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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G.S.PANNU & SHRI RAVISH SOOD
ORDER PER G.S.PANNU,A.M:
The captioned appeal filed by the Revenue pertaining to assessment year 2010-11 is directed against an order passed by CIT(A)- 20 Mumbai dated 30/03/2015, which in turn arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 15/03/2013.
In this appeal, Revenue has raised the following Ground of appeal:- “1.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the assessee has not contravened the provisions of section 260T of the IT Act, without appreciating the fact that the assessee converted loan into equity shares i.e. made repayment of said loan otherwise than by way of an account payee cheque or a Demand Draft.”
3. The grievance of the Revenue in this appeal arises from the action of the CIT(A) in deleting the penalty levied by the Additional CIT, Range – 9(2), Mumbai of Rs.15,00,00,000/- under section 271E of the Act on account of contravention of the provisions of section 269T of the Act.
The facts relevant to appreciate the controversy lie in a narrow compass and can be understood as follows. The assessee before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of export of sea food. In the course of the assessment proceedings finalized under section 143(3) of the Act dated 15/03/2013, the Assessing Officer noted that the assessee company had received loan from one of its director and major share holder Mr.Ashvin Samtani, which has been repaid otherwise than the modes specified in section 269T of the Act. It transpires that the said director had given unsecured loans to the assessee company on various dates and the opening balance as on 01/04/2009 was Rs.9,55,74,643/- and during the year further amounts of Rs.14,20,71,159/- were advanced. The Assessing Officer noted that a total of Rs.16,32,85,513/- was repaid during the year which, inter-alia, included a sum of Rs.15,00,00,000/- for which assessee company had issued 1,50,00,000 equity shares of the face value of Rs.10/- each in the name of the director. The conversion of part of the loan into equity capital to the extent of Rs.15,00,00,000/- has been understood to be repayment of loan in violation of the provisions of section 269T of the Act. Based on this, the Addl. CIT, Range 9(2), Mumbai show caused the assessee as to why the penalty under section 271E of the Act be not levied. The assessee canvassed that conversion of part of the loan into equity capital was effected in the books of account by way of passing a journal entry and not by way of any actual fund movement and, therefore, it cannot be considered as violative of the requirements of section 269T of the Act. However, the Addl. CIT differed with the assessee and held that conversion of loan into equity capital was repayment of loan by a mode other than by way of account payee cheque or bank draft, and was violative of the provisions of section 269T of the Act and thus he levied a penalty of Rs.15,00,00,000/- in terms of section 271E of the Act.
Before the CIT(A), a pertinent plea of the assessee was that conversion of loan into equity shares does not constitute repayment of loan as envisaged under section 269T of the Act. The CIT(A) noted that the same issue has been adjudicated by his predecessor while dealing with the assessment order passed by the Assessing Officer under section 143(3) of the Act dated 15/03/2013. The CIT(A) referred to the operative finding of the order of the CIT(A) dated 02/12/2013 and noted that once the conversion of loan in the equity shares has been accepted to be not constituting repayment of loan as envisaged under section 269 of the Act, the levy of penalty under section 271E of the Act was misplaced. Accordingly, he has deleted the penalty levied under section 271E of the Act.
Before us, the only point which is raised by the Ld. Departmental Representative is that it is prescribed in section 269T of the Act that a firm or other person shall not repay any loan or deposit 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; and, therefore, the impugned transaction being by means other than the prescribed mode, the penalty provisions of section 271E were attracted.
On the other hand, the learned representative for the respondent-assessee defended the reasoning advanced by the CIT(A) to delete the penalty by pointing out that converting the unsecured loan into equity shares of the assessee-company would not amount to repayment of loan in the context of section 269T of the Act.
We have carefully considered the rival submissions. The issue in this appeal revolves around the provisions of section 269T of the Act. Section 269T of the Act, so far it is relevant for our purpose, prohibits repayment of any loan or deposit otherwise than by an account payee cheque or account payee bank draft. In the instant, the case set-up by the Assessing Officer is that the unsecured loans received by the assessee from its director and major shareholder has been repaid to the extent of Rs.15,00,00,000/- otherwise than by an account payee cheque or account payee bank draft. The assessee issued 1,50,00,000 equity shares of the face value of Rs.10/- each totalling to Rs.15,00,00,000/- to the said director, and to that extent, the unsecured loan was treated as repaid. Conversion of the unsecured loan outstanding into Equity Capital has been viewed by the Addl. CIT, Range 9(2) as violative of section 269T of the Act, being a repayment otherwise than by an account payee cheque or account payee bank draft. Ostensibly, the amount of unsecured loan has been reduced by Rs.15,00,00,000/- by way of a journal entry in the books of account and crediting the Equity Share Capital. Ostensibly, there is no repayment of loan in cash.
We may refer to the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Noida Toll Bridge Company Ltd. (2003) 262 ITR 260 (Delhi), which provides a good guide to explain the legal position presently before us. The case before the Hon'ble Delhi High Court stood on a somewhat similar line as is before us. The Hon'ble High Court was dealing with levy of penalty under section 271D of the Act which related to violation of section 269SS of the Act. In contradistinction to section 269T prohibiting repayment of loan or deposit otherwise than by way of an account payee cheque or account payee bank draft, section 269SS of the Act prohibits acceptance of any loan or deposit otherwise than by an account payee cheque or account payee bank draft. In the case before the Hon'ble Delhi High Court, the payment was made on behalf of the assessee to the Government in relation to the acquisition of land by an entity who was holding more than 30% of the Capital of the assessee by means of an account payee cheque to the Government. Since the amount was paid by the other concern on behalf of the assessee, in its books of account, assessee passed a journal entry crediting the account of the other concern. This was interpreted by the Revenue as being receipt of loan or deposit otherwise than by an account payee cheque or an account payee bank draft and thus violative of section 269SS of the Act. The Hon'ble High Court noted the features of the entire transaction, namely, that the transaction was by an account payee cheque; that no payment of amount was made in cash either by the assessee or by the other concern on its behalf; that no loan was accepted by the assessee in cash; and, that the payment made by assessee through other entity was reflected by a journal entry in the account books of the assessee by crediting the account of the other entity. Considering the aforesaid features of the transaction, and the fact that neither the assessee nor the other entity had made any payment in cash, it was held that the provisions of section 269SS of the Act were not attracted.
In our considered opinion, if one is to draw an analogy from the aforesaid judgment of the Hon'ble Delhi High Court, in the present case too, the repayment of unsecured loan by conversion into the Equity Share Capital, admittedly, does not involve any repayment by cash and thus, the provisions of section 269T would not be attracted. In the present case too, the repayment is by virtue of a journal entry in its books of account whereby the amount of unsecured loan has been debited and the Share Capital has been credited. Therefore, following the parity of reasoning approved by the Hon'ble Delhi High Court in the case of Noida Toll Bridge Company Ltd. (supra), it has to be held that the provisions of section 269T of the Act would not be attracted in the instant situation and thus, the CIT(A) made no mistake in deleting the penalty levied under section 271E of the Act.
In the result, appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 25/09/2017.