-
Introduction
Unaccounted cash found
in the course of searches carried out by the Income Tax Department is
often explained by tax-payers 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 and tax-payers
are also able to get confirmatory letters from such persons in support
of their explanation. With a view to countering this device, which enables
tax-payers to explain away unaccounted cash or unaccounted deposits,
the provisions of sections 269SS and 269T have been inserted in the
Act debarring persons from taking/ accepting or repaying any loan or
deposit in cash in excess of Rs. 19,999.99. (CBDT Circular No. 387
dtd. 6-7-1984). To enforce the aforesaid provisions penalties have
been provided in sections 271D and 271E of the sum equal to the amount
of loan/deposit taken/ accepted or repaid in cash in excess of the aforesaid
monetary limit.
Penalty for taking/accepting
or repaying any loan or deposit in cash in contravention of the provisions
of section 269ss and 269t
Section 269SS provides
that no person shall take or accept from any other person any loan or
deposit otherwise than by an account payee cheque/bank draft if (a)
the amount of such loan/deposit or (b) on the date of taking or accepting
such loan/deposit, any loan or deposit taken/accepted earlier is remaining
unpaid, the amount or the aggregate of amount remaining unpaid or (c)
the amount or aggregate amount referred to in (a) above together with
the amount or aggregate amount referred to in (b) above – is
Rs. 20,000/- or more; i.e., section 269SS prohibits the taking or accepting
any loan or deposit in cash exceeding Rs. 19,999.99. Section 271D provides
for penalty of a sum equal to the amount of loan or deposit taken/ accepted
in cash in contravention of the provisions of section 269SS.
Section 269T provides
that no branch of a banking company or a co-operative bank and no other
company or co-operative society and no firm or other person shall repay
any loan or deposit otherwise than by an account payee cheque/bank draft
if (a) the amount of the loan or deposit together with the interest
if any payable thereon or (b) the aggregate amount of the loans or deposits
held by such person either in his own name or jointly with another person
on the date of such repayment together with the interest, if any payable
on such loans or deposits – is Rs. 20,000/- or more; i.e., section 269T
prohibits the repayment of any loans or deposits in cash exceeding Rs.
19,999.99. Section 271E provides for penalty of a sum equal to the amount
of loan or deposit repaid in cash in contravention of the provisions
of section 269T.
The penalties imposable
under sections 271D and 271E shall be imposed by the Joint Commissioner.
Quantum of penalty
Section 271D as well
as section 271E provide that the penalty shall be the sum equal to the
amount of loan or deposit taken/accepted or repaid in cash in contravention
of the provi-sions of sections 269SS and 269T which lays down the limit
of Rs. 20,000/-. Thus the quantum of penalty would be the amount paid
in cash in excess of the said limit of Rs. 20,000/-.
In CIT vs. Ajanta
Dyeing & Printing Mills (2003) 264 ITR 505 (Raj) it was held that
if any loan is there exceeding Rs. 20,000/- and for that purpose any
penalty is to be imposed in accordance with provisions of section 271-D
for violation of section 269SS, permissible amount of Rs.20,000/- has
to be adjusted meaning thereby the penalty is leviable in respect of
the amount that exceeds the limit of Rs. 20,000/-
In Ravi Iron & Scrap
Co. vs. DICT (2001) 70 TTJ 263 it was held that the scheme
of legislation is quite clear that no penalty is attracted with reference
to amount of loan/ deposit below Rs. 20,000/- and that penalty would
only be exigible with reference to further loan/ deposit in excess of
Rs. 20,000/-; i.e., where the assessee had taken deposits of Rs. 20,000,
Rs. 2,000 and Rs. 1,500 other than by account payee cheque/draft, penalty
was imposable with reference to deposits of
Rs. 3,500/- only and not with reference to aggregate deposit of Rs.
23,500. Similar view has been taken in
ITO vs. Satya Prakash Gupta (2004) 85
TTJ (Jd.) 18.
Penalties u/ss 271d
and 271e are independent of assessment proceedings
Though the defaults
under the aforesaid sections would normally be noticed in the course
of assessment proceedings only, these penalty proceedings are independent
of assessment proceedings. Even initiation of these proceedings are
independent of assessment proceedings and hence section 275 has undergone
drastic changes to take care of such proceedings. [Manoharlal vs.
Dy. CIT (1995) 83 Taxman 255 (Jp.) (Mag.), Bhushan Chemicals vs. Dy.
CIT, 54 ITD 5 (Pune)]. The usual concepts like the assessee,
the previous year, the assessment year, or the law applicable to the
assessment year cannot be imported into the provisions of section 269SS
or section 269T. (Muthoot M. George Bankers vs. Asst. CIT (1993)
46 ITD 10 (Cochin). The question as to whether the assessee had
paid his self assessment tax for any particular assessment year or not,
shall have no relevance to the question of admissibility of the appeal
against imposition of penalty u/s. 271D on the assessee simply because
of the fact that this penalty cannot be related to any particular assessment
year or return of income in respect of any such year. Therefore, dismissal
of appeal against penalty order under section 271D in limine on ground
of non-payment of self assessment tax would not be justified.
[T.D. Rathod vs. Dy.
CIT (1995) 53 ITD 375 (Bang.)]
Provisions of sections
269ss and 271d are not retrospective in nature
In Som Nath Khem
Chand vs. O.P. Bhiana, ITO (2001) 250 ITR 785 (P&H) it was
held that the amendment/deletion brought about in section 276DD w.e.f.
1-4-1989 (which provides for prosecution of person for failure to comply
with the provisions of section 269SS) and substituting the same with
section 271D wherein only penalty has been provided, cannot operate
retrospectively unless the substitution was made specifically retrospective
or could be so inferred by implied intendment. In Jaipur Carpet Mfg.
(India) (P.) Ltd. vs. DCIT (2000) 113 Taxman 227 (Jp.) (Mag) & Muthoot
M. George Bros. vs. ACIT (1994) 74 Taxman 290 (Coch) (Mag) it was
held that provisions of sections 271D and 271E could not be invoked
in relation to violation taking place prior to 1-4-1989.
In Straptex (India)
(P.) Ltd. vs. Dy. CIT (2003) 84 ITD 320 (Mum) it was held
that since section 269T as it stood at relevant time, prohibited repayment
of deposits and word ‘loan’ was inserted later by Finance Bill, 2002,
levy of penalty u/s. 271E for assessment year 1991-92 for alleged violation
of section 269T for repayment of loan was not sustainable.
Constitutional validity
In Asst. Director
of Inspection vs. Kum. A.B. Shanthi (2002) 255 ITR 258 (SC) it was
held that section 269SS or 271D, or earlier section 271DD, cannot be
held to be unconstitutional on ground that they are draconian or expropriatory
in nature. In Chamundi Granites (P) Ltd. vs. DCIT (1999) 239 ITR
694 (Kar) it was held that the provisions of secs. 269SS and 271D
are the reasonable restrictions in accordance with the powers which
are with the Parliament and, as such, cannot be considered violative
of Articles 14 and 19. The same view has been taken in Narsingh Ram
Ashok Ram vs. Union of India (1998) 234 ITR 414 (Pat). The
constitutional validity of section 269SS and 269T has also been upheld
by the Hon’ble Rajasthan High Court in
Mehta Vegetable P. Ltd. vs. Union of India
– 235 ITR 425 (Raj)
Loans or deposits
The general law makes
a clear distinction between loan and deposit. For example, under the
Limitation Act, different limits have been set out for instituting
suits for recovery of loans and deposits. The Chambers 20th Century
Dictionary, (New Edition 1983) defines a ‘deposit’ as ‘that which
is deposited or put down; a sum of money paid to secure an article,
serving etc.; while it defines ‘loan’ as ‘anything lent, especially
money at interest; the act of lending; the condition of being lent;
and arrangement for lending’. Thus, there is a marked distinction
between a loan and a deposit [Dy. CIT vs. Dhanji R. Zalte (2001)
78 ITD 397 (Pune)]. The aforesaid distinction had more significance
prior to 1-6-2003 because prior to that date penalty u/s. 271E was
leviable only in respect of deposits repaid in contravention of the
provisions of section 269T i.e. cash loans repaid in excess of
Rs. 20,000/- were not hit by the provisions of section 269T/ 271E.
(A.M. Shamsudeen vs. UOI (2000) 244 ITR 266 (Mad.)) However,
after the amendment w.e.f. 1-6-2003, even loans are now hit by section
271E.
The prerequisite
condition for levy of penalty u/s. 271D/271E is that the transaction
in cash must result in a loan or a deposit. Thus if the receipt/repayment
of cash does not result in loan/deposit or repayment of loan/deposit
no penalty would be leviable u/s. 271D/271E as demonstrated in the
illustrative cases given below.
-
Where cash is taken
from wife without interest and with no promise to return for construction
of house, the receipt of cash does not amount to loan/ deposit.
In Dr. B.G.
Panda vs. Dy. CIT (2000) 111 Taxman 86 (Cal) (Mag) the wife
gave cash to the husband for the construction of a house which was
naturally a joint venture for the property of the family only. This
transaction was not for commercial use. It was held that though
the expenditure was apparently incurred by the husband being the
karta/ head of the family, it could not be said that the wife could
not have any interest of her own in this house being constructed.
The transaction was neither loan nor any gift as no ‘interest’ element
was involved and there was no promise to return the amount with
or without interest. Consequently no penalty was leviable.
Amount deposited
by assessee’s wife in his account out of sale proceeds of land which
is utilised for purchase of land in name of their son could not
be treated as deposit or loan
In Narotam
Singh Mann vs. ITO (2003) SOT 450 (Asr) it was held that
amount deposited by assessee’s wife in his account out of sale proceeds
of land which is utilised for purchase of land in name of their
son could not be treated as deposit or loan.
Loans
to minor children and wife
In ITO vs. Sunil
M. Kasliwal (2003) 80 TTJ (Pune) (TM) 1 the assessee
was a manufacturer of building material, etc. He was in need of
funds for his business and borrowed money from his minor children
and wife. As far as minors were concerned, the assessee himself
acted as the guardian. No other person was involved. In the capacity
of the guardian of the minor children, he had given the loan and
accepted it in the capacity of individual. The question was as to
whether there was breach of section 269SS and penalty was leviable
u/s. 271D. It was held that even assuming that there was breach,
it was only a technical and venial breach. There is a common law
maxim : "De non minimis curat lex". It means law does not take into
consideration trivialities. In respect of the loan taken from the
wife, the amount of loan was very small. Normally, it could not
be construed to be a transaction between the borrower and the lender.
Genuineness of the transaction was not doubted. Apropos the relation
of husband and wife it is said in the Bible that "what god hath
joined together man cannot cast as under". As such, there existed
a mitigating circumstance. The penalty could not be maintained in
respect of the loans to minor children and wife.
Where
purchase consideration of a property purchased by assessee alongwith
his father was paid by his father as per co-ownership agreement
and shown as loan from father to assessee
In Mahesh
Prasad Soni vs. Addl. CIT (2003) 128 Taxman 91 (Jab.) (Mag.)
the assessee purchased a property along with his father for certain
consideration. Since the assessee had no funds available, the father
of the assessee paid the entire consideration, partly by way of
bank draft and partly in cash. As per co-ownership agreement, the
consideration was to be paid by father whereas the property was
to be registered in the name of the assessee. Thus, in the assessee’s
account, the entire amount was shown as loan from the father to
the assessee. The Assessing Officer was of the opinion that such
loan was accepted in contravention of the provisions of section
269SS and, accordingly, imposed penalty u/s. 271D. It was held that
keeping in view the intention of the Legislature behind enacting
section 269SS, it was to be held that the loan/ deposit brought
in by the assessee was not to explain his unaccounted cash and,
therefore, the question of violating the provisions of section 269SS/269T
did not arise. Further, penalty u/s. 271D is imposable where ‘a
person takes or accepts deposits’. But in the instant case, as per
co-ownership agreement, which was registered, purchase consideration
was to be paid by the father of the assessee to the seller and no
amount came to the assessee. It was also provided in the agreement
that till the payment was made by the assessee to his father, the
amount would be shown as outstanding in the name of the father.
These facts clearly indicated that actually there was no actual
acceptance of loan or deposit by the assessee. Only the entries
were made in the accounts of the assessee. Hence, question of any
violation of the provisions of section 269SS and attracting the
penalty u/s. 271D did not arise.
Where
father of the assessee assisted him by giving money to purchase
vehicle to settle him in life and assessee was under no obligation
to return it
In Mohan Karkare
vs. Dy. CIT (1995) 52 ITD 236 (Ind.) (SMC) it was held that
where father of the assessee assisted him by giving money to purchase
vehicle to settle him in life and assessee was under no obligation
to return it, it would be wrong to say that the receipt of amount
in cash amounted to violation of section 269SS so as to attract
penalty u/s. 271D.
Where
father deposits cash for education of his son
In ITO
vs. Shree Mahaveer Industries (2004) 82 TTJ (Jd.) 549
it was held that deposit of cash by father for the education of
the son being trust amount did not contravene section 269SS nor
repayment of the said money in cash contravened section 269T.
Withdrawal
from joint account of father and son
In Shiv
Nandan Kaushik vs. Dy. CIT (2002) 74 TTJ 761 (Chd) an
amount of Rs. 2 lakhs was withdrawn from the joint bank account
of assessee and his son and same was deposited with a company. It
was agreed between father and son that deposits of Rs. 1 lakhs each
would be made in the separate names of father and son and income
arising therefrom would be respective income of father and son.
It was held that mere fact that the company had issued one receipt
in the name of the assessee was not a conclusive evidence that the
deposit was made by the father alone, when in fact income arising
from their respective deposits was being enjoyed by both and assessed
accordingly. It was held that the department had not been able to
establish the fact that transaction was indeed a loan to assessee
from his son.
Payment
by a partner to firm is a payment to self and, therefore, not a
deposit or loan which would attract penalty u/s. 271D
In Shrepak
Enterprises vs. Dy. CIT (1998) 64 ITD 300 (Ahd.) it was
held that in view of the departmental Circular No. 387, dtd. 6-7-1984
which is a clarification of binding nature on the departmental authorities,
section 271D was brought in to cover those situations where unaccounted
cash found in the course of search was explained by the tax-payers
as representing loans taken or deposits made by various persons.
This particular section was brought in with a view to counter such
tactics of the assessees. Payment by partner to firm is a payment
to self and not a loan or deposit and as such it would not attract
penalty u/s. 271D.
Repayment
to partner of capital amount remaining with the assessee firm
In ITO vs. Shree
Mahaveer Industries (2004) 82 TTJ (Jd.) 549 it was held
that repayment to partner of capital amount remaining with the assessee
firm did not amount to repayment of loan or deposit.
Where sister concerns and their partners are closely related to
each other.
In Motilal
& Co. vs. ITO (1999) 102 Taxman 108 (Ahd.) (Mag.) the assessee
contended that it had three sister concerns and the partners of
these firms were closely related to each other and as and when money
was required, it was taken and paid back to the other party and
entries made in running accounts. It was therefore held that the
amount received by the assessee were neither loans nor deposits.
Similar view has also been taken in Muthoot M. George Bankers
vs. ACIT (1993) 46 ITD 10 (Coch.) and
ACIT vs. G.P. Taparia (2004) 84 TTJ (Jd.) 34.
Temporary advances
being neither loans nor deposits are outside the purview of section
269SS
In Karnataka
Ginning & Pressing Factory vs. Jt. CIT (2001) 77 ITD 478 (Mum.)
it was held that where the amounts taken by the assessee from
its sister concern were temporary advances and there was no evidence
that there was any stipulation as to the period or any stipulation
for interest, it was therefore a matter of grave doubt as to whether
the amounts received from its sister concern could be characterised
as loans or deposits. They could be more appropriately referred
to as temporary advances which are outside the purview of section
269SS.
Where
promoter director of assessee-company provided funds in cash to
assessee from time to time to meet immediate requirements of assessee’s
project activity, the provision of funds, did not amount to a transaction
of loan/deposits as it was a unilateral transaction
In Chandra Cement
vs. Dy. CIT (2000) 68 TTJ (Jp.) 35 when the promoter
director found company being unable to make the resources available
for the project work, he decided to involve and utilise his own
money for construction work. There were neither compelling reasons
nor a compelling force by the so called artificial person, i.e.
company, to bring in the money. It was merely a suo motu
decision of the promoter to expose himself to such a huge risk of
utilising his personal money for company’s purpose, with the hope
that he would take it back when the loans were disbursed to the
company. It was a case where agent utilised his own money in order
to fulfil his obligations towards the principal upon which he became
entitled to get back the money. This was thus a unilateral transaction
on the part of the promoter to involve and utilise his own money
by withdrawing it from his own sources. As unilateral Act cannot
result in a contract for which existence of two parties is a sine
qua non. Loan or deposit, both are contracts only, originating from
bilateral Act. The company was bound to pay for the construction
expenditure. The promoter paid it because he was interested in the
capacity as promoter and also because his personal guarantees were
involved in the finances to the company. Thus, he paid the amount
and became entitled for the reimbursement by the company. It was
thus, neither a loan which was a bilateral transaction at the instance
of borrower having predetermined repayment period, nor a deposit
which was at the instance of depositor and was repayable on fulfilment
of certain conditions. The provisions of section 269SS were therefore
not attracted.
Where cash withdrawal is made by promoter
director of a closely held sick company for purchase of FDR which
is offered as security in accordance with the direction of AAIFR
In Mrs. Rupali R. Desai vs. Addl. CIT (2004) 88 ITD 76 (Mum)
the assessee was a shareholder of a private limited company
which was a sick unit covered by BIFR. The AAIFR had directed the
Chairman and Managing Director of the company who was the father
of the assessee to deposit Rs. 41.50 lakhs as security. Accordingly
cash was withdrawn from the company and given to the assessee to
enable her to get FDRs which were offered as security. Ultimately
the revival proposal failed and the money was returned to the company
by the assessee through cheque. It was held that taking into consideration
the entire conspectus of the case, there existed a reasonable cause
for accepting the cash loans and the penalty was accordingly deleted.
Application money received by assessee for
purchase of its shares does not have character of ‘loan’ or ‘deposit’
within meaning of section 269SS
In Jagvijay Auto Finance (P.) Ltd. vs. Asst.
CIT (1995) 52 ITD 504 (Jp.) it was held that the amount
taken in cash by the assessee-company from a party by way of application
money for the purchase of shares of the assessee-company does not
have character of ‘loan’ or ‘deposit’ within meaning of section
269SS.
Advance for
purchase of truck does not amount to loan or deposit See
CIT vs. Kharaitilal & Co. (2004) 270 ITR 445 (P&H)
In case of Kachcha Arhatiya
The Board is of the opinion that where a ‘Kachcha
Arhatiya’ sells goods belonging to an agriculturist, the sale proceeds
thereof which remain with him cannot be regarded as a deposit made
by the agriculturists with the ‘Kachcha Arhatiya’. Further, whether
the ‘Kachcha Arhatiya’ remits only a part of the sale proceeds to
the agriculturists, the unremitted part of the sale proceeds would
also not assume the character of a deposit. Therefore, the repayment
of such sale proceeds does not fall within the purview of section
269T of the Act. (CBDT Circular No. 556 dtd. 23-2-1990).
The said Circular has been relied upon in Harpal Singh Jaswant
Singh vs. ITO (1995) 82 Taxman 81 (Asr.) (SMC) (Mag).
Once loan amount is added/ treated as income
by the A.O, the said amount cannot again be treated as a loan for
the purpose of penalty
In Diwan Enterprises vs. CIT (2000) 246 ITR
571 (Delhi) it was held that the Assessing Officer cannot be
permitted to treat the amount of loan as income for the purpose
of assessing tax thereon while framing the assessment and at the
same time to treat it as a loan for the purpose of section 269SS,
read with section 271, and subject the transaction to penalty. Such
proceedings would be self contradictory. Where for non-compliance
with the provisions of sec. 269SS, the genuineness of the transaction
as loan was doubted by the Assessing Officer and so the amount was
surrendered by the assessee, and the surrender was accepted by the
Assessing Officer as income of the assessee, it ceased to be a loan
and, therefore, the very foundation for the initiating the proceedings
for levying penalty u/s. 271D could be said to have been lost.
It must be established that money is borrowed
in cash – mere presumption raised under section 132(4A) that assessee
had borrowed money in cash is not sufficient
In Straptex (India) (P.) Ltd. vs. Dy. CIT
(2003) 84 ITD 320 (Mum) it was held that even where presumption
was raised under section 132(4A) that assessee had borrowed money
in cash, levy of penalty u/s. 271D could not be sustained in the
absence of corroborative evidence to establish that the assessee
borrowed money in cash.
Some transactions otherwise than
through account payee cheque/bank draft which are not hit
Though sections 269SS
and 269T use the words "otherwise than by an account payee cheque or
account payee bank draft" the said provisions are meant to hit only
cash transactions (as evident from CBDT Circular No. 387 dtd. 6-7-1984)
i.e. if there are transactions which are "otherwise than by an account
payee cheque or account payee bank draft" but they do not involve any
movement of cash, the said transactions would not be hit by the aforesaid
provisions as demonstrated hereunder.
-
Payment/
Adjustment by Journal Entry
In CIT vs.
Noida Toll Bridge Co. Ltd. (2003) 262 ITR 260 (Delhi) it was held
that when no payment is made in cash, but the same is effected by
journal entry in books of account of assessee and there is no violation
of section 269SS so as to warrant penalty u/s. 271D. Similar view
has been taken in CIT vs. Govind Kumar
– (2002) 253 ITR 103 (Raj).
-
Where amount
was transferred by deposits through transfer vouchers
In Asst. CIT vs.
Jag Vijay Auto Finance (P.) Ltd. (2001) 78 ITD 378 (Jp.) it was
held that the main object of section 269SS is to counter the device
of taking unaccounted cash or unaccounted deposits otherwise than
by an account payee cheque or account payee draft. Where the amount
was transferred by the deposits through transfer vouchers, the amounts
in question could be said to have been credited in the company’s bank
account through proper banking channels as per spirit of section 269SS
and, thus, the assessee company could not be said to have violated
the provisions of section 269SS.
Exceptions
The provisions of sections
269SS and 269T are not applicable to any loan/ deposit or repayment
of any loan/ deposit taken or accepted from
-
Government
-
Any banking company,
post office saving bank or co-operative bank
The explanation to
section 269SS provides that
-
"banking company"
means a company to which the Banking Regulation Act, 1949 (10 of
1949), applies and includes any bank or banking institution referred
to in section 51 of that Act;
-
"co-operative bank"
shall have the meaning assigned to it in Part V of the Banking Regulation
Act, 1949 (10 of 1949).
-
Any corporation established
by a Central, State or Provincial Act
-
Any Government company
as defined in section 617 of the Companies Act, 1956
-
Such other institution,
association or body or class of institutions, associations or bodies
which the Central Government may, for reasons to be recorded in writing
notify in this behalf in the Official Gazette.
Housing Development
Finance Corporation Ltd. is notified under clause (e) of proviso to
the section, being institution to which the aforesaid provisions are
not applicable. (Notification: No.
SO 3607, dtd. 18-7-1986 as modified by SO 3828/4250, dtd. 28-10-1986).
In addition to the
above, the provisions of section 269SS shall not apply to any loan
or deposit where the person from whom the loan or deposits is taken
or accepted and the person by whom the loan or deposit is taken or
accepted are both having agricultural income and neither of them has
any income chargeable to tax under this Act.
Levy of penalty
– Whether mandatory ?
Though the provisions
of section 271D and 271E use the word "shall", the Legislature has given
discretion to the assessing authority u/s. 273B to levy the penalty
as provided u/s. 271D/ 271E or not. U/s. 273B, if the Court finds that
there was a reasonable and sufficient cause for not imposing the penalty
on the assessee in the given facts and circumstances of the case, the
penalty shall not be levied. Therefore levy of penalty is not mandatory
but only directory in nature.
(Muthoot M. George Banker vs. ACIT (1993)
46 ITD 10 (Coch).)
Illustrative cases
showing existence of reasonable cause
-
Genuine
transactions to satisfy immediate requirement of money
In CIT vs. Bhagwati
Prasad Bajoria (HUF) (2003) 263 ITR 487 (Gauhati) it was
held that where there is an immediate need of money, the person cannot
get such money from the nationalised bank. To satisfy the immediate
requirement of money the person normally approaches the money-lender
or his friend or relative who could lend money to him to satisfy his
immediate requirement. In those circumstances it cannot be said that
the assessee has entered into a cash transaction to avoid the payment
of tax or to defraud the Revenue. Thus no penalty should be levied.
-
Where loans
are taken to clear cheques (i) so as to avail discount (ii) due to
urgent need of time bound supplies
-
In CIT vs. Parma
Nand (2003) 266 ITR 255 (Delhi) the Tribunal held that there
was reasonable cause as the loans were taken to clear the cheques
issued by the assessee as there was no sufficient bank balance with
the assessee. The amounts were prepaid through account-payee cheques.
It was held that there was a reasonable cause because the assessee
was going to be directly benefited if the cheques issued were cleared
in time, as there was a discount at the rate of 2 per cent for cash
payment against the bills. The High Court held that the conclusion
of the Tribunal that there was a reasonable cause in not strictly
complying with the provisions of section 269SS was based on relevant
factors and that the findings recorded by the Tribunal were essentially
factual giving rise to no question of law much less a substantial
question of law.
-
In CIT vs. Manoj
Lalwani (2003) 260 ITR 590 (Raj) the Tribunal came to
the conclusion that as the assessee was an exporter and in the urgent
need of the time bound supplies, the assessee took a loan of Rs.
2.50 lakhs from his brother-in-law the genuineness of which had
not been doubted by the Assessing Officer and the assessee immediately
deposited a sum of Rs. 2.45 lakhs out of Rs.2.50 lakhs in the bank
on the same day for making the payment to his suppliers, which showed
that there was no intention of the assessee to violate the provisions
of law. It was also observed that since the assessee was not having
sufficient time and funds, the cash loan was taken to avoid further
delay in the process of clearing the cheque. In view of these peculiar
circumstances, the Tribunal held that the cash loan was taken by
the assessee in the exceptional circumstances and it was a case
of reasonable cause which was proved by the assessee. Consequently,
the Tribunal deleted the penalty. The High Court held that the Tribunal
had acted in accordance with law in waiving the penalty imposed
on the assessee by the Revenue authorities.
-
The loans
and deposits as well as the repayments of loans in cash as a result
of discounting of cheques/ dishonouring of cheques issued by the assessee
In Shreenath Builders
vs. Dy. CIT (2000) 66 TTJ (Ahd.) 113 it was found that the assessee-firm,
carrying on business as building contractor, had accepted loans/ deposits
from two shroffs and had also repaid the same in cash. The genuineness
of the transactions in relation to which penalties had been imposed
had not been doubted. The loans and deposits as well as the repayments
of loans was a result of discounting of cheques/ dishonouring of cheques
issued by the assessee. Both the Shroffs from whom the cheques were
discounted by the assessee or to whom the payments in cash were made
on account of dishonouring of cheques issued by the assessee were
regular income-tax assessees. The discounting of the cheques was made
by the assessee to meet urgent business needs of making the payments
to the labourers for enabling the assessee to carry on its business
of working as a building contractor as the payments from the State
Government which were due to the assessee were not forthcoming. It
was held that the contention of the assessee that violation of the
provisions of sections 269SS and 269T was an innocent mistake on its
part on account of ignorance of the relevant provisions of law and
it constituted a reasonable cause within the meaning of section 273B,
could not be just brushed aside. Ordinarily a plea as to the ignorance
of law cannot support the breach of a statutory provision. But the
fact of such an innocent mistake due to ignorance of the relevant
provisions of law, combined with the fact that the transactions in
question were genuine and bona fide transactions and were undertaken
during the regular course of its business, would constitute a reasonable
cause.
-
Temporary
cash advances from sister concern in cash for business exigencies
In Karnataka
Ginning & Pressing Factory vs. Jt. CIT (2001) 77 ITD 478 (Mum.)
the assessee-firm having a running account and business relationship
with a sister concern, took temporary advances in cash for business
exigencies, more particularly for payment of excise duty and repaid
them from out of sale proceeds or through adjustments, it was held
that since genuineness of borrowing was not in doubt and assessee
was prevented by reasonable cause from taking monies through account
payee cheque or draft, there was reasonable cause for assessee to
act in contravention of provisions of section 269SS by taking monies
from its sister concern in cash and as such no penalty under section
271D could be imposed on assessee.
-
Loans taken
from sister concern in violation of section 269SS to project better
financial position of sister concern for taking loan from bank
In Jay Builders
vs. Asst. CIT (2000) 111 Taxman 211 (Mum) (Mag.) there were common
partners between the assessee firm and its sister concern. Instead
of partners making withdrawals from the sister concern which would
deflate the capital, the assessee firm took cash loans from its sister
concern to enable the partners to withdraw those amounts from the
books of the assessee firm which arrangement was gone through under
the advise of the accountant in order to project a better picture
of the financial position of the sister concern for the purpose of
taking a loan from the bank for a certain project. It was held that
the exhibition of the accounts in the balance sheet filed with the
bank was an overriding consideration and in the anxiety to do so the
provisions of section 269SS had not been kept in view. The fact that
the assessee-firm acted on the advice of the accountant was also supported
by an affidavit filed by the partner. There was no reason to disbelieve
the averments contained in the affidavit. Under the circumstances,
therefore, the penalty imposed on the assessee under section 271D
was not justified.
-
Cash deposited
by Director in bank account of the company
In Dillu
Cine Enterprises (P.) Ltd. vs. Addl. CIT (2002) 80 ITD 484 (Hyd.)
the assessee was domestic company in which public was not substantially
interested. All the three directors, who managed the company, had
personal accounts in the form of current account in the books of the
company. One of the directors, who was actively looking after the
company, brought in the funds from this personal account whenever
the company was in requirement of funds. He was also withdrawing money
as and when he required the same. Penalty u/s. 271D was levied on
account of amounts given by the Director to the company. It was held
that the expression "reasonable cause" has to be considered pragmatically
and as it was an open transaction done to meet exigencies of business,
it could be said to have constituted "reasonable cause". As the company
had issued certain cheques and they were coming up for encashment,
the active Director of the assessee considered it expedient to deposit
cash in the bank account of the company to save the situation. The
assessee had a ‘bonafide’ belief that no offence was committed. The
levy of penalty was not automatic. In the light of the above, both
on law and on facts, the penalty levied u/s. 271D was not sustainable.
Similar view has been taken in Chandra
Cement Ltd. vs. Dy. CIT (2000) 68 TTJ (Jp.) 35.
-
In the case
of Kachha Arhatiya
In Hissaria
Brothers vs. Jt. CIT (2001) 73 TTJ (Jodh.) 1 the assessee was
a Kachha Arhatiya and was dealing with village agriculturists and
was under bona fide belief that cash transactions were permissible
with farmers. The dealing between the assessee and the farmer-constituents
were in cash. Sometimes they took sums in cash from the assessee-firm
and sometimes they gave the sums to assessee-firms, so that their
prospective requirements might be met. For making deposits in cash
and receiving payments in cash penalties were levied against the assessee
under sections 271E and 271D. It was held that the assessee acted
under bona fide belief and did have reasonable and sufficient cause
as provided u/s. 273B, so as to exonerate the assessee of the default/
defiance, under sections 271D and 271E.
-
Where assessee-firm
engaged in business of commission agency and trading in agricultural
produce had been keeping sale proceeds of its parties (living in remote
area) for purpose of safe custody
In ITO vs.
Bharadiya Trading Co. (2003) 85 ITD 42 (Pune) (SMC) it
was held that where assessee-firm engaged in business of commission
agency and trading in agricultural produce had been keeping sale proceeds
of its parties (living in remote area) for purpose of safe custody,
imposition of penalty treating such amounts as loans taken and repaid
in cash, was not justified because assessee kept money of constituents
under bonafide belief and it being covered by Circular No. 556, dtd.
23-2-1990, such transactions were not hit by provisions of sections
269SS and 269T and the said bonafide belief constituted reasonable
cause.
-
Where assessee
had accepted deposits in cash from agriculturists who had no bank
accounts
In ITO vs.
Ganesh Wooden Industries (2003) SOT 44 (Ahd) (SMC) it was
held that where assessee had accepted deposits in cash from agriculturists
who had no bank accounts, default was merely technical and venial
in nature which had not resulted in loss to the Government revenue
and therefore penalty was not attracted.
-
Cash loans
from friends serving as a bridge loan as and when emergency arose
In Industrial
Enterprises vs. Dy. CIT (2000) 73 ITD 252 (Hyd.) it was
held that where though assessee had succeeded in securing certain
loans sanctioned by banks and financial institutions, those finances
had not come in time to meet financial needs of assessee during construction
stage of factory and therefore assessee was very much constrained
to accept cash loans from its friends as and when emergency arose,
assessee could be said to have been prevented by reasonable cause
from complying with provisions of section 269SS.
-
Cash loan
from wife for construction of house
In Dr. B.G.
Panda vs. Dy. CIT (2000) 111 Taxman 86 (Cal) (Mag) it was held
that where assessee due to urgency of situation obtained certain loan
from his wife in cash for construction of house which was naturally
a joint venture for prosperity of family and transaction did not involve
any interest element and there was no promise to return amount with
or without interest, it could be said that there was a reasonable
cause for not complying with section 269SS.
-
Where assessee
had allegedly received a loan in cash from his wife and was under
bonafide belief that amount was not to be returned
In ITO vs.
Tarlochan Singh (2003) 128 Taxman 20 (Asr.) (SMC) (Mag) it was
held that where assessee had allegedly received a loan in cash from
his wife for investment in acquisition of immovable properties, and
assessee was under bonafide belief that amount was not to be returned,
no penalty was leviable as (a) keeping in view the contents of the
departmental Circular No. 387, it was never the intention of the Legislature
to punish a party involved in a genuine transaction. (b) the wife
had given money to husband for prosperity of the family only and there
was no evidence that the amount in question was taken for commercial
use. Though the revenue considered it loan, but there was no material
on record to show that the assessee had returned the amount received
from the wife or paid interest thereon (c) intention of Legislature
was never to punish a party involved in genuine transactions.
-
Where recurring
defaults have not been pointed out/ commented on by Auditors/Assessing
Officer
In Farrukhabad
Investment (I) Ltd. vs. JCIT (2003) 85 ITD 230 (Delhi)
it was held that where professional auditors did not point out any
violation of provisions of section 269SS/269T, and senior officers
of department passed assessment order u/s. 143(3) for some years without
commenting about any such violation, assessee’s ignorance of these
provisions could be said to be bonafide and no penalty was imposable.
-
Where loans
in cash up to Rs. 20,000/- were accepted by assessee, under an impression
that acceptance of cash deposit up to Rs. 20,000/- would not attract
penalty.
In Shreenathji
Corpn. vs. Asst. CIT (1997) 58 TTJ (Ahd.) 611 it was held
that where loans in cash up to Rs. 20,000 were accepted by the assessee,
who was in construction business to meet exigencies of construction
work as assessee was under an impression gathered from certain circular
and advertisement that acceptance of cash deposits upto Rs. 20,000/-
would not attract penalty, assessee could be said to have a reasonable
cause for accepting deposits in cash. Similar view has been taken
in ITO vs. Satya Prakash Gupta (2004) 85 TTJ (Jd.) 18.
-
Where assessee, a dentist, took bona fide loans
for buying a flat and for purposes of business
In
Dr. Deepak Muchala vs. ITO (1997) 58 TTJ (Bom) 524 it was held
that section 271D was introduced to prevent abuse of laws and to discourage
tax avoidance and tax evasion. In particular, it was meant to circumvent
the device by which the tax-payers often explain away unaccounted
cash or unaccounted deposits found in the course of searches carried
out by the Department. Thus where assessee, a dentist, took bona fide
loans for buying a flat and for purposes of business, without complying
with provisions of section 269SS, provisions of section 271D were
not to be invoked.
-
Genuine belief that provisions are not applicable
constitutes reasonable cause
Reference
may be made to CIT vs.
Eetachi Agencies – 248 ITR 525 (Bom)
-
Where identity
of payee is established and genuineness of transaction is not doubted
In Addl. CIT vs.
Smt. Prahati Baruah (2003) 133 Taxman 74 (Gau) (Mag) it was held
that the introduction of section 269T and section 271E in the statute
is to prevent proliferation of black/ unaccounted money deposited
with banks and other persons by introducing the system of repayment
through account payee cheques and drafts and, thus, to ensure that
the identity of the payee is established. Where the identity of the
lender to whom repayment had been made was known to the department
and the genuineness of the loan transaction was not in doubt, it could
not be said that the breach of law, if any, was deliberate and the
default, if any, could be said to be a technical default for which
no penalty would be leviable.
-
Genuine transaction – penalty deleted
Reference
may be made to CIT vs. Bhagwati Prasad Bajoria (HUF) (2003) 263
ITR 487 (Gau)
-
Bona fide belief, coupled with genuineness of
transactions, would constitute a reasonable cause for not invoking
provisions of section 271E
In Faridkot-Bathinda Kshetriya Gramin Bank vs.
Jt. CIT (2002) 125 Taxman 268 (Asr.) (Mag.) the assessee
was a rural bank. The officers and staff of the bank primarily dealt
with illiterate agriculturists. The staff of the assessee-bank was
working in an area where their exposure to banking and other laws
like income-tax, was very limited. They repaid certain deposits in
excess of Rs. 20,000/- in cash. Due to ignorance of law, the concerned
officer was under bona fide belief that repayments exceeding Rs. 20,000/-
could be made in cash also. It was held that in the instant case it
could be safely held that the bona fide belief coupled with the genuineness
of the transactions constituted a reasonable cause, as provided under
section 273B.
-
Where repayment of loans is in cash as creditors
are not willing to accept cheques or drafts due to unfavourable credibility
of the assessee company
In Premier Art Silk Processors (P. ) Ltd. vs.
Dy. CIT (2005) 142 Taxman 13 (Ahd) (Mag) the creditors demanded
repayment of loans to be made only in cash and were not ready to accept
payment by cheque or draft because the assessee’s credibility
in the market was not favourable due to losses incurred. It was held
that there was a reasonable cause for the default and the penalty
was deleted.
Illustrative cases
showing non existence of reasonable cause
-
Ignorance
of law is no excuse for violation of provisions of sections 269SS
and 269 TT where assessee is represented by two C.As. and an Advocate.
In Udaichand
Santosh Kumar Jain vs. ITO (2003) 79 TTJ (Indore) 88 it
was held that where assessee was represented by two C.As. and an Advocate
ignorance of law was no excuse for violation of provisions of sections
269SS and 269 TT and the same would not constitute reasonable cause.
-
Where loan
taken by partner of assessee–firm by account payee cheque was deposited
by partner in cash with firm showing it as loan from partner.
In Goyal Construction
Co. vs. Asst. CIT (2003) 127 Taxman 46 (Agra) (Mag) it
was held that penalty was justified even where loan taken by partner
of assessee–firm by account payee cheque was deposited by partner
in cash with firm showing it as loan from partner.
-
Urgency
of immediate funds is to be established to establish reasonable cause.
In ITO vs. Sunil
M. Kasliwal (2003) 80 TTJ (Pune) (TM) 1 it was held that
the assessee contended that loans in cash was taken from cousin sister
of his mother because of urgent requirement of machines. Held that
the exigency was stated to be the requirement of machine. How urgent
that requirement was, was not known. The machine was not purchased
soon after taking the loan. This indicated that the assessee could
have complied with the requirements of section 269SS without much
difficulty. It is the duty of every citizen to respect law. Majesty
of law is to be maintained. Therefore, there existed no reasonable
cause for accepting these loans in cash and as such penalty was justified.
Question of law
The following questions
were held to be questions of law
-
Whether the
Tribunal was right in cancelling penalty levied u/s. 271D/ 271E in
view of the provisions of section 269SS/269T ?
[CIT vs. Ramraj Ramgopal (2003) 179 CTR (Raj) 88.]
Whether on
facts and in the circumstances of the case the Tribunal was not justified
in confirming the penalty of Rs. 92,000/- u/s. 271D ?
[National Surgical Corporation vs. CIT (2000)
242 ITR 667 (AP).]
Whether on
the facts and in the circumstances of the case, no penalty was leviable
under section 271D on the amount of Rs.20,000 received by the assessee
from R and Rs. 20,000/- received from D on the ground that those amounts
were in the nature of ‘Amanat’ and not loan or deposit within the
meaning of section 269SS ? [Jagir
Singh Balraj Kumar & Co. vs. CIT, (1999) 235 ITR 146 (Punj.)]
Others
-
Where the
word ‘deposit’ had not been mentioned by the lower authorities in
the show cause notice under section 271E
In Udaichand
Santosh Kumar Jain vs. ITO (2003) 79 TTJ 88 (Indore) it
was held that imposition of penalty would not become invalid just
because the word ‘deposit’ had not been mentioned by the lower authorities
in the show cause notice under section 271E.
-
Where cash
transactions exceeding the specified limit have been admitted by the
assessee
In Dhanji R. Zalte
vs. ACIT (2004) 265 ITR 205 (Bom) the assessee was an advocate
specializing in land acquisition cases who had admitted during search
proceedings that he had accepted/ repaid loans/deposits in excess
of Rs. 20,000/- by cash. Despite the aforesaid admission, the assessee
contended that it was obligatory upon the revenue to establish that
he had raised loans in contravention of section 269SS. It was held
that in presence of admission by assessee that transactions in question
were loans taken by him, initial onus, which was on revenue, was shifted
on assessee to prove that what he had stated was not true and transactions
were not loan. In absence of any such attempt by assessee, revenue
was not under any obligation to establish that assessee had raised
loans in violation of provisions of section 269SS.
Conclusion
Penalties under sections
271D and 271E would be leviable where any person accepts/ takes or repays
loan/ deposit in cash in excess of Rs. 19,999.99/-. The quantum of penalty
would be the sum of loan/ deposit which exceeds the limit of Rs.20,000/-.
The pre-requisite condition for the levy of the aforesaid penalties
is that the cash transaction must result in a loan or deposit. Transactions
between family members wherein there is no obligation to repay or wherein
the amount is held in trust, payment by partner to a firm or repayment
of capital amount by firm to partner, temporary advances and withdrawals
from joint account do not result in loan/ deposit and are therefore
outside the purview of the aforesaid provisions. The aforesaid penalties
are neither automatic nor mandatory, but are directory in nature; i.e.,
the said penalties would not be leviable if there exist reasonable cause
for the default in view of the provisions of section 273B.
|
