DCIT CENT. CIR. -7(3), MUMBAI vs. PALAVA DWELLERS PVT. LTD. (FORMERLY KNOWN AS LODHA DWELLERS PVT. LTD.), MUMBAI

This appeal by the Revenue and the cross objection by the assessee are arising out of the order of Commissioner of Income Tax (Appeals)-49, Mumbai [in short CIT(A)], in appeal No. CIT(A)-49/IT-227 & 228/2015-16 dated 11.08.2016. The Assessment was framed by the Dy. Commissioner of Income Tax, Centre Circle-7(3), Mumbai (in short ‘DCIT’) for the A.Y. 2012-13 vide order dated 31.03.2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’). The penalties under section 271D and 271E were levied by the Addl.CIT, Central Range-7, Mumbai vide different orders of even date 28.09.2015.

2. The only common issue in this appeal of Revenue and the cross objection of the assessee is against the order of CIT(A) deleting the penalties levied by the additional CIT central range, Mumbai under sections 271 D & 271E of the Act for accepting & repayment in cash loan/ deposit/ transactions made through journal entries in excess of ₹20,000/- in violation of the provisions of section 269SS & 269T of the Act by holding that the genuineness of transactions made through journal entries is not in doubt and consequently there is a reasonable cause for accepting & repayment in cash loan/ deposit/ transactions made through journal entries in excess of ₹20,000/-. For this Revenue has raised the following two grounds: - “1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the penalty levied u/s. 271D & 271E of the Income Tax Act, 1961 on the ground that the genuineness of the transaction made through journal entries is not in doubt.'

The assessee is also in Cross Objection against the order of CIT(A) on merits and for this assessee has raised the following grounds: - “1. The ld. Commissioner (Appeals) erred in holding that journal entries/ book adjustments result in the contravention of section 269SS and 269T of the Income-tax Act, 1961."

3. Briefly stated facts are that the assessee is engaged in land development, construction business and real estate properties. During the course of assessment proceedings under section 143(3) of the Act for the relevant FY 2011-12 relevant to AY 2012-13, the AO while passing assessment order dated 31.03.2015 initiated the penalty proceedings under section 271D and 271E of the Act for violation of provisions of section 269SS and 269T of the Act. The AO initiated the penalty proceedings vide Para 4 of the assessment order as under: - “4. By not accepting the loans through account payee cheque or bank draft and also the repayment the same other than through banking mode, the assessee in fact has violated the provision of section 269SS/269T which prohibits such transactions. The proviso to section 269SS exempts certain categories mentioned as (a) to (3) where loan or deposit taken can be accepted other than by account payee cheque or draft but the assessee does not fall under any of the exempt category. Hence, by not accepting the loan/ deposit or the repayment of the same by account payee cheque or bank draft the assessee has violated the provisions of section 269SS / 269T of the IT Act. Therefore, the matter is being referred to addl. Commissioner of Income Tax (Appeals), CIT-7, Mumbai for necessary action regarding initiation of penalty proceedings under section 271D / 271E of the IT Act.”

4. The matter was referred to the additional CIT by the AO for levy of penalty under section 271D and 271E of the Act. The additional CIT, Range-7, Mumbai issued show cause notice dated 03-07-2015, requiring the assessee to explain as to why the penalty under section 271D and 271E should not be levied. The assessee before the additional CIT range, 7 explained the facts that the assessee has adjusted the payments from/to various sister concerns through journal entries due to business expediency and reasonable cause. It was explained that the transferring the asset and the liabilities to the sister concerns by way of journal entries does not constitute the loan or deposit in term of money within the provisions of section 269SS and 269T of the Act. It was also explained that back to back entries while receiving payment or making final payment is always by account payee cheques and this can be verified by the AO. The Additional CIT was not convinced with the explanation of the assessee and vide different orders under section 271D and 271E of the Act levied the penalty for both the defaults by observing as under: - “In view of the above, the assessee company is a part of the Lodha Group which is a major construction group engaged in the construction business and development of real estate. Lodha Developers Ltd. is the parent holding company which has further subsidiaries and step down subsidiaries. The reference received from the assessing officer reveals that the assessee has received/ accepted loans from various concerns through a mode other than that specified in section 26955. The loans have been received/accepted through journal entries.

Section 269SS of the Income Tax Act 1961, clearly states that no person specified therein shall take or accept from any other person any loan or deposit otherwise than by account payee cheque or account payee bank draft if, the amount is Twenty Thousand Rupees or more.

The assessee has submitted that the journal entries pointed out by assessing officer is not loan or deposit of money. Assessee has mainly relied in on the judgment of Delhi High Court in the case of Worldwide Township Projects Ltd. which has been quoted with approbation in the decision of the Mumbai ITAT in to 481/2014. The ITAT Mumbai has held that since there is no involvement of money the provisions of Section 269SS and Section 269T are not attractive. In this context the Hon'ble Bombay High Court in the case of CIT(Central)-IV Vs. Triumph International Finance (India) Ltd. dated 12.06.2012 has held that 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 269SS of the IT Act. It needs to be stated that the judgment of Delhi High Court did not consider the judgment of the Bombay High Court in Triumph International Finance (India) Ltd. To that extent this judgment of Delhi High Court can be said to be sub silentio. The case of the assessee is squarely covered by the mischief of section 269T and also the assessee cannot claim the benefit of section 273B since the assessee has failed to prove any reasonable cause. The Hon'ble Bombay High Court in the case of Triumph International Finance (India) Ltd. has held as under:

'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.

This is evident from the manner in which journal entries have been passed. Without prejudice to the genuineness of the transactions carried out, even bonafide transactions, if carried out in violation of section 269SS/269T, shall attract penalty as has been held by the jurisdictional High Court in the case to Triumph International Finance (India) Ltd. The assessee has also not made out any case of reasonable cause u/s 273B following the guidelines laid down by the Bombay High Court in Triumph International Finance (India) Ltd. The Mumbai [TAT 'F' Bench in its order in the case of M/s. V.N. Parekh Securities Vs. ACIT, Cent.Cir.40. & 6083/ Mum/2009 dated 16.08.2013 has stated " In view of the judgement of the Hon'ble jurisdictional High Court (in CIT Vs Triumph International Finance (I) Ltd (2012) 345 ITR 270), it is apparent that there can be no deletion of penalty if simply there is a receipt of loan or repayment of loan through journal entries. Each and every case is required to be considered as to whether there was some reasonable cause in accepting such loans or repaying loan in contravention of provision of sec.269SS / 2692". The assessee in the instant case has not been able to show as to what was the compulsion to pass journal entries.

The Assessee could not justify that the repayment / acceptance of loan / deposits are merely transactions with one party with whom repayment and acceptance is involved. The case before the Hon'ble Bombay High Court in Triumph International Finance (12.06.2012) involved transaction with one party and hence it was held that it would be an empty formality to pay and accept by account payee cheque the same amount. The assessee in this ease has not shown that such transaction is with same party. It is not a ease of simple squaring up or mutual extinguishment of liabilities which can be done by passing journal entries. In our ease, the party from whom amount is shown to be accepted/ in the nature of loan or deposit is not the same party to whom the same amount is repaid. The assessee has not able to demonstrate in support of its case the necessity of receiving / repayment of loan / deposit otherwise than by account payee cheque in ease of alternate mode of raising funds, assignment of receivables, squaring up of transactions, operation efficiency purpose, consolidation of family debts etc. The plea of the assessee for the benefit of reasonable cause cannot be accepted. The spirit of the Bombay High Court judgment is that only such transactions which are in the nature of squaring up with the same party can only claim the benefit of reasonable cause. Needless to add, the onus is on the assessee to prove there was a reasonable cause in respect of each such transaction since section 273B postulates that penalty is not enforceable if assessee proves that there was a postulates that penalty is not enforceable if assessec proves that there was a reasonable cause for the said failure. No such reasonable cause could be found in this case. The assessee has further submitted that there is no unaccounted cash flowing among the group entities. It shall not be out of place to mention here that the assessee group has made a disclosure before the Hon'ble Income Tax Settlement Commission, Murnbai, of undisclosed income arising out of transactions with and by various group entities which are also the subject matter of investigation pursuant to direction of Hon'ble ITSC. 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 purpose of tax evasion.

From the entire conspectus of facts and law adumbrated above, I am satisfied that the assessee company has violated the provisions of Section 269SS of the Income Tax Act, 1961 and committed default within the meaning of section 271D of the IT Act, 1961, for which a penalty is leviable. I therefore, levy a sum of Rs.1372,17,45,978/- (Rupees One Thousand Three Hundred and Seventy Two Crore Seventeen Lakh Forty Five Thousand Nine Hundred and Seventy Eight Only) by way of penalty u/s 271D of the Act, 1961.”

6.1. The assessment in this case was completed u/s.143(3) on 31 3.2015 at the returned income. In the assessment order it was observed by the A.O. that the assessee has violated the provisions of section 269SS/269T by not accepting/not repaying the loans through account payee cheque or bank draft and accordingly a reference was made to the Addl.CIT., Central Range-7, Mumbai. The AddI.CIT has levied the penalty ufs.2710 with respect to the total of credit entries arising in its books with four sisters concerns by way of journal entries during the financial year 2011-12 relevant to A.Y. 2012-13. The Addl.CIT has relied on the decision of Hon'ble Bombay High Court in the case of Triumph International Finance(l) Ltd to hold that the transaction of loan/deposit by way of adjustment through book entries will result in contravention of the provisions of section 269SS of the Act. Further, it was found that the appellant could not prove any reasonable cause for contravention of above said provision: The Addl.CIT has taken the view that in the case of Triumph International (supra) the transaction was in the nature of squaring up with the same party and accordingly the benefit of reasonable cause would be available if the transactions by way of passing journal entries was with respect to the same party The Addl.CIT has also observed that in view of the disclosure made by the group companies before the Income Tax Settlement Commission. Mumbai following search in the Lodha group of cases on 10 1 2011. it could not be ruled out that the entities through whom such repayment/acceptances are done by way of journal entries are not part of a chain of entities involved in transaction for the purpose of tax evasion)

6.2. The appellant has submitted that the journal entries passed for transactions assigning debts and liabilities among sister concerns and reimbursement of expenses do not constitute acceptance of loan or deposit of money as per provisions of section 269SS of the Act. It has been submitted that the levy of penalty was not justified since the transactions made through journal entries were bonafide and out of commercial expediency and since there existed reasonable cause u/s.273B of the Act 6.3. From the details furnished and submissions made it is noted that the penalty has been levied with respect to journal entries with group concerns, which have been undertaken to assign receivables, payment on behalf of group concern for squaring up transactions and for ease in consolidation of accounts, rectification entries etc. As a result of these entries the receivables have gone up or down resulting in taking of loan/ repayment of loan. Since the transactions are for more than the amount of Rs. 20,000/- and the same are not through account payee cheque or bank draft, there is violation of the provisions of Section 269SS/269T In this regard reliance is placed on the decision of the jurisdictional High Court in the case of CIT vs Triumph International Finance(l) Ltd dated June 12, 2012 (22 Taxmann.com 138 BOM) for AY. 2003-04 and the case of CIT vs MIs. Triumph International Finance(I) Ltd ITA No-5745 of 2010 dated 17 8.2012 for A.Y.2000-01, The decision for AY 2003-04 is with respect to contravention of provisions of section 269T, since there was a repayment of loan by making journal entries in the books of account and it was held by the Hon’ble court that repayment of - loan/deposit, except by the modes specified in Section 269T, would amount to contravention of the said provision. The decision for the A.Y.2000-01 is with respect to contravention of provisions of Section 2693S wherein the appellant company and its sister concern MIs. Triumph Securities Ltd had transactions of sale and purchase with common customers and the credit/debit liabilities were settled through journal entries The Hon’ble court held, applying the ratio laid down in of 2010 decided on 12th June 2012 (the decision for A.Y.2003-04), that receiving loans/deposits through journal entries would be in violation of section 26955 of the Act.

6.3.1 Further, I find that the issue regarding levy of penalty u/s.271D/271E of the I.T. the case of various other companies of Lodha group (Lodha Builders Pvt. Ltd vs ACIT and five other group concerns) for A.Y.2009-10 has been decided by the ]TAT 'E' Bench, Mumbai vide order dated 27.6.2014 In the said order, under similar facts and circumstances, the ITAT is of the opinion that the assessee has violated the provisions of section 269SS/269T of the Act in respect of journal entries. Accordingly, following the above said decision, it is held that the appellant has undertaken the journal entries, as noted in the penalty order, in contravention of the provision of section 26955 and ground No.2 taken by the appellant in this regard is dismissed.”

(i) Hon’ble Delhi High Court in the case of CIT vs. Noida Toll Bridge Co. Ltd. [2003] 262 ITR 260 (Delhi) rendered on 28.01.2003.

(ii) Hon’ble Rajasthan High Court in the case of CIT vs. Hissaria Bros. [2007] 291 ITR 244 (Rajasthan) rendered on 21.07.2006.

(iii) Order of Co-ordinate Bench of this Tribunal in the case of CIT vs. Triumph International Finance (I) Ltd. in dated 29.01.2008.

(iv) Order of Co-ordinate Bench of this Tribunal in the case of Muthoot M. George Bankers vs. ACIT [1993] 46 ITD 10 (Cochin), dated 16.04.1993.

In Woodward Governors India (P) Ltd. Vs. CIT 118 Taxman 433 (Delhi), the Hon’ble Delhi High Court considered the meaning of reasonable cause and held 'Reasonable cause as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do In the case of CIT vs. Triumph International Finance (I) Ltd. (supra). the Hon'ble Bombay High Court has held (I) that the Tribunal was not justified in holding that repayment of loan or deposit through journal entries did not violate the provisions of section 269T of the Act.

(ii) That it would have been an empty formality to repay the loan or deposit amount by account-payee cheque or draft and receive back almost the same amount towards the sale price of the shares. Neither the genuineness of the receipt of loan or deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business had been doubted in the regular assessment There was nothing on record to suggest that the amounts advanced by Investment Trust of India to the assessee represented the unaccounted money of the Investment Trust of India or the assessee. The fact that the assessee-company belonged to the Ketan Parekh group involved in the securities scam could not be a ground for sustaining penalty imposed under section 271E of the Act if reasonable cause was shown by the assessee for failing to comply with the provisions of section 269T. Settling claims by making journal entries in the respective books is also one of the recognized modes of repaying loan or deposit. Therefore, on the facts, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan or deposit was not a bonafide transaction and was made with a view to evade tax, the cause shown by the assessee was a reasonable cause and in view of section 273B of the Act, no penalty under section 271E could be imposed for contravening the provisions of section 269T of the Act.

6.5 In the appellant's case the genuineness of the transaction made through journal entries is not in doubt and it has not been shown either in the assessment proceedings or in the penalty proceedings that unaccounted income of the lender or the borrower was involved. From the assessment order passed uls.143(3) dated 31.3.2015, it is noted that the income returned has been accepted as the assessed income after making necessary verification etc. Thus, there is no finding that the transactions by way of Journal entries were undertaken to evade tax. Further, the appellant has submitted that there was reasonable cause for the above said contravention of section 269SS since (i) the journal entries have been made with the group concerns under the bonafide belief that such transactions would not be hit by the provisions of section 269SS in view of various judicial decisions on this issue, including the decision of High Court of Delhi in the case of Noida Toll Bridge 262 ITR 260 and (ii) such loans by way of journal entry transactions were undertaken for various commercial reasons like assigning of receivables for operational efficiency, payment on behalf of group concern for squaring up transactions, for ease in consolidation of accounts, rectification entries etc. In this regard I find that the decision dated June 122012, of the Hon’ble Bombay High Court in the case of CIT vs. Triumph International Finance(l) Ltd (supra), holding that repayment of loan/deposit by way of journal entries was in contravention of provision of section 269T has been given after the close of the financial year 2011-12 relevant to A.Y.201213. In my considered opinion the above said reasons do constitute reasonable cause within the meaning of section 273B of the Act, particularly in light of the fact that there is no finding at such transact were undertaken to evade tax. Reliance is placed on the decision of the ITAT dated 27.6.2014 in the case of Lodha Builders Pvt. Ltd vs ACIT and ITA No.481/M/2014 AY.2009- 10 and five other group cases, wherein under similar facts and circumstances, it has been held that the assessee has shown reasonable cause and therefore, the penalty imposed u/s.271D/271E of the Act are not sustainable.

6.5.1. In the penalty order the AddI.CIT has observed that the plea of the assessee for the benefit of reasonable cause cannot be accepted as the spirit of the Bombay High Court judgement (in the case of CIT vs Triumph International Finance(I) Ltd) is only that such transactions which are in the nature of squaring up with the same party can only claim the benefit of reasonable cause. This observation is found to be without merit particularly in light of the decision of High Court of Bombay in the case of CIT vs MIs. Triumph International Finance(l) Ltd of 2010 dated 17.8.2012 for the A.Y.2000-01,as noted in para 6.3 above, wherein the appellant company and its sister concern M/s, Triumph Securities Ltd had transactions of sale and purchase with common customers and the credit/debit liabilities were settled through journal entries and it was held 'that the transactions in question were undertaken not with a view to receive loans/deposits in contravention of Section 26955, but in a view to extinguish the mutual liability of paying/ receiving the amounts by the assessee and its sister concern to the customers In the absence of any material on record to suggest that the - transactions in question were not reasonable or bonafide and in view of section 273B of the Act, we see no reason to interfere with the order of the Tribunal in deleting the penalty of Rs.22.99 crores.' 6.5.2. It has also been observed by the AddI.CIT that it shalt not be out of place to mention that the assessee group has made a disclosure before the Hon'ble Income Tax Settlement Commission, Mumbai, of undisclosed income arising out of transactions with and by various group entities which are also the subject matter of investigation pursuant to the direction of Hon’ble ITSC Hence it cannot be ruled out that the entities through whom such repayment/acceptances are done are not part of a chain of entities involved in transaction for the purpose of tax evasion. In this regard the appellant has submitted that no investigation pursuant to the order of the Settlement Commission was pending on 28.92015 i.e. the date of levy of penalty since the order of the Settlement Commission u/s.245D(4) was passed on 25.11.2014. Thus, the above said observation is found to be based on presumptions and do not justify the levy of penalty u/s.271D of the Act.

7.0. In view of above discussion, the levy of penalty of Rs, 1372,17,45,978/- u/s.271D is not found to be justified and the same is hereby cancelled. Ground No 3 to 9 taken by the appellant are allowed.

Appeal No.IT-228I2015-16 (A.Y.2012-13) Penalty u1s.271E 8.0. The grounds taken by the appellant and the facts of the case are similar to those taken in appeal against levy of penalty ufs.2710 of the Act. The A.O. has levied the penalty of Rs.16,15.47,23.035/- u1s.271E of the Act holding that the appellant has contravened the provisions of section 269T of the Act without any reasonable cause, in respect of the total debits of Rs.16.15,47,23,035/-, with the four sister concerns which represent repayment of loans by way of journal entries as under:

The reasons for levying the penalty u/s 271E is on the same lines as stated in the penalty order u/s.271D of the Act. The submissions made by the appellant are on the same lines as for the appeal with respect to penalty u/s.271D of the Act.

Following the decision with respect to the levy of penalty u/s.271D as discussed in para 6.1 to 652 above, it is held that although the transactions by way of journal entries are in contravention of provision of section 2691 of the Act, the appellant has shown reasonable cause uls.2738 of the Act and the levy of penalty was not justified. Accordingly, the levy of penalty of ₹16,15,47,23,035/- is hereby cancelled Ground No. 2 is dismissed and Ground No. 3 to 9 are allowed.”

Aggrieved, now Revenue is in appeal before Tribunal.

(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 the large number of entries in this case as compared to only one entry in the case before this Court. The test of reasonable cause can not, in the present facts be determined on the basis of the number of entries. If there was a reasonable cause for making the journal entries, then, the number of entries made, will not make any difference.

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

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

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

Order pronounced in the open court on 15-06-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 15-06-2018 kao kI ga[- .