If assessee show that there was reasonable cause for taking money in cash, and amount did not also represent unaccounted money either of assessee or of persons from whom they were taken, normally it is sufficient to hold that penalty under section 271D is not justified

IN THE ITAT HYDERABAD BENCH ‘A’

Andhra Bombay Carriers v. Additional Commissioner of Income-tax

IT APPEAL NO. 425 (HYD.) of 2009

[ASSESSMENT YEAR 2003-04]

MARCH 31, 2011

 ORDER

Chandra Poojari, Accountant Member.- This appeal by the assessee is directed against the order of the CIT(A), Vijayawada, dated 3 1-12-2008 and pertains to assessment year 2003-04.

2. The grievance of the assessee in this appeal is with regard to confirmation of penalty of Rs. 31,56,490 by the CIT(A).

3. Brief facts of the case are that the assessee is a partnership firm and engaged in the business of transport. This partnership firm filed its return of income for assessment year 2003-04 on 25-11-2003 admitting total income at Rs. 1,34,700. The assessee also filed, along with this return, the audited Profit and Loss A/c., Balance Sheet and Tax Audit Report under section 44AB of the Income-tax Act, 1961 since the total turnover was of Rs. 10,29,35,775. The Assessing Officer completed the assessment under section 143(3) on 27-3-2006 assessing the total income at Rs. 9,80,150. During the year, assessee took temporary loans amounting to Rs. 39,28,236 and assessee was asked to file their postal addresses of the lenders. The required information was filed in respect of 82 persons covering loans amounting to Rs. 31,56,490. The Assessing Officer held balance temporary loans amounting to Rs. 7,7 1,746 as unexplained. The Assessing Officer also initiated penalty proceedings for violation of section 269SS of the Act.

4. The Assessing Officer issued and served a notice under section 271D on 3-5-2006 asking as to why this penalty for accepting cash loans in contravention of section 269SS should not be levied. The assessee furnished explanation vide letter dated 5-5-2006 and it reads as under:

“We bring to your kind notice that during the financial year 2002-03 , our firm faced severe financial crisis. My husband Sri R. Venkateswara Rao, a reputed man in the society used to arrange finances for the firm by contacting closely known people, whenever our firm is in need of finance but unfortunately during the said financial year 2002-03, the firm has not only financial difficulties, but also Sri R. Venkateswara Rao the then director of one of the co-operative banks was arrested along with the other directors of the bank. Due to this incident all of a sudden there was a rumour in the market that ‘Andhra Bombay Carriers’ will be closed down/dissolved and at the same time creditors were pressing for their payments. We were in embarrassing situation and firm’s reputation was in stake. We tried for temporary loans and due to above situation nobody in the market was ready to give loans to the firm.

As there was very little time, observing the situation the employees at head office as well as at other branches including hamalis were afraid that they will lose their jobs and livelihood will be in danger. In these circumstances, they met and came forward to give petty loans from available cash savings with them. As they are uneducated and not aware of banking facilities, whatever they saved from the past earnings they used to keep cash with them due to illiteracy. Out of the total loans of Rs. 39,28,236 being given by their employees and hamalis which helped the firm to run smoothly.

We have filed all details and particulars regarding the loans taken during the year and explained in detail for the loans taken. We have also furnished the address of the loan creditors and some confirmation letters. The Assessing Officer conducted enquiry through his inspector in some cases also, summoned some of the creditors and acquired the genuineness of the amounts advanced to us. However, due to lack of tune and other constraints, we could not produce the details of the above loan of Rs. 7,7 1,746 as such we offered some of the additions and in our opinion it will not become concealment of income.

In the above said circumstances, they have given the petty amounts as loans in cash which was available with them to save the firm out of financial crisis. Therefore, we request your goodself to see the case sympathetically and drop the proposed penalty proceedings under section 271D not complying with provision of section 269SS Income-tax Act, 19651.”

5. The Assessing Officer rejected this explanation on the ground that the assessee was doing business in Hyderabad where banking facilities were available. Sri R. Venkateswara Rao, husband of Smt. R. Anjali (partner) was arrested but other 3 partners were there to run the business. His arrest was in connection with affairs of Urban Co-operative Bank which does not have any connection with the business of the assessee. The Assessing Officer, therefore, levied a penalty of Rs. 31,56,490 under section 271 D of the Act.

6. On appeal, the learned CIT(A) confirmed the order of the Assessing Officer. Against this order of the CIT(A), the assessee is in appeal before us.

7. The learned counsel for the assessee submitted that the assessee is in the business of transport and operating from various cities, districts, towns, etc., and nature of its business is such that it has to run the business on cash. The business of the assessee is to hire lorries and transport goods from various places in the country and it necessarily involves cash transactions for which it had to borrow money from its own employees and others to pay to its creditors. The assessee established the genuineness of the cash credits and same was accepted by the Assessing Officer. However, for want of time it could not explain the genuineness for a sum of Rs. 7,7 1,746 and therefore, the same was offered to tax to buy peace.

8. Sri R. Venkateswara Rao, husband of one of the partners, used to arrange finance when the firm was in need of finance but unfortunately during the financial year 2002-03 Sri R. Venkateswara Rao, one of the directors of Co-operative Urban Bank was arrested along with other directors of this Bank. On account of this event, there were rumours in the market that assessee firm would be closed down/dissolved and consequently there was pressure from creditors for payments. Efforts to raise temporary loans were made but were not successful in view of this special situation.

9. The employees at its head office as well as other branches including hamalies, had come forward to give petty loans from their cash savings so that they will not loose their jobs and livelihood by way of closure of this firm. These employees and hamalies were uneducated and were not aware of banking facilities and they gave petty loans in cash. These loans helped the assessee to revive the firm from financial crisis.

10. The Assessing Officer’s observation that the arrest of Sri R. Venkateswara Rao in connection with the affair of an Urban Co-operation Bank has nothing to do with the business of the firm, fails to appreciate that the assessee is a firm and not a corporate entry. The assessee also relies on the following decisions:(a) Industrial Enterprise v. Dy. CIT [2000] 73 ITD 252 (Hyd.)

(b) Omec Engineers v. CIT [2007] 294 ITR 599/[2008] 169 Taxman 158 (Jhark.)

(c) Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC).

13. We have heard both the parties and perused the material on record. The main contention of the assessee’s counsel is that the assessee borrowed cash loans from its employees and the provisions of section 269SS cannot be applied to any amount received from assessee’s employees in contravention of provisions of this section. Even assuming that the assessee received cash loans exceeding Rs. 20,000, we do not see how it is excluded from the purview of the words “any other person” appearing in section 269SS. In our opinion, these words denote any person other than the assessee because there was no question of assessee receiving any money from itself in contravention of this section. We, therefore, find no force in this contention of the assessee. However, as regards the existence of reasonable cause, the assessee’s counsel stated that one of the assessee’s partner was under threat from the customers of the co-operative society where he was a director and he was not regularly attending the business of the assessee and he is on run to avoid the harassment from public as well as from police. He cannot be able to concentrate on the business of the assessee and the assessee is having different branches at Mumbai, Andheri, Poorna Bhiwandi, Bhayander, Ullhas Nagar, Bhiwandi (T), Vasi, Ahmedabad, Sarkej, Vapi, Secunderabad, Fateh Nagar, Jeedimetla, Diwan Devdi, Vijayawada, Guntur, Bhuvanagiri and Chennai in addition to the head office at Hyderabad. Since there was shortage of cash balance in some of the branches on a particular date, the assessee was forced to pay the dues to the creditors who were troubling in and out of the day and the employees sitting in such office having no option used their own money to pay the dues of the customers to escape from their clutches and to avoid unpleasant situation. Further the contention of the assessee’s counsel is that though there was positive cash balance in centralised account when the assessee consolidated all the accounts of the branches, actually there was cash shortage in particular branches where the cash loan was taken and this is reasonable cause as provided under section 273B of the Act.

14. We find force in the argument of the assessee’s counsel. It will not be possible for an assessee to predict with precision the exact requirement of money for discharging its obligation connected to the business and sometimes it is not possible to keep exact amount of cash in each branch as they are situated in different parts of the country. It may not also be possible for it to anticipate the exact date on which it will be required to discharge such obligation. There can be some difference between what was anticipated and what was actually required. In assessee’s case the partner avoiding the public in view of a problem in a co-operative society where he was a director. The employees are actually involved in the business of the assessee; to save their skin they might have introduced their own cash and this cannot be construed as deliberate attempt by the assessee to introduce unaccounted money in assessee’s business. The object of introducing section 269SS is to ensure that the taxpayer is not allowed to give false explanation for his unaccounted money, or if he makes some false entries he shall not escape by giving false explanation for the same. During the search and seizure, unaccounted money is unearthed and the taxpayer would usually give the explanation that he had borrowed or received deposits from friends, relatives and it is each for the so called lender also to manipulate his records to suit the plea of the taxpayer. The main objective of section 269SS is to curb this menace of making false entries in account books and later on giving explanation for the same. The provisions of section 271D is substantially mitigated by the inclusion of section 273B providing that if there was a genuine and bona fide transaction and the taxpayer could not get a loan by account payee cheque or Demand Draft for some bona fide reasons the authority vested with the power to impose penalty has a discretionary power not to levy penalty. The Assessing Officer while levying the penalty has to see the entire facts and circumstances of the case and shall take judicious view of the facts. It has not been brought on record by the Department nor by the assessee that the assessee has sufficient money or cash balance on each day of Borrowal in a place where it has borrowed cash loan from its employees. If there is shortage of cash balance in a particular branch where the cash loan was taken exceeding Rs. 20,000 from its employees then the assessee is having reasonable cause for taking such cash loans and penalty cannot be levied. Further while interpreting the provisions of section 269SS, we have to bear in mind the objective for which it was introduced. If the assessee is able to lead evidence to show that not only was there reasonable cause for taking the money in cash, but the amount did not also represent unaccounted money either of the assessee or of the persons from whom they were taken, normally that should be sufficient to hold that the penalty is not justified. As regards the genuineness of the borrowing in the present cash, there does not appear to be any doubt. The authorities herein have raised no doubt about the genuineness as it is clear from the facts of the case. Apparently, the Revenue authorities were satisfied with the assessee’s explanation regarding the nature and source of the amount. Thus, the transactions between the assessee and the employees did not fall within the mischief sought to be remedied by the section. As already pointed out by us if the assessee was prevented by reasonable cause from taking the money through account payee cheques or demand draft the penalty cannot be levied. The expression of ‘reasonable cause’ has to be considered pragmatically and keeping in view of this expediency of the business wherein it is not always possible to get things done or to anticipate the course of the events with infallible precision. The assessee also made a plea before us that most of the payments were made to drivers or owners of the transport vehicles either before the beginning of the banking hours or at the close of the banking hours. He submitted that usually the transport vehicles start from a particular place before the banking hours and the assessee has to make payment to the drivers or owners of the vehicles towards hire charges. This is regarding vehicles going out from the assessee’s place. The vehicles which are usually coming into assessee’s place are usually coming after the banking hours and the assessee has to make payment to the drivers or the owners of the vehicles. In such circumstances the assessee has to make payment and the assessee’s partner is not available and the assessee’s employees have made the payments. In our opinion this is also a reasonable cause not to levy penalty.