Valchand Bhalraj Shah Vs ITO (ITAT Mumbai)
Mumbai ITAT Deletes Section 271D Penalty on Loan Transfer Through Journal Entries During Group Restructuring
The Mumbai ITAT deleted the penalty levied under Section 271D for alleged violation of Section 269SS, holding that the transfer of loans through journal entries during an internal group restructuring constituted a reasonable cause under Section 273B. The assessee had taken over loans originally advanced to a partnership firm after its business was transferred to a group company. Since the assessee had stood as guarantor for the borrowings and both entities were facing financial constraints, the lenders requested that the loans be transferred to the assessee through journal entries, without any movement of cash.
The Tribunal observed that the transaction formed part of a genuine financial restructuring undertaken to facilitate the smooth takeover of the partnership firm’s business and that the loans were subsequently repaid through banking channels. Relying on the Bombay High Court’s decisions in Triumph International Finance (I) Ltd. and Ajinath Hi-Tech Builders (P.) Ltd., it held that journal entries are a recognised mode of recording genuine business transactions and, in the absence of any finding that they were used to circumvent the law or involved cash, the assessee had established a reasonable cause for non-compliance with Section 269SS. Accordingly, the Tribunal deleted the penalty of ₹70.05 lakh levied under Section 271D.
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