PALGHAT FINE ARTS SOCIETY,PALAKKAD vs. JCIT PALAKKAD RANGE, PALAKKAD

This is a set of two Appeals by the Assessee, directed against the Orders dated 15.02.2021 passed by the Commissioner of Income-tax (Appeals), Income Tax Department (‘CIT(A)’), confirming the levy of penalty under sections 271D and 271E of the Income-tax Act, 1961 (the Act), for assessment year (AY) 2012-2013, vide, again, separate orders of even date (25.09.2015). The 24-day delay in filing the appeals being suitably explained, the same was condoned, and the appeals admitted.

The background facts and the respective cases: It would be relevant to recount the background facts of the case, leading to the impugned penalty/s. During the course of assessment proceedings for the relevant year, the assessee-society was observed by the Assessing Officer (AO) to have accepted cash loans from it’s President (Sri. Jayapala Menon) and Secretary (Sri. P.N.Subbaraman), in excess of Rs.20,000, i.e., the threshold limit u/s.269SS of the Act, default whereof attracts penalty u.s.271D of the Act. Likewise, the former was & 109/Coch/2023 (AY : 2012-13) Palghat Fine Arts Society v. Jt.CIT found to have also been repaid in cash, violating section 269T, so as to invite penalty u/s.271E. As explained, the assessee, a public charitable institution, formed primarily for the promotion of arts, music and fine arts, at Tharekkad Village, Palakkad, is run by it’s governing body consisting of 11 members. It incurred debt, including term loans from Catholic Syrian Bank, for construction of an Auditorium where it’s programmes are held. The assessee had been depending on it’s President and Secretary for financial assistance from time to time. As the term loan was, for want of service of interest, becoming a non-performing asset (NPA), the President, ignorant of the provisions of s. 269SS, withdrew Rs.2 lakh from his saving bank account (with Punjab National Bank, Chittur) and deposited it in the loan accounts of the assessee. Similarly, the President, who had been the principal contributor of funds, when in dire need of funds; the assessee having no liquid funds, its Secretary, sharing the financial burden, paid him Rs.10 lakh. The funds were arranged by withdrawing the same from the bank account of his son, Sri.P.S. Narayanan (with Corporation Bank, Kalpathy, Palakkad). The transaction was accounted for by the assessee-society by crediting and debiting respectively the accounts of the Secretary and President. However, being otherwise than by account payee cheque or account payee bank draft, the prescribed mode for receipt or repayment of loan or deposit u/ss.269SS and 269Twhere in excess of the threshold limit of Rs. 20,000, there was a breach of the said provisions at Rs.10 lakh each. As such, penalty equal to the amount/s accepted and deposited in default of the relevant provisions, i.e., s.271D and s. 271E, for acceptance and repayment of loan/deposit thus, was levied at Rs.12 lakh and Rs.10 lakh respectively. There was nothing to show that the bank had insisted on being repaid in cash; rather, was a dubious claim. Similarly, timely help to Society’s President did not bring about an emergency situation warranting a cash transaction. The assessee, as well as it’s President and Secretary, all maintained bank accounts, through which the sums could be routed. No reasonable cause, saving penalty, was made out. The same were confirmed in first appeal by the ld.CIT(A), holding as: 2 & 109/Coch/2023 (AY : 2012-13) Palghat Fine Arts Society v. Jt.CIT ‘6. Decision The order u/s.271D and submissions of the appellant have been carefully perused and considered. The appellant has accepted the fact that it had taken a total cash loan of Rs.12 lakhs (Rs.2 lakhs in cash from Shri Jayapala Menon, President of the Society, and Rs.10 lakhs from Sri P.N.Subbaraman, Secretary of the Society). The only issue left to be decided is whether there was “a reasonable cause” which prevented the appellant from taking these very loans through banking channels and what forced it to take such loans in cash. A careful perusal of all the facts and circumstances cited by the appellant makes it obviously clear that there was absolutely no reason for the appellant to take the loan of Rs.12 lakhs in cash. The appellant claims that it had simply withdraw cash from Sri P.N.Subbaraman and Shri Jayapala Menon’s saving account and deposited the same cash in the appellant’s account. The appellant has not given any evidence or any reason as to why these transactions could not have been done through banking channels i.e. by issue of cheque / draft / NEFT/ RTGS, etc. No reason has been given as to why the bank would insist on payment of cash when it could very well have accepted the payment through any of the banking channels. In any case, the appellant has not substantiated this highly dubious claim with any evidence whatsoever, that the banking authorities insisted on repayment in cash only. The very purpose of introducing Sec.269SS was to counter such cash transactions. In view of the above facts, the A.O. was rightly satisfied that this was a fit case for levy of penalty u/s.271D. The A.O’s action is therefore upheld and the appellant’s appeal is accordingly dismissed.’ ‘6. Decision The order u/s.271E and submissions of the appellant have been carefully perused and considered. The appellant has accepted the fact that it had taken a total cash loan of Rs.10,00,000/-to SriJayapala Menon, President of the Society towards loan taken from him. The only issue left to be decided is whether there was “a reasonable cause” which prevented the appellant from repaying this very loan through banking channels and what forced it to repay such loan in cash. A careful perusal of all the facts and circumstances cited by the appellant makes it obviously clear that there was absolutely no reason for the appellant to repay the loan of Rs.10 lakhs in cash. The appellant claims that it had simply withdrawn cash from the saving bank account of Sri P.N.Subbaraman and deposit the same cash in Shri Jayapala Menon’s account. The appellant has not given any evidence or any reason as to why these transactions could not have been done through banking channels i.e. by issue of cheque / draft / NEFT/ RTGS, etc. The very purpose of introducing Sec.269SS was to counter such cash transactions. In view of the above facts, the A.O. was rightly satisfied that this was a fit case for levy of penalty u/s.271E. The A.O’s action is therefore upheld and the appellant’s appeal is accordingly dismissed.’ & 109/Coch/2023 (AY : 2012-13) Palghat Fine Arts Society v. Jt.CIT 3. We have heard the parties, and perused the material on record. 3.1 There has, without doubt, been violation of ss.269SS and 269T of the Act, at Rs.12 lakh and Rs.10 lakh respectively, during the relevant year. The only question, therefore, as rightly observed by the ld. CIT(A), is the existence or otherwise of a reasonable cause/s, proving which precludes penalty in terms of s.273B of the Act. Reasonable cause is principally a matter of fact (viz. CIT v. Sahara Financial Corporation Ltd. [2023] 456 ITR 788 (SC)). The primary facts are not disputed, with in fact the transactions being admitted and confirmed by both the President and the Secretary. Reasonable cause has not been defined under the Act, and we would therefore be required to fall on the common understanding of these words, as indeed the manner in which the expression has been read and understood by the Hon'ble Courts in the variety of fact-situations it has come up before them for elucidation Reasonable cause has received the judicial interpretation as a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides.