 2011-12 49.24 crores Total 51.74 crores

7.1 Explaining the appropriation of the said loans, learned Counsel

mentioned that out of Rs.49 crores, Rs.4.38 crores was given to some

unrelated parties as loans by the assessee. Details are given below

(Page 17 of the paper book) :

Remarks Directors 42.72 crores Schedule-7 of the (Digambar D. Patil, balance sheet for Mrs. Jyotsna Patil) purchase of lands Loan given to 4.38 crores Claimed as Bad Debts others Property advances 3.92 crores For purchase of land 51.74 crores

Thus, the loan of Rs.4.38 crores was subsequently considered as bad

and doubtful debts. There was discussion in the orders that out of

Rs.49.02 crores given to the Directors in assessment year 2011-12 and

the same was already utilized in procuring the land for the company

and leaving no balance either refundable to the assessee or to be

invested in acquiring further lands for the company. Assessee had to

use the names of the Directors for buying the lands for assessee as

there are some restrictions in Maharashtra for the company to hold the

Agricultural lands in the name of the assessee. Normally, it is the

assessee which gives cheques and money through the Directors.

Learned Counsel also mentioned that the VSK was under Investment

Agreement with the assessee for supply of loans in exceeding around

Rs.100 crores for the business purposes and the payment of Rs.51.74

crores to the assessee is part of compliance to the said agreement.

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There was discussion in the orders about how the VSK received funds

from Hong Kong based company i.e. Citi Reliance Ltd. The contents of

CIT(A)’s order in para 6.2.4 describes these facts. Relying on the

financial statement of assessee, learned Counsel submitted that the

assessee reflected the amount as loans and advances before they are

immediately converted into share application money by passing journal

entries which are further converted into 9% Redeemable Cumulative

preferential shares ( in short ‘9% RCP shares’). Assessee got the

approval of the ROC for increased Authorized Capital. Eventually, the

assessee allotted shares to VSK at face value of Rs.100/- without any

premium.

7.2 Considering the above facts of the case, learned Counsel argued

that the inflow of funds from VSK to the assessee has genesis in the

Investment Agreement dated 02.02.2010 and providing the part

ownership of the company to VSK by allotting requisite shares has been

the original idea of the company. In tune with the same, the assessee

allotted 9% RCP shares to VSK to make VSK as a preferential

shareholder of the company, which is incorporated for the purpose of

development of townships in Pune and Mumbai. As per the assessee,

taking loans and advances is never the intention of assessee, and

therefore, the loan of Rs.51.74 crores from VSK was never for loans and

advances and it is always for the allotment of ownership of the company

to VSK eventually. He also submitted that loans and advances were

subsequently converted into share application money pending the

request for increase of the Authorized Capital limits with the relevant

ROC. Soon after the permission is received, the assessee made book

entries converting the loan into share application money (in short ‘SAM’)

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and then allotted the said 9% RCP shares. These book entries of the

said conversion of loan into SAM, which has the consequent effect of

repayment of loans to VSK, was considered by the Assessing Officer as

contravention to the provisions of section 269T of the Act. These

provisions state that the repayment of loan has to be done by way of

issue of account payee cheque or Account payee demand draft. Taking

objection to the same, learned Counsel submitted that the said

provisions do not apply to the case of share application money, more so

when the shares are eventually allotted to VSK. Assessee also

questions the timing/assessment year in the penalty proceedings is

initiated. The fact that similar penalties were deleted by the Hon’ble

High Court of Delhi in the case of CIT Vs. Noida Toll Bridge Co. Ltd.

(supra), was highlighted by the learned Counsel. Referring to the

jurisdictional High Court judgment in the case of CIT Vs. Triumph

International Finance India Ltd. (suupra), learned Counsel submitted

that the assessee got relief from levy of penalty on the ground of

“reasonable cause (in short ‘RC’) mentioned in section 273B of the Act.

Thus, the Ld. Counsel argued that the penalty needs to be deleted.

7.3 Analyzing the RC, i.e., the reasonable cause for the assessee,

learned Counsel submitted that loans received from VSK/utilized for

business purposes. Ld. Counsel mentioned that when the loans are

used for business purpose, it is impossible for the assessee to repay the

loans as the same are invested in stock-in-trade through Shri Digambar

D Patil, Director of the company. Obtaining share holding of the

assessee is the main object of VSK The funding should have been

shown in the books as the share application money only from the

beginning. Now assessee is divested of adequate funds for repayment

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by way of Account payee cheque or demand draft. To issue the cheques

to VSK for repayment of loans in order to comply with the provisions of

section 269T of the Act, the assessee would have to raise the funds to

repay and the same should be returned from VSK towards 9% RCP

shares or share application money. This transaction of issuing account

payee cheques/demand drafts and receiving the same for investment in

SAM by the assessee, should constitute an “empty formality” as

discussed by the jurisdictional High Court in the case of CIT Vs.

Triumph International Finance (I) Ltd. (supra).

Considering the facts relating to reasonable cause, the facts are

identical, journal entries were passed in both the cases and therefore,

benefits of reasonable cause should be decided in favour of assessee

and delete the penalty levied by the Assessing Officer and confirmed by

the CIT(A).

7.4 Further, on the issue of correct assessment year initiation of

penalty, elaborating the Assessing Officer’s failure to initiate / levy

penalty in assessment year 2012-13, where the conversion of loans and

advances to share application money was done by passing journal

entries, learned Counsel submitted that assessment year 2013-14 is the

year of allotment of shares to the assessee and the default, if any, is not

relatable to the year under consideration. A.Y. 2012-13 is the year,

where the default occurred and there the penalty should have been

initiated. The CIT(A) did not deal with this issue in para 8 of his order,

was also highlighted by the learned Counsel. It is the case of learned

Counsel for the assessee that the amounts received by the assessee

from VSK do not constitute loans or advances. Therefore, the allotment

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of shares to VSK do not constitute any repayment of said loans or

advances in order to attract provisions of section 269T of the Act.

Further, it is the case of assessee that, notwithstanding the above

arguments, the assessee passed the journal entries for converting the

loans and advances to share application money and passing journal

entries for squaring up of loans with VSK and eventually allotting

preferential shares to VSK, constitutes part of reasonable cause. The

assessee had for resorting to book entries, otherwise the assessee had

to raise funds to repay the loans to VSK and issue cheques to VSK to

square up the loans first. Considering the Investment Agreement on

allotment of shares to VSK, the assessee had to take cheques again

from VSK for allotment of shares and the same should constitute empty

formality. Finally, it is the case of assessee that there is an error in

levying penalty in the year under consideration when the default, if any,

i.e. conversion of loans and advances to share application money

happened in the preceding assessment year 2012-13.

7.5 Written Submissions : Further, learned Counsel filed written

submissions in this regard explaining the reasonable cause issue and

others and the relevant paras from the said submissions are extracted

hereunder:

“1.2 In Para No. 2 of these submissions, it is admitted that the appellant has received loan from VSK Technologies Pvt. Ltd. during F.Y. 2009-10 & 2010-11 and that these amounts appear in the Balance Sheet of appellant as on 31.03.2010, 31.10.2011 and 31.03.2012 as share application money. The true nature of this transaction, conversion of loans into share application money is being challenged by the department on the pretext of what is apparent is not real by arguing that the true nature of the transaction has to be ascertained ONLY by knowing the purpose and intention of VSK Technologies Pvt. Ltd. Further in Para No. 4, they are referring to lifting veil of corporate entity to understand the true nature. It has been further argued that in the Balance Sheet of VSK Technologies Pvt. Ltd., the amount under consideration is being reflected under the head “Loans and Advances" and, it is only during A.Y. 2013-14

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that the amount is shown as investment. It is concluded accordingly that VSK Technologies Pvt. Ltd. have throughout treated the money advanced to the appellant as "Loans" and consequently, during A.Y. 2013-14, it is the “Loans" which has been transferred by way of JV entry into share capital.

1.3 The arguments of the department are based on incorrect appreciation of the Balance Sheet of VSK Technologies Pvt. Ltd. In the Balance Sheet, copy of which has been filed with the written submission by the department for A.Y. 2012-13, in Note No. 14, which has broad heading of "Long Term Loans and Advances", the amount under consideration is shown under sub heading of "Unsecured Advances to Radhamadhav Realcon Pvt. Ltd.”. The department is missing the fact that under the broad heading of "Long Term Loans and Advances", the advances given for the purchase of shares are also included. The amount under consideration is in fact advance for purchase of shares and not loan to Radhamadhav Realcon Pvt. Ltd. In this connection, it is pointed out to make things crystal clear that in Note No. 14 for the earlier assessment year, the same amount is reflected as advances for share application. Therefore, the department has proceeded on incorrect presumption about the Balance sheet of VSK Technologies Pvt. Ltd.

1.4 Even otherwise, the department is trying to raise issue of lifting the veil of the company and going into the true nature of the transaction at this stage of imposition of penalty under consideration by the Hon'ble Tribunal, whereas as a matter of fact, throughout the assessment proceedings for all the assessment years involved, the status of corporate entity has not been disturbed by the department itself, even though the scrutiny assessments have been made. It is also the fact that all rules and regulations relating to Registrar of Companies and Companies Law have been complied and have been acknowledged by the department on various stages of imposition of this penalty. Such issues cannot be raised in isolation only to suit the purpose of the department ignoring the blunt realities of the balance sheet of the appellant company duly accepted by the Registrar of the Companies, where there are specific stipulations of share application money, which has never been challenged in the past in any of the earlier assessment years either by the department itself or by ROC.

1.5 Moreover an issue of imposition of penalty has to be decided by facts relevant on record of appellant assessee and not any third party. What entries have been made in books of account of a third party are of no direct significance for the purpose at hand.

1.6 It is therefore prayed that the contentions raised by the department in their submissions made on 27.06.2018 be dismissed as not relevant for the purpose at hand.

2.2 Hon'ble Bombay High Court have dealt with the issue of reasonable cause in their judgment in the case of Triumph International Finance (I) Ltd. reported in 345 ITR 270. They have laid down parameters and circumstances as to when the benefit of reasonable cause can be denied in situations where transactions are

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effected through JV entries to the violation of Section 269 T of the Act. These are summarized in following paragraphs:

Para No. 23:

"The expression "reasonable cause" used in Section 273B is not defined under the Act. Unlike the expression "sufficient cause" used in Section 249 (iii), 253 (v) and 260A (iia) of the Act, the legislature has used the expression "reasonable cause" in Section 273B of the Act. A cause which is reasonable may not be a sufficient cause. This, the expression "reasonable cause" would have wider connotation than the expression "sufficient cause". Therefore, the expression "reasonable cause" in Section 273B for non-imposition of penalty u/s 271E would have to be construed liberally depending upon the facts of each case."

2.3 Therefore a liberal view is sought from the Hon'ble Tribunal in the present facts of the case as well. Further Hon'ble Court have also held as under:

Para No. 24

"In the present case, the cause shown by the assessee for repayment of the loan/deposit otherwise than by account payee cheque/bank draft was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom the loan/deposit was received by the assessee. It would have been an empty formality to repay the loan/deposit amount by account payee cheque/draft and receive back almost the same amount towards the sale price of the shares."

2.4 In the present facts of the case, the situation is exactly identical. The loans were accepted in the past and were lying in the books of account of the appellant as share application money. It was decided to issue shares against the share application money. There exists a Board Resolution to this effect which is on record and admitted in the orders of lower authorities. A strict compliance of Section 269 T would have required repaying the share application money by issue of cheque/draft and then receiving back the same amount by cheque /draft. This would have been, to use the terminology as done by Hno'ble Court, "An empty formality" only.

2.5 Further, Hon'ble Court have also observed as under:

"Neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in ordinary course of business has been doubted in regular assessment. There is 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."

2.6 In the present case also, the adjustment made in the books of

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account through book entries carried out in ordinary course of business has been doubted in regular assessment. Also there is nothing on record, not even an iota of doubt raised by the authorities to the effect that the amounts advanced by VSK Technologies Pvt Ltd represented the unaccounted money of VSK Technologies Pvt Ltd or that of the appellant.

2.7 Further in the same paragraph no. 24 it has been held as under:

“It is not in dispute that settling the claims by making journal entries in the respective books is also one of the recognized modes of repaying loan/deposit. Therefore, in the facts of the present case, in our opinion, though the assessee has violated the provisions of Section 269 T, the assessee has shown reasonable cause and, therefore, the decision of the Tribunal to delete the penalty imposed under Section 271E of the Act deserves acceptance"

2.8 In the present case also, the transaction has been completed by passing journal entries in the books of account of the appellant and VSK Technologies Pvt. Ltd. It is an accepted mode of repaying loan/deposit. There exist reasonable cause as explained in the preceding paragraphs. The penalty therefore deserves to be cancelled.

3.2 Consequently if these do not hold good then JV shall tantamount to a reasonable cause. In the present facts, none of these causes exist so as to deny the appellant the benefit of reasonable cause. The penalty therefore should be cancelled.

3.3 There is no transaction of cash. There is no stipulation at all that the moneys involved are unaccounted money either of appellant or of VSK Technologies Pvt. Ltd. The journal entries have not been doubted in the assessment proceedings. The transaction of transfer of share application money to share account by passing journal entries has been done as a prudent commercial transaction. This mode is a recognized mode of transaction in commercial as well as accounting world. The genuineness of these JV transactions has not been questioned in assessment proceedings. There is no purpose imputed outside the commercial motive of appellant. There is no involvement of cash alleged. No undisclosed income is alleged associated either of the appellant or of VSK Technologies Pvt. Ltd. There is no allegation of proliferation of black money which was the intending objective behind insertion of Section 269SS and 269 T of the Act. Therefore the objective as explained in CBOT circular no 345 dated June 28, 1982 are not being violated in the facts of the case. All that appellant has done is that instead of repaying the amount by account payee cheque/demand draft and receiving back the

18 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

same amount by way of demand draft/cheque, as a matter of commercial prudence, undertaken the transaction of issue of shares by passing JV entries and transferring amounts from share application money to shares. This mode is legally permissible in commercial transactions as also in accounting practice. Therefore it must be held that genuine transactions like the transaction in the present case deserve the benefit of reasonable cause enshrined in Section 273 B of the Act. It is prayed accordingly that the penalty imposed be cancelled.”

Assessing Officer and CIT(A). Learned DR analyzed the adverse

consequences drawn by the CIT(A) in his order. He submitted that the

funds from Hong Kong were transferred to VSK before they are finally

received by the assessee. The said funds were further transferred to

Shri Digambar D Patil for the purpose of acquiring the land and

questioned the way Shri Digambar D Patil had received the funds from

the company which is not usual method of investment in stock-in-trade.

Mentioning that it is a case of colourable transaction, learned DR

submitted for confirming penalty under section 271E of the Act.

Highlighting the fact that the book entries in the accounts of assessee

as well as VSK are not in sync qua the relevant assessment years,

learned DR submitted that the funds are always received by the

assessee in the form of loans or advances only and relied heavily on the

entries appearing in the Balance Sheets of both the companies.

Accepting the fact that shares were finally allotted, learned DR

submitted that it should not alter the sustainability of penalty, in view

of the jurisdictional High Court’s decision in the case of CIT Vs.

Triumph International Finance (I) Ltd. (supra). Emphasizing that the

amount received by the company constitutes loans and advances only,

he submitted that the repayment by way of journal entries in the books

of account constitute contravention to the provisions of section 269T of

19 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

the Act and therefore, penalty under section 271E of the Act is rightly

levied. Referring to the reasonable cause related issues and facts,

learned DR submitted that the facts of the jurisdictional High Court in

the case of CIT Vs. Triumph International Finance (I) Ltd. (supra) are

distinguishable and therefore, penalty cannot be deleted on the ground

of reasonable cause and also in view of the decision of the jurisdictional

High Court in the case of CIT Vs. Triumph International Finance (I) Ltd.

(supra).

perused the orders of the Revenue, written submissions, paper book

filed before us. We find there are couple of major issues for

adjudication. They are (1) whether the transactions in question

between the VSK to assessee and to VSK constitutes the loan

transaction- payments/loan repayments thereby attracting the

provisions of section 269T of the Act; (2) year of initiation of penalty

proceedings and (3) whether the reason of lock of funds with the

assessee or coupled with the empty formality of repayment by

cheque/demand draft to VSK to squire up the loans and receiving the

same by same route for allotment of shares, constitute a reasonable

cause (RC) within the meaning of section 273B of the Act or not for

deleting the penalty u/s.271E of the Act.

9.1 For adjudication of these two core issues, we proceed to first

extract relevant provisions of section 269T and 273B etc. Relevant

portions are extracted as under :

“269T : Mode of repayment of certain loans or deposits —No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay

20 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

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] if— (a ) the amount of the loan or deposit [or specified advance] together with the interest, if any, payable thereon, or (b ) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, [or] (c) the aggregate amount of the specified advances received by such person either in his own case or jointly with any other person on the date of such repayment together with the interest, if any, payable on such specified advances.]

is twenty thousand rupees or more: Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid.

273B : Penalty not to be imposed in certain cases - Notwithstanding anything contained in the provisions of [clause (b) of sub- section (1) of] [section 271, section 271A, [section 271AA] section 271B [section 271BA], [section 271BB,] section 271C [section 271CA,] section 271D, section 271E, [section 271F, [section 271FA,] [section 271FAB,] [section 271FB,] [section 271G.]] [section 271GA,] [section 271 GB] [section 271H,] [section 271-I,] [section 271J,] clause (c) or clause (d) of sub-section (1) or sub-section (2) of 272A, sub-section (1) of section 272AA] or [section 272B or] [sub-section (1) [or sub-section 1A) of section 272BB or] [sub-section (1) of section 272BBB or] clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure].”

9.2 From the above, it is the spirit of the above provisions relating to

repayment of loan/advance and the same needs to be done by the

specified modes only, i.e. account payee cheque/demand draft and not

by other modes. Legal provisions and the other judgmental law do not

allow transaction of repayment of loan is done by way of cash or by way

of book entries without having a reasonable cause. The reasonable

cause is not defined in the Act and therefore, the same differ from case

21 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

to case. We shall now examine the aforesaid three issues in the

succeeding paragraphs.

repayment : The transactions of flow of funds from VSK-Assessee-VSK,

constitutes loans at all or nor, when the same is intended for share

application money from the very beginning of the inception of company.

Further, the book entries leading to conversion of said loan to share

application money and then the allotment of shares, constitute any

violation of the provisions of section 269T of the Act.

10.1 Relevant facts are already discussed in the paragraphs above.

The same are pictorially represented as under :

FLOW OF FUNDS – TAKEN AS LOAN – BOOK ENTRIES

Directors for Business purposes VSK Assessee for acquiring lands Unsecured loans Lender Lonee Other business used

10.2 Undisputedly, the assessee received loan from VSK amounting to

Rs.51.74 crores over the years. In the beginning, the transactions are

recorded in the books of both lender as well as the loanee on the loans

only. These loans were converted into share application money in the

preceding year in the books of the assessee. However, corresponding

entries in the books of the VSK are not in sync with that of the

assessee. In the books of VSK, they continue to be loans till the shares

are allotted in A.Y. 2013-14. Assessee converted the loans to share

application money and then finally allotted 9% Redeemable Cumulative

22 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

Preference Shares to VSK in A.Y. 2013-14. On these facts, Ld. Counsel

for the assessee claims that the funds given by the VSK being part of

the original commitment, were always meant for investment in company

and the intention of VSK is not for giving loans to assessee expecting

repayment. However, there are no answers to various relevant

questions from the assessee and they are (1) why the agreements do not

specify that the funds are redeemable subject to allotment of shares; (2)

why they are shown as loans in the books of both assessee and VSK; (3)

why the 9% RCP shares are allotted eventually giving some benefit of

interest for VSK etc., Therefore, we find that the amounts given to

assessee, constitute loans only. We proceed to confirm the view of the

CIT(A) on this part of the issue. The arguments of assessee that the

fund inflow is always meant for said shares are dismissed.

Accordingly, relevant grounds are dismissed.

questions relating to years of initiating the penalty proceedings, the

case of the assessee is that assessee converted the said loan into share

application money in books in the preceding assessment year and

therefore, the year of initiation of penalty should have been done by the

AO in that year and not in the year under consideration.

11.1 Per Contra, the case of the Revenue is that the said book entries

in the books of the assessee are not in tune with that of the VSK.

Therefore, argument of Ld. Counsel constitutes a self-serving one.

11.2 On going through the relevant extracts relating to book entries of

both assessee and VSK, we find the orders of AO/CIT(A) are fair and

23 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

reasonable. We proceed to extract the relevant lines from the order of

CIT(A). The same reads as under :

“6.1.3 The appellant also claimed that the share application money is not a loan or deposits. The appellant claimed that the loan connotes a transaction in which the borrower approached the lender for certain sum for a fixed period on the terms and conditions agreed between them which includes the rate of interest, the tenure of loan and other security conditions. The deposit connotes a transaction in which the depositor gives to another person a deposit of his belongings which may be money on certain terms and conditions. The deposits can also be made for assuring the other of the performance of a contract etc., in the case of Bailment Contracts. The appellant holds that the test applicable to the deposits and loans when applied to the receipt of share capital would not constitute the same as deposit or loan. The appellant relied on the following case laws :

6.1.4 The appellant relied that the penalty is not leviable for A.Y.13-14, as the amounts received have been transferred as share application money in the F.Y. 09-10 & 10-11 itself. Therefore, it is claimed that there is repayment of loan by any stretch of imagination for A.Y.13-14.

6.1.5 The identify and the source of the funds received from VSK are duly explained as that company had filed the required returns of income and it sources of income is from IT and IT enable services and BOP services.

6.2 The submissions made are gone through. A close look at the ledger extracts and the bank accounts indicate that initially, an amount of Rs.23 lakhs on 19-12-2009 and Rs.42 lakhs and Rs.50 lakhs on 30- 12-2009 were paid directly by VSK Technologies to Digambar D. Patil prior to the investment agreement dtd.2-2-2010 mentioned above. Subsequent to the investment agreement, these amounts were returned back to the VSK Technologies Pvt. Ltd. by Digambar Patil on 22-2-2010. These returned amounts were immediately advanced by VSK to the appellant company on 23-2-2010 (Rs.50 lakhs) and 24-2-2010 (Rs.60 lakhs). Prior to the receipt of the above amounts, the appellant company received sums of Rs.50 lakhs and Rs.90 lakhs on 12-2-2010 and 16-2- 2010 respectively on signing the investment agreement dtd.2-2-2010. Thus, the appellant company received Rs.2.5 crores in the F.Y. 09-10 from VSK.

6.2.1 As on 31-2-2010, the appellant company had an authorized share capital of Rs.5 lakhs only and this authorized share capital was already subscribed by the promoters and thus the paid up capital was equivalent to authorized share capital. So the amounts of Rs.2.5 crores could not have been towards share application money, as there was no authorized share capital to receive the same. So therefore, this amount has to be treated as a loan/deposit. It is shown under share application money in

24 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

the figures mentioned for F.Y. 09-10 of the balance sheet filed for F.Y. 10- 11 as it contains the figures of the earlier years. It is not clear as to how these figures are reflected in the balance sheet filed for F.Y. 09-10, as the appellant did not file the balance sheet for F.Y. 09-10 filed with ROC. Even otherwise, mere representation of an amount as share application money would not be the true criteria to determine its correct nature.

6.2.2 The appellant company received an amount of Rs.49 crores and Rs.24 lakhs during the F.Y. 10-11. On verification of the ledger extract, it is seen that the appellant company had received an amount of Rs.33.71 crores (2.5 crores in F.Y. 09-10 and Rs.31,21,25,000/- by 29-10-2010) even before passing the resolution for increasing the authorized share capital in respect of preference shares. Further, the appellant had received the total amount of Rs.51.74 crores by 24-2-2011 which is the date on which the resolution was passed to increase the authorized share capital from Rs.49 crores to Rs.59 crores. Thus, the appellant had received Rs.33.71 crores and another Rs.2.5 crores prior to having the authorized share capital. Under no circumstances, this amount of Rs.36.21 crores can be treated as share application money in the absence of required authorized share capital. In the case of ITO Wd.13(1) New Delhi Vs. Nandi Promoters Pvt. Ltd. in ITA No.3462/Delhi/2009 for A.Y. 05-06 dtd.10-12-2009, it has been held that no company can receive any money more than its authorized share capital under the cover of share application money. It is also seen that the appellant had passed the general entry on 31-3-2012 treating the amount of Rs.49 crore as share application money. Even the appellant himself had considered the amounts received as loans before converting them into share application money after increasing the authorized share capital. The share application money was finally converted to 9% non cumulative redeemable preference shares @100/- per each on 3-10-2012. The VSK Technologies was issued 51,50,000 preference shares on this date. There is a considerable delay in issuing the preference shares and as per the Companies Act 2013, a company must allot shares against share application money within 60 days from the date of its receipt failing which they should refund the same within 15 days after expiry of said 60 day period to avoid being classified as deposit u/s.73 of the 2013 Act. The courts in various cases have also held that any undue delay in issue of shares, the amount has to be refunded even under the Companies Act, 1956. There has been a failure on the appellant in refunding the amounts. M/s. VSK who provided the funds has treated the amounts as loans and advances in the balance sheet filed with the income tax department. Further, the investment agreement itself states that the amounts are invested for the purpose of making investment in real estate and not for acquiring the shares of the appellant company. In view of the above facts, the amount received has to be treated as loan/deposit.”

Thus, the facts suggest that the entries in the books of the

assessee and the VSK are not in sync in this regard. Therefore, we find

the reason given by the CIT(A) has merits. Therefore, we dismiss

relevant arguments of Ld. Counsel for the assessee. Accordingly,

relevant ground No.7 is dismissed.

25 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

loans and the penalty proceedings are initiated property in the year

under consideration, now we proceed to adjudicate the transaction on

repayment by way of book entries qua the allotment of 9% Redeemable

Cumulative Preference Shares.

the assessee demonstrates undisputedly the fact of conversion of the

existing loan to the share application money by way of the book entries

only. These entries resulted in squiring up of the said loans and

therefore, in this case, the loans got repaid neither by way of account

payee cheque nor by demand draft as specified in the Act. On these

facts, the case of the assessee is that VSK never gave loans to the

assessee and they are part of the investment into shares and therefore,

the repayment by way of book entries does not arise.

13.1 On the other hand, the case of the Revenue is that it is the case of

repayment of loan only and the mode of the said repayment by way of

book entries constitutes violation of section 269T of the Act. In this

regard, Ld. DR submitted that the issue stands covered in favour of the

Revenue by virtue of the binding judgment in the case of CIT Vs.

M/s.Triumph International Finance (I) Ltd. (supra).

provisions of section 269T of the Act : On hearing both the sides, we

perused the orders of the Revenue and the said judgment. We find, on

similar facts, the repayment of loan by way of book entries constitutes

violation of provisions of section 269T of the Act as held by the

jurisdictional High Court in the case of CIT Vs. M/s.Triumph

26 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

International Finance (I) Ltd. (supra). Relevant para No. 19 is extracted

as under:

“19. In the present case, it is not in dispute that the assessee has repaid loan / deposit by debiting the account through journal entries. The question is, whether such repayment of loan / deposit is in contravention of the modes of repayment set out in Section 269T ? The argument advanced by the counsel for the assessee that the bonafide transaction of repayment of loan / deposit by way of adjustment through book entries carried out in the ordinary course of business would not come within the mischief of Section 269T cannot be accepted, because, the section does not make any distinction between the bonafide and non-bonafide transactions and requires the entities specified therein not to make repayment of any loan / deposit together with the interest, if any otherwise than by an account payee cheque / bank draft if the amount of loan / deposit with interest if any exceeds the limits prescribed therein. Similarly, the argument that only in cases where any loan or deposit is repaid by an outflow of funds, Section 269T provides for repayment by an account payee cheque / draft cannot be accepted because Section 269T neither refers to the repayment of loan / deposit by outflow of funds nor refers any of other permissible modes of repayment of loan / deposit, but merely puts an embargo on repayment of loan / deposit except by the modes specified therein. Therefore, in the present case, where loan / deposit has been repaid by debiting the account through journal entries, it must be held that the assessee has contravened the provisions of Section 269T of the Act.

From the above, it is a decided issue that the squiring up of loans by

way of book entries constitutes violation. Hon’ble High Court dismissed

all the similar arguments of Ld. AR before stating that the section 269T

of the Act does not distinguish the between the bonafide or non-

bonafide transactions. Therefore, we proceed to dismiss the arguments

of Ld. Counsel. Accordingly, the relevant ground No.6 is dismissed.

cause. The provisions of section 273B of the Act are relevant. The

provisions of section 273B of the Act mandate for not levy of penalty if

there exist a reasonable cause for the assessee for the failure to make

the repayment of loans in the modes other than the specified ones.

Relevant extract from the said section reads as under :

27 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

“273B. Notwithstanding anything contained in the provisions of....................................... Section 271E......................., no penalty shall be imposable on the persons or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure.”

In this regard of reasonable cause, the case of the assessee is

that loans received by the assessee from VSK are used for the purpose

of the business in acquiring the land for building the SEZs. This

activity is relatable to the primary object of the company. We find that

the same is undisputed by the Revenue. Thus, by appropriating the

said loans for land purchase, the assessee is devoid of required funds to

repay the loans to the VSK by an account payee/cheque or demand

drafts. Assessee showed repayment by squaring up the accounts in the

books by way of book entries. Consequently, when assessee does not

have funds to repay and hence, the possibility of repayment to VSK by

way of specified modes is impossible. Therefore, as per the assessee,

the paucity of funds for complying with the said provisions of section

269T of the Act, constitutes a reasonable cause within the meaning of

section 273B of the Act. In addition, making the repayment by issue of

account payee cheque/demand draft to VSK and receiving the same

towards the share application money through the same mode,

constitutes an “empty formality”. Thus, the said ‘empty formality’ is

also part of the said reasonable cause. As per Ld. AR for the assessee,

making repayment of loans and receiving back said sum again

constitute an ‘empty formality’. On similar facts, as per the Ld. AR, the

jurisdictional High Court of Bombay granted relief to the assessee on

the ground of similar reasonable cause. Ld. AR relied on the judgment

in the case of CIT VS. Triumph International Finance (I) Ltd., (supra).

28 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

15.1 Per Contra, from the Revenue emphasising the need for literal

interpretation of the statute, Ld. DR for the Revenue is of the opinion

that the provisions of section 269T of the Act relating to ‘Mode of

repayment of certain loans or Deposits’ specifies the methods of

repayment of loan and it is the duty of every citizen to comply with the

same. Regarding the core argument of lack of funds due to use of funds

for business purposes read with the argument relating to empty

formality and on the applicability of said binding judgment (supra.), Ld.

DR does not have much to say.

this issue relating to reasonable cause, i.e. lack of funds-cum-empty

formality. We have perused the orders of the Revenue along with the

paper book and the written submissions made by the Ld. Counsels

before us. We shall now take up the reasonable cause of the assessee

and the merits of it.

Meaning of Reasonable Cause: The expression “reasonable cause” is

undefined in the Act. However, the same was subject matter of

discussion in many orders of the Tribunal and the same exists in the

public domain. Accordingly, what constitutes a reasonable cause

cannot be laid down with a precision. It all depends on the factual

background of each case. The reasonable cause, as applied to human

action, is that which would constrain a person of average intelligence

and ordinary prudence. The word “reasonable cause” is interpreted by

the Tribunal in the case of Mrs.Manju Kataruka Vs. ITO 74 TTJ (Kol.)

“12. What would constitute reasonable cause cannot be laid down with precision. It would depend upon the factual background. Reasonable

29 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

cause, as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence. The word 'reasonable' has in law the prima facie meaning of reasonable with regard to those circumstances of which the actor, called on to act reasonably, knows or ought to know. Reasonable cause can be reasonably said to be a cause which prevents a man of average intelligence and ordinary prudence, acting under normal circumstances, without negligence or inaction or lack of bona fide. What can be construed as a reasonable cause is to be decided on the available facts of each and very case in a judicious manner. The decision on the matter should be taken by giving sufficient attention to particular facts of the case. It is to be looked from the view point of a man of average intelligence and ordinary prudence. It should also be borne in mind, that the law itself spells out the circumstances in which penalty can be levied by providing for reasonable cause for avoiding penalty. In other words, to decide what can be construed as a reasonable cause for avoiding penalty one has to keep in mind that the law itself requires that the default should have occurred without reasonable cause to merit penalty and that the issue must be decided on the available facts and the nature of default in a judicious manner. Before a cause can be said to be reasonable or not, it must be found as a fact that a particular cause operated upon the mind of the assessee which prevented him from doing the required act under normal circumstances. It is true that the word "reasonable cause" is not defined under the IT Act but it could receive same meaning and interpretation which is given to the expression "sufficient cause". Therefore, in the context of the penalty provisions, the word "reasonable cause" would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides, from doing the act of which he, called on to act reasonably, knows or ought to know.”

Although the said interpretation was given in the context of levy

of penalty u/s.271F of the Act, the meaning of reasonable cause holds

relevant in the present context where penalty is levied u/s.271E

r.w.s.269T of the Act.

In the instant case, the assessee’s reasonable cause revolves

around the problem of “paucity of funds” on one side and the “empty

formality” on the other. On going through the facts relating to this

issue, the loans received by the assessee from VSK were substantially

utilised for acquisition of the lands which are needed for creation of

townships which is the original intention of the assessee. Barring

Rs.4.38 crores given to the other concerns, otherwise, rest of the total

30 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

loans of Rs.51.74 crores were undoubtedly utilised for the business

purposes. Thus, it is not the case of the Revenue that the said funds

were utilised for non business purposes. Normally, the lack of funds by

itself may not be reasonable cause. However, the reasons for not having

fund for repayment by specified mode may constitute a reasonable

cause depending on the reasons. In the present case on hand, in our

view the use of funds for business purposes of the assessee, will

constitute a reasonable cause.

Other Modes of Raising Funds : Now we shall examine how the

assessee would have met the requirement of the statute, i.e. repayment

through account payee cheque or demand draft when (a) the assessee is

divested of the funds and (b) there is need for allotment of shares to

VSK. As a first option, assessee should have sold the said acquired

lands and raise the funds to repay to VSK by account payee

cheques/demand drafts. This is a difficult option and it goes against

the object of the company. Alternatively, assessee should have

borrowed further funds from third parties or from the other promoters

to raise funds to repay to the VSK through the specified modes of

payment. This is an impossible option for exercising as the company

itself already borrowed funds of Rs.51.74 crores and borrower is bent

on demanding for allotment of share on a guarantee. On having given

Rs.51.74 crores of the loans to the assessee, like any other creditor,

VSK needed some control on the company one form or other. For that ,

assessee is under obligation to allot shares resorting to squaring the

book entries through vouchers. Thus, the assessee is under the

obligation or pressure to allot the shares.

31 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

This method of repayment of loans is obviously outside the

scope of permitted methods of repayment. Nevertheless, the raising

funds through the aforesaid option only to receive the same back

against the share allotment, is a meaningless exercise. In the language

of binding judgment in the case of Triumph International Finance (I)

Ltd. (supra.). The same constitutes an ‘empty formality’. Why should

assessee do repay when the said money is only to return to the

assessee’s account for allotment of shares? The answer lies in the

concept of empty formality profounded by the High Court in the case of

CIT Vs. Triumph International Finance (I) Ltd. (supra). It is the decision

of the Hon’ble High Court that repaying the loans to VSK through

account payee cheques/demand drafts and receiving the same towards

the share application money constitutes the empty formality. We

proceed to extract the relevant lines from the said judgment and the

same is placed here as under :

“22. The argument advanced on behalf of the assessee that if Section 269T is construed literally, it would lead to absurdity cannot be accepted, because, repayment of loan / deposit by account payee cheque / bank draft is the most common mode of repaying the loan / deposit and making such common method as mandatory does not lead to any absurdity. No doubt, that in some cases genuine business constraints may necessitate repayment of loan / deposit by a mode other than the mode prescribed under Section 269T.

To cater to the needs of such exigencies, the legislature has enacted Section 273B which provides that no penalty under Section 271E shall be imposed for contravention of Section 269T if reasonable cause for such contravention is shown.

………..

32 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

genuineness of the receipt of loan / deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. There is 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 belongs to the Ketan Parekh Group which is involved in the securities scam cannot be a ground for sustaining penalty imposed under Section 271E of the Act if reasonable cause is shown by the assessee for failing to comply with the provisions of Section 269T. It is not in dispute that settling the claims by making journal entries in the respective books is also one of the recognized modes of repaying loan / deposit.

Therefore, in the facts of the present case, in our opinion, though the assessee has violated the provisions of Section 269T, the assessee has shown reasonable cause and, therefore, the decision of the Tribunal to delete the penalty imposed under Section 271E of the Act deserves acceptance.

cause and the binding judgment in the case cited above, we are of the

opinion that the reason of lack of funds caused by the act of utilisation

of it for the business purposes of the assessee, shall constitute

reasonable cause in this case. Raising the funds by sale of lands or

borrowing from other parties to repay to VSK is an unnecessary exercise

when the funds so paid to VSK is destined to return to the assessee’s

bank account. On this reasoning, the assessee’s decision in favour of

squiring up of the loans account through passing of journal entries,

shall constitute a reasonable cause on the facts of the present case.

The same reasoning has the strength of the binding jurisdictional High

Court judgment in the case of CIT Vs. Triumph International Finance (I)

33 ITA No.137/PUN/2018 Radhamadhav Realcon Pvt. Ltd.

Ltd. (supra). In this case, the amount was to come back to that

assessee towards the sale price of the shares. Therefore, on the ground

of reasonable case, as envisaged in the provisions of section 273B of the

Act, we are of the opinion that the levy of penalty is not sustainable.

Accordingly Ground No.8 raised by the assessee is allowed.

Order pronounced on this 25th day of September, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) �याियक �याियक सद�य �याियक �याियक सद�य सद�य /JUDICIAL MEMBER लेखा सद�य लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य

पुणे Pune; �दनांक Dated : 25th September, 2018 GCVSR / Satish आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : अ�ेिषत अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. The CIT(A)-6, Pune 4. The Pr. CIT-5, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “Bench A” Pune; 5. गाड� फाईल / Guard file. 6.

आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार आदेशानुसार

स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune