IN THE ITAT HYDERABAD BENCH ‘A’
Additional Commissioner of Income-tax
Madireddy Venkat Reddy
IT Appeal No. 305 (Hyd.) of 2011
[Assessment year 2005-06]
October 19, 2012
Chandra Poojari, Accountant Member
This appeal by the Revenue is directed against the order of the CIT(A)-VI dated 30.11.2010 for assessment year 2005-06.
2. The Revenue raised the following grounds of appeal:
1. The order of the learned CIT(A) is erroneous both on law and facts.
2. The learned CIT(A) has erred in allowing relief to the assessee without considering the facts in appreciating the fact that the assessee has accepted loans in cash which is evident from the Balance Sheet filed by the assessee as shown in unsecured loans.
3. The learned CIT(A) has erred in allowing relief without considering the fact that the assessee has taken loans from different people in cash for the purpose of applying for liquor license in his name.
4. The learned CIT(A) has on technical defence has given relief to the assessee for the violations of law u/s. 269SS for accepting loans above Rs. 20,000 in cash to the extent of Rs. 10,50,000.
3. Brief facts of the issue are that the assessee is an individual carrying on the business of running vehicles on hire. For the A.Y. 2005-06, the assessee filed return of income on 29.10.2005 disclosing a taxable income of Rs. 1,10,750. The case was selected for scrutiny in order to verify the sources for Earnest Money Deposit (EMD) placed with the Prohibition Department. During the course of scrutiny assessment, it was observed by the Assessing Officer that the assessee had shown unsecured loans to the tune of Rs. 10.50 lakhs and an amount of Rs. 10 lakhs on the assets side as deposit with the Prohibition Department. The assessment was completed u/s. 143(3) of the Act, accepting the returned income. Since the assessee has received cash loans/deposits more than Rs. 20,000 in cash otherwise than by crossed account payee cheques/DDs, by following the provisions of section 269SS of the Act, the Assessing Officer invoked the provisions of section 271D of the Act by issuing a notice u/s. 274 of the Act. Accordingly penalty was levied to the tune of Rs. 10.54 lakhs.
4. On appeal, the CIT(A) deleted the penalty on the reason that the assessee had never hid the transaction and it was clearly depicted in the books of account and the payment was made by cheque to the persons who have bank account and those persons have in turn distributed the money to the persons who do not hold an account with the bank. It is also seen that the transaction was accepted by the Assessing Officer and no adverse view was taken in the order passed u/s. 143(3). The assessee was prevented by a ‘reasonable cause’, as stated by him in the submissions that he had to follow the village customs and traditions and accept the words of the elders of the village from which he hails and also due to the fact that the depositors do not have the PANs and that he acted only as a custodian of the amount and did not gain anything. In the case of Dy. CIT v. Vignesh Flat Housing Promoters  105 ITD 359 (Chennai), it was observed by the Tribunal that ‘in the instant case the undisclosed income as declared in the block return remained the assessed income. The Revenue did not doubt the veracity of the creditors. The AO did accept the credits as genuine. Most of the creditors were agriculturists, residing in remote villages and many of them did not have any bank account. The assessee was not professionally managed. From this it could be concluded that the breach flowered from a bona fide belief. Ex facie it was a venial breach. Cash was accepted because of business exigencies. As such, there existed reasonable cause for accepting the cash loans.’
5. The CIT(A) observed that, as could be seen from the sworn statements of the assessee and the depositors recorded by the AO and the confirmation letters filed before the AO, all the depositors were agriculturists and milk vendors residing at a remote village, and even their income is meagre and do not have PAN and are not assessed to tax. Even though, some of them are holding bank account it is for the reason that they do not have PAN they could not obtain the DD on their own from the bank, for this sole reason they depended on the assessee who is having bank account, PAN and is assessed to tax. The conclusion of the AO that the amounts were returned through cheque and that all the depositors have bank accounts seems to be wrong, as it could be seen that amounts mentioned in the cheques issued to the four persons were not just Rs. Four lakhs and is over and above it and is with an understanding between the assessee and the four persons that the excess amount should be returned to the persons who do not hold the bank account. After considering the entire facts and circumstances of the case, the CIT(A) observed that the imposition of penalty cannot be sustained. Against this, the Revenue is in appeal before us.
6. The learned DR submitted that the assessee has not shown any reason for accepting loans by cash and the CIT(A) deleted the penalty on irrelevant considerations and submitted that penalty levied by the Assessing Officer has to be confirmed.
7. On the other hand, the learned AR submitted that the order of the CIT(A) dated 16.10.2010, clearly upholding the appeal in favour of the assessee and admitting that the imposition of the penalty cannot be sustained is based on extensive study and considering all the facts of the case. The CIT(A) in Para 8.0 of her order clearly discussed that the total assessment record in the case for the relevant assessment year was called for and the same was perused. The CIT(A), therefore, thoroughly discussed the amounts received from different parties, the nature of the receipt, the mode of the receipt, the purpose of the receipt, confirmation letters received from the parties, the deposition letter obtained by the Assessing Officer in the course of scrutiny, the fact that the Assessing Officer cross checked the statement recorded and the confirmation letter received, the submission made by the assessee have been cross checked with the bank statement and found to be tallying, the nature and mode of refund to the respective persons when the liquor license is not granted, the verification of the refund of the amounts through one Mr. Manipal Reddy and the Assessing Officer obtaining letter dated 26.09.2007 confirming the same from him of his disbursement to the respective persons etc,.. clearly speaks out that the CIT(A) clearly believed and concurred with the views of the Assessing Officer who had genuinely and reasonable believed that the amount were received by the assessee as custodian and not as a loan to be used for his business purposes or to make gain out of that. The Assessing Officer after completing the scrutiny had accepted the return of income filed by the assessee and no additions were made and no mala fide intentions were attributed to the submissions of the assessee. The AR submitted that CIT(A) after considering all the above points including depicting the amounts in the balance sheet etc, found that there was no concealment on the part of the assessee at any point of time.
8. The AR submitted that in view of the above, the grounds appealed by the Assessing Officer 1, 2 and 3 are not sustainable and are baseless. The 4th point in the grounds of appeal is irrelevant and proved wrong beyond doubt by both the Assessing Officer and the CIT(A) as follows:
(a) The Assessing Officer never considered them as loans attracting provisions of 269SS as the deposits nor the depositors were never doubted by the Assessing Officer at any stage and no adverse remarks were passed by the Assessing Officer which means he has felt reason and satisfied with the explanations and proofs submitted by the assessee of its genuineness. Further, there is no finding of the appellate authority that the transaction in breach of the aforesaid provisions made by the assessee was mala fide and with the sole object to disclose the concealed or undisclosed money.
(b) Further, because of these transactions committed by the assessee, it has not resulted in loss of revenue, therefore, the action of the assessee is purely unintentional, technical lapse not knowing the law of the land. The assessee was not professionally managed and acted at the behest of the village elders and also not gained any business benefit out of these transactions, it could be concluded that the breach flowered from a bona fide belief that i.e., venial breach.
9. The AR submitted that these facts have been clearly discussed by the Assessing Officer and the CIT(A) while passing their respective orders. Hence, the grounds of appeal of the department that the CIT(A) on technical defence has given the relief to the assessee is false and erroneous and not based on the fact. Hence, it should not be allowed. The AR submitted that the Assessing Officer in this case is satisfied not arbitrarily but judicially, it means the genuineness of the transaction and bona fide belief of the assessee were accepted by the Assessing Officer and hence while passing 143(1) order he did not invoke the provisions of Section 271D. The veracity of the creditors was not doubted by the Assessing Officer at any point of time and the Assessing Officer did accept the deposits as genuine. It was held in the case of Citizen Co-operative Society Ltd. v. Addl. CIT  8 taxmann.com 27 (Hyd.) that “technical break due to ignorance of the relevant provisions of law or on account of bona-fide belief, coupled with the facts that the transactions in question were genuine and bona-fide, would not result in levy of penalty u/s 271 D”. The AR relied on the decision of Jharkhand High Court in the case of Omec Engg. v. CIT  294 ITR 599, wherein the High Court held “In our view, in the facts and circumstances of the case the imposition of the penalty merely on technical mistake committed by the assessee, which has not resulted in any loss of revenue cannot be sustained in law” . Both the above cases squarely suit the present case and hence, the order of the CIT(A) shall be maintained and the appeal of the department shall be annulled.
10. We have heard both the parties and perused the material on record. The provisions of section 269SS read as under:
“269SS. No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft if,-
(a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or
(b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or
(c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b),
is [twenty] thousand rupees or more:
Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by,-
(b) any banking company, post office savings bank or co-operative bank;
(c) any corporation established by a Central, State or Provincial Act;
(d) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette:
[Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.]
Explanation – For the purpose of this section –
[(i) ‘banking company’ means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;]
(ii) ‘co-operative bank’ shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949)
(iii) ‘Loan or deposit’ means loan or deposit of money.]”
11. So far as the validity of the provisions of 269SS is concerned, the same came up for consideration before the Hon’ble Supreme Court in the case of Asstt. Director of Inspection (Investigation) v. Kumari A.B. Shanti  255 ITR 258, against the judgement Madras High Court 197 ITR 330 and the Hon’ble Supreme Court held the validity of the provisions of section 269SS and held as follows:
“Section 26955 of the Income-tax Act, 1961, prescribing the mode of taking or accepting certain loans or deposits, is not discriminatory and is not violative of article 14 of the Constitution of India; nor was it enacted by Parliament without legislative competence. It cannot be said that section 269SS deals with a subject outside the scope of the Income-tax Act or that it relates to a topic not within the competence of Parliament. Nor are the provisions of section 26955 or section 2710 or section 276DD unconstitutional on the ground that the provisions are draconian or expropriatory.
The object of introducing section 26955 is to ensure that a 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 search and seizures, unaccounted money is unearthed and the tax-payer. would usually give the explanation that he had borrowed or received deposits from his relatives or friends and it is easy for the so-called lender also to manipulate his records to suit the plea of the taxpayer. The main object of section 269SS was to curb this menace of making false entries in the account books and later giving an explanation for the same.
The undue hardship of the provisions of section 2710, which replaced section 276DD providing for a penalty, 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 or deposit by account-payee cheque or demand draft for some bona fide reason, the authority vested with the power to impose penalty has a discretionary power not to levy the penalty.
It is settled law that the heads of legislation given in the Lists in the Seventh Schedule to the Constitution should not be construed in a narrow or pedantic way. If any Legislature makes an ancillary or subsidiary provision which incidentally transgresses its jurisdiction for achieving the object of such legislation, it would be a valid piece of legislation. The entries in a legislative list should be given their fullest meaning and widest amplitude and be held to extend to all ancillary and subsidiary matters which can fairly and reasonably be said to be comprehended in them. It is only when a Legislature which has no power to legislate, or the legislation is camouflaged in such a way as to appear to be within its competence when it knows that it is not, that it can be said that the legislation so enacted is a colourable legislation and that there is no legislative competence. If any legislation which is intended to achieve the collection of income-tax and to make it easier and systematic is enacted, such legislation would certainly be within the competence of Parliament.
When a provision in a statute is challenged on the ground of colourable legislation, what has to be proved to the satisfaction of the court is that though the statute ostensibly is within the legislative competence of the Legislature in question, in substance and in reality, it covers a field which is outside its legislative competence.”
12. In consequence of such provisions it has to be seen that for deleting a penalty u/s. 271D, the existence of reasonable cause is necessary and it should be based on factual explanation furnished by the assessee. It is incumbent upon the assessee to satisfy the Assessing Officer about the existence of reasonable cause. The Assessing Officer, in arriving at satisfaction in such a situation, acts in a quasi judicial capacity. The proceedings imposing penalty is a quasi criminal proceedings. The satisfaction has to be reached by the Assessing Officer objectively and after consideration of relevant material only to the total exclusion of extraneous and irrelevant considerations. Now adverting to the facts of the present case it is found to be an admitted fact that the assessee has accepted cash loans in excess of Rs. 20,000 from various persons otherwise than by crossed account payee cheques or DDs. Since there is violation of provisions of section 269SS penalty proceedings are initiated and after considering the reply of the assessee, the Assessing Officer imposed the penalty of Rs. 10.54 lakhs u/s. 271D of the Act by holding that the assessee failed to establish the existence of reasonable cause for accepting such loans otherwise than crossed account payee cheques or DDs. The said penalty was deleted by the CIT(A) on the ground that there exists reasonable cause in accepting such loans. In our opinion, the assessee may be exonerated from the rigour of penalty under the provision of section 271D of the Act provided it is established that there existed a reasonable cause for not complying with the prescription of section 269SS of the Act. The mandate given u/s. 269SS of the Act is clear. Any departure from the said mandate invites penalty, as is envisaged u/s. 271D of the Act. It is clearly laid down in that section that no person shall after 30.6.1984 take or accept from any other person any loan or deposit otherwise than by account payee cheques or account payee DD, if the amount or loan or deposit or the aggregate amount of such loan or deposit is Rs. 20,000 or more.
13. This provision of the Act was brought on the statute book to counter tax evasion. Therefore, it is not sufficient to say that simply the transaction was genuine, so provisions of section 269SS of the Act are not applicable. One cannot accept such proposition of law. There is no ambiguity in the language of the provisions of section 269SS as well as 271D of the Act. Penalty proceedings are to construe strictly in view of judgement of Supreme Court in the case of CIT v. National Taj Traders  121 ITR 535 wherein held that “the principle that a fiscal statute should be construed strictly is applicable only to the taxing provisions such as a charging provision or a provision imposing penalty and not to those parts of the statute which consist machinery provisions.”
14. Therefore, subject to the existence of mitigating circumstances penalty cannot be deleted. The assessee must prove beyond the shadow of the doubt there existed a reasonable cause for not complying with the conditions contained in section 269SS of the Act. Circumstances under which the cash was accepted must be explained. Unfortunately no cogent material was produced in that direction. The exigency was stated to be village customs and traditions and the assessee accepted words of the elders of the village from which he hailed and the depositors do not have PANs and the assessee only acted as a custodian of the amount and did not gain anything and the depositors were agriculturists. However, there is no material whatsoever placed on record regarding which elder advice the assessee has taken and details of the agricultural activities carried on by the depositors. Even otherwise, there is nothing brought on record to show that when some of the depositors are holding bank account what prevented the assessee to receive the loan by crossed account payee cheques or by DDs.
15. In our opinion, the assessee could have very much complied with the requirement of section 269SS of the Act without any difficulty. The majesty of law is to be maintained. The CIT(A) is not justified in accepting the oral explanation offered by the assessee without any cogent material brought on record to delete the penalty. In our opinion, there existed no reasonable cause for accepting the loans/ deposits or aggregate of such loans or deposits of Rs. 20,000 or more from various persons otherwise than by crossed account payee cheques or DDs. As such the assessee committed violation of provisions of section 269SS of the Act. Therefore, the penalty u/s. 271D is attracted and rightly imposed by the Assessing Officer and the learned CIT(A) was not factually or legally correct in deleting the penalty levied by the Assessing Officer. Accordingly, we cannot sustain the order of the CIT(A) which is based on irrelevant considerations. Therefore, we reverse the order of the CIT(A) and restore the order of the Assessing Officer.
16. In the result, Revenue appeal is allowed.