M/S S.R.ASSOCIATED CONSTRUCTION CO (P) LTD.,KOLKATA vs. J.C.I.T RANGE - MALDA., MALDA

These appeals of the assessee arise out of the common order of the Learned CIT(A), Jalpaiguri in Appeal Nos. 23& 24 /MLD/CIT(A)/JAL/12-13 dated 26.11.2012 against the penalty orders framed by the Learned AO for the Asst Year 2007-08 u/s 271D and 271E of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

A.Y 2007-08 – Penalty u/s 271D

( in Rs.) Cash Account Dr 17,25,000 To Ashok Kumar Sarda Account 17,25,000 (Being sale proceeds of agri-landed property of aks received in mode of demand draft in favour of UMFL)

Here ‘aks’ refers to ‘Ashok Kumar Sarda’.

3.2. Hence the narration clearly states that the said sum represents sale proceeds of agricultural lands of Mr Ashok Kumar Sarda which were received in demand drafts in favour of UMFL. The Learned AO doubted the veracity of this entry and stated that this entry has been passed by the assessee in its books on 13.9.2006 which is prior to the date mentioned in the money receipt by UMFL as 26.9.2006 and accordingly concluded that this receipt transaction on 13.9.2006 is totally separate from the demand drafts handed over to UMFL on 26.9.2006. He further stated that the narration mentioned above appears to be misleading and incorrect and he made an 3 M/s. S.R Associated Construction Co.Pvt. Ltd allegation that the assessee had changed the said narration to suit his needs. Based on these observations, he invoked the provisions of section 269SS of the Act for receipt of cash loans exceeding Rs 20,000/- and show caused the assessee why penalty u/s 271D of the Act should not be levied on the assessee. In response to this, the assessee stated that there was no fresh receipt of cash from its director to the tune of Rs. 17,25,000/- and apart from reiterating the aforesaid facts also stated that the assessee is maintaining a current account with its director Mr Ashok Kumar Sarda and accounting entries passed in the books cannot be termed as ‘loan’ or ‘deposit’ and accordingly the provisions of section 269SS of the Act would not be applicable.

3.3. The Learned AO not convinced with the replies filed by the assessee proceeded to levy penalty u/s 271D of the Act which has been upheld by the Learned CIT(A) on first appeal. Aggrieved, the assessee is in appeal before us on the following grounds :- (1) That under the facts & circumstances of the case L'd CIT (A) erred in confirming the penalty u/s 271D ignoring the reasonable cause of recording the receipt of sale proceeds on behalf of director in the company cash book against sale of agricultural land belonging to one of the director to payoff company's bank loan. (2) That the JCIT & CIT (A) erred in not considering the retention of sale proceeds against sale of agricultural land owned by Ashok Kumar Sarda, director of the company for onward payment to Assets Construction company in satisfaction of bank loan availed by the appellant company. (3) That the CIT (A) erred in not considering the receipt of bank drafts by the Usha Martin Finance Ltd., being Asset Reconstruction company on behalf of Punjab National Bank, (lender) directly from the buyers of agricultural land belonging to director in satisfaction of bank loan granted by the bank to the appellant company. (4) That the CIT (A) was unjustified, arbitrary and unlawful in ignoring the book entry without corresponding receipt of cash being passed through Cash book and consequently erred in not considering the reasonable cause and totality of facts.

(5) That under the facts & circumstances of the case, the appellant neither received loan nor deposit and consequently imposition of penalty u/s 271D by the JCIT and confirmation by CIT(A) is wholly unreasonable unjustified, pervasive and therefore order passed u/s 271D is liable to be annulled. (6) That the CIT(A) was wrong, vague and arbitrary in confirming the penalty order on irrelevant points of facts, ignoring the factual. (7) That your petitioner appellant craves the right to put additional grounds and / or to alter /amend /modify the present grounds before or at the time of hearing.”

3.4. The Learned AR reiterated the submissions made before the lower authorities and referred to the relevant pages of the paper book containing the evidences of the aforesaid facts. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

3.5. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. The basic facts of the case remain undisputed are not reiterated herein for the sake of brevity. We find that the assessee was under a bonafide belief that the transaction need to be responded by the assessee in its books on the date of agreement itself which is 13.9.2006 and accordingly passed the receipt entry erroneously in the cash book. The assessee ought to have only responded by passing a journal entry in its books of accounts. There is no doubt that the director’s account should be credited for the amounts discharged by him on behalf of the assessee company. Moreover, we find that the transactions of the director with the assessee company, the same is maintained in the form of a current account and it is well established that the transactions in the running current account would not take the character of a loan or deposit. In this regard, we find lot of force in the case laws relied upon by the Learned AR :- a) Decision of Hon’ble Madras High Court in the case of CIT vs Idhayam Publications Ltd reported in 285 ITR 221 (MAD) 5 M/s. S.R Associated Construction Co.Pvt. Ltd

“4. We heard the arguments of learned counsel for the revenue. We have perused the materials available in record. Admittedly Mr. S.V.S. Manian was one of the directors. Therefore the order of the lower authority clearly shows that there was a running current account in the books of account of the assessee in the name of Mr. S.V.S. Manian. Mr. S.V.S. Manian used to pay the money in the current account and used to withdraw the money also from the current account. The revenue should establish that what was received by the assessee is a loan or deposit within the meaning of section 269SS. The deposit and the withdrawal of the money from the current account could not be considered as a loan or advance. Further it was also found that the assessee filed a letter dated 29-9-1997, and in that letter he explained that the amount received from Mr. S.V.S. Manian had been shown as "unsecured loan from directors" in the balance-sheet. As per the Companies Act, under the Companies (Acceptance of Deposits) Rules, 1975, under rule 2(b)(ix), deposit does not include any amount received from a director or a shareholder of a private limited company. Therefore the transaction between the appellant and the director-cum-shareholder is not a loan or deposit and it is only a current account in nature and no interest is being charged for the above transaction.

5, In the foregoing conclusions, we are of the view that since the said transaction does not fall within the meaning of loan or advance, there is no violation of section 269SS of the Income Tax Act. We find no error in the order of the Tribunal and the same requires no interference. Hence, no substantial question of law arises for consideration of this court. Accordingly, we dismiss the above tax case. No costs.” b) Decision of the co-ordinate bench of this tribunal in the case of Krishna Kr. Pathak (HUF) vs ITO reported in (2004) 90 TTJ 940 (Kol. Trib) in dated 12.3.2004 In this case, there was a current account between the assessee (HUF) and the Karta and there is no relation of lender and lendee or depositor or deposite between the two. The transaction between them was in the nature of temporary adjustment / accommodation. It was held that :-

The Cochin Bench of the Tribunal has also held in Muthoot M.George Bankers vs ACIT (1993) 46 ITD 10 (Coch) that temporary accommodation or adjustment between sister concern does not tantamount to loan or deposit and as such, the transactions do not attract section 269SS of the Act. The Hyderabad Bench of the Tribunal has also considered the similar isseue in the case of Dillu Cine Enterprises (P) Ltd vs Addl CIT (2002) 80 ITD 484 (Hyd) wherein the director of a private limited company maintained current account with the company where he deposited and withdrew funds as per exigencies of the company. It was held that such transactions had nothing to do with evasion of tax or concealment of income and the transactions did not fall within the mischief sought to be remedied by section 269SS of the Act. The Pune bench of the Tribunal in the case of Sun Flower Builders (P) Ltd vs DCIT (1997) 61 ITD 227 (Pune Trib) held that acknowledgement of debt by the assessee company by passing a journal entry in its books of accounts would not come within the ambit of the words ‘loan’ or ‘deposit’ as mentioned in section 269SS of the Act. c) Decision of the co-ordinate bench of this tribunal in the case of Orange Securities Pvt Ltd vs DCIT in & 1914/Kol/2010 dated 24.5.2011, wherein it was held that :

“Held, dismissing the appeal, that the transaction between the assessee and the director –cum-shareholder was not a loan or deposit and it was only a current account in nature and no interest was being charged for the above transaction. The deletion of penalty was justified.”

6.1. Respectfully following the same, we find no justification on the part of the revenue to levy penalty either u/s 271D or 271E of the IT Act in respect of the transactions made by the assessee company with one of the directors. Therefore, we delete the penalty levied by the revenue authorities and allow the appeals of the assessee.

3.6. We find that the assessee instead of merely responding by way of journal entry on 26.9.2006 in its books, had erroneously passed a receipt entry and a payment entry in its cash book. Hence the entire penalty proceedings had been triggered only based on mere book entries of the assessee and there is no categorical finding that the assessee indeed had received cash from the director when the assessee had actually denied the same. We also find that independent examination of the director was made by the Learned AO to ascertain the true facts, wherein the director had categorically stated on oath that he neither had any cash balance or paid any cash loan to the company. We also find that merely by passing one receipt entry in cash book and one payment entry in cash book for the same sum of Rs. 17,25,000/-,no additional source of cash had emanated to the assessee, which fact is quite evident from the relevant pages of the cash book itself, forming part of the paper book filed before us. We find that the closing cash balance as on 26.9.2006 was only Rs. 13,17,466.11 and it had not increased by Rs. 17,25,000/- as alleged by the Learned AO.

3.7. From the totality of the facts and circumstances of the case, we are convinced that there is no case for invoking the provisions of section 269SS of the Act and hence the penalty levied u/s 271D for violation of section 269SS of the Act thereon is quashed herewith. Accordingly the appeal of the assessee in is allowed. Penalty u/s 271E

4.1. The brief facts of this issue is that the assessee had made the following payments in cash to its director Mr.Ashok Kumar Sarda on the following dates :- (Rs.) (Rs.) 20.11.2006 4,50,000 23.11.2006 4,00,000 11.12.2006 8,75,000 --------------- 17,25,000 The assessee had written the following narration for the aforesaid payments :-

“cash paid to aks for paying buyer of the agri-land of aks against the land sale agreement kept in abeyance”

Here ‘aks’ refers to ‘Ashok Kumar Sarda’.

4.2. The assessee claimed that the said payments were made to its director out of balances payable in the current account of the director as the said monies were to paid back by the director to the buyers of the agricultural lands as the registration of sale deeds were kept in abeyance for removal of certain defects in the said land purchase deed. Ultimately the defects were duly removed and the registration of agricultural lands was executed on 19.2.2007.

4.3. The assessee claimed that the assessee was duly necessitated to pay the monies to its director by cash for onward transmission in cash by the director to various persons who had originally agreed to buy the agricultural lands from the director (Mr. Ashok Kumar Sarda). In fact the assessee had duly withdrawn cash from its bank and immediately passed on the same to its director for the purpose stated above. Apart from this, the assessee was also having sufficient cash balance to make payments to its director. The assessee tried to explain that the assessee has got reasonable cause in terms of section 273B of the Act in the aforesaid facts and circumstances and accordingly prayed for dropping the penalty proceedings u/s 271E of the Act. The Learned AO not convinced with the arguments of the assessee proceeded to levy penalty u/s 271E of the Act. On first appeal, the same was even upheld by the Learned CIT(A). Aggrieved, the assessee is in appeal before us on the following grounds:-

(1) That under the facts & circumstances of the case L'd CIT (A) erred in confirming the penalty u/s 271E despite no loan 1 deposits were repaid in contravention to section 269T. (2) That under the facts & circumstances of the case L'd CIT (A) erred in confirming the penalty u/s 271E ignoring the reasonable cause & factual position being return of cash to the buyers of agricultural land (mortgaged to Punjab National Bank against credit facilities to the appellant company) upon non execution of sale document due to minor defect in the source purchase deed. (3) That the appellant didn't repay any loan in contravention to sec. 269T and consequently JCIT & CIT (A) order to this effect are wholly arbitrary, unjust, uncalled for and liable to be quashed specifically when no corresponding loan of Rs. 17,25,0001- was received by the appellant company. (4) That your petitioner appellant craves the right to put additional grounds and 1 or to alter / amend / modify the present grounds before or at the time of hearing.

4.4. The Learned AR adduced his arguments in threefold. Firstly, he argued that the assessee had duly proved the reasonable cause in terms of section 273B of the Act as it was duly necessitated to make payments to its director in cash for onward transmission to the buyers of agricultural lands. Secondly, he argued that the payments were made out of credit balances lying in the current account of the director and argued that current account transactions would not fall within the ambit of ‘loan’ or ‘deposit’. Thirdly, he argued that the main purpose of introduction of provisions of section 269SS and 269T of the Act is to avoid evasion of tax by way of parties routing their undisclosed income in the garb of loans from various parties and were also able to obtain false confirmation from those parties and escape from taxation. In the instant case, the assessee as well as the director had duly accounted for the cash transactions in their respective books of accounts and the main intention behind introduction of the said provisions fail and hence no penalty could be levied. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

4.5. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove including the arguments of the Learned AR remain undisputed and hence the same are not reiterated herein for the sake of brevity. We find lot of force in the multiple arguments advanced by the Learned AR. We have already held that the transactions between the assessee and its director are maintained in a current account which would neither be categorized as a loan or deposit. We have already relied on the various decisions in this regard hereinabove in support of this proposition. Hence the provisions of section 269T of the Act cannot be applied in the facts of the instant case.

4.5.1. We also find that the assessee was duly necessitated by force to make the payments in cash to its director for the reasons stated above. Hence we find that the assessee had duly adduced reasonable cause in terms of section 273B of the Act and hence no penalty could be levied u/s 271D of the Act.

4.5.2. We also find that there is nothing on record that transactions made by the assessee is not genuine and the amount involved was unaccounted. The return filed by the assessee was accepted in scrutiny assessment proceedings by the Learned AO u/s 143(3) of the Act and no addition was made to prove that the assessee had routed its undisclosed income in the form of loan transactions. We find that the transactions of the assessee with its director has nothing to do with evasion of tax or concealment of income. In this regard, we place reliance on the decision of the co-ordinate bench of Jabalpur Tribunal in the case of Mahesh Prasad Soni vs Addl CIT reported in (2004) 86 TTJ 815 (Jab- Trib) wherein it was held that :-

“6. We have considered the rival submissions. In the case before us, the assessing officer/Commissioner (Appeals) have imposed penalty under section 271D of the Act as the assessee has taken or accepted loan or deposits otherwise than by an account payee cheque or account payee Bank draft in violation of section 269SS of the Act.

With a view to circumventing this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Bill seeks to make a new provision in the Income Tax Act debarring persons from taking or accepting, after 30-6-1984, from any other person any loan or deposits otherwise than by an account payee cheque or account payee Bank draft if the amount of such loan or the aggregate amount of such loan and deposit is Rs. 10,000 or more. This prohibition will also apply in cases where on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), and the amount or the aggregate amount remaining unpaid is Rs. 10,000 or more. The proposed prohibition would also apply to cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit proposed to be taken, is Rs. 10,000 or more"

concealment of income. As rightly pointed out by the Commissioner (Appeals) himself, it may be a case of negligence. But a negligent person does not have any intention or mensrea to purposely violate any provision of law, so as to be visited with stringent punishment of heavy penalty".

"We find force in the argument of the learned counsel for the assessee that the object of the provisions being unearthing of unaccounted money, is not applicable to any transaction which is done in an open manner, which is genuine and in which no unaccounted money is involved. Mere technical breach of the provisions, while the transactions are held to be genuine, do not attract the provisions of section 269SS. It is not the case of the revenue that the amounts involved were unaccounted transaction. It is an undisputed fact that the transactions are genuine. The Chapter XX-B and section 269SS begins with the heading-Requirement as to mode of acceptance, payment or repayment in certain cases to counteract evasion of tax. The term 'certain' used therein, when read along with the legislative intent of curbing tax evasion, clearly means that all loans are not attracted. This section attracts only 'certain' loans that are brought in by the taxpayer to explain away his unexplained cash or unaccounted deposit. This section is definitely not intended to penalize genuine transactions, where no tax. evasion is involved. It is well settled that the headings preferred to sections or set of sections in some modern statutes are regarded as 'preambles' to those sections. This view was approved by Farewell I.J. in Fletcher v. Birkenhead Corpn. (1907) 1 KB 205".

relevant factor to be considered for levy of penalty under Section 271D was not well-founded and while referring to the CBDT Circular No. 387, dated 6- 7-1984 explaining the object of introducing the provisions of sections 269SS and 269T of the Act, it was held that it was not the intention of the legislature to penalize genuine flow of funds for meeting the urgent business necessities. Tribunal, Pune Bench, in the case of MotiLal J Doshi(supra) has held that where the loan received in cash was from a relative of the partner of the firm, there was a bonajide belief that section 269SS vas not attracted. The Chandigarh Bench of the Tribunal in the’ case of Income Tax Officer v. Rajendra Trading Co. (1994) 48 ITD 210 (Chd) while cancelling the penalty under Section 271 D had observed as under:

"An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceedings and penalty will not ordinarily be imposed unless the party is 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. 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."

4.6. From the totality of the facts and circumstances of the case, we are convinced that there is no case for invoking the provisions of section 269T of the Act and hence the penalty levied u/s 271E for violation of section 269T of the Act thereon is quashed herewith. Accordingly the appeal of the assessee in is allowed.