Section 271D & 271E Penalty Not Leviable for Bona Fide Cash Loans from Agriculturists: ITAT Mumbai

Chemfert Traders (Bombay) Pvt. Ltd. Vs ACIT 1(1) (ITAT Mumbai)

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) allowed the assessee’s appeals and deleted penalties levied under Sections 271D and 271E of the Income-tax Act, 1961. The Tribunal held that where cash loans were accepted from and repaid to agriculturists who had no bank accounts, the transactions were bona fide, undertaken out of business necessity, and not intended to evade tax. Consequently, the assessee had established a reasonable cause under Section 273B, making the penalties unsustainable.

The assessee, a company engaged in the business of manufacturing and trading fertilizers, sold its products to farmers and co-operative societies in the districts of Satara, Sangli and Kolhapur through district-wise salesmen. According to the assessee, sudden business requirements occasionally necessitated borrowing funds from persons connected with its sales network. During Assessment Year 2003-04, the assessee accepted cash loans of ₹25,000 each from two relatives of one of its salesmen, aggregating to ₹50,000. These loans were subsequently repaid in cash during Assessment Year 2004-05.

Since each transaction exceeded the statutory threshold prescribed under the Act, the Assessing Officer held that acceptance of the loans violated Section 269SS and repayment violated Section 269T. Accordingly, he imposed penalty under Section 271D for Assessment Year 2003-04 and penalty under Section 271E for Assessment Year 2004-05, each equal to the amount of the cash transactions. The Commissioner (Appeals) affirmed both penalties.

Before the tax authorities, the assessee explained that both lenders were agriculturists residing in a village where there was no banking facility and that neither of them maintained a bank account. It was submitted that the loans were accepted and repaid in cash solely because of these practical constraints. The assessee also pointed out that interest on the loans had been paid and duly accounted for in its books of account, demonstrating that the transactions were genuine and fully recorded. It was therefore contended that the default, if any, was merely technical and that no penalty ought to be levied.

Before the Tribunal, the assessee reiterated these submissions and relied upon several judicial precedents. It cited the decision of the Madras High Court in CIT v. Balaji Traders, wherein it was held that where money was received because of commercial expediency and business necessity without causing any loss to the Revenue, levy of penalty under Section 271D was not justified. Reliance was also placed on the Rajasthan High Court decision in CIT v. Maheshwari Nirman Udyog, the Chandigarh Bench decision in DCIT v. Flat and Housing Promoters, and the Punjab & Haryana High Court decision in CIT v. Saini Medical Stores, which recognised that genuine and bona fide transactions supported by reasonable cause do not warrant imposition of penalties under Sections 271D and 271E.

The assessee further relied upon the judgment of the Bombay High Court in CIT v. Triumph International Finance (I) Ltd., wherein the High Court held that although there may technically be a violation of the statutory provisions, penalty cannot be imposed where there is no finding that the transaction was not bona fide or was intended to evade tax. In such circumstances, the assessee would be entitled to the protection available under Section 273B by establishing reasonable cause.

After considering the rival submissions, the Tribunal observed that the factual explanation offered by the assessee had remained uncontroverted throughout the proceedings. The Revenue had neither disproved nor rejected the assertion that the lenders were agriculturists residing in a village without bank accounts. The Tribunal also noted that neither the assessment order nor the penalty orders recorded any finding that the cash transactions were sham, lacked genuineness, or were entered into with the object of evading taxes.

The Tribunal regarded this omission as significant because the existence of a bona fide transaction and the absence of any intention to evade tax are material considerations while applying Section 273B. It observed that where a reasonable cause exists for accepting or repaying loans in cash, penalties under Sections 271D and 271E are not automatic.

Relying principally on the Bombay High Court judgment in CIT v. Triumph International Finance (I) Ltd., the Tribunal held that in the absence of any finding that the impugned transactions were not bona fide or were designed to avoid tax liability, the explanation furnished by the assessee constituted a reasonable cause within the meaning of Section 273B. The Tribunal reproduced the relevant observations of the High Court, which clarified that even where there is a technical contravention of the statutory provisions, penalty is not leviable if the assessee demonstrates a bona fide explanation and there is no evidence of tax evasion.

Applying this principle to the facts before it, the Tribunal concluded that the assessee had satisfactorily established the circumstances under which the loans were accepted and repaid in cash. The transactions were genuine, properly reflected in the books of account, supported by payment of interest, and arose because the agriculturist lenders did not possess bank accounts. Since there was no material indicating any attempt to evade tax, the assessee had successfully established reasonable cause.

Accordingly, the Tribunal held that this was not a fit case for levy of penalty either under Section 271D for contravention of Section 269SS or under Section 271E for contravention of Section 269T. Both penalties were deleted, and the appeals filed by the assessee were allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Both these appeals are filed by the assessee and are directed against two separate orders passed by Ld. CIT(A) dated 20/08/2010 for assessment years 2003­04 and 2004-05. Grounds of appeal read as under:

“On the facts and in the circumstances of the case and in law the learned CIT(A)’s erred in confirming the penalty of Rs.50,000/- levied by the assessing officer, u/s. 271D of the I.T. Act, 1961 on account of contravention of provisions of section 269SS of the I.T.Act, 1961.”

2. The assessee company is engaged in the business of manufacturing and trading of fertilizers. Fertilizers manufactured by the assessee are sold in Satara, Sanghli and Kolhapur Districts of Maharashtra to farmers and various farmers co­operative societies. The sales are done by salesman appointed by the company district wise. According to the submissions made by the assessee before the AO, for the purpose of running the business, the assessee company was accepting loans from various parties due to sudden requirement of the business, which include relatives of one of the salesman. In respect of assessment year 2003-04 the following loans were obtained by the assessee from the relatives of salesman namely Mr. Sopan Bhoite.

The aforementioned loans were returned back in the assessment year 2004-05 as follows:

2.1 As aforementioned amount exceeded a sum of Rs.20,000/-, the AO applying the provisions of section 269SS of the Income Tax Act, 1961 (the Act), which was violated, levied penalty under section 271D of the Act of the equal amount for A.Y 2003-04 and for the A.Y. 2004-05 for the violation of section 269T, penalty under section 271E of equal amount is imposed. It was explained that the assessee has paid interest on the loans to the said parties and the same has also been accounted for in the books. The reasons , why the loan was accepted and repaid in cash is that both the above parties are farmers and neither they have any bank account nor there is any bank in their village, therefore, the loan was accepted in cash as well as was repaid in cash. It was submitted that according to the exceptions laid down in the section, where the loan is accepted and repaid to agriculturist, who did not have bank account no penalty should be levied as the default would be mainly technical in the nature. Thus, it was pleaded before AO that no penalty should be levied. However, AO did not accept such submission of the assessee and levied the penalty. Ld. CIT(A) has also confirmed the same. Aggrieved by this, assessee filed aforementioned appeals.

3. Apart from reiterating the contentions raised before AO and Ld. CIT(A), Ld. AR of the assessee has placed reliance on the decision of Hon’ble Madras High Court in the case of CIT vs. Balaji Traders, 303 ITR 312 (Mad), in which it has been held that where money was received for commercial expediency and necessitated by business and there was no revenue loss, levy of penalty under section 271D would not be justified.

3.1 Reliance was also placed on the decision of Hon’ble Rajasthan High Court in the case of CIT vs. Maheshwari Nirman Udyog (2008) 302 ITR 201 (Raj), ITAT Chandigarh Bench in the case of DCIT vs. Flat and Housing Promoters, 303 ITR (AT) 453(Chd), wherein it has been held that where creditors were agriculturists in remote villages and they did not have any bank account before making deposit with the assessee, then it should be accepted as reasonable explanation and penalty should not be levied. Reference was also made to the decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Saini Medical Stores,, 277 ITR 420 (P&H) to contend that bonafide and genuine transactions would constitute reasonable cause for not invoking the provisions of section 271D and 271E of the Act.

3.2 Reference was also placed on the decision of Hon’ble Bombay High Court pronounced on 12/6/2012 in the case of CIT vs. Triumph International Finance (I) Limited (I) Ltd., in Income Tax Appeal No.5746 of 2010, copy of which was placed on our record to contend that in absence of any finding recorded in the assessment order or in the penalty order to the effect that repayment of loans/deposit was not under a bonafide transaction and was made with a view to evade tax, the cause shown by the assessee was a reasonable cause and in view of section 273B no penalty could be imposed.

4. On the other hand, Ld. DR relied upon the order passed by AO and Ld. CIT(A).

5. We have heard both the parties and their contentions have carefully been considered. In the present case, in assessment year 2003-04 cash loans were obtained and in A.Y 2004-05 they were repaid. According to the plea raised before AO as well as Ld. CIT(A), the persons who have advanced these loans to the assessee are relatives of a salesman who reside in a village and were having no bank account. Such contention of the assessee has not been discarded or disproved. It is also not mentioned in the penalty order that the aforementioned amount taken by the assessee in violation of section 269SS and repayment thereof in violation of section 269T was not bonafide transaction and the same was made with a view to evade tax. If it is so, then according to the decision of Hon’ble Bombay High Court in the case of CIT vs. Triumph International Finance (I) Ltd. (supra), no penalty is imposable either under section271D or under section 271E as the explanation submitted by the assessee would be considered to be reasonable cause under section 273B of the Act. For the sake of completeness the observations of their Lordships from para-25 of the said decision are reproduced below:

“25. In the result, we hold that the Tribunal was not justified in holding that repayment of loan/deposit through journal entries did not violate the provision of Section 269T of the Act. However, in the absence of any finding recorded in the assessment order or in the penalty order to the effect that the repayment of loan/deposit was not a bonafide transaction and was made with a view to evade tax, we hold that the cause shown by the assessee was a reasonable cause and, therefore, in view of Section 273B of the Act, no penalty under section 271E could be imposed for contravening the provisions of section 269T of the Act.

5.1 In view of above discussions, we hold that it is not a fit case where levy of penalty either under section 271D or under section 271E is justified. The same are deleted and the appeals filed by assessee are allowed.

6. In the result, both the appeals filed by the assessee are allowed.

Order pronounced in the open court on 16/02/2015