S.269SS not applies to transfer between two accounts by Journal Entry

Section 269SS is attracted when the loan or deposit taken or accepted otherwise than by account payee cheque or account payee bank draft and in the Explanation (iii) below Sec.2 69SS, it is mentioned that loan or deposits means “loan or deposit of money” and transfer between two accounts by way of journal entry does not imply receipt of loan or deposit in money terms. When there is no violation of Section 269SS there is no question of levy of penalty of u/s.271D. The penalty of Rs. 24,74,700/- (sic.) is thus directed to be deleted.

ITAT “D” BENCH, AHMEDABAD

BEFORE SHRI MUKUL Kr.SHRAWAT, JUDICIAL MEMBER And
SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER

I.T.A. No.643/Ahd/2010
Assessment Year: 2006-07)

Income-tax Officer 

Vs.  

Shri Mineshkumar Shantilal Patel  

Date of Hearing: 09/11/2012
Date of Pronouncement: 4^th Jan-2013

O R D E R

PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :

This is an appeal filed by the Revenue arising out of the order of ld.CIT(A)-V, Baroda Ahmedabad dated 31.12.2009 passed for A.Y. 2006-07 and the grounds raised are as follows:-

1.   On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the penalty of Rs. 24,74,000/- levied u/s.271D of the Act for contravention of provisions of section 269SS of the Act.

2. Facts in brief as emerged from the corresponding assessment order passed u/s. 143(3) of the IT Act dated 24/12/2008 and the penalty order passed u/s.271D of the Act dated 31.07.2009 were that the assessee in individual capacity is a proprietor of M/s.Paras Associates and engaged in the business of manufacturing of Cement Poles used by Electricity Board. The main supplies were made to Madhya Gujarat Vij Co. Ltd. It was noticed by the AO that the assessee had received deposits amounting to Rs. 24,74,000/- in cash. In the opinion of the AO, the assessee had violated the provisions of section 269SS of IT Act. The details of the unsecured loan was as under:-

2.1. Further, it has also been brought to our notice that the impugned amount was taxed in the hands of the assessee on account of the reason that the genuineness of the deposits could not be established, resultantly taxed as “unexplained cash credit”.

2.2. During the course of proceedings u/s.271D of the Act, the assessee had stated that the above funds were received from Vishnubhai M. Patel & Others pursuant to an agreement dated 22.3.2005. As per the agreement, those funds were provided for running the business. In turn, those parties have share in the profits & losses of the assessee. The assessee had therefore made out a case that the cash had actually not been received but those persons have incurred certain expenses on behalf of the assessee for restarting the assessee’ s business, including buying of machinery. The accounts of those persons were credited by passing a J.V. in the books of accounts.

2.3. That argument was not acceptable to the AO and it was held that there was no evidence in support of the contention that the expenditure had actually been incurred directly by those persons. It was held that the assessee had shown the amounts in question as loans/deposits in his books of accounts. The AO had referred Schedule-II of the balance-sheet. It was concluded that since the amounts were not received through account payee cheques, therefore the provisions of section 269SS were contravened. In the result, a penalty of Rs.24,74,000/- was imposed.

3. When the matter was carried before the first appellate authority, it was argued that Vishnubhai M. Patel & Others have infused funds in the business. An another fact has also been brought to the notice of ld.CIT(A) that in respect of the quantum addition the issue was decided in assessee’s favor vide an order dated 30/10/2009 by CIT(A)-V, Baroda. It was pleaded that the impugned addition now stood deleted. Considering the above reply, ld.CIT(A) has held as under:

“4.3. I have carefully considered the facts of the case, the submissions of the appellant and the penalty order and the provisions of the Act. In the quantum appeal proceedings, the AO vide remand report dated 23/09/2009 submitted that from perusal of the memorandum of understanding and the statements of Vishnubhai Patel and others recorded by Additional Civil Judge, Anand, it is clear that the said group has infused the funds to the tune of Rs.24, 74,000/- and that the addition u/s.68 of the Act is not sustainable. Section 269SS is attracted when the loan or deposit taken or accepted otherwise than by account payee cheque or account payee bank draft and in the Explanation (iii) below Sec.2 69SS, it is mentioned that loan or deposits means “loan or deposit of money” and transfer between two accounts by way of journal entry does not imply receipt of loan or deposit in money terms. When there is no violation of Section 269SS there is no question of levy of penalty of u/s.271D. The penalty of Rs. 24, 74,700/- (sic.) is thus directed to be deleted.”

4. With this brief background, we have heard both the sides. Our attention has been drawn at the outset on a Remand Report dated 23/09/2009 which was submitted by the AO to CIT(A) while deciding the quantum addition. There was a reference of a Civil Suite for recovery filed by Vishnubhai M.Patel & Others on 23/07/2008 through which it was apparent that they had infused the funds of Rs. 24,70,000/- in the business of the assessee and as per the MOU, it was not an unsecured loan but it was in the form of the capital contribution. In view of the evidences placed on record, ld.CIT(A) has rightly deleted the impugned penalty. The view taken by the ld.CIT(A) is hereby confirmed and the ground raised in this regard by the Revenue is hereby dismissed.