SUMANGLA DEVELOPERS PRIVATE LIMITED ,MUMBAI vs. ADDL.CIT CEN CIR 6, MUMBAI

During the year under consideration, the assessee had passed journal entries for assigning and reassigning loans as detailed below:- Name of Sister Concern Debit Credit Lodha Estate P Ltd 31,78,48,852 34,65,62,786 Vamadevi Developers & Farms P Ltd 3,00,000 --- Suryoday Buildwell & Farms P Ltd 3,40,02,143 Sunanda Agrobuild P Ltd 3,986 3,986 ------------------ ------------------ 31,81,52,838 38,05,68,915 ============= ============ Here “Debit” signifies that the assessee has repaid loans (or reassigned debts) and “Credit” signifies that the assessee has accepted loans (or got assignment of debts).

The Addl. CIT issued show-cause notice dated 06.08.2014 to the assessee and asked the assessee to show cause as to why penalty u/s 271D and 271E of the Act should not be imposed on the assessee for violation of provisions of sec. 269SS and 269T of the Act. The assessee explained that it has passed journal entries out of business expediencies and there was reasonable cause for the same. The assessee also furnished ledger account copies of sister concerns. The assessee contended that the action of transferring of rights and liabilities to sister concerns by way of journal entries does not constitute “Loan in Money” within the meaning of sec.269SS/269T of the I.T Act. It was submitted that the impugned journal entries were passed to avoid procedural delays in preparing cheques, obtaining signatures and also to avoid banking

It was also contended that the scope of section 269SS/269T is restricted to the transaction involving acceptance or repayment of money and not intended to effect the cases where debt/liabilities arises on account of book entries. The assessee placed reliance on the decision rendered by Hon’ble Delhi High Court in the case of CIT vs. Worldwide Township Projects Limited (ITA 232/2014) and other decisions, wherein it was held that the liability recorded in the books of accounts by way of journal entries is clearly outside the ambit of provisions of sec.269SS of the Act.

The assessee also contended that there exists reasonable cause in transferring of assets/liabilities through journal entries within the meaning of sec.273B of the Act. In this regard, the assessee placed reliance on the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of CIT vs. Triumph International Finance (India) Limited (345 ITR 270), wherein it was held that settling of claims by making journal entries in the respective books is also one of the recognized modes of repaying loan/deposit. Though the Hon’ble Bombay High Court held that the same violates the provisions of sec.269T, yet it was held that the same constitutes reasonable cause within the meaning of sec.273B of the Act, as 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 and further, 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 the ordinary course of business has been doubted in the regular assessment.

The Ld Addl. CIT, however, took support of the decision rendered by Hon’ble Bombay High Court in the case of Triumph International Finance (India) Ltd (supra) to hold that the journal entries are hit by the provisions of 4 Sumangla Developers & Farms Private Limited sec.269SS and 269T of the Act. By placing reliance on the decision rendered by co-ordinate bench in the case of V.N. Parekh Securities vs. ACIT (ITA No.6082 & 6083/Mum/2009 dated 16-08-2013), the Ld Addl. CIT expressed the view that the assessee is required to show reasonable cause in respect of each and every case. The Ld Addl.CIT took the view that the assessee has not shown reasonable cause for every entry. Further he observed that the facts in the case of Triumph International Finance India Ltd (supra) were that the adjustments by way of journal entries were made with regard to the transactions entered with the same party. The Ld Addl. CIT held that, in the instant case, the acceptance of loan and repayment of loan by way of journal entries are with different parties. He held that the spirit of Bombay High Court judgement is that only such transactions which are in the nature of squaring up the outstanding amounts of each other between two parties can alone claim the benefit of reasonable cause. The Ld Addl. CIT further observed that the assessee is part of Lodha group, which had declared about Rs.200/- crores as unaccounted income during the course of search conducted in their hands. Hence it cannot be ruled out that the entities through whom such repayment/acceptances are done are not part of a chain of entities involved in transaction for the purposes of tax evasion. Accordingly he levied penalty of Rs.38.05 crores u/s 271D of the Act for accepting loan in violation of sec. 269SS of the Act and Rs.31.81 crores u/s 271E of the Act for violation of sec. 269T of the Act.

Being aggrieved with the orders passed by Ld Addl. CIT, the assessee filed appeals before Ld CIT(A), who disposed of both the appeals by common order. The Ld CIT(A) called for ledger account details of sister concerns from/to whom the loans were taken/repaid for the three years, viz., for F.Y 2009-10, 2010-11 and 2011-12 relevant to the assessment years 2010-11, 2011-12 and 2012-13. The Ld CIT(A) analysed the journal entries passed in all these three years. The Ld CIT(A) noticed that (a) the assessee has not clarified as to what was the basis of assignment of assets/liabilities.

Accordingly the Ld CIT(A) took the view that (a) without actual and real transactions, the credits and debits of Lodha Estates against two different parties have been cross adjusted through the books of assessee company and other companies involved.

The Ld CIT(A) further took the view that the assessee has carried out bogus transactions, i.e., the rights and liabilities of Lodha Estates were artificially transferred through book entries to a third entity M/s Suryoday Buildwel & Farms P Ltd and they were extinguished and adjusted against each other as payables and receivables from assessee company. The assessee had placed reliance on the decisions rendered by the Tribunal in other group cases, wherein following reasons were held to constitute reasonable cause:- (a) Alternative mode of fund rising (b) Assignment of receivables. (c) Squaring of transactions. (d) Operational efficiencies/MIS purpose (e) Consolidation of family members debt (f) Correction of errors (g) Loans taken in case.

The Ld A.R submitted that the provisions of sec.269SS and 269T governs the mode of taking or accepting/repaying certain loans or deposits. He submitted that under Explanation to sec. 269SS, the term “loan or deposit” is defined as per which it would mean “loan or deposit of money”. He submitted that the provisions should normally attract only when the transactions involving “money” are undertaken. He submitted that the term “money” is defined in P Ramanatha Aiyar’s Advanced Law Lexicon as “a medium of exchange authorised or adopted by a domestic or foreign government as a part of its currency” (one of the meanings given). The Ld A.R further submitted that the object of introducing the provisions of sec. 269T and 269SS is explained in Circular No.345 of 1982 dated 28-06-1982 and in Circular No.387 of 1984 dated 06-07-1984 respectively. It has been stated that these provisions have been introduced to curb the practice of explaining unaccounted cash found in the course of searches as representing loans or deposits taken from various persons. Thus these provisions mainly aim at 8 Sumangla Developers & Farms Private Limited curbing the attempts to circulate black money through the transactions of loans or deposits. Accordingly the Ld A.R submitted that the provisions of sec.269SS and 269T should be applicable only the transactions involving exchange of “physical form of money”. He further submitted that the transactions carried out through journal entries, which does not involve exchange of physical form of money, should not be hit by the provisions of sec.269SS and 269T of the Act.

The Ld A.R submitted that, in the instant cases, the transactions of transferring or assigning assets and liabilities have been undertaken by passing journal entries between the group concerns. This is quite common in business circles and is also recognised under accounting principles. He submitted that the Lodha Group is one of India’s large infrastructure developer. For practical and commercial reasons, the group establishes and incorporates Special Purpose Vehicles in the form of Companies for each project/business line it proposed to enter. This is necessitated to have better control over the projects, to insulate the project from legal/financial risks of other projects, to raise project specific finances. In this process, the assessee was constrained to assign and reassign certain debts and liabilities between the group concerns, which has been done through passing of journal entries.

The Ld A.R submitted that the provisions of sec.269SS/269T should apply only the transactions take place between two persons. However in the instant cases, three persons are involved. These types of transactions fall in the category of “Novation” as defined under sec.62 of the Indian Contract Act, 1872, which reads as under:- “62. Effect of novation, rescission, and alteration of contract:- If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

The ld A.R submitted that the co-ordinate bench of Tribunal has considered an identical issue of undertaking transactions by way of journal entries in the case of Lodha Builders P Ltd & others (ITA No.476/M/2014 & others) and the Tribunal, vide its order dated 27-06-2014, has deleted the penalty levied u/s 271D and 271E of the Act. He submitted that the above said decision of the Tribunal has since been upheld by the Hon’ble Bombay High Court in its order dated 06-02-2018 passed in Ajitnath Hi-tech Builders P Ltd & others in Income tax Appeal No.171 of 2015 and others. The Ld A.R submitted that the parties accepted in this case before Hon’ble Bombay High Court that the transactions of accepting/repaying loans by way of journal entries are hit by the provisions of sec. 269SS and 269T of the Act, in view of the binding decision of the Hon’ble Bombay High Court in the case of Triumph

He submitted that the Hon’ble Bombay High Court has held in the case of Triumph International Finance (I) Ltd (345 ITR 270) that the transactions of receipt and repayment of loans or deposits are hit by the provisions of sec.269SS and 269T of the Act. The above said decision was rendered on 12- 06-2012. The Ld A.R submitted that the Hon’ble Delhi High Court in the case of CIT vs. Noida Toll Bridge Co. Ltd (262 ITR 260) and the Tribunal in many other decisions, had taken the view that the transactions undertaken by way of journal entries are not hit by the provisions of sec.269SS/269T of the Act. Various assessees were undertaking transactions through journal entries on the strength of the above said decisions. Since the Hon’ble Bombay High Court has taken a different view in the case of Triumph International finance (I) Ltd (supra) with regard to journal entries, it was pointed out to Hon’ble Bombay High Court that the parties were undertaking the transactions of accepting/repaying loans or deposits through journal entries on the strength of decisions that were prevailing, prior to the decision rendered by Hon’ble Bombay High Court. The Hon’ble High Court, while hearing the appeal filed in the case of Ajitnath Hi-tech Builders P Ltd & others (supra), accepted the above said position and accordingly held as under:- “(i) In the present facts, the period during which the journal entries were made by the respondents was in the previous year relevant to the Assessment year 2009-10, i.e., Financial year 2008-09. At that time, the decisions of the Tribunal in the cases of Triumph International (supra) and decision of V.H. Parekh (P) Ltd, Ketan V Parekh, Sunflower Builders (supra), Ruchika Chemicals (supra), Lala Murari Lal (supra0 and the decision of Delhi High Court in Noida Toll Bridge Co. Ltd (supra) were holding the field. Thus, not in breach of Section 269SS of the Act. In the above view, while agreeing with the submission of Mr. Mohanty, learned Counsel for the appellant that the decision of this Court in Triumph International Finance (supra) has only clarified/stated the position as always existing in law, the receiving of deposits/loans through journal entries would certainly be hit by Section 269SS of the Act. Nevertheless,

The Ld A.R submitted that the revenue had levied penalties u/s 271D and 271E of the Act for identical reasons of receiving/repaying loan or deposits through journal entries, in the following cases and the co-ordinate benches of Tribunal has deleted the penalty in the following cases, by following the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of Ajitnath Hi-tech Builders P Ltd & others (supra):- (a) National Standard India Ltd (ITA No.6607 & 6609/Mum/2016 dated 06-06-2018)

The Ld D.R, on the contrary, strongly supported the orders passed by the tax authorities. He submitted that the journal entries have been passed for transferring the assets/liabilities at the instance of Lodha Estates P Ltd, the flagship company of Lodha Group. He submitted that the assets and liabilities have been artificially assigned and the procedure of squaring up the outstanding amounts without actual payments defies the basic principles of accounting. The Ld D.R submitted that the Ld CIT(A) has explained as to when lawful adjustments are possible through journal entries. He submitted that the lawful adjustment through journal entries is possible in the following situation:- (a) A has to pay X (b) A has to receive from Y (c) Y has to pay X (independent of A’s transaction) (c) Then Y, instead of paying to A, can pay to X in settlement of dues of A.

The Ld D.R submitted that the assessee had placed reliance on various decisions rendered by Tribunal. However, the Ld CIT(A) has held that 13 Sumangla Developers & Farms Private Limited complete facts of the case and the transactions between group companies were not brought to the notice of the Tribunal and further held that such kind of passing of journal entries are against the principles of accountancy. Accordingly the Ld CIT(A) has held that the decisions rendered by the Tribunal are distinguishable. The Ld D.R submitted that the Hon’ble Bombay High Court in the case of Triumph International Finance (supra) was concerned with the adjustments made by way of journal entries between two parties, who owed money to each other. However, in the instant cases, the one to one liability was not shown and further the transactions were carried between different companies through journal entries without showing the subsistence of liability interse the parties. Accordingly he submitted that the assessee cannot place reliance on the decision rendered by Hon’ble Bombay High Court in the case of Triumph International Finance (supra) as the “reasonable cause”, as understood in the above said case is different and the assessee has failed to show that the adjustments were carried out through journal entries between two parties. The Ld A.R further submitted that the assessee is required to show the reasonable cause for each of the entry of receipt/repayment of loans, but the assessee has failed to show the same. The assessee did not explain the business compulsion or necessity, which compelled it to pass journal entries.

The ld CIT-DR submitted that the Tribunal has rendered its decision in other cases by accepting reasonable cause and the reasons so accepted were grouped into seven categories (discussed supra). The assessee herein also, has tried to explain that the transactions carried on by it through journal entries in one or more of the seven categories. However, the Ld CIT(A) has held that none of the classification shall apply to the transactions carried on by the assessee herein. The Ld CIT(A) has also observed that none of the seven categories shall apply to the transactions carried on by the assessee for detailed reasons in page 53 -54 of her order. The Ld CIT(A) has further pointed out that the transactions carried through journal entries are not real

The Ld CIT-DR further submitted that the assessee has explained that these transactions have been entered by the group entities for genuine business purposes. However, the Ld CIT(A) has observed that the assessee did not clarify the basis of assignment of assets/liabilities. He submitted that the assessee has not proved business exigencies or compelling reasons or business constraints for undertaking the transactions through journal entries. The Ld D.R placed his reliance on the following case laws in support of his arguments:- (a) Five Star Marine Exports (P) Ltd vs. DCIT (2018)(92 taxmann.com 404)(Mad)

We have heard rival contentions and perused the record. The assessee herein belongs to Lodha group of companies, which is one of the leaders in infrastructure and real estate development. The Ld A.R submitted that the group, as part of its business strategy, incorporates various subsidiary and associate companies as Special Purpose Vehicle, in order to execute various projects. It is the contention of the assessee, that due to business exigencies and upon commercial considerations, the debts and liabilities outstanding in the books of one company is assigned to another company. It is also submitted that the process of issuing cheques to group companies, encashing of the cheques by them would result in avoidable paper works, wastage of time and also blocking of huge funds for a shorter period without any commercial gains. It was further submitted that the transfer of assets and liabilities from one company to another company could be done by passing journal entries is one of the recognised methods under accounting principles and is also carried out in the ordinary course of business by all. It is also stated that this is quite common in business circles. The specific reasons cited by the assessee for 15 Sumangla Developers & Farms Private Limited undertaking loan transactions through journal entries before Ld CIT(A) are extracted below:- “2.2.2 We hereby submit that due to following reasons the Appellant had passed journal entries in the books of account:-

The Addl. CIT was not convinced with the explanations so given by the assessee. The Ld Addl. CIT took view that the assessee cannot take support of the decision rendered by Hon’ble Bombay High Court in the case of Triumph International Finance (I) Ltd (supra), since the High Court was considering a case of adjustment of cross outstanding between two parties through journal entries, i.e., both the parties owned money to each other. However, in the instant case, the transactions through journal entries have been entered between parties who did not owe money to each other. However, we notice that the very same contention was raised by the revenue before the Hon’ble Bombay High Court in the case of CIT vs. Ajitnath Hi-tech Builders P Ltd (supra) and the Hon’ble Bombay High Court, vide its order dated 06-02-2018 has held as under:- “(e) Mr. Mohanty’s submission that the test laid down in Triumph International Finance (supra) will have no application in the present facts in view of large number of entries in this case as compared to only one entry in the case before this Court. The test of reasonable cause cannot, 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...…”

It can be noticed that the impugned entries have been passed by the entities, which are corporate entities incorporated under the provisions of Companies Act. It is also in the knowledge of every one, the Companies are subjected to statutory audit under the Companies Act, who are required to mandatorily follow Accounting principles and Accounting Standards. The 18 Sumangla Developers & Farms Private Limited accounts so audited are required to be approved in the Annual General Meeting and also required to be filed with Registrar of Companies. Even though the Ld CIT(A) states that the journal entries passed by the assessee are against Accounting principles, yet she has not identified the accounting principles, which have been violated. In any case, the application of correct accounting principles and accounting standards should have already been examined by the Statutory auditors. The Ld CIT(A), in any case, has not taken support of any authority to come to her conclusion that the accounting policies have been violated.

The question of transferring an asset or a liability through journal entries shall arise only when the concerned asset or liability already exists in the books of accounts. The assessee has furnished the reasons for undertaking the transactions through the journal entries. However, the Ld CIT(A) did not accept the said reasoning and further taken the view that the assessee has undertaken the transactions with malafide intentions to defraud revenue. In our view, these observations are adverse inferences drawn by the Ld CIT(A) without any basis. The transfer of assets/liabilities have been undertaken through journal entries in the books of accounts of the companies in the ordinary course of business, which is accepted as quite normal in business circles. The accounts have been audited, meaning thereby, the transactions have been accepted as normal transactions carried out in the ordinary course of carrying of business. Under these set of facts, we are unable to understand as to how these transactions could be considered to be illegal. When the transactions cannot be considered to be illegal, the question of malafide intentions, defrauding of revenue should not arise. There should not be any dispute that the legal transactions may also give rise to any income, but the said aspect is required to be examined during the course of regular assessment proceedings. In the instant case, the issue considered by the Ld CIT(A) related to the penalty levied u/s 271D and 271E of the Act, where the existence or otherwise of reasonable cause is required to be examined. Hence the view drawn by the Ld CIT(A) that these transactions are not genuine are mere

We notice that the Ld CIT(A) has passed the impugned order prior to the order passed by Hon’ble Bombay High Court in the case of Ajitnath Hi-tech Builders P Ltd (supra). In the above said case, the assessee argued that the transactions of accepting/repaying loans through passing of journal entries passed, prior to the ruling given by Honble Bombay High Court in the case of Triumph International Finance (supra), should be considered as reasonable cause, as they have been entered on the strength of the decisions rendered by Hon’ble Delhi High Court and Tribunals, which had held that the transactions undertaken through journal entries are not covered by sec. 269SS/269T of the Act. The Hon’ble Bombay High Court has rendered it decision in the case of Ajitnath Hitech Builders P Ltd on 12.06.2012. The Hon’ble Bombay High Court accepted the said contentions and the relevant observations made by Hon’ble High Court are extracted below:- "(h) In any event, as rightly pointed out by Mr. Sridharan, learned Senior Counsel for the respondents assesses, the order of this Court in Triumph International Finance (supra) was rendered on 12th June, 2012. This, was in an appeal filed by the Revenue from the order of the Tribunal dated 29th January, 2008, which had held that deposits/loans received through journal entries do not fall with the mischief of Section 269SS of the Act, so as to invite penalty under Section 271D of the Act. This, the Tribunal did by following its earlier orders in the case of V.N. Parekh Ltd. and Ketan

We have already noticed that the transactions, in the instant cases, were undertaken during the period from 01-04-2010 to 31.03.2011, i.e., much prior to the decision dated 12-06-2012 rendered by Hon’ble Bombay High Court in the case of Ajitnath Hi-tech Builders P Ltd (supra). Hence the transactions undertaken through journal entries prior to 12-06-2012 shall constitute reasonable cause within the meaning of sec.273B of the Act.

During the course of hearing, the Ld CIT-DR placed his reliance on the decision rendered by Hon’ble Madras High Court in the case of Five Star Marine Exports (P) Ltd (supra). We notice that was a case of acceptance of loans by way of cash. The Ld CIT-DR also placed reliance on the decision rendered by Hon’ble Kerala High Court in the case of Al-Ameen Educational Trust Kulapully P.O. (supra). This was also a case of acceptance of deposits by way of cash from staff members. The facts in the instant case relate to the transactions of accepting/repaying loan through journal entries. Hence, we are of the view that the above said decisions, relied upon by Ld CIT-DR, are not applicable to the facts of the present case.

In view of the foregoing discussions, we are of the view that the transactions of accepting/repaying loans by way of assignment of debts/liabilities have been undertaken by the assessee in the normal course of carrying on of business in the ordinary course and hence they constitute reasonable cause within the meaning of sec. 273B of the Act. In any case, these transactions have been undertaken prior to 12.06.2012, i.e., the date on which the decision in the case of Triumph International finance (supra) holding that the journal entries are hit by the provisions of sec. 269SS/269T of the Act. The Hon’ble Bombay High Court, in the case of Ajitnath Hi-tech Builders P Ltd (supra) has held that the transactions of loans undertaken through journal entries on the strength of the decision rendered by Hon’ble Delhi High Court and tribunals, prior to the ruling given by it in the case of Triumph International finance (supra) is covered by “reasonable cause” within the meaning of sec.273B of the Act. Hence we are unable to sustain the view taken by Ld CIT(A). Accordingly we set aside the orders passed by Ld CIT(A) and direct the AO to delete the penalties levied u/s 271D and 271E of the Act for the year under consideration.

In the result, both the appeals of the assessee are allowed. Order has been pronounced in the Court on 12.9.2018.