CIT vs. M/s Muthoot Financiers (Delhi HC)

CIT vs. M/s Muthoot Financiers (Delhi HC)

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Issue:

Whether advance given by partner to firm is covered under section 269SS? Whether penalty of section 271D would be applicable?

Provision:

Section 269SS of Income Tax Act 1961

As per section 269SS no person can accept deposits above Rs 20000 otherwise through account payee cheque, bank draft and electronic clearing system through bank.

Exceptions to section 269SS

Provisions of this section do not apply to any loan/deposit or any sum taken or accepted from:

  • The Government;
  • Any banking company, post office, saving bank or any co-operative bank;
  • Any corporation established by a Central, State or Provincial Act;
  • Any Government company defined in clause (45) of section 2 of the Companies Act, 2013;
  • Or any institutions associated with the Central Government may, for reasons to be recorded in writing, notify in this behalf in the official gazette.

It is further mentioned that the provisions under this section are not applicable to the individual providing/giving any loan/deposit or specified sum of money, and the person accepting or taking the loan/ deposit or specified sum of money, both are having agricultural incomes and neither of them has any tax chargeable income under the Income Tax Act.

Section 271D of Income Tax Act 1961

Penalty of sum equal to amount of loan or deposit accepted otherwise than by account payee cheque, bank draft and electronic clearing system through bank.

CIT vs. M/s Muthoot Financiers (Delhi HC)

In given case advance was given by partners to firm by way of cash. The Assessing Officer levied penalty under section 271D.The matter was carried to CIT (A) who upheld the order of the Assessing Officer.

Aggrieved by the order of CIT (A), assessee challenged his order before ITAT Delhi .ITAT concluded that the advance made to the firm by one of its partners cannot be regarded as loan. Therefore the transaction is not even covered by section 269SS.

Revenue aggrieved by the decision of ITAT preferred appeal to Delhi High Court.

The High Court referred the Supreme Court case of Commissioner of Income Tax, Madras Vs. R.M.Chidambaram Pillai & Ors wherein the Supreme Court held that a firm is not a legal person even though it has some attributes of the legal personality.

Further in case of CIT v Lokhpat Film Exchange (Cinema) Raj, it was held that transaction between firm and partners are not governed by provision of section 269SS and 269T.

The Delhi High Court further observed that the money brought by the partners of the assessee-firms is an undisputed fact. The source of money has also not been doubted by the revenue. The transaction was bona fide and not aimed to avoid any tax liability. Creditworthiness of the partners and genuineness of the transactions coupled with the relationship between the “two persons” and two different legal interpretations put forward could constitute a reasonable cause in a given case for not invoking section 271D of the of Income Tax Act 1961.

Conclusion:

Thus as per Delhi High Court judgment it was concluded that no penalty will be leviable under section 271D of Income Tax Act 1961 if advance given by partner to firm by way of cash.


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