Case Law Details
Valchand Bhalraj Shah Vs ITO (ITAT Mumbai)
Mumbai ITAT Deletes Section 271D Penalty on Loan Transfer Through Journal Entries During Group Restructuring
The Mumbai ITAT deleted the penalty levied under Section 271D for alleged violation of Section 269SS, holding that the transfer of loans through journal entries during an internal group restructuring constituted a reasonable cause under Section 273B. The assessee had taken over loans originally advanced to a partnership firm after its business was transferred to a group company. Since the assessee had stood as guarantor for the borrowings and both entities were facing financial constraints, the lenders requested that the loans be transferred to the assessee through journal entries, without any movement of cash.
The Tribunal observed that the transaction formed part of a genuine financial restructuring undertaken to facilitate the smooth takeover of the partnership firm’s business and that the loans were subsequently repaid through banking channels. Relying on the Bombay High Court’s decisions in Triumph International Finance (I) Ltd. and Ajinath Hi-Tech Builders (P.) Ltd., it held that journal entries are a recognised mode of recording genuine business transactions and, in the absence of any finding that they were used to circumvent the law or involved cash, the assessee had established a reasonable cause for non-compliance with Section 269SS. Accordingly, the Tribunal deleted the penalty of ₹70.05 lakh levied under Section 271D.
Cases Discussed:
- Valchand Bhalraj Shah Vs ITO (ITAT Mumbai)
- Ajinath Hi-Tech Builders (P.) Ltd. (82 Taxmann.com 228)
- Triumph International Finance (I) Ltd. (22 Taxmann.com 138)
- 102 Taxmann.com 57 (SLP dismissal)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2011-12 arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC [CIT(A)] dated 06.06.2025 confirming partial penalty of Rs.70.05 Lacs as levied by Ld. AO u/s 271D vide order dated 30.09.2016.
2. The Ld. AR advanced arguments on merits as well as on legal grounds and referred to various decisions to support the argument that there being a reasonable cause, impugned penalty would not be justified. The Ld. Sr. Dr justified levy of penalty. Having heard rival submissions and upon perusal of case records, our adjudication would be as under.
3. The facts leading to impugned penalty are that the assessee was assessed u/s 143(3) wherein it was observed that the assessee obtained loan of Rs.95.05 Lacs from 14 parties of an entity namely M/s KBA Infrastructure Pvt. Ltd. (in short `KBA’) otherwise than through account payee cheque or bank drafts. The loans were transferred via journal entries. The same was in contravention to the provisions of Sec.269SS and consequently, a reference was made for initiation of impugned penalty u/s 271D against the assessee.
4. The assessee explained that M/s KBA was incorporated on 22.07.2009 by taking over an existing firm by the name M/s Karan Builders & Associates. In order to comply with the provisions of the Companies Act, the loans of the firm were taken over by the present assessee who was husband of one of the directors of M/s KBA. It was decided to transfer the loans via a journal voucher. No cash was involved in the transaction. However, going by the provisions of Sec.269SS, Ld. AO rejected the arguments of the assessee and levied penalty of Rs.95.05 Lacs u/s 271D.
5. The Ld. CIT(A) upheld the action of Ld. AO, inter-alia, on the ground that no reasonable cause in terms of Sec.273B could be established by the assessee. However, the loan of Rs.25 Lacs was found to be advanced through banking channels and penalty, to that extent, was deleted. The remaining penalty of Rs.70.05 Lacs was confirmed against which the assessee is in further appeal before us.
6. From the case records, it emerges that a partnership firm M/s Karan Builders and Associates (in short ‘Karan Builder’) had obtained loan from 14 parties for its business purposes. The loans were interest bearing loans and taken through banking channels. These 14 parties advanced loan to Karan Builders on the basis of guarantee given by the present assessee. Later on, the business of M/s Karan Builders was taken over by M/s KBA vide agreement dated 01.04.2010. However, both the entities were not in a financial position to repay the loan to these parties. The assessee became shareholders in M/s KBA. Therefore, the lenders requested the assessee to take over the loan for their safety as the assessee had given the guarantee. Accordingly, the loans were transferred to the assessee via journal entries which have been alleged to be in contravention of provisions of Sec.269SS and led to impugned penalty on the assessee. In our considered opinion, the loan transfer was part of financial restructuring of assessee’s sister concerns and the loans were transferred through journal entries to address an immediate shortage of funds and to ensure a smooth transition of takeover of M/s Karan Builders by M/s KBA. The same constitute sufficient and reasonable cause for transfer of loans through journal entries. It could also be gathered that M/s KBA started repaying these loans as well as interest through assessee starting from 23.03.2011 and substantial loans stood repaid thereafter. Therefore, impugned penalty could not be sustained. Our view is duly supported by the order of Hon’ble High Court of Bombay in the case of Triumph International Finance (I) Ltd. (22 Taxmann.com 138). In para-23, it was held that the expression ‘reasonable cause’ as used in Sec.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. 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. It was further observed by Hon’ble Court that settling the claims by making journal entries in the respective books was one of the recognized modes of repaying loan / deposit. It was finally held that though the assessee had violated the provisions of Section 269T, the assessee demonstrated reasonable cause and, therefore, the deletion of penalty by Tribunal was in order. This decision has subsequently been followed by Hon’ble Court in Ajinath Hi-Tech Builders (P.) Ltd. (82 Taxmann.com 228) wherein it was reiterated that journal entries constitute recognized mode of recording of transactions and in the absence of any adverse finding by authorities that journal entries were made with a view to achieve purposes outside normal business operations or there was any involvement of money, there is a reasonable cause for not complying with Sec.269SS and penalty u/s 271D is not to be imposed. The department’s Special Leave Petition (SLP) against the said decision has been dismissed by Hon’ble Apex Court which is reported as 102 Taxmann.com 57. In our considered opinion, the ratio of these binding judicial precedents applies to the facts of the present case before us. Therefore, finding substantial force in ‘reasonable cause’ claim of the assessee, we delete the impugned penalty of Rs.70.05 Lacs as sustained in the impugned order. No other ground has been urged in the appeal.
7. The appeal stand allowed.
Order pronounced u/r 34(4) of ITAT Rules, 1963.
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