Whether when the assessee fails to establish the urgent nature of business necessities for taking loans from its Directors in cash, such transaction warrants levy of penalty u/s 271D – YES: ITAT

Whether when the assessee fails to establish the urgent nature of business necessities for taking loans from its Directors in cash, such transaction warrants levy of penalty u/s 271D - YES: ITAT

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Whether when the assessee fails to establish the urgent nature of business necessities for taking loans from its Directors in cash, such transaction warrants levy of penalty u/s 271D – YES: ITAT Special Bench
ITA No.6304/Mum/2012
Assessment Year: 2008-09
G S Pannu, AM, Joginder Singh, JM & B R Baskaran, AM
Date of Hearing: March 14, 2018
Date of Decision: June 13, 2018
17. We have heard rival contentions and perused the record. We have noticed that the assessee has received loans by way of cash from its director named Sherbanoo A.S Batliwala of Rs.1.00 lakh each on two occasions. Admittedly, the assessee did not offer any explanation before the Addl. CIT except referring to the Grounds of appeal urged before Ld CIT(A) in the appeal filed against quantum assessment proceedings, wherein it was stated that the loans were taken for business requirements. In the appeal filed before Ld CIT(A) challenging the levy of penalty of Rs.2.00 lakhs u/s 271D of the Act, the assessee has further elaborated its explanations that the loans were taken in cash from its director in order to meet the expense relating to payment of Custom duty, freight etc., towards import of furniture. However no specific details of import was given before ld CIT(A). Before us, the assessee has given further details like, from whom the goods were supposed to be imported, when the goods were shipped etc.
18. There is no dispute between the parties that bonafide nature of transactions alone would not be sufficient to escape the clutches of sec. 271D of the Act. As per the decision rendered by Hon’ble Supreme Court in the case of Kum. A.B. Shanthi (supra), it is required to be established that there was some bonafide reasons for the assessee for not taking or accepting loan or deposit by account payee cheque or account payee bank draft, so that the provisions of sec.273B of the Act will come to the help of the assessee. Only in such cases, the AO is precluded from levying penalty u/s 271D of the Act. The Ld A.R took support of Explanatory note given while introducing the provisions of sec. 269SS of the Act. However, the Hon’ble Supreme Court has rendered its decision in the case of Kum. A.B.Shanthi (supra) after considering the same and has expressed the view extracted above. In the case of Triump International Finance (I) Ltd (supra) also, the Hon’ble Bombay High Court has deleted the penalty only on the ground of existence of reasonable cause.
19. The Ld A.R also contended that the impugned transactions are current account transactions. However, the ledger account of Smt. Sherbanoo A.S. Batliwala does not support the contentions of the assessee. The Ld A.R also contended that the amount received from the directors cannot be considered as deposits under Companies Act, 1956. However, we are examining the case under the provisions of the Act and the Hon’ble Delhi High Court has held in the case of Samora Hotels (P) Ltd (supra) that the transaction with the directors of the Company are not excluded from the ambit of the provisions of sec. 269SS of the Act.
20. Now the question that boils down is whether the assessee has, in the instant case, demonstrated that there was reasonable cause for taking loan of Rs.1.00 lakh each on two occasions in violation of provisions of sec. 269SS of the Act? For the sake of convenience, and at the cost of repetition, we extract below the explanation furnished by the assessee :-
(A) Cash was received on 01-10-2007 for payment of Custom Duty/Freight etc., for import of furniture items from Indo-Afrique United Traders (HK) Ltd, 301, Kam On Building, 176, Queens Road Central, Hongkong. As communication was received from the exporter that consignment is delayed, the above said fund was returned back by way of cheque on 03-10-2007.
(B) Actual goods dispatched by the said Indo-Afrique United Traders (HK) Ltd on 11.12.2007 vide their invoice No.0201. As Mrs. Sherbanoo A.S. Batliwala, director/shareholder was to go out of Mumbai for a month, she arranged fund of Rs.1,00,000/- on 05-12-2007 for payment of Custom Duty/Freight etc., on arrival of goods.
As rightly pointed out by Ld D.R, the assessee has not substantiated the above said explanation with any documentary evidence, i.e., the assessee has failed show that there was any urgent business necessity and hence the assessee was constrained to take loans by way of cash. We may also analyse the explanations, considering the same as true.
21. As per the explanations of the assessee, the goods were being imported from Hongkong. The assessee received first loan of Rs.1.00 lakh on 01-10- 2007. It was repaid on 03-10-2007, since the consignment was stated to be delayed. The second loan of Rs.1.00 lakh was received on 05.12.2007, since the foreign supplier was expected to ship the goods on 11.12.2007.
22. The above said explanation would show that the goods were not shipped either on 01-10-2007 or on 05-10-2007, i.e., on the dates on which the impugned loans were taken. The question of payment of customs duty etc., would arise only upon shipment or receipt of goods. In fact, the assessee admits that the goods were expected to be shipped on the second occasion only on 11.10.2007, while the cash loan was taken on 05-10-2007. If the director had given cheque on 05-10-2007, the funds would have been credited to the account of the assessee well before 11.10.2007. These facts would show that there was no urgent business necessity for the assessee on both the occasions to accept the loan in cash. Further, the assessee has also failed to demonstrate that on both the dates the assessee was not having sufficient funds in its possession.
23. In view of the foregoing discussions, we are of the view that the assessee has failed to show that there was a reasonable cause for getting loans in violation of the provisions of sec. 269SS of the Act. Accordingly we are of the view that the Ld CIT(A) was justified in confirming the penalty of Rs.2.00 lakhs imposed by the assessee.
24. In the result, the appeal filed by the assessee is dismissed.

(Order has been pronounced in the Court on 13.06.2018)

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