S. 271D penalty for receipt of Loan in cash Justified if no reasonable cause exist

HIGH COURT OF MADRAS

Builtec Engineers & Builders

Versus

Deputy Commissioner of Income-tax

Tax Case (Appeal) No. 259 of 2006

JULY 18, 2012

JUDGMENT

Mrs. Chitra Venkataraman, J.

This Tax Case (Appeal) filed by the assessee as against the order of the Income Tax Appellate Tribunal relating to the assessment year 1994-95, was admitted by this Court on the following substantial questions of law:

“1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in confirming the levy of penalty of Rs. 7,35,475/- under Section 271D of the Income Tax Act?

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in rejecting the explanation offered by the appellant that the amount was received from M.T. Nair by way of gift and consequently, the provisions of Section 271 D would not apply to the transaction?

3. Whether on the facts and in the circumstances of the case and without prejudice to the aforesaid contentions, the Tribunal is right in law in confirming the levy of penalty under Section 271D in respect of the opening balance of Rs. 45,475/-?”

2. The assessee is a firm engaged in the business of construction. Three of the partners are brothers and the fourth partner happens to be the mother of the three partners. It is seen from the facts that the appellant had secured certain contracts in Rajamundhry. Taking the stand that the contract executed at Rajamundhry required urgent cash for disbursal to labourers and suppliers from time to time, the assessee had taken cash from Mr. M.T. Nair, who happens to be the father of three partners and husband of one of the partners and he had also supervised the business of the firm. It is stated that because of the close relationship between the parties, M.T. Nair agreed to provide financial support, which was to the tune of Rs. 6,51,000/-. The said amount was paid in cash on various dates commencing from April, 1993. Considering the fact that the amount received was in contravention of Section 269 SS of the Income Tax Act, the Assessing Authority called upon the assessee to explain as to why penalty should not be levied under Section 271D of the Income Tax Act. The assessee explained that the amounts received were for use in the business. It pointed out that the assessee had to undergo financial hardship to meet their commitments for wage payment and to suppliers especially in connection with the work executed at Rajamundhry. Since there was no bank finance facility for the assessee to meet their requirements, funds were raised from relatives and friends. The letter addressed by the assessee on 24.9.1997 states that since the work at Rajamundhry was the first out of State contract undertaken and labour payments had to be made in cash and suppliers were also insisting for cash payment, the amount was received in cash. Not satisfied with the explanation, the Assessing Authority confirmed the proposal of penalty and accordingly, a sum of Rs. 7,36,475/- was levied as penalty under Section 271 D of the Income Tax Act.

3. Challenging the order of penalty, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). Confirming the findings of the Assessing Officer, the Commissioner held that the explanation offered by the assessee was far from satisfactory. The work was done in Rajamundhry, which was a district headquarters, where one could not claim that there was no bank facility. Besides this, the assessee had not given any explanation for accepting the loan in cash. The Commissioner further pointed out that the assessee’s explanation that it accepted the deposit for the business expediency was not acceptable, since the said money could have been routed through bank. The assessee’s business was to put up construction of multi-storeyed building, which required bank transaction and involved payment and receipts to many suppliers and other miscellaneous nature. Thus the levy of penalty was confirmed. Aggrieved by this, the assessee went on appeal before the Income Tax Appellate Tribunal.

4. In the grounds of appeal the assessee pointed out that the assessee required large amount of cash for payment of labour charges and for payment of materials, especially, after banking hours, festival days etc. If the demand for cash payment was not met, the assessee’s work would come to a stop. Hence, loans were raised to meet such exigencies in the course of the assessee’s business, which could not be avoided in view of the peculiar nature of business. In the circumstances, the assessee sought for cancellation of the penalty levied. The assessee further pointed out that the Commissioner had not considered the fact that the site office of the assessee, where payments were made in cash was at a place where there was no sufficient or proper banking facility.

5. A perusal of the order of the Tribunal shows that in the course of hearing, the assessee produced an affidavit from Mr. M.T. Nair stating that he had given these amounts as gift and not intending it as loan. The affidavit was dated 01.04.2003. The assessee also produced certain letters purportedly written by Mr. M.T. Nair to the partners of the firm in support of the contention that what was given was not loan. In considering the submission, particularly as regards the claim that the transaction was a gift and not a loan, the Tribunal pointed out that the said plea was made for the first time and the document in connection therewith were not placed before any lower Authorities. The Tribunal pointed out that the diametrically opposite stand taken as to the nature of transaction between the parties was clearly an after thought and that there was no reasonable cause shown, which prevented the assessee from taking such ground before the Authorities below. It also pointed out that there was no statement or return of gift by the donor and even the letters did not mention the transaction as gift. Thus both on the maintainability of such alternate plea as well as on merits of such plea, the Tribunal rejected the plea of the assessee. It also pointed out that there was no bona fide shown in such a plea taken.

6. As far as the merit of the transaction is concerned, the Tribunal pointed out that the amount taken was utilised for payment relating to construction activity throughout the year, such as wages, material purchases etc. It accepted the Department’s arguments that the requirement of such payments in a construction business were routine in nature. The Tribunal further pointed out that the assessee had taken the loan in cash from Mr. M.T. Nair, who happened to be the close relative of the partners throughout the year under consideration. The Tribunal pointed out that on the mere ground of the expenditure in the form of payment to labours being genuine, the contention of the assessee that there was reasonable cause shown could not be accepted for exonerating the assessee from the rigour of penalty under Section 271 D of the Income Tax Act. In the absence of any satisfactory explanation offered for receiving cash in violation of Section 269 SS of the Income Tax Act, the Tribunal confirmed the levy of penalty. Aggrieved by this, the present appeal has been filed by the assessee.

7. Learned counsel appearing for the assessee strenuously argued that the Authorities including the Tribunal had not considered the reasonable cause shown by the assessee through the letter dated 24.9.1997. She submitted that when the assessee had given the explanation for receiving cash payment, the Authorities should have accepted the case of the assessee for dropping the penalty. Referring to Section 273 B that penalty shall not be levied if the assessee proved that there was a reasonable cause for receiving money in cash over and above Rs.20,000/-, she submitted that the reasonable cause has to be looked at from the angle of the nature of business done by the assessee. The exigencies of the business demanding payment in cash to labour, the letter written by the assessee thus explains its position as regards the reasonable cause, which ought to have weighed with the Authorities concerned and the Assessing Authority had not understood to the totality of the circumstances before levying penalty. In any event, when the assessee had taken an alternate plea that the loan transaction be treated as a gift transaction, the Tribunal should have at least considered the case in a proper perspective to grant the relief. She submitted that in the event of this Court not accepting the plea on reasonable cause, the alternate plea taken that the transaction was only a loan transaction merited to be considered by the Authorities below.

8. We do not think that we could accept either the ground projected on the reasonable cause or on the alternate plea taken that the transaction be treated as a gift and not a loan transaction. The letter dated 24.9.1997 from the assessee to the Assessing Authority reads as under:

“In reply to your letter referred to above, we wish to state as follows:

During the accounting year ended 31.3.1994 corresponding to the assessment year 1994-95, we had to undergo great financial hardship to meet our commitments for wage payment, payment to suppliers etc, especially in connection with a work taken up at Rajamundry (A.P.) for construction of a building for Manorama Hotels Projects. As there was practically no bank finance facility for us, we had to meet our requirements out of funds raised from friends and relatives, work undertaken by us at Rajamundry was the first work we undertook out of Madras, where we were not known and the labour payments had to be made in cash and suppliers were also insisting on cash payment. Major part of the loan received by us was from Sri. M.T. Nair who is the father of the 3 partners and the husband of the other partner and therefore a very close relative. He is also working in the firm as the Chief Executive. An amount of Rs. 6,51,000/- was received from him during the year and a sum of Rs. 91,389/- was repaid to him. There was an opening balance of Rs. 45,475/- due to him in his account. Apart from this, we have taken a very short term loan of Rs. 40,000/- from M/s.Lakshmy Finance on 20.8.93 which was repaid on 21.8.93. The entire amounts were received and used for our business purposes and we had no option other then to take such funds from close relatives to enable us to continue and survive in the business.

We would therefore humbly request you to kindly take a lenient view and to kindly drop your proposal for penal action in this regard and oblige.”

9. On the facts projected before this Court, it is evident that the assessee is in the business of construction, which required many a time payment in cash to the labour. As far as the present case is concerned, we may note that the subject matter of dispute is not with reference to an outgoing, but as regards a receipt. Thus, the necessities of making payment to labour or to small suppliers in cash cannot be accepted as a good and justifiable ground for receiving cash by the assessee herein. The necessities of expenditure to be made in cash are not the same as necessities involved in receiving money in cash. If the line of reasoning of the assessee is to be accepted, then the purport of Section 269 SS itself would be lost and there is no necessity at all to the provision like Section 273 D of the Income Tax Act. The parameters which would govern an outgoing and receipt cannot be one and the same, the assessee is duty bound to justify the receipt of cash from a close relative, particularly when the assessee is an established business and that to meet the requirements, funds were raised from friends and relatives. The said submission was made in the context of the explanation given in the letter that the assessee had no bank finance facility. While there could be no objection to the assessee raising funds from friends and relatives, the only requirement of law is that when the assessee goes for any finance facility from friends and relatives or from any quarters, the receipt has to be in the manner provided for under the Act. When such receipt crosses the particular sum, law does not frown on receipt of cash beyond a particular level subject to the fact that the assessee explains the reasonable cause for taking money in cash.

10. As far as the present case is concerned, except for stating that they had to make payments to the suppliers and the labours, there is hardly any material available on record to show any justification for receipt of cash over and above Rs. 20,000/- during the course of the year. The assessee admits that they are in the line of business of construction where day in and day out cash payments are made to labourers and to suppliers. Even herein, the justification for making payment in cash must necessarily satisfy Rule 6 DD of the Income Tax Rules, as it existed then. The assessee had not shown any acceptable or unavoidable circumstances or impracticability or difficulty in receiving money otherwise than in cash. Even accepting the reasoning of the assessee that the reasonable cause that the assessee may show could be appreciated on the lines shown in Rule 6 DD, we fail to find any reasonable cause shown in the letter, which was in a very general form. Except for mere statement that the work undertaken by the assessee at outside the State was for the first time and there was necessity for meeting the requirements to labour and other suppliers demanding cash, we do not find any details placed before the Authorities concerned to accept the case of the assessee that there was a reasonable cause shown in receiving an amount of Rs.6,51,000/- in cash from Mr. M.T. Nair. Thus the Assessing Authority rightly pointed out that the explanation was not convincing, hence, the case of the assessee was rejected. As the Commissioner of Income Tax (Appeals) as well as the Tribunal confirming such a finding, we do not think that there are grounds in the appeal which persuade us to take a different view. In the circumstances, we have no hesitation in rejecting the tax case.

11. As far as the submission for the alternate plea taken by the assessee is concerned, as rightly pointed out by the Tribunal, the plea that the transaction should be viewed as a loan transaction is devoid of merit and it is only an after thought. Confronting with the factual situation the transaction in cash attracted penal provision, the assessee immediately wanted to change the colour of the transaction to one of gift. We do not think that facts could take different colour at different point of time when confronted with one kind of conclusion against the assessee, that too to wriggle out of penal liability, the assessee attempted to give a different colour to the nature of transaction as it pleased. As pointed out by the Tribunal, we do not find any bona fides in such a claim. In the circumstances, we have no hesitation in rejecting such a plea. Thus, taking into consideration the statement in the letter dated 24.9.1997, the alternate contention does not call for even a remand. It is stated in the letter that the assessee received Rs. 6,51,000/- from Mr. M.T. Nair during the year and a sum of Rs. 91,389/- was repaid to him. There was an opening balance of Rs. 45,475/- due to him in his account. Thus the conduct of the assessee treating the transaction as loan transaction and so too the letter dated 24.9.1997 belies the claim of the assessee made through the affidavit of Mr. M.T. Nair that the transaction be treated as a gift, we agree with the Tribunal that the changed stand is only an after thought and does not merit any consideration including the remand.

12. Accordingly, the Tax Case (Appeal) stands dismissed. No costs.