Case Law Details

Case Name : Lodha Builders Pvt Ltd Vs ACIT (ITAT Mumbai)
Appeal Number : I.T.A. No. 476/M/2014
Date of Judgement/Order : 27/06/2014
Related Assessment Year : 2009- 10
Courts : All ITAT (5168) ITAT Mumbai (1632)

CA Sandeep Kanoi

Accepting/ repaying loans/ advances via journal entries contravenes Section 269SS & 269T but Penalty cannot be levied under section 271D and Section 271E of the Income Tax Act,1961 if  transactions are bona fide & genuine.

Briefly stated relevant facts of the case are that the assessee who belongs to the Lodha group of cases, is engaged in the business of land development and construction of real estate properties. Assessee filed the return of income declaring the total income at Rs. NIL and the same was subsequently revised to adjust carry forward losses. Assessment was completed determining the total income of Rs. 26,69,084/- under the special provisions of section 115JB of the Act. In the scrutiny assessment, there is a solitary and minor addition made by the AO u/s 14A of the Act. There is no further appeal against the said order of the AO before the CIT (A). Thus, the assessment reached finality. In the assessment, vide para 6, the AO, otherwise, mentioned about “Accepting / repayment of loans other than account payee cheques / draft”. Eventually, AO mentioned that such accepting / repayment of loans other than account payee cheques / drafts (through journal entries) amounts to violation of the provisions of section 269SS and 269T of the Act. Subsequently, for imposing the penalty proceedings, AO made a reference to the Addl. CIT for necessary action.

Addl. CIT examined the provisions of section 269SS/T of the Act, as the case may be, and discussed certain judgments including the binding judgment of the Honble Bombay High Court in the case of Triumph International (I) Ltd, dated 12th June, 2012 reported in 22 taxmann.com 138. Further, he reproduced the contents of the said judgment of the Honble High Court (supra) which is relevant for the proposition that where the loan / deposit were repaid by debiting the amount through journal entries, it must be held that the assessee has contravened the relevant provisions. Though  the said judgment was delivered in the context of provisions of section 269T of the Act, the same was equally adopted for the provisions of section 269SS of the Act. Addl. CIT discussed on the irrelevance of the genuineness of the transactions in these matters of impugned penalty proceedings. He also examined the aspects of the bona fide and genuineness of the transactions before concluding that the assessee failed to establish the genuineness of transactions carried out. Addl. CIT further mentioned that even bona fide and genuineness of the transactions, if carried out in violation of provisions of section 269SS of the Act, the same would attract the provisions of section 271D of the Act. There was a discussion on the applicability of the decision of the Tribunal in the case of Mahak Sing vs. ITO (ITAT, Del) 127 ITD 1 relating to the mens rea issues. Eventually, the Addl. CIT levied the penalty of Rs. 495,23,61,634/- u/s 269SS of the Act within the meaning of section 271D of the Act. Further, depending on the nature of credit, journal entries are summarized into 6 categories, namely (i) assignment of debit balance to a group company (4.75 Crs); (ii) lender assigns debt to group company (Rs. 93.47 Crs); (iii) assigning of group debt to an independent company (Rs. 374.92 Crs); (iv) Directors / family account transfers (Rs. 2.81 Crs); (v) payment / receipt on behalf of group company (Rs. 19.19 Crs) and (vi) miscellaneous (Rs. 0.10 Crs). Addl CIT passed similar penalty order u/s 271D in respect of other group concerns namely M/s. Lodha Properties Development Pvt Ltd (Rs. 30,11,30,396/-); M/s. Adhinath Builders Pvt Ltd (Rs. 32,81,39,868/-); M/s. Ajitnath Hi-tech Builders Pvt Ltd (Rs. 81,75,244/- ); M/s. Aasthavinaya Real Estate Pvt Ltd (Rs. 61,50,900/-); M/s. Ajitnath Hi-tech Builders Pvt Ltd and M/s. Infratech Builders and Agro Pvt Ltd (Rs. 36,67,81,854/-). Aggrieved with the same, assessee filed an appeal before the CIT (A).

During the first appellate proceedings, CIT (A)-38, Mumbai passed a combined order on 31.12.2013 confirming the penalties levied by the Addl. CIT in all the above referred cases. It is the conclusion of the CIT (A) that the assessee failed to establish the reasonable cause as required u/s 273B of the Act.

It is the submission of the assessee that the Honble High Court has laid down the broad principles for determining the reasonable cause within the meaning of section 273B of the Act. The judgment in the case of Triumph International (I) Ltd dated 12.6.2012 (this judgment is different from that of judgment of Triumph International (I) Ltd dated 17.8.2012) and it explains the guidelines for the expression “reasonable cause”.

The contents of paras 23 and 24 of the said of judgment of the Honble High Court in the case of Triumph International (I) Ltd, dated 12.6.2012 reported in 345 ITR 370 (Bom) are relevant and the same reads as under:

“23. The expression ‘reasonable cause’ used in Section 273B is not defined under the Act. Unlike the expression ‘sufficient cause’ used in Section 249(3), 253(5) and 260A(2A) of the Act, the legislature has used the expression ‘reasonable cause’ in Section 273B of the Act. A cause which is reasonable may not be a sufficient cause. Thus, the expression ‘reasonable cause’ would have wider connotation than the expression ‘sufficient cause’. Therefore, the expression ‘reasonable cause’ in Section 273B for non-imposition of penalty under Section 271E would have to be construed liberally depending upon the facts of each case.

24. In the present case, the cause shown by the assessee for repayment of the loan/deposit otherwise than by account-payee cheque/bank draft was on account of the fact that the assessee was liable to receive amount towards the sale price of the shares sold by the assessee to the person from whom loan/deposit was received by the assessee. It would have been an empty formality to repay the loan/deposit amount by account-payee cheque/draft and receive back almost the same amount towards the sale price of the shares. Neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. There is nothing on record to suggest that the amounts advanced by Investment Trust of India to the assessee represented the unaccounted money of the Investment Trust of India or the assessee. The fact that the assessee company belongs to the Ketan Parekh Group which is involved in the securities scam cannot be a ground for sustaining penalty imposed under Section 271E of the Act if reasonable cause is shown by the assessee for failing to comply with the provisions of Section 269T. It is not in dispute that settling the claims by making journal entries in the respective books is also one of the recognized modes of repaying loan/deposit. Therefore, in the facts of the present case, in our opinion, though the assessee has violated the provisions of Section 269T, the assessee has shown reasonable cause and, therefore, the decision of the Tribunal to delete the penalty imposed under Section 271E of the Act deserves acceptance.”

From the above extracts from the judgment of jurisdictional High court, it is clear that the journal entries are hit by the relevant provisions of section 269SS of the Act. However, it is the finding of the Honble High court that completing the “empty formalities” of payments and repayments by issuing/receiving cheque to swap/squire up the transactions, is not the intention of the provisions of section 269SS of the Act, when the transactions are otherwise bonafide or genuine. Such reasons of the assessee constitute reasonable cause within the meaning of section 273B of the Act. In the light of the above ratio of judgment, we analysis the facts of the present case here as under.

We find that there is no finding of AO in the order of the AO during the assessment proceedings that the impugned transactions constitutes unaccounted money and are not bona fide or not genuine. As such, there is no information or material before the AO to suggest or demonstrate the same. In the language of the Hon ble High court, neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. Admittedly, the transactions by way of journal entries are aimed at the extinguishment of the mutual liabilities between the assessees and the sister concerns of the group and such reasons constitute a reasonable cause.

 In the present case, the causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by account-payee cheque/bank draft, was on account of the following, namely: alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/MIS purpose; consolidation of family member debts; correction of errors; and loans taken in case. In our opinion, all these reasons are, prima facie, commercial in nature and they cannot be described as non-business by any means. Further, we asked ourselves as to why should the assessee under consideration take up issuing number of account payee cheques / bank drafts which can be accounted by the journal entries. This being the spirit of Honble High Court of Bombay, we adopt the same to the present issue. As such, the same is binding on us. What is the point in issuing hundreds of account payee cheques / account payee bank drafts between the sister concerns of the group, when transactions can be accounted in books using journal entries, which is also an accepted mode of accounting? In our opinion, on the factual matrix of these cases under consideration, journal entries should enjoy equal immunity on par with account payee cheques or bank drafts. Of course, the above conclusion apply so long as the transactions are for business purposes and do not involve unaccounted money and they are genuine. In fact, such journal entries shall save large number of cheque books for the banks.

 Further, There is no dispute that the impugned journal entries in the respective books were done with the view to raise funds from the sister concerns, to assign the receivable among the sister concerns, to adjust or transfer the balances, to consolidate the debts, to correct the clerical errors etc. In the language of the Honble High court, the said journal entries constitutes one of the recognized modes of recording the loan/deposit. The commercial nature and occurrence of these transactions by way of journal entries is in the normal course of business operation of the group concerns. In this regard, there is no adverse finding by the AO in the regular assessment. AO has not made out in the assessment that any of the impugned transactions is aimed at non commercial reasons and outside the normal business operations. As such, the provisions of section 269SS and 269T dof the Act shall not be attracted where there is no involvement of the moneyas held by the Honble High Court of Delhi in the above cited cases, supra. Therefore, in the facts of the present case, in our opinion, though the assessee has violated the provisions of Section 269SS / 269T of the Act in respect of journal entries, the assessee has shown reasonable cause and, therefore, the penalty imposed under Section 271D/E of the Act are not sustainable. Regarding an amount of money said to have been paid in violation of the said provisions, the same needs to be deleted in view of our decision on the legal issue discussed in para 16 to 22 of the this order. Accordingly, the grounds raised in this regard are allowed.

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