INDIRA GANDHI MEMORIAL TRUST,NELLIKUZHY, KOTHAMANGALAM vs. JOINT COMMISSIONER OF INCOME TAX(EXEMPTION), ERNAKULAM

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri Waseem Ahmed, Accountant Member & Shri Soundararajan K, Judicial Member ITA No.165/Coch/2024 :Asst.Year 2012-2013 ITA No.54/Coch/2024 :Asst.Year2012-2013 Indira Gandhi Memorial Trust The Joint Commissioner of Income-tax (Exemption) Nellikuzhy PO, Kothamangalam v. Ernakulam. Ernakulam – 686 691. PAN :AAATI5308K. (Appellant) (Respondent) Appellant by :Sri.P.T.Joy, CA Respondent by :Sri.Sanjit Kumar Das, CIT-DR Date of Pronouncement : 30.09.2024 Date of Hearing : 24.09.2024 O R D E R Per Bench : These two appeals filed by the assessee challenging the orders of the CIT(A)/NFAC, Delhi, dated 13.12.2023, against the levy of penalty u/s.271D and 271E of the Act, respectively, in respect of the assessment year 2012-2013.

First we take the appeal ITA No.165/Coch/2023:

2 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. must make way for the cause of substantial justice the delay is condoned and the appeal is admitted for adjudication.

3 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. against the said order of the ld.CIT(A), the assessee has filed this present appeal with the following grounds:-

“1. Rejecting our contentions in our reply dated 04-12-2023, as detailed in the statement of facts, the CIT (Appeals) NFAC has confirmed the penalty u/s 271D by his order dated 13-12- 2023 and dismissed our appeal. (Copy of the order ofCIT (Appeals) NFAC is attached herewith). . Aggrieved by the order of the CIT(Appeals) NFAC, the appellant assessee is approaching the hon'bie Tribunal for relief on the following grounds: a) During the first appellate proceedings before the CIT(Appeals), NFAC, we have submitted that in the year 2011- 12 the appellant has accepted deposits totaling Rs 3,43,85,000/- from its former employees, out of which Rs 3,15,85,000/- was received in cash and Rs 28,00,000/- received through bank . A detailed list of security deposits accepted by the appellant during the FY2011-12 is attached as Annexure-2. The appellant has received deposits from its employees in cash and these deposits are duly accounted in the books of accounts of the assessee. There is no undisclosed income or evasion of tax as a result of receipt of such deposits. The appellant is furnishing herewith the ledger account copies of all these former employees of the appellant as Annexure-3 and affidavit from the said former employees stating that they have paid deposits to the appellant and these are paid in cash as insisted by the said employees. (Out of the 81 employees from whom cash deposits arereceived, we are able to produce affidavits from 47 employees, 2 persons passed away and other employees are not available for contact)(Annexure-2)- b) The appellant has submitted a detailed reply to the CIT(Appeals), NFAC in response to the notice dated 28-11- 2023 during the first appellateproceedings, wherein reference was made to the case law Assistant Director of Inspection (Investigation) v. Kum. A.B. Shanthi, (2002) 255 ITR 258 (SC), where the Hon'ble apex courtheld that the legislature has given discretion to the authority in the matter of levy of penalty under Section 271D of the Act.The Hon'ble apex Court further held that where a reasonable cause exists for transactions covered under Section 269SS, the penalty shall not be imposed merely because it is lawful to do so. In the backdrop of legal position, the facts and circumstances requires to be looked at in cumulative manner to ascertain the existence of mala fide if any.

4 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. c) The appellant has also referred to the judgment of the Hon'ble ITAT Mumbai Bench (in appeal dated 31* January, 2020, in Lodha Builders P.Ltd, Mumbai vsDCIT Cen Cir 7(3), Mumbai). In the judgement of the above referred case, the Hon'ble Tribunal stated that the imposition of the penalty under section 271D by the department cannot bemechanical in nature. d) The Income Tax Appellate Tribunal "C", Bench,Kolkota,, in the case of Auto Fuel Centre, Durgapur Vs J.C.I.T., Circle-1, Durgapur, (Date of order, 16thMarch, 2020), (ITA No.398/Kol/2019, AY 2013914) held that "it is an undisputed fact that the penalty u/s. 271E of the Income Tax Act, 1961 was imposed in respect of the repayment in the aggregate sum of Rs. 5,80,000/-being amount so borrowed from the relatives and friends of the partners and as such, the object of the provisions of section 271E read with section 269T of the Act are to be considered in light of the intention of the Legislature enacting such provision. It is settled that the object of introduction of section 269SS and 269T of the Income Tax Act, 1961 is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money and if he hasmade some false entries in his accounts, he shall not escape by giving false explanation for the same. The essence of this philosophy was embodied through the introduction of section 269SS and 269T of the Act in the statute which was to eradicate the evil practice of making false entries in account books and later manufacturing explanations in support thereof While arrivingat the above judgement the Hon'ble Tribunal has also taken note of thedecision of the Hon'ble Supreme Court in the case of A.D.I.T. -VS- Kumari A.B. Shanti (2002) 255 ITR 487 (SC). The Hon'ble Tribunal further held that "It is important to note that another provision, namely Section 273B was also incorporated which provides that notwithstanding anything contained in the provisions of Section 271D, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provision if he proves that there was reasonable cause for such failure and if the assessee proves that there was reasonable cause for failure to take a loan otherwisethan by account payee cheque or account-payee demand draft, then the penalty may not be levied. Therefore, undue hardship is very much mitigated by the inclusion of Section 273B in the Act. If there was a genuine and bona fide transaction and if for any reason the tax payer could not get a loan or deposit by account- payee cheque or demand draft for some bona fide reasons, the authority vested with the power to impose

5 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. penalty has got discretionary power." "At this juncture it is appropriate to quote the circular issued by the Central Board of Direct Taxes. The CBDT in Circular No.387 dated 06-07- 1984 has issued explanatory notes after the Finance Act, 1984, which is given below: "Unaccounted cash found in the course of searches carried out by the IncomeTax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, andtaxpayers are also able to get confirmatory letters from such persons in support of their explanation". e) As stated in the above referred legal precedents, it is an established principle that the imposition of penalty u/s 271D should not be blind folded and mechanical. The intention of the legislature in bringing out this section, as referred in the above case laws also reiterates the tenet that the introduction ofsection 269SS is that the tax payer is not allowed to give false explanation for his unaccounted money. In the instant case of the appellant, the acceptance of deposits are accounted in books of accounts for FY 2011-12 which are auditedand Income Tax Returns are filed accordingly. Therefore, there is no malafideintention on the part of the appellant in accepting deposits from employee by way of cash. f) Thus on the above explained grounds and other grounds, as may be allowed, at the time of proceedings before the Hon'ble Tribunal, the appellant seeks thefollowings reliefs: 3) Relief Sought: a) The appellant prays for quashing the order of the CIT (Appeals), NFAC dated 13.12.2023 [DIN No & Order No:ITBA/NFAC/S/250/2023-24/1058721442(1)under section 271Dimposing penalty of Rs 3,43,85,000/- on the appellant. b) Any other order which this Hon'ble Tribunal deem fit and proper and in the circumstances of the case.”

6 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. were furnished before the AO and in fact the notarized affidavit from the employees were also filed before the ld.CIT(A), but without considering the same, the ld.CIT(A) had dismissed the appeal. The ld.AR also contended that there is no suppression of any income and no additions were made by the AO while passing the assessment order and in fact out of the above said security deposit, Sri.Shaji had made the deposit of Rs.18 lakh by transferring the amount from bank account. Further he is also one of the trustees of the assessee-trust, and therefore, the amount that he transferred to the assessee-trust would not fall under the mischief of sec.269SS of the Act, since the section contemplates that “no person shall take or accept from any other person”, that is, the assessee should not receive any loan or deposit from any third party not related to the assessee-trust. Admittedly, in this case the said Sri.Shaji is a trustee of the assessee-trust and therefore, he should not be treated as any other person and in fact the same could not be treated as an offence u/s.269SS of the Act in order to levy penalty u/s.271D of the Act.

7 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. from the judgment of the Hon’ble Supreme Court reported in (2002) 255 ITR 258 (SC) in the case of Asst.Director of Inspection (Investigation) v. Kumari A.B.Shanthi, wherein the Hon’ble Supreme Court while deciding the validity of sec.269SS and 271D of the Act, had observed as follows:-

“…..The object of intro-duding section 26955 is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money, or if he has given some false entries. in his accounts, he shall not escape by giving false explanation for the same. During search and seizures, unaccounted money is unearthed and the tax payer would usually give the explanation that he had borrowed or received deposits from his relatives or friends and it is easy for the so-called lender also to manipulate his records later to suit the plea of the taxpayer. The main object of section 2695S was to curb this menace. As regards the tax legislations, it is a policy matter, and it is for Parliament to decide in which manner the legislation should be made. Of course, it should stand the test of constitutional validity. ……………. The above dictum applies in full force as regards the present case. The object sought to be achieved was to eradicate the evil practice of making of false entries in the account books and later giving explanation for the same. To a great extent, the problem could be solved by the impugned provision.”

8 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. the Act. In the present case before us, the jurisdictional Assessing Officer as well as the JCIT and the CIT(A) had not doubted about the transactions and to that effect no addition or nothing has been made by the AO while framing the assessment. To prove that the transactions are genuine, the assessee also filed various documents including notarized affidavit to show that the security deposits are genuine and would not attract provisions of sec.269SS of the Act and consequently sec.271D of the Act. The jurisdictional AO had not made further inquiries to ascertain the genuineness of the security deposits and in fact the ld.CIT(A) also not considered the notarized affidavit filed before him, but relied on the findings of the JCIT and affirmed the levy of penalty u/s.271D of the Act.

“An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and

9 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.”

10 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. Now we take up ITA No.54/Coch/2024

“1. Rejecting our contentions in our reply dated 25-10-2023, as detailed in the statement of facts, the CIT (Appeals) NFAC has confirmed the penalty u/s 271E by his order dated 28-11- 2023 and dismissed our appeal. (Copy of the order of CIT (Appeals) NFAC is attached herewith). 2. Aggrieved by the order of the CIT(Appeals) NFAC, the appellant assessee is approaching the hon'ble Tribunal for relief on the following grounds: a) During the first appellate proceedings before the CIT(Appeals), NFAC, wehave submitted that in the year 2011- 12 the appellant has repaid deposits totaling Rs 5750000/- to its former employees, out of which Rs 29 lakhs was repaid in cash and Rs 28.50 lakhs repaid through bank. A detailed list of repayments of deposits made by the appellant during the FY 2011-12 is attached as Annexure-1. The list shows that the repayment of all the deposits as made by the appellant during the year are not by cash but only in those cases which are requested by the former employees on their resignation from the appellant are made in cash. (Out of 10 cases where cash repayments aremade, one person is a trustee of the appellant Trust ( Mr K P Shaji) , 4 cases are former employees locally available, from whom notarized affidavits are taken, 2 persons are in abroad from them emails are received and KYC details available, 2 persons passed away and one person is not available for contact). This is referred in Annexure -1. The appellant is furnishing herewiththe ledger account copies of all these former employees of the appellant as Annexure-2 and affidavit from the said former employeesstating that they have paid deposits to the appellant and these are repaid in cash on their resignation from the appellant Trust (Annexure- 1).Thus the deposits are repaid by the appellant to its former employees in cash on their resignation and these are as requested by them which is reasonable cause under section 273B b) The appellant has submitted a detailed reply to the CIT(Appeals), NFAC in response to the notice dated 19-10- 2023 during the first appellateproceedings, wherein reference was made to the case law Assistant Director of Inspection (Investigation) v. Kum. A.B. Shanthi, (2002) 255 ITR 258 (SC), where the apex courtheld that the legislature has given

11 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. discretion to the authority in the matter of levy of penalty under Section 271D of the Act. The Hon'ble apex Court held that where a reasonable cause exists for transactionscovered under Section 269SS, the penalty shall not be imposed merely because it is lawful to do so. Drawing parallel, same proposition would apply in the matter of provisions of Section 271E of the Act which is enacted on thesimilar footings. Similar proposition was echoed towards existence of reasonable cause by the Hon'ble Delhi High Court in Director of Income Tax vS. All India Deaf and Dumb Society (2006) 198 CTR 376 (Del). In the backdrop of legal position, the facts and circumstances requires to be looked at in cumulative manner to ascertain the existence of mala fide if any. c) The appellant has also referred to the judgment of the Hon'ble ITATVisakhapatnam Bench(in appeal No ITA 317/Viz/2019-judgment dated 18-03-2020 inSudhaAgro Oil & Chemical Industries Limited VsAddlCIT,in the reply to the notice dated 28-11-2023 submitted to the CIT(Appeals), NFAC. In the above referred case, the hon'ble ITAT Visakhapatnam Bench held that "We have heard both the parties and perused the material placed on record. In the instant case, the assessee has repaid the loans borrowed from E.Rajeev and E.V. Sudhakar by way of self cheque withdrawal and in the case of E.Lakshmi and E.Padmapriya also, the amounts were paid, otherwise than by crossed cheque. As verified from the order of the Addl.CIT, the assessee has frequently borrowed monies from directors and shareholders, mostly repaid bycrossed cheque as per the details given by the AO, except on one occasion in each case. In all the remaining occasions, the assessee has paid the amounts by way of crossed cheque. The assessee has made the payment by self cheque and drawn the cash and paid the same to the creditors. Prima facie,the assessee has violated the provisions of section 269T of the Act. Further as observed from the penalty order, out of 20 occasions, the assessee has violated the provision on four occasions at the rate of one event in the case of each lender. Thus, we observe that the assessee has mostly repaid the loans by way of crossed cheque and complied with the statute. The reason explained by the assessee was that it has made the payment on the request of the creditor in exceptional circumstances. Further the assessee also explainedthat E.Rajeev, E.Padmapriya, E.Lakshmi and E.V.Sudhakar are the shareholders of the company. The repayment was made on the demand of the creditor. The Ld.AR further explained and taken us to the account copies of the every creditor, from which we observe that the transactions were duly accounted in the respective accounts. The assessee also paid the interest on the borrowings and claimed the same as expenditure

12 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. which was allowed asdeduction at the time of passing the order u/s 143(3) in the case of theassessee. The assessee also enclosed income tax returns of the creditors,wherein, it is observed that the interest payment was duly accounted and admitted as income in their hands. From the above information, we find thatthe transactions are genuine and duly accounted in the books of accounts of the respective persons. There is no reason to suspect the transaction. Apart from the above, all four of them are closely associated with the company, who are supporting the company frequently by advancing monies to the company. Therefore, we find that the transactions are closely associated in respect of day to day affairs as well as the financial transactions of the company. d) The facts of the case involved in our case are similar to the facts contained in the above decided by the Hon'ble ITAT Visakhapatnam Bench, the said appellant Company borrowed funds from its directors and shareholders and in certainoccasions repaid funds in cash and in remaining occasions repaid by way ofaccount payee cheque. The transactions were genuine and accounted in the books of accounts of the Company and the persons to whom the deposits arerepaid are persons closely associated with the Company. The facts are similar in the case of this appellant Trust, where the persons to whom the funds are repaid are former employees and Trustee of the Trust and not third parties.The appeal was allowed by the hon'ble ITAT Visakhapatnam Bench. e) The Income Tax Appellate Tribunal "C", Bench,Kolkota,, in the case of Auto Fuel Centre, Durgapur Vs J.C.I.T., Circle-1, Durgapur, (Date of order 16th March, 2020), (ITA No.398/Kol/2019, AY 2013914) held that "It is an undisputed fact that the penalty u/s. 271E of the Income Tax Act, 1961 was imposed in respect of the repayment in the aggregate sum of Rs. 5,80,000/-being amount so borrowed from the relatives and friends of the partners and as such, the object of the provisions of section 271E read with section 269T of the Act are to be considered in light of the intention of the Legislature enacting such provision. It is settled that the object of introduction of section 269SS and 269T of the Income Tax Act, 1961 is to ensure that a taxpayer is not allowed to give false explanation for his unaccounted money and if he has made some false entries in his accounts, he shall not escape by giving false explanation for the same. The essence of this philosophy was embodied through the introduction of section 269SS and 269T of the Act in the statutewhich was to eradicate the evil practice of making false entries in account

13 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. books and later manufacturing explanations in support thereof' While arriving at the above judgementthe Hon'ble Tribunal has also taken note of thedecision of the Hon ble Supreme Court in the case of A.D.I.T. -VS- Kumar A.B. Shanti (2002) 255 ITR 487 (SC). The Hon'ble Tribunal further held that "it is important to note that another provision, namely Section 273B was alsoincorporated which provides that notwithstanding anything contained in the provisions of Section 271D, no penalty shall be imposable on the person or theassessee, as the case may be, for any failure referred to in the said provision if he proves that there was reasonable cause for such failure and if the assesseeproves that there was reasonable cause for failure to take a loan otherwisethan by account-payee cheque or account-payee demand draft, then the penalty may not be levied. Therefore, undue hardship is very much mitigated by the inclusion of Section 273B in the Act. If there was a genuine and bona fide transaction and if for any reason the tax payer could not get a loan ordeposit by account- payee cheque or demand draft for some bona fide reasons, the authority vested with the power to impose penalty has got discretionary power." "At this juncture it is appropriate to quote the circular issued by the Central Board of Direct Taxes. The CBDT in Circular No.387 dated 06-07- 1984 has issued explanatory notes after the Finance Act, 1984,which is given below: "Unaccounted cash found in the course of searches carried out by the Income Tax Department is often explained by taxpayers as representing loans takenfrom or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, andtaxpayers are also able to get confirmatory letters from such persons in support of their explanation". A As stated in the above referred legal precedents, it is an established principle that the imposition of penalty u/s 271E should not be blind folded and mechanical. The intention of the legislature in bringing out this section, asreferred in the above case laws also reiterates the tenet that the introduction of section 269T is that the tax payer is not allowed to give false explanation for his unaccounted money. In the instant case of the appellant, the repayment of deposits are accounted in books of accounts for FY 2011-12 which are audited and Income Tax Retums are filed accordingly. Therefore, there is no malafide intention on the part of the appellant in repaying certainof the employee deposits by cash. g) Thus on the above explained grounds and other grounds, as may be allowed, at the time of proceedings before the Hon'ble Tribunal, the appellant seeksthe followings reliefs:

14 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust.

3) Relief Sought: a) The appellant prays for quashing the order of the CIT (Appeals), NFAC dated28-11-2023 [DIN No & Order No: ITBA/NFAC/S/250/2023-24/1058268711(1)] under section 271E imposing penalty of Rs 34 lakhs on the appellant. b) Any other order which this Hon'ble Tribunal deem fit and proper and in the circumstances of the case.”

15 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust. insistence.Further the ledger account produced by the assessee would support the case of the assessee. Moreover the assessee also filed affidavits in support of their claim from their ex employees to show that the transactions are genuine. The department has no other documents to disprove the claim of the assessee except relying on the provision.There is not even a single allegation about the unaccounted money or false entries in the books of accounts. The object for the introduction of the provision was not defeated since the assessee had established the facts in detail and therefore we are of the view that it is a fit case for imposing the penalty u/s 271 E of the Act.

Order pronounced on this 30th day of September, 2024. Sd/- Sd/- (Waseem Ahmed) (Soundararajan K) ACCOUNTANT MEMBER JUDICIAL MEMBER Cochin ; Dated : 30th September, 2024. Devadas G*

16 ITA No.165 & 54/Coch/2024. Indira Gandhi Memorial Trust.

Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT Concerned. 4. The DR, ITAT, Cochin. 5. Guard File. Asst.Registrar/ITAT, Cochin