Case Law Details

Case Name : DCIT Vs. Erneskay Financial Services Ltd. (ITAT Visakhapatnam)
Appeal Number : IT (SS) A Nos. 11 & 12/Vizag/2002November 28, 2008
Date of Judgement/Order :
Related Assessment Year :
Courts : All ITAT (5586) ITAT Visakhapatnam (56)


15. In the instant case, the promoters of the company though technically qualified and experienced are new to the business. For a finance company, money is the working capital. The assessee company has to maintain its integrity and good will to mobilize deposits. In view of the competition in business the assessee company resorted to innovative method of collecting deposits i.e. collecting the deposits at the door steps of the customer. Most of the deposits were collected from women and agriculturists who were not having bank accounts. When the agents collected the deposits in cash, the management of the assessee company chose to retain them in the interest of business prudence and good will. Even the amount assessed under the block assessment proceeding, it was stated that they are deposits which are voluntarily surrendered by the assessee.

16. The submission of the assessee that the deposits were received from persons who are not having bank accounts or from place where there was no banking facility has not been rejected by the Additional C.J 7. Instead, the Additional CIT decided against the assessee by making following observations:

“The main reason as to why people deposited in finance companies was higher rate of interest. Acceptance of deposit through cheque/bank draft would add strength to the case of the depositor in case of problems with the company accepting deposits at a later date. Deposits in cash are made by people who are dose to and have complete trust in the person accepting deposits. The provisions of section 269SS insist on acceptance of loan or deposit Through an account payee cheque/draft, which main objective of curbing circulation of black money through the said loan/deposits. Being fully aware of the provisions of law and also having issued instructions to agents not to accept deposits in violation of ‘the provisions of Jaw and having succeeded in mobilizing a Jarpe chunk of deposits in accordance with law, the assessee company should have desisted from accepting any deposits in cash in violation of s.269SSI hold that the assessee has not been able to prove the existence of reasonable cause for the default committed by it. On the other hand, as brought out clearly in the foregoing paragraphs, a careful study of this case has established that the assessee has violated the provisions of sec 269SS quite consciously and through a deliberate design.”

As can be seen from the above said observations, the Addl. CIT did not examine the ‘reasonable cause’ from the point of view of a man with a reasonable mind. He has assumed that the deposits in cash are made by people who are close to and have complete trust with the management. The genuineness of the deposit has not been doubted by the department. The existence of business compulsion and business prudence has been completely ignored by the Additional CIT. The fact that the Addl. CIT did not consider the explanations furnished by the assessee in right perspective is brought out by his observation that the assessee company should have desisted from accepting any deposits in cash. In the case of levy of penalty u/s 271E also, the Addl. CIT rejected the explanations of the assessee without assigning any reason.

17. At the same time, it has to be noted that the assessee company has continued to accept a portion of the deposits in cash since the date of its inception. The assessee company has explained the reasons for accepting the deposits in cash from the point of view of the depositors. We would have better appreciated the case, if the assessee had also shown the reasons from its own point of view, i.e. reasons like business compulsion or business necessity. The fact remains that the company is well aware of the provisions of section 269SS/269T. For a finance company, money is the product with which it carries on the business. Since the directors have made maiden venture. The necessity of establishing good will and reputation, that too in a finance company, is of utmost necessity. At the same time, it cannot give a permanent license to the company to continue to violate the provisions of section 269SS/269T. Under the facts and circumstances of the case, a demarcation should be made up to which the explanation given can be said to be a reasonable cause. In our opinion, a period of three years from the date of Starting up of business would be a reasonable period for making such demarcation. We fix the period of three years for the reason that normally a business is expected to stabilize in a period of three years, barring unforeseen circumstances. As stated earlier, (the penalty is not leviable, if the deposit or aggregate deposit received is less than Rs. 20,000/- Only the additional deposits would attract penalty once the aggregate amount of deposit is Rs. 20,000/- or more.


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Category : Income Tax (28574)
Type : Judiciary (12873)
Tags : ITAT Judgments (5766)

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