No section 271E penalty if payments were genuine & duly accounted

Sudha Agro Oil & Chemical Industries Limited Vs Add. CIT (ITAT Visakhapatnam)

Conclusion: Penalty under section 271E for violation of provision of section 269T could not be levied as assessee-company repaid loans advances otherwise than by crossed cheque, however, it substantiated with relevant documents that all the payments made by it were genuine and all the creditors accounted the loans as well as the repayments in their books of account and moreover, it was a mere technical violation.

Held: Assessee had frequently borrowed monies from directors and shareholders, mostly repaid by crossed cheque as per the details given by the AO, except on one occasion in each case. In all the remaining occasions, assessee had paid the amounts by way of crossed cheque. AO levied penalty under section 271E for violation of provision of section 269T. Assessee submitted that all the payments made by it were genuine and all the creditors accounted the loans as well as the repayments in their books of account and also filed returns of income. It was further submitted that the payment were made to the creditors otherwise than by crossed cheque on their request and thus, requested to drop the penalty.  It was held that there was no dispute that the transactions were between mutually / closely associated with the persons i.e. company, directors and shareholders of the company. The amount was repaid otherwise than by crossed cheque. The transactions were genuine which were duly reflected in the books of accounts. The interest paid was also allowed by AO in the assessment made u/s 143(3). In the instant case, assessee had demonstrated that transactions were genuine with relevant documents. It was a mere technical violation and there was no loss to the revenue. Hence, there was sufficient and reasonable cause for repayment of the loan to the directors and shareholders and hence the penalty levied was cancelled.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [CIT(A)]-9, Hyderabad in I.T.A No.10195/CIT(A)-9/Hyd/2017-18 dated 22.03.2019 for the Assessment Year (A.Y.)2013-14.

2. All the grounds of appeal are related to the penalty sustained by the Ld.CIT(A) u/s 271E of the Income Tax Act, 1961 (in short ‘Act’) to the extent of Rs.80,64,690/-. The assessee has repaid the loans and advances received from various creditors to the extent of Rs.94,04,690/- otherwise than by crossed cheque as per the details given under :

In the case of Sri E. Rajeev, Smt. E. Padmapriya, Smt. E. Lakshmi and Sri E.V.Sudhakar, the assessee has withdrawn cash from the bank account and repaid the amount to the creditors. In the case of Sri A. V. V. Subrahmanyeswara Swamy & Others, the assessee has repaid the amount by way of crossed Demand Drafts. The Addl. Commissioner of Income Tax (in short ‘Addl. CIT’) initiated proceedings u/s 271E and called for the explanation for violation of the provision of section 269T of the Act. The assessee explained before the Addl.CIT that the payments were genuine and all the recipients of the amounts have accounted the loan as well as the repayments in their books of accounts and filed the returns of income. The assessee further submitted before the Addl. CIT that the payment was made to the creditors on their request. In the case of A.V.V.Subramanyeswara Swamy & 62 others, the assessee explained that all the payments were made through demand drafts, therefore, requested to drop the penalty u/s 271E of the Act. Not being convinced with the explanation of the assessee, the Addl.CIT levied penalty of Rs.94,04,690/-u/s 271E of the Act.

3. Against which the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the penalty levied by the Addl.CIT to the extent of Rs.80,64,690/- i.e. the amount representing the over and above the sum of Rs.20,000/- repaid otherwise than by crossed cheque and cancelled the penalty on the remaining amount. Thus, the Ld.CIT(A) allowed part relief.

4. Against which the assessee is in appeal before this Tribunal. During the appeal hearing, the Ld.AR submitted that Sri E.V.Rajeev and E.V.Sudhakar are directors and shareholders of the company. E.Padmapriya and E.Lakshmi are also shareholders of the company . All the four creditors i.e. E.Rajeev, E.Padmapriya, E.Lakshmi and E.V.Sudhakar are closely associated with the company, since, the major investment was made by the above four share holders. Therefore, as and when the company was in need of the money, the company is taking advances from the shareholders and the directors and repaying the same. In the course of business transactions, the company had borrowed monies from the above creditors and repaid the same. Except on one occasion in each case, in the remaining occasions, the company has repaid the loan by way of crossed cheque and there was no violation in respect of repayment of the loan. In the case of E.Rajeev, the company was obliged to make the payment by way of cash on 21.04.2012 and in the case of E.Padmapriya on the same date. In the case of E.Lakshmi, on 25.03.2013, the amount was paid through self withdrawal. Similarly in the case of E.V.Sudhakar on 21.04.2012, the company has made the repayment by way of self withdrawal cheque. The Ld.AR submitted that in exceptional circumstances and on request made by the creditor, the company has made the repayment of loans to above four persons by way of self withdrawal cheque. The above repayment was accounted in the books of accounts of the creditor. The company has to make the payment to meet the urgent needs of the directors and shareholders who has given the timely advances. The Ld.AR further submitted that all the above repayments were duly accounted in the respective accounts of the directors and shareholders. The assessee filed a paper book and enclosed capital account copies of E.Rajeev, in page No.12 and the repayment was accounted in the account. Similarly, in the case of E.Padmapriya, the account copy was enclosed in page No.13 and the payment of Rs.13,77,880/- was duly accounted in her account. In the case of E.Lakshmi and E.V.Sudhakar also, the amounts paid was duly recorded in the respective accounts of the creditors. Apart from the above, the assessee also paid the interest on the amounts borrowed from the above individuals which was duly credited in the respective accounts of the creditors, which is appearing in the account copy placed in paper book in page No.12 to 15. The Ld.AR further enclosed the copies of income tax returns filed by the creditors, in page No.87 in respect of E.Rajeev with statement of computation showing balance sheet and profit and loss account, in page No.94, the income tax return filed by E.Padmapriya, in page No.101, the income tax return filed by E.Lakshmi, in page No.108, the income tax return filed by E.Venkata Sudhakar(HUF). In respective accounts, the creditors have admitted the interest received from the company, which was taxed in their hands. Similarly, the Ld.AR argued that for the assessment year under consideration, the AO has completed the assessment u/s 143(3) and examined all the above issues and completed the scrutiny assessments and allowed the interest payment made to the respective parties. Therefore, argued that the repayment of loan is genuine. There is no malafide intention and the assessee has made the payment in exceptional circumstances, therefore, argued that repayment made by the assessee to be considered in exceptional circumstances, hence requested to take lenient view and cancel the penalty. The assessee also relied on the decision of Hon’ble High Court of Jharkhand in OMEC Engineers Vs. Commissioner of Income Tax (2008) 169 taxman 0158 and argued that in the case of repayment of loan, in exceptional circumstances is considered to be a reasonable cause. Similarly, placing reliance on the decision of Commissioner of Income Tax Vs. Sunil Kumar Goel (2009) 183 taxman 0053, the Ld.AR argued that in closely connected family transactions, the penalty is not leviable if the transaction proves to be genuine.

5. On the other hand, the Ld.DR argued that levy of penalty u/s 271E is for violation of specific provisions u/s 269SS and it is purely for technical evaluation and there is no case for considering the case on genuineness or otherwise of the transaction. The genuineness of the transaction has nothing to do with the levy of penalty. If the assessee has failed to comply with the provisions of section 271D, penalty is leviable u/s 271E of the Act. Therefore, argued that the Ld.CIT(A) has rightly confirmed the penalty levied by the AO and no interference is called for. The Ld.DR relied on the order of this Tribunal in the assessee’s own case in ITA No.191 &196/Viz/2013 dated 24.03.2016. Thus, requested to uphold the order of the Ld.CIT(A) and dismiss the appeal of the assessee.

6. We have heard both the parties and perused the material placed on record. In the instant case, the assessee has repaid the loans borrowed from E.Rajeev and E.V.Sudhakar by way of self cheque withdrawal and in the case of E.Lakshmi and E.Padmapriya also, the amounts were paid, otherwise than by crossed cheque. As verified from the order of the Addl.CIT, the assessee has frequently borrowed monies from directors and shareholders, mostly repaid by crossed cheque as per the details given by the AO, except on one occasion in each case. In all the remaining occasions, the assessee has paid the amounts by way of crossed cheque. The assessee has made the payment by self cheque and drawn the cash and paid the same to the creditors. Prima facie, the assessee has violated the provisions of section 269T of the Act. Further as observed from the penalty order, out of 20 occasions, the assessee has violated the provision on four occasions at the rate of one event in the case of each lender. Thus, we observe that the assessee has mostly repaid the loans by way of crossed cheque and complied with the statute. The reason explained by the assessee was that it has made the payment on the request of the creditor in exceptional circumstances. Further the assessee also explained that E.Rajeev, E.Padmapriya, E.Lakshmi and E.V.Sudhakar are the shareholders of the company. The repayment was made on the demand of the creditor. The Ld.AR further explained and taken us to the account copies of the every creditor, from which we observe that the transactions were duly accounted in the respective accounts. The assessee also paid the interest on the borrowings and claimed the same as expenditure which was allowed as deduction at the time of passing the order u/s 143(3) in the case of the assessee. The assessee also enclosed income tax returns of the creditors, wherein, it is observed that the interest payment was duly accounted and admitted as income in their hands. From the above information, we find that the transactions are genuine and duly accounted in the books of accounts of the respective persons. There is no reason to suspect the transaction. Apart from the above, all four of them are closely associated with the company, who are supporting the company frequently by advancing monies to the company. Therefore, we find that the transactions are closely associated in respect of day to day affairs as well as the financial transactions of the company. The Ld.AR relied on the decision of Hon’ble High Court of Punjab & Haryana, wherein, Hon’ble High Court held that in the case of transactions with sister concerns and between the family due to business exigencies, it is to be considered as reasonable cause u/s 273B of the Act. For the sake of clarity, we extract para No.14 of the decision of Hon’ble Punjab & Haryana High Court which reads as under :

“14. The Tribunal was right in recording its conclusion that a ‘reasonable cause” had been shown by the respondent assessee. The Tribunal relied on the fact that the respondent assessee had produced his cash books, depicting loans taken by him unilaterally before the Revenue. Another fact taken into consideration was that no prejudice was caused to the Revenue in the instant action of the respondent assessee inasmuch as the respondent assessee did not attempt by the Impugned act to avoid any tax liability. Furthermore, there (5 no dispute about the fact that the instant cash transactions of the respondent assessee were with the sister concern, and that, these transactions were between the family, and due to business exigency. A family transaction, between two independent assessees, based on an act of casualness, specially in a case where the disclosure thereof is contained in the compilation of accounts, and which has no tax effect, in our view establishes “reasonable cause” under s. 273B of the Act. Since the respondent assessee had satisfactorily established “reasonable cause under s. 2736 of the Act, he must be deemed to have established sufficient cause for not invoking the penal provisions (as. 271D and 271E of the Act) against him.”

6.1. The Ld.AR also relied on the decision of Hon’ble High Court of Jharkhand in the case of OMEC Engineers Vs. Commissioner of Income Tax (supra), wherein, Hon’ble High Court held that the penalty is not exigible, if there exists a reasonable cause. For the sake of clarity and convenience, we extract para No.21 and 22 of the decision of Hon’ble High Court of Jharkhand which reads as under :

“21. The words “reasonable cause’ have not been defined under the Act but they could receive the same interpretation which is given to the expression “sufficient cause”. Therefore, in the context of the penalty provisions, the words reasonable cause would mean a cause which is beyond the control of the assessee. “Reasonable cause” obviously means a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides. Before imposition of penalty under s. 271, the AO must be satisfied, not arbitrarily but judiciously, that the assessee has without reasonable cause failed to comply with the provisions.

22. In the instant case, as noticed above, there is no finding of the assessing authority, the appellate authority or the Tribunal that the transaction made by the assessee in breach of the provisions of s. 269SS was not a genuine transaction. On the contrary, the return filed by the assessee was accepted after scrutiny under s. 143(3) of the Act. 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. The authorities have proceeded on the basis that breach of condition provided under s. 269SS of the Act shall lead to penal consequences. In our view, in the facts and circumstances of the case, the imposition of penalty merely on technical mistake committed by the assessee, which has not resulted in any loss of revenue, shall be harsh and cannot be sustained in law.”

6.2. In the instant case, there is no dispute that the transactions are between mutually / closely associated with the persons i.e. company, directors and shareholders of the company. The amount was repaid otherwise than by crossed cheque. The transactions are genuine which were duly reflected in the books of accounts. The interest paid was also allowed by the AO in the assessment made u/s 143(3) of the Act. The Ld.DR relied on the decision of this Tribunal in ITA No.191 & 196/Viz/2013 dated 24.03.2016 in the assessee’s own case. We have gone through the decision relied upon by the Revenue and observed that the Tribunal has rendered the decision in respect of acceptance of loans but not repayment of loans. In the case relied upon by the Revenue, penalty was imposed u/s 271D of the Act. In the instant case, the assessee has demonstrated that transactions were genuine with relevant documents. It is a mere technical violation and there is no loss to the revenue. Hence, we are of the view that facts of the present case are distinguishable from the facts of the case relied upon by the revenue. Therefore, we hold that there is sufficient and reasonable cause for repayment of the loan to the directors and shareholders i.e. E.Rajeev, E.Padmapriya, E.Lakshmi and E.V.Sudhakar and hence we set aside the order of the Ld.CIT(A) and cancel the penalty levied by the Addl.CIT. Accordingly, appeal of the assessee on this ground is allowed.

7. The next issue in this appeal is repayment of deposit to A.V.V.Subrahmanyeswara Swamy and 62 persons amounting to Rs.36,45,000/-. The AO made the addition though the assessee stated that the deposits were repaid through account payee demand draft, since the assessee failed to produce the copies of demand drafts or counterfoils of the demand drafts. On appeal, the Ld.CIT(A) allowed relief to the extent of Rs.20,000/- on each deposit, thus allowed Rs.12,60,000/- and the balance penalty was confirmed.

8. Against which the assessee is in appeal before us. During the appeal hearing, the Ld.AR submitted that all the deposits were repaid by way of demand draft, but not by cheque. Therefore, argued that there is no case for levying penalty u/s 271E of the Act. The assessee enclosed account copies of the each depositor and as per page No.86 of the paper book, the assessee also furnished the demand draft number in the account copy. The Ld.AR argued that since the amount was paid through demand draft, the Ld.CIT(A) erred in sustaining the addition, hence requested to cancel the penalty and allow the appeal of the assessee.

9. On the other hand, the Ld.DR supported the orders of the lower authorities and requested to confirm the order of the Ld.CIT(A).

10. We have heard both the parties and perused the material placed on record. The Addl.CIT has levied the penalty for non-producing the evidence for payment through demand drafts. In the instant case, the assessment was completed u/s 143(3) and the AO has completed the assessment after verification of the books of accounts and we find no adverse comment with regard to payment of loan through DDs. The assessee also furnished the demand draft number in the account copy. Therefore, we do not see any reason to disbelieve the submission of the assessee that the repayment was made through demand drafts as furnished in the account copies, hence, we hold that there is no case for levy of penalty u/s 271E with respect to the payments made to the depositors in the case of Sri A.V.V.Subrahmanyeswara Swamy & Others and accordingly, we set aside the order of the Ld.CIT(A) and delete the penalty.

11. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 18^th March, 2020.