HIGH COURT OF BOMBAY
Commissioner of Income-tax, Central-IV
V/s.
Triumph International Finance (I) Ltd.
IT APPEAL NO. 5746 OF 2010
June 12, 2012
JUDGMENT
J.P. Devadhar, J. –
This appeal was admitted on 13th September 2010 on the following substantial question of law :-
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that transactions effected through journal entries in the books of the assessee would not amount to repayment of any loan or deposit otherwise than by account payee cheque or account payee bank draft within the meaning of Section 269T to attract levy of penalty under Section 271E of the Income Tax Act, 1961 ?”
2. The assessment year involved herein is AY 2003-04.
3. The respondent-assessee, a Public Limited Company, is a member of the National Stock Exchange and is also a Category I Merchant Banker, registered with the Securities and Exchange Board of India (SEBI). The assessee is engaged in the business of shares, stock broking, investment and trading in shares and securities.
4. In the assessment year in question, the assessee had filed its return of income declaring loss of Rs. 17,27,21,815/-. The assessment was completed on 5th November 2003 under Section 143(3) of the Income Tax Act, 1961 (‘Act’ for short) determining loss at Rs. 9,84,92,500/-.
5. Prior to 1st April 2002, the assessee had accepted a sum of Rs. 4,29,04,722/- as and by way of loan/inter-corporate deposit from the Investment Trust of India which was repayable during the assessment year 2003-2004. During the previous year relevant to the assessment year in question, the assessee on 3rd October 2002 had transferred 1,99,300 shares of Rashal Agrotech Limited held by it to the Investment Trust of India for an aggregate consideration of Rs. 4,28,99,325/-. Thus, in the assessment year in question, the assessee was liable to repay the loan/inter-corporate deposit amounting to Rs. 4,29,04,722/- to the Investment Trust of India and receive Rs. 4,28,99,325/- from Investment Trust of India towards sale price of the shares of Rashal Agrotech Limited sold by the assessee to the Investment Trust of India. Instead of repaying the loan/inter-corporate deposit to the Investment Trust of India and receiving the sale price of the shares from the Investment Trust of India, both the parties agreed that the amount payable/receivable be set-off in the respective books of account by making journal entries and pay the balance by account payee cheque. Accordingly, after setting off of the mutual claim through journal entries, the balance amount of Rs. 5,397/- due and payable by the assessee to the Investment Trust of India was paid by a crossed cheque dated 19th February 2003 drawn on the Citibank.
6. In view of the objections raised in the Audit Report regarding repayment of loan/inter-corporate deposit otherwise than by an account payee cheque or draft, the assessing officer issued a show-cause notice calling upon the assessee to show cause as to why action should not be taken against the assessee for violating the provisions of Section 269T of the Act. The assessee opposed the show-cause notice by filing a detailed reply. However, by an order dated 21st March 2006 passed under Section 271E of the Act, the assessing officer on the basis of the report of the Joint Parliamentary Committee of Lok Sabha and Rajya Sabha on the Stock Market Scam imposed penalty amounting to Rs. 4,28,99,325/- on the ground that the assessee had repaid the loan/inter-corporate deposit to the extent of Rs. 4,28,99,325/- in contravention of the provisions of Section 269T of the Act.
7. On appeal filed by the assessee, the Commissioner of Income Tax (Appeals) by his order dated 21st December 2006 confirmed the penalty levied upon the assessee. On further appeal filed by the assessee, the Tribunal by the impugned order dated 29th January 2008 allowed the appeal by following its decision in the case of V N Parekh Securities Private Limited and Ketan V Parekh and held that the payment through journal entries do not fall within the ambit of Section 269SS or 269T of the Act and consequently no penalty can be levied either under Section 271D or Section 271E of the Act. Challenging the aforesaid order, the Revenue has filed the present appeal.
8. Mr. Suresh Kumar, learned counsel appearing for the Revenue submitted that the assessee belongs to the Ketan Parekh Group, which is involved in the securities scam. He submitted that the Ketan Parekh Group was found to be indulging in large scale manipulation of prices of select scripts through fraudulent use of bank and other public funds and had flouted all the norms of risk management by making transactions through a large number of entities so as to hide the nexus between the sources of funds and their ultimate use with the sole motive of evading tax. He submitted that since the language of Section 269T of the Act is clear and unambiguous, the Tribunal ought to have held that repayment of the loan/inter-corporate deposit otherwise than by account payee cheque or demand draft was in violation of the provisions of Section 269T of the Act and, hence, the penalty imposed under Section 271E of the Act was justified.
9. Mr. Pardiwala, learned Senior Advocate appearing on behalf of the respondent – assessee, on the other hand submitted that Section 269T of the Act has been enacted to curb the menace of giving false explanation of the unaccounted money found during the course of search and seizure. He submitted that the bona fide transaction of repayment of loan or deposit by way of adjustment through book entries carried out in the ordinary course of business would not come within the mischief of the provisions of Section 269T of the Act. Referring to the legislative history as also the circulars issued by the Central Board of Direct Taxes from time-to-time, Mr.Pardiwala submitted that Sections 269SS and 269T were not meant to hit the genuine transactions and the legislative intent is to mitigate any unintended hardships caused by the provisions to genuine transactions. He submitted that in the present case genuineness of the transactions entered into by the assessee with the Investment Trust of India is not in doubt. No additions on account of the impugned transactions have been made in the regular assessment made under Section 143(3) of the Act. He submitted that Section 269T postulates that if a loan or deposit is repaid by an outflow of funds, same has to be by an account payee cheque or demand draft. He submitted that discharge of the debt in the nature of loan or deposit in a manner otherwise than by an outflow of funds would not be hit by the provisions of Section 269T.
10. Mr. Pardiwala further submitted that in the present case Rs. 4,29,04,722/- was due and payable by the assessee to the Investment Trust of India and the assessee was liable to receive a sum of Rs. 4,28,99,325/- from the Investment Trust of India. Instead of repaying the amount by account payee cheque/demand draft and receiving back the amount by way of demand draft/cheque, the parties as and by way of commercial prudence have settled the account by netting off the accounts and paid the balance by account payee cheque. Relying on a decision of the Apex Court in the case of J B Boda and Company P Limited v. Central Board of Direct Taxes reported in [1997] 223 ITR 271 (S.C.), counsel for the assessee submitted that the two-way traffic of forwarding bank draft and receiving back more or less same amount by way of bank draft was unnecessary and, therefore, in the facts of the present case, no fault could be found with the repayment of loan through journal entries.
11. Mr. Pardiwala submitted that Section 269T, if plainly read, supports the contention of the Revenue that each and every loan or deposit has to be repaid only by an account payee cheque or draft. However, such literal interpretation, if accepted, would lead to absurdity because, by such interpretation not only mala fide transactions but even the genuine transactions would be affected. Relying on the judgments of the Apex Court in the case of ADIT (Inv.) v. Kum.A B Shanti reported in [2002] 255 ITR 258 (S.C.) and Commissioner of Income Tax v. J H Gotla reported in 156 ITR 323, counsel for the assessee submitted that if a strict and literal construction of a statute leads to an absurd result, that is, a result not intended to be sub-served by the object of the legislation ascertained from the scheme of the legislation and if another construction is possible apart from the strict and literal construction, then, that construction should be preferred to strict literal construction.
12. Referring to the provisions contained in the Code of Civil Procedure and books on accountancy, counsel for the assessee submitted that set off of the claim/counter-claim otherwise than by account-payee cheque or bank draft are legally permissible in commercial transactions as also in the accounting practice. Therefore, it must be held that genuine transactions like the transaction in the present case involving repayment of loan through journal entries do not violate Section 269T of the Act. In any event, it is contended that having regard to the commercial dealings between the parties it must be held that there was reasonable cause for repaying the loan through journal entries and in view of Section 273B of the Act penalty was not imposable under Section 271E of the Act. In support of the above contention, reliance was placed on the decision of the Delhi high Court in the case of Commissioner of Income Tax v. Noida Toll Bridge Company Limited reported in 262 ITR 260 (Del.), decision of the Gujarat High Court in the case of Commissioner of Income Tax v. Shree Ambica Flour Mills Corporation reported in [2008] 6 DTR 169 (Guj.) and a decision of this Court in the case of Commissioner of Income Tax v. Motta Constructions P. Limited reported in [2011] 338 ITR 66 (Bom.).
13. We have carefully considered the rival submissions.
14. The basic question to be considered in this appeal is, whether repayment of loan of Rs. 4,28,99,325/- by making journal entries in the books of account maintained by the assessee is in contravention of Section 269T of the Act, and, if so, for failure to comply with the provisions of Section 269T, the assessee is liable for penalty under Section 271E of the Act.
15. Section 269T, Section 271E and Section 273B of the Act, to the extent relevant for the present case relating to AY 2003-2004 read thus :-
“Mode of repayment of certain loans or deposits.
269T.- 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 made with it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit 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 with the branch of the banking company or cooperative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits,
is twenty thousand rupees or more :
Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid :
Provided further …
Explanation. – For the purposes of this section, –
(i) …
(ii) …
(iii) “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature.”
